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Solving the Deficit: Fix Medicare

By Dr. Nilesh Kalyanaraman

If you’ve turned on your TV or picked up your newspaper you can’t help but be concerned about the budget deficit. We’re being told that the country is heading for bankruptcy and that the only way to deal with this problem is by slashing spending and raising taxes. But is this true?

Well, sort of. In reality, the biggest problem the government has going forward is the ever rising costs of Medicare and Medicaid. The Congressional Budget Office projects that over the next several decades the cost of Medicare and Medicaid will steadily rise from 4% of GDP to 12.5% of GDP in 2050 with the vasy majority of that rise due to Medicare spending. (Just to be clear, total health care costs aside from Medicare and Medicaid are also projected to increase from 13% of GDP currently to 24.5% in 2050, but this won’t add to the federal deficit since it’s private spending.)  In contrast, spending on Social Security and other spending will be fairly constant over the coming decades.

GraphThe recently passed health care law (the Affordable Care Act for all you wonks) makes serious inroads in addressing the challenge of reigning in Medicare costs. The most significant provision of the law is the Independent Payment Advisory Board (IPAB). The IPAB is charged with recommending cuts in Medicare spending if spending grows too fast. Every two years if Medicare spending increases by more than 1% over the growth in GDP per person, the IPAB is required to craft a slate of cost cutting measures that will bring Medicare costs back down. The beauty of this is that the recommendations must be adopted by Medicare unless Congress passes a law that achieves the same level of spending cuts through a different set of cost cutting measures. Cost control will now become a required and recurring component of Medicare. More importantly, putting the power of cost control in a regulatory agency and removing it from Congress’ purview frees Congress from avoiding the necessary but politically unpalatable choices that it should make but rarely does.

The bottom line is that the growing budget deficit is a consequence of the projected rise in Medicare spending. The health care law, in addition to expanding access to care, is also a serious attempt at balancing our federal budget. Kind of makes you wonder why anyone would want to repeal the health care law. Maybe they’re not as serious about the deficit as they say they are.

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