Healthcare Costs Are a Major Driver of the National Debt and Here’s the Biggest Reason Why

As the recent long-term projections from the Congressional Budget Office (CBO) show, the national debt is on an unsustainable path. Under current law, the nation’s debt trajectory will rise from nearly 100 percent of gross domestic product (GDP) in 2024 to 166 percent in 2054. One of the largest drivers of that rising debt is federal spending on major healthcare programs, such as Medicare and Medicaid. Such spending is projected to rise by 73 percent over the next decade and will exceed all other categories of federal spending in 2028. By 2054, such spending will account for 30 percent of total federal outlays, exceeding the total amount spent on discretionary programs, such as defense and education, by 51 percent.

The amount the federal government spends on major healthcare programs is broadly influenced by two factors:

1. The changing demographics of the population: Older individuals spend more, on average, on healthcare than younger individuals. And as more people reach age 65, enrollment and therefore spending on federal programs like Medicare rises.
2. Additional cost growth: Generally defined as the rate at which healthcare costs, adjusting for demographic changes, outpaces the growth rate of the economy. When such cost growth occurs, the amount the federal government spends on healthcare programs will rise.

Here we focus on the latter of those factors and its effect on the federal budget. Below is an overview of additional cost growth, its contribution to rising healthcare costs, and why it matters for fiscal sustainability.

Why Does Additional Cost Growth Matter?

The amount that the federal government spends on healthcare can rise due to a number of factors. Evaluating additional cost growth helps economists and policymakers isolate how much of the growth in healthcare spending is due to rising healthcare costs as opposed to other factors. For instance, part of the growth in federal healthcare spending is due to the aging of the population, which increases enrollment in programs such as Medicare. At the same time, spending may also grow due to the general growth in the economy, because as economic output rises, so too may the cost of healthcare. Additional cost growth captures the growth per capita in healthcare spending above and beyond what is already accounted for by demographic changes and the growth in the economy.

Additional cost growth has varied considerably over the past 45 years, according to data from the Centers for Medicare & Medicaid Services. Spurred by high healthcare costs stemming from factors such as innovations in medical technology and rising prices, additional cost growth was the highest in the late 1980s, averaging 3.5 percentage points from 1986 to 1990. There was negative additional cost growth from 1996–2000 and 2011–2015 because the economy grew faster than healthcare costs per capita (adjusted for demographic effects). Additional cost growth then grew to 1.9 percentage points from 2016–2020, primarily due to the growth in healthcare costs throughout the first year of the pandemic, but the average from 2016–2022 was -0.5 percentage points because GDP has recently outpaced healthcare expenditures.

How Will Additional Cost Growth Contribute to the Rise in Federal Healthcare Spending?

Additional cost growth is projected to occur across most areas of the U.S. healthcare system, including federal programs such as Medicare and Medicaid. Because about 45 percent of healthcare spending is financed through government programs, additional cost growth will have important spending ramifications for the federal government. Over the next 30 years, federal spending on healthcare (not including offsetting receipts of premiums) is projected to climb from 6.3 percent of GDP in 2024 to 9.8 percent in 2054. According to the Congressional Budget Office (CBO), about two-thirds of that growth is due to additional cost growth.

In 2035, the earliest year for which CBO reports such estimates, additional cost growth is projected to be 1.6 percentage points in Medicare and 1.0 percentage points in Medicaid. While those levels are projected to decline by 2054, reaching 0.2 percentage points and 0.6 percentage points for Medicare and Medicaid respectively, it still remains that healthcare costs, adjusted for demographic changes, are projected to outpace economic growth in the federal healthcare system. That trend is primarily driven by factors such as rising medical prices and growth in real (inflation-adjusted) national income per person, as healthcare spending has traditionally risen with increases in income.

How Would Constraining Additional Cost Growth Affect the Fiscal Outlook?

While reducing additional cost growth is no easy task, constraining healthcare costs would reduce federal spending on healthcare and decrease budget deficits — making the nation’s fiscal outlook more manageable. In fact, if federal healthcare spending grew at about the same rate as the economy, gross spending on healthcare by the federal government would only be 7.2 percent of GDP by 2054 — a 27 percent reduction from its current projected level. That reduction in federal spending would likely ease pressure on the nation’s fiscal picture. For example, instead of debt held by the public growing to 166 percent of GDP in 2054 as projected under current law, in a scenario where additional cost growth is eliminated immediately, the projected debt-to-GDP ratio would be around 20 to 25 percentage points lower (such an estimate does not account for the effects of reduced spending and lower deficits on the economy).

Restraining Rising Healthcare Costs Is the Key to Sustainable Fiscal Future

If healthcare costs continue to rise at their current levels, they will impose a financial burden on Americans and exacerbate the nation’s fiscal outlook. The U.S. healthcare system is expensive and complex, so tackling the nation’s exorbitant healthcare costs will likely require enacting broad-based reforms or involve implementing numerous solutions. To that end, a number of broad strategies have been proposed, including, but not limited to:

• Implementing healthcare cost growth targets to help healthcare systems track and control costs
• Containing the rise in prices for healthcare goods and services, such as prescription drugs
• Reducing inefficient and wasteful healthcare spending

Improving the U.S. healthcare system will be crucial to providing quality, affordable healthcare and to bettering our nation’s long-term economic and fiscal wellbeing. High and rising debt can have a number of damaging implications for the U.S. economy — slowing the growth of the economy, constraining lawmaker’s ability to enact deficit-financed policy, and even elevating the risk of a fiscal crisis in the future. To put the nation on a sustainable fiscal and economic path, addressing healthcare costs must be priority for policymakers.

Related: How Can We Reduce the Cost of an Increasingly Expensive Healthcare System?

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