An Enhanced Macroeconomic Approach to Long-Range Projections of Health Care and Social Security Expenditures as a Share of GDP

Abstract

An enhanced two-sector economic growth model is created to project health care and Social Security expenditures as a share of GDP in the United States. Parameters used in the economic simulation model are based largely on consensus views in the literature. The main advantages of an economic model over the more commonly used actuarial models are: (1) explicit specification of underlying fundamental structures, (2) ability to investigate relationships in the entire economy, and (3) a fuller scope provided for policy analysis. Under the base model assumptions, that is, a continuation of current conditions for the production of, demand for, and financing of health care services, the economic model projects that the health care sector consumes 15.8 percent of national output by the year 2000 and 27.1 percent by the year 2040. The annual rate of increase in per capita consumption (less health spending) (“adjusted consumption”) falls from 1 percent in 2000 to 0.6 percent in 2025, and then increases to 0.8 percent in 2040, as the rate of increase in spending on health care for the elderly, and the capital investment required to support such spending, flow and ebb with the passing of the baby boom generation. Over the whole projection horizon, government spending on the health care of the elderly increases from a projected 3.8 percent of GDP in 2000 to 9.2 percent in 2040. Social Security expenditures for the elderly are projected to increase from 3.9 percent to 6.3 percent over the same period. More widespread HMO coverage is shown to lead to some small improvements in adjusted consumption. Over the long horizon, improved efficiency and productivity in the health sector and lower Social Security benefits assumed to cause an increased rate of savings and investment, however, actually cause the rate of growth in health spending to increase and adjusted consumption to decline, ceteris paribus. By contrast, an increase in sensitivity to health care prices leads to dramatically improved results, both in higher adjusted consumption and better finances for government programs of health care for the elderly.