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Congratulations: We Just Saved Half a Trillion Dollars

You may not have noticed it, but the Federal Government just saved half a trillion dollars over the next decade. It's one of the biggest deficit-reductions in history, and it made virtually no headlines.

Health care cost growth -- the driver of effectively all long-term budget deficits -- is coming in much lower than expected. Part of that is likely due to the economy and the recession. But there's more to it than that. Falling cost growth began before the recession and has taken place in regions that escaped the recession without much pain. As Harvard health economist David Cutler said last year: "The recession just doesn't account for the numbers we're seeing. I think there's much more going on." 

The effect this has on the federal budget is huge. Over the last 43 years, Medicare cost per beneficiary grew 2.7% faster than the broad economy. That trend has now reversed itself. Since 2009, costs per beneficiary have gown 1.3% slower than the overall economy, according to The New York Times

Add it up, and "projected Medicare spending over the 2011-2020 period has fallen by more than $500 billion since late 2010," according to the Center on Budget and Policy Priorities, which cites Congressional Budget Office Data:

The budget savings are even greater when you add in Medicaid spending. The Congressional Budget Office wrote in its latest budget outlook (emphasis mine):

In recent years, health care spending has grown much more slowly both nationally and for federal programs than historical rates would have indicated. (For example, in 2012, federal spending for Medicare and Medicaid was about 5 percent below the amount that CBO had projected in March 2010.) In response to that slowdown, over the past several years, CBO has made a series of downward technical adjustments to its projections of spending for Medicaid and Medicare. From the March 2010 baseline to the current baseline, such technical revisions have lowered estimates of federal spending for the two programs in 2020 by about $200 billion -- by $126 billion for Medicare and by $78 billion for Medicaid, or by roughly 15 percent for each program.

If this keeps up, current forecasts of runaway long-term budget deficits melt quickly. Journalist Annie Lowrey noted last year: "If the growth in Medicare were to come down to a rate of only 1 percentage point a year faster than the economy's growth, the projected long-term deficit would fall by more than one-third."

Take all of this with an appropriate grain of salt. The fact that a past budget forecast was revised is a good reminder that the current budget forecast can be revised, too. But we too often forget that revisions can be a good thing. People might overlook positive surprises because virtually every budget forecast during the last decade brought worse news, falling deeper into the red. But that isn't a law. In the early 1990s, budget forecasters were predicting deep deficits as far as the key could see. By the late 1990s, the budget was in surplus -- something virtually no one predicted a few years prior. That's an extreme example, but it emphasizes that bad forecasts don't necessarily mean never-ending bad news. Good surprises can happen -- and it looks like we're seeing one right now. 


Read/Post Comments (10) | Recommend This Article (19)

Comments from our Foolish Readers

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  • Report this Comment On February 22, 2013, at 4:24 PM, DividendsBoom wrote:

    any idea on causation? Lots of big drugs coming off of patent.

  • Report this Comment On February 22, 2013, at 5:54 PM, TMFMorgan wrote:

    ^ There are a lot of theories, but I think it's still too early to pin down exactly what's going on. Drugs seems to be a lot of it. The big theory is that we just hit a point where medicine in general was too expensive. There's evidence of doctors/patients being more price sensitive.

  • Report this Comment On February 22, 2013, at 8:45 PM, TMFTypeoh wrote:

    Great article morgan.

    I think there is more room for improvement as well. If you think about a lot of the big advances in health care, many of them came years and years ago. More recently I feel the improvements have been more incremental in nature. Add a statin (lipitor), and you get a huge improvement. Change the statin slightly to say, crestor, and you may see an improvement, but its very small compared to adding a statin overall.

    In addition, Medicare just launched a new "competitive bidding" program, that is going to lay waste to the blood glucose meter market (diabetes). Margins are going to get killed as many of these meter companies go generic (in a matter of speaking). As diabetes is a HUGE driver of medicare, I think its reasonable to expect future declines in the years ahead.

    Here's hoping that America as a country decides to eat more healthy food and exercise. Can you what that would do to the deficit?

  • Report this Comment On February 23, 2013, at 4:24 PM, atthelakejim wrote:

    Sounds like a political ad. We have saved money that we haven't yet even figured out how to spend. What a deal.

  • Report this Comment On February 23, 2013, at 4:44 PM, xetn wrote:

    Yet the president is all shook up over a potential $1trillion reduction in the projected increases in the federal budget. They are threatening an 800000 layoff of civilian workers in the defense industry because defense won't get as big of an increase in budget as they would like. What utter nonsense!

  • Report this Comment On February 24, 2013, at 1:19 AM, kyleleeh wrote:

    <<Here's hoping that America as a country decides to eat more healthy food and exercise. Can you what that would do to the deficit?>>

    It could be a disaster...they would live longer and draw down more social security.

    Never forget the law of unintended consequences

  • Report this Comment On February 24, 2013, at 4:20 AM, simpdon wrote:

    No, this is good news. Projections are usually a simple matter of saying that what is happening now will continue to happen in the future. This is really an article saying that Medicare/Medicaid health care cost increases are slowing.

    One obvious reason is the ability under the ACA to allow the government to negotiate drug and other health care prices like those for durable medical equipment. Also the increasing use of generic drugs is another.

  • Report this Comment On February 24, 2013, at 9:25 PM, keaters wrote:

    Not too difficult to change an assumption on a spreadsheet and "save" a trillion dollars. Harder to do it in reality.

  • Report this Comment On February 24, 2013, at 9:26 PM, keaters wrote:

    Modern budgeting: start with the desired result and use a program to calculate the assumptions.

  • Report this Comment On February 25, 2013, at 6:40 AM, TMFMorgan wrote:

    <<Harder to do it in reality.>>

    But it's actually happening in reality. Health care cost growth is a fraction of what we thought it would be a few years ago. That's not a projection. That's happening now.

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