The Contribution of Federal Health Programs to U.S. Fiscal Challenges and the Need for Reform
Is the projected spending on federal health programs sustainable?
The unequivocal answer is NO.
In 2023, the federal government is expected to spend 6.2 percent of the economy (or more than $1.6 trillion) on mandatory health programs. These programs include Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and subsidies for insurance purchased through the exchanges established by the Affordable Care Act (ACA). The Congressional Budget Office (CBO) estimates that within 30 years, the federal government will annually spend at least nine percent of the economy on those programs.
The growth in spending on federal health programs is unsustainable. In this paper, I find that spending on health programs will likely compromise the federal government’s ability to borrow money, as well as the sustainability of existing debt, within the next 30 to 50 years. This is estimated using a method adopted by the International Monetary Fund (IMF) and a range of assumptions about interest rates and how much debt the Federal Reserve is able to hold, as well as other estimates from leading academics and risk management organizations. This means that spending on federal health programs without structural reforms will significantly limit the federal government’s ability to take on additional debt to address a future economic recession, pandemic, war, or another adverse event.
I find that there are two main causes of debt accumulation over the next 30 years: federal health spending and interest payments associated with rolling over existing debt. I also find that the Congressional Budget Office’s assumptions of excess cost growth (i.e., the increase in spending per capita relative to per capita growth in the economy) for federal health programs are far lower than historical norms and thus may understate the level of health spending in the future. However, even if excess federal health costs were to be lower than historical levels, the capacity of the federal government to take on additional debt over the next 30 years would not substantially change.
To ensure that the federal government’s borrowing capacity does not become exhausted within the next 30 to 50 years, federal health care spending must be reduced relative to baseline spending. I provide two scenarios that would provide additional borrowing capacity. These would require federal spending on Medicare, Medicaid, CHIP, and the insurance subsidies to be reduced by at least 7.5 percent of baseline spending, or 0.5 percent of the economy, over the fiscal year 2025 to 2034 budget window. Beginning structural reforms sooner rather than later will allow a path of continuous growth in the budget for health programs while avoiding much larger, drastic cuts in the future.