Sunday, February 24, 2013

Medicare I

Medicare I
by Juan Rubio-Ramírez on 1 October 2010

One of the most important consequences of the recent crisis is that markets and rating agencies have shown themselves to be very sensitive to public deficits of western economies.  Spanish debt has been downgraded from its highest rating and the same thing has happened with many economies in southern europe.

For this reason, in a bid to calm the markets, political leaders have announced and launched adjustment plans and tighter budgets everywhere (see, for example, the latest out of France).

As I've pointed out more than once on this blog, western economies' fiscal problems are more structural than crisis-related.  The aging population, on one hand, and the increase in public health spending per person, on the other, pose long-term fiscal problems related to pensions and health -- much more important than those related to the current economic situation.

At Nada es Gratis we're going to dedicate Saturdays to the subject of pensions, so I would like to dedicate this post (and those following) to healthcare spending.  In particular, I'd like to address healthcare spending in the United States.  This federal program pays healthcare costs for older citizens.  In 1970 medicare spending was less than one percent of GDP.  In 2009 it was 3.5%.  A significant increase.

As we can see in the following chart, and as I mentioned above, the majority of the increase in healthcare spending (as a percentage of GDP) on medicare in the United States is due to the per-person spending increase rather than the increase in older people (the chart was created by the CBO for their report on the deficit and long-term debt from December 2005).

Sources of Medicare Cost Growth Since 1970

As Jesús has said before, this is normal for two reasons.  First, new technologies are being developed that are much more effective but at a much greater cost.  Second, as our income increases we want to consume more health in relative terms.  As has also been mentioned on this blog, medicare spending will become even greater in terms of GDP as the "baby boomer" generation ages.

The problem is that, for reasons Jesús has outlined many times, medicare poses a spending/financing problem for the american government.  In the coming week we'll talk about how this will be solved.  We hold that the proposed cuts on the spending side don't seem to be sufficient to square the national accounts and that tax increases are inevitable if there are no radical changes to the proposed solution.

No comments:

Post a Comment