Thomas Donlan of Barron’s says the 50th birthday of Medicare and Medicaid offers a good opportunity to examine the two programs’ health.

From modest beginnings in 1965, M&M have grown to account for more than a third of all U.S. health spending. Gross spending on Medicare in 2015 is expected to total $634 billion, though Medicare beneficiaries are paying about $100 billion of the current cost of benefits through premium charges. Spending by states and the federal government on Medicaid and its associated Children’s Health Insurance Program is $463 billion. Together, M&M spending exceeds all of the payments made by private health insurers. Together, M&M are the largest federal program. Together, they are the largest source of intended federal spending for which no revenue source is provided.

Federal spending for M&M rose from 2% of gross domestic product in 1985 to 4.7% in 2014. Under current law, the future of M&M is more rapid growth, to 8% of GDP in 2040. M&M’s unfunded liabilities for the next 75 years exceed $45 trillion, nearly three times the officially acknowledged national debt.

Two factors account for most of the growth. The number of elderly people in the U.S. is rising faster than the population, due to extended longevity and the retirement of the baby-boom generation. Also, the per capita cost of medical care is rising faster than GDP, partly because old patients have the most chronic diseases that are the most expensive to care for.

As they grew more expensive, M&M were repeatedly recognized as unaffordable. Congress enacted price controls, spending caps, practice restraints, and other measures, but none did more than slow spending growth. …

… In a recent Senate Budget Committee hearing, a senator asked the director of the Congressional Budget Office what would happen to the national deficit and debt if national spending on health care fell gradually over the next 10 years from 16.7% of GDP to 12%. That’s not impossible in theory: The Netherlands spends 12% of GDP on health care. Every other country in the world (except the U.S.) spends less than 12%.

The answer covered only the federal government’s share of health-care spending, and was startling: If spending as a share of GDP on M&M and lesser health programs fell by about 25% over 10 years and then stayed in line with GDP, the nation would have a surplus of about 2% of GDP in 2040, instead of the projected deficit of 6.6% of GDP. Debt held by the public would fall to about 24% of GDP—assuming that the government wouldn’t spend the savings some other way.
An Unlikely Story

The cost curve has never been bent like that. Such a change seems politically impossible. But it tells us the size of the U.S. health-care problem: If we could create a system that provided a Dutch level of benefits for a Dutch level of spending, all of our nation’s fiscal problems would vanish.