Damage isn't over

It is often said that curbing retiree healthcare costs is key to solving the nation's long-term debt problem. What is less well- known—but needs more attention now that the budget showdown in Washington has temporarily ended—is how faster economic growth will be crucial to affording even a shrunken healthcare tab, and how the follies in Washington are undermining that much-needed growth.

The government shutdown during the first half of October did enormous damage to the U.S. economy. The months before the shutdown saw consumer confidence plunge.

Economists now project third-quarter economic growth slipped to less than 1.5% annually—barely enough to add jobs in an economy still suffering from 7.3% unemployment. That's less than half the economy's potential, which is usually pegged at 3%.

The damage is far from over. Flash estimates for the cost of the two-week shutdown suggest fourth-quarter growth will be trimmed by anywhere from 0.3 to 0.6 percentage points. There's no reason to think that the Tea Party's debt ceiling brinkmanship games won't continue through at least the 2014 election. If their goal is to dampen consumer spending, keep unemployment high and create a climate of unrelenting economic fear, they are succeeding admirably.

How does this affect healthcare? The sector's share of economic activity is approaching 18%. However, that has remained constant over the past three years for the first time in generations.

The debate among economists as to reasons for healthcare's growth slowdown is over. An August report from the Congressional Budget Office—always a prudent voice in these debates—“found no link between the recession and slower growth in spending for Medicare.” As a result, the CBO substantially reduced its projections for Medicare and Medicaid spending for the coming decade.

Indeed, Congress' budget arm in September projected the nation's budget deficit will shrink to 2% of GDP as soon as 2015. By 2018, the federal debt as a share of GDP—that closely watched number by deficit hawks—is projected to fall to 68% from its current 73%.

But there are some assumptions in that rosy scenario, the most important of which are the projections for economic growth. The CBO assumes that next year the economy will grow 3%—the same assumption it has made since 2010. Indeed, its average growth projection for the next five years is 3.6%, twice what it has averaged during the years of the Tea Party's control over one house of Congress.

The other rosy scenario in the CBO projection involved healthcare. Its economists assumed that spending on physicians would follow current law, that is, there would be no “doc fix.” But that cost is a rounding error compared to the projections for overall Medicare spending, which are assumed to follow the Independent Payment Advisory Board formula. That sets a target growth rate for Medicare spending at 1 percentage point above the increase in per capita GDP. In other words, if GDP grows at 3.6% per capita, Medicare spending can grow at 4.6%.

That is manageable by the nation's providers. They're well below that now.

But if GDP growth continues to bumble along at 2% or less because Washington can't get its act together, Medicare spending will be forced into a 3% or less straitjacket. That's a full percentage point below where spending growth is now.

Given that CBO says 54% of projected growth in spending over the next quarter century is due to the baby boomers moving through retirement and just 28% is due to excess cost growth, the only way to achieve that kind of spending reduction is by either slashing payments to providers or slashing benefits to seniors or some combination of the two.

It makes one want to hold up a sign that says, “Keep the Tea Party's hands off my Medicare.”

Follow Merrill Goozner on Twitter: @MHgoozner