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As Congress wrangles over a reform to the Affordable Care Act, a logical question to ask is: “can the current levels of health care spending be sustained?” The answer: “unlikely!”

Medicare and Medicaid became active in 1966. This was like providing a blank check to a payee with deep pockets.

Personal consumption expenditures are a measure of spending on goods and services purchased by, and on behalf of, households. In 1965 spending on health ca
re was 6% of total personal consumption expenditures in the nation. By 2016 spending on health care was over 17% of total expenditures, an 84-fold increase in health care spending.

Since the end of the recession in 2008, through 2015 spending on personal health care is up 35.1%. This compares to a 23.8% increase in U.S. personal income and a 21.9% rise in GDP, excluding health care. Obviously, spending on health care is out stripping economic growth.

The sources of personal consumption spending on personal health care are instructive. From 2008-15 out-of-pocket spending on personal health care rose 15% and spending from private health insurance increased 35%. Simultaneously, Medicare spending was up 37% and Medicaid spend jumped 53%.

In their 2016 annual report, the Medicare board of trustees acknowledges that total 2015 Medicare expenditures exceeded total income and the Medicare A trust fund depletion rate is 2028 with Medicare B facing substantial increases now in the premium rate for some beneficiaries.

As to Medicaid, state government spending on Medicaid went up 39% between 2008-15 while total state government tax revenue increased by less than 1%.

The choices required to sustain the current levels of health care expenditures are clear. Households must commit more income to health care spending through either higher out-of-pocket payments, higher insurance premiums, or higher Federal and state taxes. Businesses must have health insurance premiums rise or increase copays, and expect Federal and state government to raise fees or taxes.

Today, 12% of personal health care spending is out-of-pocket, 35% is from private insurance, and 45% is paid by government. This has shifted from 52% out-of-pocket and 25% private health insurance in 1965.

As shown in the chart, over time there has been a steady decline in out-of-pocket payments, even through the most recent decade. And since 2005 the load picked up by government (i.e., Medicare and Medicaid) has acceler
ated beyond the payments from private insurance.

 Percent of personal health care expenditures by source of payment

Health care is what economists term a “stagnant industry.” While new technology can be added, it is very difficult to substitute capital for labor. Health care prices will continue to rise at least at twice the rate of general inflation.

Will expenditures be able to continue to keep pace with rising costs?

With flat real wages, the average worker will struggle against higher out-of-pocket spending. The private insurance industry is dodging responsibility for the higher risk uninsured. And raising taxes is a sure way to lose re-election.

The most effective “reform” is for businesses and private health insurance to substantially increase co-pays. And for Medicare and Medicaid co-pays to be increased based upon the ability to pay. Consumers will then be immediately impacted by rising costs and consumer demand choices will once again move toward being based upon household opportunity costs.

Certainly, the current pace of health care spending cannot be sustained.