How Much of the Growth in Health Care Spending is Coming From Medicare and Medicaid?
Answer: a lot
I’ve recently written about two topics that intersect: (1) the outsized percentage of U.S. consumer spending growth coming from health care post-pandemic (link and link) and (2) the outsized role that government transfer payments have played in supporting consumer spending growth and therefore GDP growth post-pandemic (link). Two of the three largest government transfer payment programs are Medicare and Medicaid (Social Security is the third, and largest), and they account for nearly 50% of health care spending.
Per a 2020 paper from the Bureau of Economic Analysis (BEA) and Centers for Medicare & Medicaid Services (CMS), Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) are classified as “government social benefits” that finance spending that make up GDP. The BEA’s monthly “Personal Income and Outlays” release breaks out Medicare and Medicaid but not CHIP, such that I’ll focus on the former two in this post. I recently noted that health care spending has accounted for ~50% of real (inflation-adjusted) consumer spending/PCE growth over the past two years, roughly double the ~23% of real PCE that health care spending comprises. As of October, Medicare and Medicaid spending was up 22% since the end of 2021, in line with the growth in nominal health care spending (Medicare and Medicaid are reported in nominal rather than in real dollars). Put in different terms, Medicare and Medicaid account for 45% of health care spending and have accounted for ~45% of the growth in health care spending and ~12% of the growth in nominal PCE since the end of 2021, bearing in mind that PCE accounts for nearly 70% of GDP. Any way you slice it, Medicare and Medicaid have been important contributors to economic growth over the past three years, to speak nothing of Social Security spending (which is up 31% since the end of 2021, topping the growth in Medicare and Medicaid spending by a comfortable margin).
The incoming administration announced an outside advisory group with the goal of reducing what it deems wasteful spending, and numerous news outlets have reported that Republicans may consider significant cuts to Medicaid. Doing any of this won’t be easy, as only 14% ($948 billion) of government spending last fiscal year was on nondefense discretionary categories. Furthermore, federal spending is authorized by Congress, and Congress may be unwilling to touch entitlement programs. If, however, the administration is successful in cutting Medicaid payments, what will happen to consumer spending in that case? Government spending has accounted for a disproportionate percentage of GDP growth and hiring over the past two years; how logical is it to assume that such spending could be cut with little or no consequences?
