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March 09, 2010

Long Term Healthcare in the USA, Controlling Costs and Increasing Economic Growth

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CBO (Congressional Budget Office) projects that without significant changes in policy, total spending for health care will be 31 percent of GDP by 2035 and will increase to 46 percent by 2080. Total spending for Medicare is projected to increase to 8 percent of GDP by 2035 and to 15 percent by 2080. Total spending for Medicaid is projected to increase to 5 percent of GDP by 2035 and to 7 percent by 2080.

In 2009, total consumption per person is expected to average about $26,000, of which about $6,000 will be spent on health care. Under CBO’s projections, spending per person by 2035 would have grown by more than $14,000 (in 2009 dollars), but more than 80 percent of that extra money would be spent on health care. Although spending for other goods and services would grow by just 14 percent, spending for health care would nearly triple.

Even without policy changes, though, actual spending for health care could be much lower or much higher than in CBO’s and other forecasters’ projections. In the past, technological developments have generally resulted in the expansion of treatment options and greater total spending. Future innovations could accelerate that trend. Alternatively, if future research resulted in the development of inexpensive curative therapies or if the health care sector changed in other fundamental ways, growth could slow.



Current Healthcare Costs
A combination of private and public sources finances health care in the United States. Most Americans under the age of 65 have private health insurance that they obtained through an employer. According to CBO’s estimates, in 2010, about 56 percent of that population (150 million people) will have employment-based coverage, and about 5 percent (13 million people) will have private coverage purchased directly from an insurer. At any given time during that year, in CBO’s estimation, about 50 million people (19 percent of the nonelderly population) will be uninsured. In 2010, CBO projects, about 100 million people will be covered by Medicare and Medicaid, the two main sources of public financing for health care.



In 2007, total spending for health care (spending for health services and supplies) amounted to nearly $2.1 trillion, or 15.2 percent of the nation’s GDP. Some 54 percent of that amount was financed privately; the rest of the spending came from public sources


If there was research to enable healthcare to be delivered with lower cost increases or even lower cost then the situation would be vastly improved. It is a matter of keeping annual increases to 1% or less.

Technology that could enable this are things like super cheap paper based medical tests. This not only makes the medical tests cheaper but allows for a change to the approach to healthcare. People could be tested every month or several times a year to watch biomarkers for disease. Someone could be identified with a problem at the earliest stages or even before the disease develops. Cheap preventative steps could be taken. Instead spending a million dollars on radical cancer therapies or heart procedures a few hundred dollars in medicine and life style changes could be used.

Increasing Economic Growth

The share of GDP could be reduced if economic growth could be increased by 0.5-2% per year.

One proposed policy for economic growth that has been proposed and received extensive analysis is the Fair Tax
The Fair Tax Act (H.R. 25/S. 1025) is a bill in the United States Congress for changing tax laws to replace the Internal Revenue Service (IRS) and all federal income taxes (including Alternative Minimum Tax), payroll taxes (including Social Security and Medicare taxes), corporate taxes, capital gains taxes, gift taxes, and estate taxes with a national retail sales tax, to be levied once at the point of purchase on all new goods and services. The proposal also calls for a monthly payment to households of citizens and legal resident aliens (based on family size) as an advance rebate of tax on purchases up to the poverty level.

Supporters argue that a consumption tax, such as the FairTax, would have a positive impact on savings and investment (not taxed), ease of tax compliance, increased economic growth, incentives for international business to locate in the U.S., and increased U.S. international competitiveness (border tax adjustment in global trade).


Eighty economists, including Nobel Laureate Vernon L. Smith, stated that the FairTax would boost the United States economy. According to the National Bureau of Economic Research and Americans For Fair Taxation, GDP would increase almost 10.5% in the year after the FairTax goes into effect. Real investments could increase by as much as 76% initially and remain 15% above present levels. In addition, the incentive to work would increase by as much as 20%, the economy’s capital stock would increase by 42%, labor supply by 4%, output by 12%, and real wage rate by 8%. A study in 2007 by the Beacon Hill Institute of Suffolk University stated that within five years real GDP would increase 10.7% over the current system, domestic investment by 86.3%, capital stock by 9.3%, employment by 9.9%, real wages by 10.2%, and consumption by 1.8%. Laurence Kotlikoff of Boston University finds that the shift to the FairTax would raise marginal labor productivity and real wages over the course of the century by 18.9% and long-run output by 10.6%. Further, studies of the FairTax at Boston University and Rice University suggests the FairTax will bring long-term interest rates down by as much as one third. As falling tax compliance costs lower production costs, exports would increase by 26% initially and remain more than 13% above present levels. According to Professor Dale Jorgenson of Harvard University’s Economics Department, revenues to Social Security and Medicare would double as the size of the economy doubles within 15 years after passage of the FairTax. Wall Street Journal columnist James Taranto states the FairTax is unsuited to take advantage of supply-side effects and would create a powerful disincentive to spend money
FURTHER READING
The longterm CBO outlook for social security

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