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How the Economic Slowdown Has Drastically Affected How Much America Spends on Health Care

The weak economy has caused people to postpone consumption of health care services and has encouraged states and employers to restrain their spending on health.

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Who are vulnerable?

That is not unexpected, because the largely retired Medicare population is less vulnerable to macroeconomic fluctuations than is the working-age population. The Council of Economic Advisers, whose members write the president's report, surmise that structural changes - including stronger incentives for efficiency by hospitals and providers, more cost-sharing in insurance policies, and the substitution of generic drugs for branded drugs - explain most of the deceleration in  per capita spending growth.

They also suggest that payment reforms contributed to the slowdown in Medicare's spending growth after 2001, and that early responses to new Medicare regulations in the Affordable Care Act may have caused a further decline after 2010.

The long-term effect on the federal budget implied by a sustained reduction in the growth of Medicare and Medicaid spending to the rates of the last several years would be profound. These programmes currently claim 21 percent of the budget, with Medicare accounting for two-thirds of that amount.

Even a small reduction in the growth of these programmes would save billions of dollars. Based on the unexpected slowdown in spending growth during the last few years, the Congressional Budget Office recently  cut its 10-year projections for these programmes by 3.5 percent, reducing the 10-year deficit by $382bn.

In 2011, Medicare spending accounted for 3.7 percent of GDP. Based on current policies, the government forecasts that Medicare spending per beneficiary will grow at an average annual rate of 4.3 percent and will rise to 6.7 percent of GDP over the next 75 years. If, instead, Medicare spending per beneficiary grew by only 3.6 percent a year, the average rate of the last five years, Medicare's share of GDP would remain unchanged. This would  narrow the fiscal gap, a widely used measure of long-term budgetary imbalance, by almost one-third.

Trends in the US budget reflect an inconvenient truth: If the growth of spending on health care programmes cannot be slowed, stabilising the federal debt at a sustainable level will require deep cuts in spending on other priorities and increases in taxes on the middle class. The recent slowdown in the growth of health care spending is a promising sign that America's budgetary tradeoffs may turn out to be less difficult than expected.

Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.

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