Federal Public Budget Problem Research Paper

Pages: 6 (1819 words)  ·  Bibliography Sources: 3  ·  File: .docx  ·  Level: College Junior  ·  Topic: Healthcare

Budget Problem

Health care is viewed by some as the biggest point of crisis in the federal budget. Americans currently spends $2.2 trillion on health care every year and this cost is expected to rise to over $4 trillion by 2017 at current estimated rates of growth. The federal government is responsible for part of this, through the Medicare and Medicaid programs. In the 2009 budget, those two programs accounted for $676 billion, or 19% of the federal budget. In the project 2011 budget, the estimate for Medicare and Medicaid is $788 billion, 20.5% of total outlays. Health care costs are rising faster than other budget costs, and this trend is expected to continue. The baby boom generation is entering its retirement years, and therefore over the course of the next several years Medicare expenses in particular will increase significantly as a result of this demographic shift.

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The budget is currently in a deficit of $1.267 trillion dollars. At present, this is not affecting the cost of credit for the U.S. government, but as the debt increases so too does the cost of debt service. In 2011, debt service costs are estimated to be $251 billion, or 6.5% of outlays. By 2017 this is expected to be $681 billion, or 13.9% of outlays (2011 Budget). Along with health care, debt service is one of the fastest growing cost components of the federal budget. Therefore, it is judged to be essential that the deficit be either reduced or eliminated in the coming years. The challenge is to do this in an environment when demographic trends and rapid inflation in the cost of providing health care are working to increase health care outlays dramatically.

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Research Paper on Federal Public Budget Problem Assignment

There are a number of different policy solutions that are being proposed. The Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act are listed in the federal budget as providing assistance to the federal budget, with inflows exceeding outflows on aggregate between now and 2020 $916 billion to $670 billion. The Congressional Budget Office estimates are more conservative, estimating that the provisions of health care reform will reduce the federal deficit by a cumulative $143 billion through 2019 (CBO, 2010). More reductions are expected in the 2020-2030 years as a result of health care reform.

These two pieces of legislation work in two ways to help reduce the impact of health care costs on the federal budget. The first is stems from provisions that include slight reductions in Medicare benefits for some and a further $19 billion from the education provisions. It is believed that health care reform primarily impacts the budget by impacting coverage provisions. The education component assumes that with advance education about healthy lifestyle practices, health care costs can be reduced further as these choices reflect in an overall better state of health for American.

Health care reform clearly is not going to solve the budget problem on its own. The estimates still show that health care costs are expected to increase substantially in the coming years and are going to comprise an even greater portion of the federal budget. Therefore, other solutions beyond those already signed into law are going to be required in order to address this issue. There are a number of ways in which this can be addressed.

The stock Republican suggestion is to privatize Medicare and Medicaid. This proposal, either stated explicitly as by Paul Ryan (Klein, 2010) or implicitly as part of a starve the beast strategy in conjunction with unfunded tax cuts, would have the advantage of cutting these programs out of the federal budget. This proposal has the advantage of taking these two programs out of the federal budget, although it would replace them with vouchers. The rate of growth in those vouchers, however, would be slower than the current expected rate of growth in health care outlays. This would contribute significantly to balancing the budget (Ibid). The downside of this proposal is that health care would be put out of reach of many Americans. Those who cannot afford the care they need would simply be left to die. Senior citizens and the ill are not in a position to increase their income in order to pay for added health care costs. This proposal, while in theory solving the budget problem, would create a host of negative externalities. However, budgets and economics are amoral, and it is only the sense of moral duty that makes this suggestion unpalatable.

Another option is to move towards a fully nationalized system, akin to those in most civilized countries. These systems operate at varying levels of efficiency, depending on demographics and government cost control initiatives. In the U.S., the Congressional Budget Office notes that Medicare is able to negotiate lower prices than private providers and is run more efficiently (Klein, 2010). Presumably, economies of scale improve efficiency, and Medicare's large size results in better buying power. If Medicare becomes a monopoly, as is the case in countries with socialized health care systems, then it would be able to dictate prices. It is worth noting that drug prices are lower in most countries than in the U.S. Lowering drugs prices is a critical element of bringing the health care budget under control.

Politically, there is little will to address health care costs and few ideas. Rep. Ryan's plan is one of the few concrete proposals that have been tabled. The starve the best strategy has been intimated, not expressed. The Democratic Party has rested its health care strategy on health care reform, although all estimates show that this legislation is inadequate for addressing the escalating impact of health care costs on the budget. Pundits on both sides of the political spectrum occasionally have ideas, but few have the ability to bring their ideas to fruition. Among those in power, long-run ideas to reign in the costs of health care are few and far between. Ones that will actually work in the face of a major demographic problem are even scarcer.

There are issues that can be resolved, however, but remain unresolved. For example, there is no pathway for regulating biosimilars. These are the biologic equivalent of generic drugs, but for technical reasons they cannot be given the same regulatory treatment. The government has an interest in a streamlined approval pathway that would allow it to rely heavily on biosimilars to lower health care costs going forward, but public safety concerns would indicate that the regulatory pathway should be fairly stringent, much like the European model. Such a pathway would not be as helpful in cost containment, so this creates an ethical dilemma that the FDA has for years procrastinated resolving, but is not trying to bring to resolution in 2011. If ethics are removed from the equation, then certain a rapid approval process would help with budgetary cost controls.

It is unlikely that any major solution will be implemented by those in power. Republicans are unlikely to repeal health care, despite the talk, and Democrats are unlikely to be able to expand the program any time soon. At this point, however, there is an impasse with respect to addressing this problem, due to lack of creative ideas and due to the amount of political capital that would be expended on implementing further solutions.

The best solution is to progress with aggressive cost controls on drugs and to create a relatively lenient pathway for the approval of biosimilars. These measures could leverage the enhanced bargaining power of Medicare in particular to limit drug costs. No entity can match the buying power of a monolithic government entity -- while governments sometimes fail to use this bargaining power, the importance of cost control in health care all but assures Medicare could extract significant drug cost reductions from the pharmaceutical industry. Another step towards cost reduction, one that has been proposed by Republican lawmakers, is to limit malpractice payouts, which in turn should lower the cost of malpractice insurance. As these insurance costs are passed on to customers, a decrease in these costs could help to stop the escalation in doctor's fees.

Each of these solutions would be relatively low cost to implement as they would require legislation, but little direct action to be under taken. The costs are less economic than they are social. A streamlined pathway for biosimilars increases the risk of poor products being approved. Aggressive drug cost controls would create a disincentive for the industry to invest in R&D. Limiting malpractice awards would increase incentive for malpractice, again increasing risk to the public. However, each solution would contribute to decreasing the costs of health care in the federal budget.

However, it is worth considering two things. The first is that the demographics make actually solving the health care problem nearly impossible and the best solutions will only add an element of containment. The second is that health care is only a problem for the budget to the extent that it increases borrowing costs -- at present the… [END OF PREVIEW] . . . READ MORE

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