Rapidly growing health care costs have been a major driver of federal budget deficits. Could a decline help solve the nation's long-term fiscal problem?

Rapidly growing health care costs have been a major driver of actual and projected federal budget deficits and the national debt. In recent years, the rate of growth in medical spending has slowed, leading many to ask whether a permanent decline could solve the nations long-term fiscal problem.

The Tax Policy Center is a joint venture of the Urban Institute and Brookings Institution. The Center is made up of nationally recognized experts in tax, budget, and social policy who have served at the highest levels of government. TaxVox is the Tax Policy Center's tax and budget policy blog.

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Along with University of California at Berkeley economist Alan Auerbach,we recentlyexaminedthe role of health spending in budget projections. Our conclusions: Yes, a long-term slowdown in medical cost growth could have a dramatic positive impact on future deficits. But no decline within the realm of our historical experience could fix the nations fiscal imbalance.

We take no position on whether the current slowdown will continueand, in fact,recent evidencesuggests costs may again be bumping up. Rather, we incorporated different health cost scenarios into a budget calculator to see how they change fiscal outcomes.

We did this by modeling a range of possible changes in health spending using a concept known as excess cost growth or ECG. The Center on Medicare and Medicaid Services defines this measure as the growth rate of health spending after adjusting for population aging, sex composition, and overall economic growth. Thus, excess cost growth captures the rate of growth in both per-person utilization and prices, controlling for demographics and the economy. Absent demographic changes, excess cost growth of zero means that health care spending would grow at the same rate as GDP.

Annual excess cost growth has averaged1.9 percent between 1975 and 2011, but has varied a lot; the five-year averages range from -0.3 percent in 19952000 to 2.7 percent in 20002005. The overall rise in excess cost has been driven by a diverse set of factors, including improved medical technology, expanded health insurance coverage, and growth in personal incomewhich increased utilization.

ECG has been lower recently, averaging 1.3 percent in 2005-11, and many believe this could be the beginning of a new long-term trend. For example, the Congressional Budget Office recentlyrevised downwardsits tenyear estimates of Medicare and Medicaid spending.

Excerpt from:

How curbing health care spending will affect the deficit