Health Care Costs: Connect the Dots

Whether it’s keeping up with the latest fashion trend, sports score or NASDAQ stock quote, the Internet, cell phones and wireless devices allow — and sometimes force — all of us to stay connected anytime, anywhere. Being easily and readily connected 24/7 has the major advantage of being instantly informed, increasing the importance of “now,” at the expense of tomorrow, next week and even next year.

From a public policy standpoint, however, it’s increasingly important to disconnect ourselves from the here and now at times. Instead, policymakers are best served when they can survey the horizonto look up from their PDAs and look ahead to the future.

For on the horizon are ominous storm clouds gathering around a number of related long-run structural issues:

• The federal deficit is now $415 billion and likely to grow dramatically over the next decade. 
• State revenues will grow much more slowly than federal revenues over the next decade, which will create tough choices between funding health care or education. 
• The continued emergence of highly capitalized, highly skilled and low-wage countries will erode the competitive edge the U.S. currently enjoys in the international marketplace.

All of these challenges are related in two ways.

First, if we fail to meet them, the standard of living for most Americans will decline over time. The effects will snowball into a series of even-more-negative consequences. For example, a burgeoning federal deficit leads to higher interest rates. Long-term interest rate hikes will reduce U.S. investment in new technology, further threatening America’s competitive edge. Cutbacks in state education spending will reduce the skill and education level of the workforce, which also reduces the nation’s global competitiveness. If our position in the world marketplace erodes, it will slow economic growth. The snowball continues to roll, reducing revenues for both federal and state governments and exacerbating the federal deficit and the state structural problem.

The second relationship is that a major culprit in all of these challenges is the fact that health care costs are increasing at double-digit rates. If you are looking to identify the main reason for the burgeoning federal budget deficit, ongoing state fiscal shortfalls, and continued decline in the nation’s competitiveness, simply connect the dots — it’s soaring health care costs.

With respect to the federal deficit, the one-two punch of Medicare and Medicaid accounts for 20 cents of every federal dollar. Medicare and Medicaid are expected to grow 8.1 percent and 9.4 percent respectively, each year for the next 10 years. Now, compare these numbers to only 4.5 percent growth for Social Security. Connecting the dots just got a whole lot easier.

The numbers are just as bleak at the state level. Here, Medicaid and other health care spending represent about 30 percent of state budgets, about the same as all elementary, secondary and higher-education spending. Medicaid and health care spending are projected to grow about 9 percent per year over the next decade, or nearly twice the state revenue projections. Obsolete state tax systems, designed with the 1940s manufacturing economy in mind, don’t help matters given today’s service-oriented, international high-tech economy. The fact that major tax increases are not “on the table” highlights the real choice facing policymakers today — more spending on health care or education, but not both.

One of the big disadvantages U.S. firms have in the international marketplace is that most employers pay for a major portion of health care benefits. This employer-paid health care model requires firms to price their services or goods high enough to cover the cost of health care for employees. This places U.S. firms at a major disadvantage relative to most other industrialized countries that have government-operated health care systems, which are not reflected in the price of goods and services.

The bottom line is that soaring health care costs are a huge and growing problem for federal and state governments, as well as the private sector. Our nation’s chief policymakers, legislators and leaders need to take a step back — disconnect — and focus their attention on the next decade. If we begin connecting the dots and making a national commitment for health care reform, we can bring health care cost growth down to a reasonable level, and then maybe we can return to checking the weather forecast on our pocket computer.

Raymond C. Scheppach, Ph.D., is the executive director of the National Governors Association. The views expressed here are those of the author and do not necessarily represent those of the National Governors Association.