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Blog | Budgeting

Who’s afraid of the federal debt?

Blog | Budgeting

Who’s afraid of the federal debt?

  • A recent Wall Street Journal opinion piece says the budget deficit this year is expected to reach $1 trillion.
  • Federal healthcare spending will likely rise through the next recession.
  • If Alternative Payment Models haven’t proven any more successful at wringing out unnecessary utilization and reducing per capita expenditures for federal programs, Congress might look to blunt rate cuts to reduce deficit spending to sustainable levels.

An Aug. 23 opinion piece by American economist Valerie Ramey in The Wall Street Journal says the budget deficit this year is expected to reach $1 trillion.

“The stock of national debt in the hands of the public now stands at almost $17 trillion, which amounts to almost 80% of U.S. gross domestic product, the value of what the economy produces in a year,” says Ramey’s opinion piece titled “It’s time to start worrying about the national debt.”

“This level of the debt-to-GDP ratio is not unprecedented. The highest debt-to-GDP ratio in American history occurred at the end of World War II, when debt reached 106% of GDP,” Ramey’s opinion piece states. “As soon as the war ended, the government ran budget surpluses for a few years, reducing the national debt by about 12%. However, the main driver of the subsequent steep decline in the debt-to-GDP ratio was the rapid growth of GDP, owing to growth in the real economy as well as to inflation, which raises the dollar value of current GDP but has no effect on the amount of outstanding debt.”

Mulvany commentary

That growth, in part, was fueled by demographics and specific circumstances. GIs  were returning from war and starting families, and the United States was the only major industrial base left functioning after WWII. When the economy is booming, deficits aren’t much of an issue as long as overall growth GDP exceeds deficit spending. But as it looks more and more likely that we’re heading into a recession in the next 12 to 24 months, this could be a problem in the near term.

With interest rates at current levels, the Fed doesn’t have much room to cut interest rates at the overnight window, so monetary policy options are limited. And with annual deficits now cresting the $1T mark, additional spending/tax cuts to stimulate the economy may be hard for bond investors to swallow.

Takeaway

Federal healthcare spending will likely rise through the next recession. First, Medicare spending is less sensitive to the business cycle than other segments of the economy. And Medicaid is counter-cyclical. The feds and states tend to spend more on Medicaid to help those who have been recently separated from their jobs, and also to quickly pump cash into the economy.

What this means for APMs

However, once we muddle through the recession, I would expect policymakers to take a hard look at the liability section of the U.S.’s balance sheet as annual deficits through the recession will likely exceed $1T annually. And if Alternative Payment Models (APM) haven’t proven any more successful at wringing out unnecessary utilization and reducing per capita expenditures for federal programs, I would expect Congress to look to blunt rate cuts to reduce deficit spending to sustainable levels.

Based on the existing options for cutting payment rates, I anticipate a focus on site-neutral payments, medical-education payments, a renewal of the recently expired Affordable Care Act reduction to the hospital market basket update, potentially preauthorization for imaging services and the deployment of bundles for orthopedic procedures. Admittedly, I see that last one is an APM, but it’s one of the few that is consistently a saver.

About the Author

Chad Mulvany, FHFMA,

is director, healthcare finance policy, strategy and development, HFMA’s Washington, D.C., office.

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