The Rising Cost of Health Care: Is it a Problem?

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

October 19, 2004

When Gail Wilensky invited me to participate in this session, I accepted readily for three reasons. First, I was honored—who would not be?—to speak at the annual meetings of the Institute of Medicine? Second, it is hard for me to say ” no ” to Gail, whom I have known in various capacities since her first job out of graduate school. Third, I know and respect David Cutler. He and I are billed arguing opposite sides on the question. But I don’t think that we disagree sharply on much of anything. Where we do see things differently, the disagreements, I am confident, will be matters of nuance and emphasis.

I begin with an economic truism and a fact. The fact is that over the long term, public expenditures cannot much exceed taxes without collapse of the nation’s economy. Yes, outlays can run ahead of revenues for a while. But deficits create debt, and interest on that debt must be paid. If a nation borrows to pay interest, debt explodes, and the currency collapses. The fact is that government expenditures under current law are almost certain to grow much faster than national income. The principal reason is rapid projected growth of government spending on Medicare and Medicaid. Projected increases in health care spending are so large that cuts in other government programs could not possibly close the projected gap between taxes and spending.

The truism and the fact jointly mean that either the proportion of income collected in taxes must be sharply increased, or the growth of outlays—and, more particularly, Medicare and Medicaid spending—must somehow be cut.