	Federal Health Care Spending Drives the Long-Term Fiscal Challenge

Among mandatory spending programs—and indeed tax expenditures—the  health area is especially important because the long-term fiscal challenge  is largely a health care challenge. Our most recent simulation results illustrate the importance of health care  in the long-term fiscal outlook as well as the imperative to take action. Simply put, our nation’s fiscal policy is on an imprudent and unsustainable  course. These long-term budget simulations show, as do those published  last December by the Congressional Budget Office (CBO), that over the  long term we face a large and growing structural deficit due primarily to  known demographic trends and rising health care costs and lower federal  revenues as a percentage of the economy. As these simulations illustrate, absent significant policy changes on the  spending and/or revenue side of the budget, the growth in mandatory  spending on federal retirement and especially health entitlements will  encumber an escalating share of the government’s resources. Indeed,  when we assume that all the temporary tax reductions are made  permanent and discretionary spending keeps pace with the economy, our  long-term simulations suggest that by 2040 federal revenues may be  adequate to pay only some Social Security benefits and interest on the  federal debt. Although revenues will be part of the debate about our  fiscal future, assuming no changes to Social Security, Medicare, Medicaid,  and other drivers of the long-term fiscal gap would require at least a  doubling of taxes—and that seems highly implausible. Ultimately,  the nation will have to decide what level of federal benefits and spending it  wants and how it will pay for these benefits. As figure 5 shows, unlike Social Security which grows larger as a share of  the economy and then levels off, within this projection period we do not  see Medicare growth abating. Whether or not the President’s Budget  proposals on Medicare are adopted, they should serve to raise public  awareness of the importance of health care costs to both today’s budget  and tomorrow’s. This could serve to jump start a discussion about  appropriate ways to control the major driver of our long-term fiscal  outlook—health care spending. For example, Department of Defense health care spending rose from  about $12 billion in 1990 to about $30.4 billion in 2004—in part, to meet  additional demand resulting from program eligibility expansions for  military retirees, reservists, and the dependents of those two groups and  for the increased needs of active duty personnel involved in conflicts in  Iraq, Bosnia, and Afghanistan. This means that addressing the  unsustainability of health care costs is also a major competitiveness and  societal challenge that calls for us as a nation to fundamentally rethink  how we define, deliver, and finance health care in both the public and the  private sectors. As  a nation, we are going to need to weigh unlimited individual wants against  broader societal needs and decide how responsibility for financing health  care should be divided among employers, individuals, and government. Individuals wanting  additional services, and insurance coverage to pay for them, might be  required to allocate their own resources. Limit spending growth for government-sponsored health care  programs (e.g., percentage of the budget and/or the economy). These policies permit the value of  employees’ health insurance premiums to be excluded from the  calculation of their taxable earnings and exclude the value of the premium  from the employers’ calculation of payroll taxes for both themselves and  employees. The problem of escalating health care costs is complex because  addressing federal programs such as Medicare and the federal-state  Medicaid program will need to involve change in the health care system of  which they are a part—not just within federal programs. We,  however, have an obligation to look beyond today. We should act sooner rather than later. We all  must make choices that may be difficult and unpleasant today to avoid  passing an even greater burden on to future generations. This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO.
Why GAO Did This Study

This testimony discusses entitlement and other mandatory spending programs in light of our nation's long-term fiscal outlook and the challenges it poses for the budget and oversight processes. In our report entitled 21st Century Challenges: Reexamining the Base of the Federal Government, we presented illustrative questions for policy makers to consider as they carry out their responsibilities. These questions look across major areas of the budget and federal operations including discretionary and mandatory spending, and tax policies and programs. We hope that this report, among other things, will be used by various congressional committees as they consider which areas of government need particular attention and reconsideration. Congress will also receive more specific proposals, some of them will be presented within comprehensive agendas. Our report provides examples of the kinds of difficult choices the nation faces with regard to discretionary spending; mandatory spending, including entitlements; as well as tax policies and compliance activities.

What GAO Found

Mandatory spending programs--like tax expenditures--are governed by eligibility rules and benefit formulas, which means that funds are spend as required to provide benefits to those who are eligible and wish to participate. Since Congress and the President must change substantive law to change the cost of these programs, they are relatively uncontrollable on an annual basis. Moreover, as we reported in a 1994 analysis, their cost cannot be controlled by the same "spending cap" mechanism used for discretionary spending. By their very nature mandatories limit budget flexibility. Mandatory spending has grown as a share of the total federal budget. Under both the Congressional Budget Office baseline estimates and the President's Budget, this spending would grow further. While the long-term fiscal outlook is driven by Medicare, Medicaid and Social Security, it does not mean that all other mandatory programs should be "given a pass." As we have noted elsewhere, reexamination of the "fit" between government programs and the needs and priorities of the nation should be an accepted practice. So in terms of budget flexibility--the freedom of each Congress and President to allocate public resources--we cannot ignore mandatory spending programs even if they do not drive the aggregate. While some might suggest that mandatory programs could be controlled by being converted to discretionary or annually appropriated programs, that seems unlikely to happen. If we look across the range of mandatories we see many programs have objectives and missions that contribute to the achievement of a range of broad-based and important public policy goals such as providing a floor of income security in retirement, fighting hunger, fostering higher education, and providing access to affordable health care. To these ends, these programs--and tax expenditures--were designed to provide benefits automatically to those who take the desired action or meet the specified eligibility criteria without subjecting them to an annual decision regarding spending or delay in the provision of benefits such a process might entail. Although mandatory spending is not amenable to "caps," that does not mean that mandatory programs should be permitted to be on autopilot and grow to an unlimited extent. Since the spending for any given entitlement or other mandatory program is a function of the interaction between the eligibility rules and the benefit formula--either or both of which may incorporate exogenous factors such as economic downturns--the way to change the path of spending for any of these programs is to change those rules or formulas. We recently issued a report on "triggers"--some measure which, when reached or exceeded, would prompt a response connected to that program. By identifying significant increases in the spending path of a mandatory program relatively early and acting to constrain it, Congress may avert much larger and potentially disruptive financial challenges and program changes in the future.