Healthcare is major factor in long-term U.S. budget deficit, CBO says

Despite projecting a short-term decrease in the nation's budget deficit, the nonpartisan Congressional Budget Office on Tuesday said it expects budget deficits to rise over the long term, fueled largely by growing spending for the nation's major healthcare programs and Social Security.

Included in those healthcare programs are Medicare, Medicaid, the Children's Health Insurance Program and federal subsidies for individuals who enroll in the public insurance exchanges under the 2010 healthcare reform law. In its long-term budget outlook (PDF), the CBO said the economy's gradual recovery from the 2007-09 recession, as well as changes to tax and spending policies, have caused the federal deficit to shrink this year to its smallest size in five years—to about 4% of gross domestic product from a peak of 10% in 2009. And if current laws remain unchanged, the deficit would continue to drop to about 2% of GDP in 2015.

But, the CBO warned, budget deficits would start to rise again mostly due to increasing interest costs and growing spending on Social Security and federal healthcare programs. An aging population, rising healthcare costs and an expansion of federal subsidies for health insurance “would cause spending for some of the largest federal programs to increase relative to GDP,” the 126-page report noted.

Federal spending for the country's major healthcare programs and Social Security would rise to a total of 14% of GDP by 2038, which is twice the 7% average of the last 40 years. The CBO said it expects spending on major healthcare programs to rise from 4.6% of GDP in 2013 to 8% in 2038—Medicare would consume 4.9%, and Medicaid, CHIP and the insurance exchange subsidies account for the rest.

“The focus is still squarely on Medicare,” said Eric Zimmerman, a partner with McDermott Will & Emery. “While the overall budget outlook is better, the percentage of expected federal spending on healthcare has an upward trending line. That's unsustainable. I think the focus will continue to be on reducing federal health spending, particularly federal Medicare spending in the coming years.”

For providers, this means more Medicare payment cuts in the future, which Zimmerman said he expects to be “significant,” although not as drastic as they would be if Congress and President Barack Obama reached a so-called grand bargain to reduce the nation's deficit, which he said now appears unlikely.

And adding to the worry of more Medicare cuts is a graph in the CBO report that shows a consistent downward trend in discretionary spending—which affects healthcare agencies such as the National Institutes of Health and the Centers for Disease Control and Prevention—while mandatory spending and discretionary defense spending both continue to shift upward.

“It gives Congress much less to work with,” Zimmerman said. “To the extent that (mandatory spending on) major health programs goes up and consumes larger amounts, it leaves less to spend on other priorities.”

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