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ObamaCare will drive government share of health spend to 2/3 by 2025

July 22, 2017

If Republican efforts to repeal and/or replace Obamacare fail, the law is on track to drive the taxpayer share of U.S. health spending to two-thirds by the year 2025.

Some have labeled President Obama a foreign policy failure while others have noted that he oversaw an economic recovery that was the weakest in the entire post-World War II era,   But he excelled at increasing federal government spending, especially on health care. As a consequence, the federal share of national health spending grew by about one-eighth between 2008 and 2016 and by the year 2025 is projected to have increased by nearly one-fifth. By 2025, federal, state and local taxpayers will be financing fully two-thirds of American health care . Some might say “not bad for government work.”

Careful readers might also note that the state and local government share of national health spending shrank slightly during the same period–a reflection of President Obama’s vision to give Uncle Sam a bigger role in health care, displacing decisions formerly made by state and local governments and the private sector in the process.

These figures will be news to health policy wonks who pay careful attention to the official annual health expenditure projections put out by the Centers for Medicare and Medicaid Services.  According to the CMS “sponsor” view, the federal government will bankroll only 29.7% of health spending in 2026, while state and local governments pick up only 10.9%. This amounts to a grand total of only about 40% of health spending.

But the CMS arrives at this view by counting Medicare payroll taxes as being paid by employers and employees (i.e., households) and by ignoring the literally hundreds of billions of dollars in health-related tax expenditures–the largest of which is the tax exclusion for employer-provided health coverage. In 2016 alone, the federal government lost over $300 billion in revenues due to such tax expenditures and states/local governments lost an additional $40 billion. By 2025, the federal tax revenue loss alone will have climbed to more than one half trillion every year!

CMS has been putting out these figures for many years, well before President Obama was elected to office. So I am not implying there’s an insidious plot to hide the true size of tax-financed health spending in America. But I will say that the readily available published figures rather significantly understate the actual role of tax financing in the American health system–a concern I expressed in my book published 5 years ago (Fig. 3.4b).

But it certainly is important for policymaking to understand accurately the role of federal, state and local taxes in financing U.S. health spending. At the margin, each dollar of tax-financed health spending shrinks the economy by 44 cents.  When government pays for two-thirds of health care and health care consumes 19.9% of GDP (which is the official CMS forecast for 2025), these figures imply we will forego 5.9% of GDP due to tax-financed health care (this year, such a loss of GDP would exceed $1.1 trillion dollars! That’s about $3,000 per U.S. resident. In short, this is not a minor issue to be swept under the rug, but instead a number whose annual size ought to be deliberately pondered rather than passively accepted).

So we would do well to minimize rather than maximize the share of health spending funded by taxpayers.  In light of this enormous “excess burden” (the economists’ term for this drag on the economy), it makes little sense for Uncle Sam to be financing Warren Buffett’s Medicare (or mine, for that matter) or to be lavishing distributing subsidies across a wide swath of Americans instead of just those who truly cannot afford to pay for their own health care.

In a perfect world, Republicans would take on the $300+ billion a year tax exclusion as part of tax reform. The revenue savings would be more than enough to finance a more sane and sensible regime of universal tax credits that would provide everyone with the means to purchase catastrophic coverage but not incentivize people to buy lavish policies with little cost-sharing or that cover routine care that grown-ups can and should budget on their own, just as they budget routine maintenance expenses for their cars and houses [1].  No one expects (indeed, to my knowledge, the market does not offer) homeowners insurance that pays for mowing the lawn or auto insurance that pays for gasoline and oil changes. Except for the fact that misguided tax policy has fueled demand for it, there is no good reason for health insurance to cover the analogous expenses for humans.

But as the Republican debacle over repeal of Obamacare reveals, taking away subsidies from Americans or state policymakers who are addicted to them is a singular challenge . It remains to be seen whether Republican leadership is up to the task.

http://bit.ly/2vwpEkY

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