• The triangle of painful choices

    Charles Roehrig of the Altarum Institute offers a brilliant graphical presentation of the federal budget pressure we face, with health care playing a central role. He calls his chart the “triangle of painful choices.” That it is! Take a look (and take your time in reading all the labeling to make sure you understand what it’s showing):

    For example, point A represents tax revenues at 18.5 percent of GDP and defense and other non-health spending at 9.3 percent of GDP. These are 2007 values and quite comfortable. However, at point A we only have 2.6 percent of GDP available for federal health spending and, using my model, health spending growth of PGDP- 4, i.e., 4 percentage points below the growth rate in [potential GDP, or GDP at full employment], would be required for a balanced budget in 2035. This is not merely uncomfortable, it is not remotely feasible.  Shifting from point A to point B gets to a more feasible health spending growth path (PGDP+1) but raises tax revenues to an uncomfortable 24.6 percent of GDP. Moving down the green line from point B to point C keeps health spending growth at PGDP+1 and brings tax revenues down toward the comfortable 18.5 percent, but spending on defense and other non-health becomes absurdly low.

    The red line running through point D represents a balanced budget with health spending held to PGDP+0, which is analogous to the Massachusetts goal of state PGDP+0. At point D, the balanced budget is achieved by setting spending on defense and other non-health items to 8.0 percent of GDP – matching the historical low – and increasing taxes to a record high 21.4 percent of GDP []. There is nothing in this “solution” that is particularly comfortable. Spending for defense and other non-health items is historically low, tax revenues are above historical highs, and health spending growth is extremely low, particularly given the aging of the population. It is possible to move in a direction that is more comfortable in terms of one of the variables (e.g., move down and left along the red line from point D to reduce tax revenues), but this will increase discomfort in one of the other variables, e.g., spending on defense and other non-health items falls below the historical low of 8 percent of GDP.

    There’s no way to sugar coat this: we’re in a pickle. It obviously takes some extreme assumptions on one or several of tax revenue, health care spending growth, or levels of defense and non-health spending to make other values for these seem reasonable. But we ought to know by now it is highly unlikely we’ll push any of these to the extreme. What’s far more sensible is a balanced approach, spreading the pain across all sectors, including revenue increases as well as spending and health care growth rate decreases.

    Check out of the campaign rhetoric for a minute and just face the math. These numbers don’t lie. They’re very serious numbers. If you want to have an adult conversation, start with these.

    @afrakt

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    • Looks to me like there has to be spending cuts and tax decreases. What I see in Washington right now has to change. Pretty simple.

    • But any politician that acknowledges this will lose.

    • Taxes decreased? Did you mean increased?

    • An adult conversation is not possible until after November and probably not until next January and the onset of the sequestration cliff. In the frenzy of an election season only the crazies attempt to be heard above the roar. So I’d suggest you schedule this blog to rerun in early December. The Adults may be ready to be more rational. But I wouldn’t count on it, no matter which team wins.

    • In reality, this problem is very solvable, but would require an outbreak of political rationality that is tragically unlikely in the current political world of the US.

      We really have only two choices for health care, with the inflection point coming within ten years.

      First, we can adopt the Romney-Ryan approach of an indiscriminate cut off the top, with reduction of money available for health care for individuals outside their own private resources. Although this discussion focuses on the public insurance sector, in reality it applies to the private insurance sector as well, since private insurance is rapidly outstripping ability of employers to pay as well, and its costs are growing faster than the public sector. One of the hidden agenda items in the proposals to “close loopholes” in the tax system is the ending the special tax status of employer provided insurance, but even without that change employer programs are rapidly becoming less generous or closing down completely.

      Second., we could adopt the approach of every other developed country in the world, creating commissions to set both insurance rates and payments for health care services. The first agenda item would be to attempt to decrease or eliminate the tremendous waste in the US system by eliminating unnecessary, ineffective, equally effective but more expensive, and outright harmful care. The results of this approach have yielded health care that costs anywhere from 30% (Japan) to 65% (the Netherlands) of what we pay and attains outcomes superior to our own.

      Both approaches envision a form of “rationing” of care, the first by increasingly making health care so expensive for individuals that low income and middle income people, both employed and retired, would face loss of access. At best, they would have to make choices about health care use that they are very poorly equipped to make. At worst, many would be excluded completely by having inadequate personal resources to bridge the gap between public and private insurance programs and the cost of care.

      The second puts those choices in the hands of informed experts, subject to negotiation with insurers, providers, and patients, but with the government holding the trump cards if consensus is not possible. Based on research in the US and actual performance elsewhere, the elimination of wasteful health care spending would result in better health for Americans and could achieve spending growth well (at least 10% and as much as 30% or more) into NEGATIVE growth, eliminating the crisis that this post defines.

      • Don’t forget that your second option has also included restrictions on malpractice lawsuits in those countries, which would translate to major tort reform in this country. As it appears the Democrats lean toward this option, that would mean they would need to change their tune with the attorneys that so heavily line their pockets.

        • It is true that most countries have tort systems that are very different from ours. Reform of malpractice systems have been a part of ideas proposed by many reformers — Ezekiel Emanuel springs to mind.

          However, what many advocates — especially conservatives — have proposed as tort reform has not proven to be effective in reducing health care costs or growth of health care costs. The typical list — reduced payments for non-monetary damages, reduced payments to plaintiffs’ attorneys, and various barriers to filing — have been passed into law in whole or part in over thirty states now. Texas implemented the entire package about 7 years ago. These changes have not led to reductions in costs or growth rates of costs in a single state, and Texas is actually above average in both cost and cost growth.

          As Aaron has written repeatedly on this blog, the conventional conservative idea of tort reform has proven to not have any positive impact on health care costs.

          So while the issue of reform of the malpractice system in ways that relieve anxieties for doctors while protecting the rights of patients who have been harmed remains an important issue, and one which could possibly decrease costs if done correctly, we need new ideas to accomplish this, since the most common old ones are failures.

          Personally, I would be most interested in seeing a system that resembles the one that was created by the American Society of Anesthesiologists thirty years ago. They created a set of well defined practice standards, then developed a system to protect doctors who could document that they had followed those standards from lawsuit. It worked very well, significantly reducing malpractice premiums for anesthesia from crisis levels to more typical amounts, decreasing lawsuits strikingly, and having the added bonus effect of significantly improving the safety of anesthesia and improving the process for evaluating and implementing worthwhile new techniques while discarding ineffective techniques, both new and old.

          • Pat, you’re completely right about the policy and numbers. But politics doesn’t always work rationally. We may need to throw the right-wingers a bone to get progress.

            So on behalf of all liberals and Democrats, I’m prepared to make a deal with Ron, the representative of all that is right-wing. The US will have a single-payer health care system. Private insurance might still exist, but only to cover unnecessary care, like in Canada. Ron can do whatever he wants to the malpractice system.

            The ironic thing is that rightwingers should like single-payer too, even without tort “reform”, at least if their only goal is to keep taxes low. I’m fairly certain Canadian Medicare spends less as a percentage of GDP than all US government spending on health care does now. And since Canada has got health spending growth under control, Canada isn’t going to face the incredible pressure to raise taxes that we can see in the triangle of painful choices. If we don’t move towards a more rational health care system I think position B on the triangle is our likely endpoint.

            But rightwingers might not see that. So let’s make a deal.

    • I have a question. Does “Healthcare Costs” include healthcare for active and retired military or would those costs be included in the “Military” budget? I am just curious.

    • First, thanks Austin, for reproducing this chart!

      In response to the question by jc, CBO includes military health care as part of non-health spending while the national health accounts include it as health spending. In the chart above, I am using the CBO definition of defense and other non-health spending. But the growth in health spending (the diagonals) refers to health spending as defined in the health accounts. The model used to derive the lines in the chart takes account of these differing definitions. Hope that helps.

    • Rather than seek a balanced budget, why not use a target deficit level that stabilizes the debt to GDP ratio at some reasonable level?