A Perfect Storm in Healthcare

John McCracken, PhD

A perfect storm is brewing in healthcare, and it will arrive full force with the next recession.

If you asked people what’s the biggest threat to the U.S. healthcare system, most might say that it’s healthcare’s uncontrollable cost, or the partisan political fighting over Obamacare and the resulting instability of the health insurance marketplace.  A greater threat, however, is what will happen to the healthcare industry when the next recession finally arrives.

Healthcare is presently the largest single item in both state and federal government budgets.  In 2017, it will represent 28% of all federal and 23% of all state and local government spending.

FY 2017 Estimated Federal Government Spending
               $ Billions                           

Healthcare                  $1,145         28%
Pensions                      $1,012         25%
Defense                        $834         21%
Welfare                          $366           9%
Interest                          $276           7%
All Other                       $429         11%
Total                           $4,062       100%

The FY 2017 federal deficit is projected to be approximately $602 billion, which will raise the year-end ratio of gross federal debt to GDP to over 106% (a figure which does not account for several trillion dollars of unfunded  government liabilities).

We’re now in the ninth year of (an albeit weak) economic expansion, the third longest expansion cycle since the Civil War, and all the indicators are looking late cycle.  (It may only be coincidence, but every single Republican president since Ulysses S. Grant has had a recession in the first half of his first term).  Based on the experience of the last three recessions, when the next one occurs it is likely to create a federal budget deficit of $1.5 trillion or more, a figure that is sure to set off alarm bells in Congress and the Administration.  As the largest single item in  the Federal budget, healthcare is the first place policy-makers are likely to look for cuts.

The Elephant in the Room

The U.S. has the world’s highest per capita healthcare costs, about double those of other wealthy nations.  Though  healthcare costs are no longer growing at double digit rates, the five year growth trend is still expected to be approximately 6% per annum, twice the projected growth rate of GDP.  Cost, however, has not been a primary consideration in the current Congressional fight over healthcare reform.  Instead, the focus has been on how to apportion the bill between federal government, state governments, employers and individual insureds.

As has been argued in this space, however, all healthcare ultimately is paid for by workers and households.  To the extent employers write the check, workers pay for it in lower wages and higher unemployment.  To the extent it’s funded by government, households pay for it in higher taxes and a greater debt burden on our children.  The widespread failure to acknowledge the effects of increasing healthcare costs on wages, taxes and government debt helps perpetuate the belief that workers and households are receiving a benefit paid for by someone else.  And the perpetuation of this myth, that someone else is bearing the cost, is what allows Congress to avoid dealing with the real issue—the unsustainable rate of healthcare inflation.

That may well change with the next recession, however.  When the Federal deficit exceeds a trillion dollars and the states are experiencing severe budget problems of their own, Congress will no longer be able to sweep the elephant under the rug.  The debate over “who pays” will have to give way to how to restrain the high and rising cost of healthcare.  Any set of solutions to that problem will require impacting provider incomes, which is sure to stir up a hornet’s nest of opposition.  If you think the fighting is fierce now, wait until the next recession arrives.