A Unified Long-Run Macroeconomic Projection of Health Care Spending, the Federal Budget, and Benefit Programs in the US

Abstract

In the official models used by the Treasury and the Social Security and Medicare Trustees for
projections and policy analysis, many key variables—like interest rates—are assumed as a continuation
of past trends. Even the Congressional Budget Office (CBO)—with a more sophisticated growth model—
does not consider supply factors determining future health care costs. By contrast, in our model, these
variables are simultaneously determined by supply and demand, based on logical functional forms and
deep parameter estimates from the literature or empirical analysis. This approach provides projections
which better reflect real economic relationships—like those that exist between health care spending,
the federal budget, and investment in capital—and changing underlying conditions, especially
demographics. Within the next ten years, we find the federal government budget deficit relative to
national income will grow significantly beyond historical experience and may be regarded as
unsustainable. We project that debt-to-GDP will be 134 percent in 2032 and 263 percent in 2052,
compared to CBO’s 115 percent and 189 percent, respectively. Real interest rates rise in the long run in
a ratcheting cycle of higher interest payments and growing deficits and debt. Our projection of national
health expenditures relative to GDP in 2072 is 29.6 percent, compared to 28.4 percent by the Centers
for Medicare & Medicaid Services (CMS), used by the Medicare Trustees. These higher rates of health
care inflation arise from labor shortage effects in an aging economy because health care is produced in a
low productivity, labor-dependent sector. This rise in health care expenditures further deteriorates the
federal budget and lowers consumer welfare.

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