Health Care Spending:

Public Payers Face Burden of Entitlement Program Growth, While All Payers Face Rising Prices and Increasing Use of Services

GAO-07-497T: Published: Feb 15, 2007. Publicly Released: Feb 15, 2007.

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GAO testified about the challenges involved in financing health care. GAO has been particularly concerned about the federal government's long-term fiscal sustainability and the contribution of health care spending to this troubling picture. For the past several years, we have consistently reported that in just a few decades, the government will face a serious fiscal imbalance driven by known demographic trends and escalating health care cost growth. Over the next several decades, growth in spending on federal retirement and health entitlements will encumber an escalating share of the government's resources. These entitlement programs primarily include Social Security, which provides, among other things, retirement income to individuals aged 62 and older; Medicare, which provides health care coverage primarily for individuals 65 and older; and Medicaid, which is a joint federal-state program providing health care and long-term care for low-income individuals. Congress's concern about the challenges involved in financing health care is consistent with the fact that certain spending pressures faced by Medicare and Medicaid are faced by all health care payers, including the Departments of Veterans Affairs (VA) and Defense, as well as private payers of health care. To provide an overview of the situation, GAO discussed (1) the long-term outlook for the federal budget and implications for the national economy, (2) health care spending increases system-wide and drivers of spending growth, and (3) cost containment challenges health care payers face now and in the future. This testimony is based largely on issued GAO work and relevant literature on health care spending. In February 2007, we updated prior work by including more recent data from GAO's budget simulation model, the Centers for Medicare & Medicaid Services, and the U.S. Census Bureau.

In summary, projections show that the federal budget is on a path that is fiscally unsustainable, in large part because of growth in spending for Medicare and Medicaid. Mandatory spending for these entitlements, together with spending for Social Security, threatens to crowd out discretionary spending for a vast array of domestic programs. It is largely the public payers who will bear the cost burden associated with the baby boom generation, whereas both public and private payers must contend with the escalating costs associated with medical technology, population risk factors leading to expensive chronic conditions, and an imperfect market in which consumers and providers lack the information and incentives needed to achieve the best value for the dollars spent.

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