Rising health-care costs are at the core of the United States' long-term fiscal imbalance. The Congressional Budget Office (CBO) projects that between now and 2050, Medicare, Medicaid, and other federal spending on health care will rise from 5.5 percent of GDP to more than 12 percent. (Social Security costs, by comparison, are projected to increase from five percent of GDP to six percent over the same period.) It is no exaggeration to say that the United States' standing in the world depends on its success in constraining this health-care cost explosion; unless it does, the country will eventually face a severe fiscal crisis or a crippling inability to invest in other areas.
The problem is not limited to the federal government. Over the past 25 years, cost increases in the national Medicare and Medicaid programs have roughly paralleled (and actually been slightly below) cost increases in the rest of the health-care system. These trends drive a wide range of problems. State governments have had to divert funds from education to health care, which is partly why salaries for professors at public universities are now often 15 to 20 percent lower than those at comparable private universities. Meanwhile, the rising cost of employer-sponsored health insurance has squeezed take-home pay for most U.S. workers at the same time as median wages have stagnated and income inequality has increased.
Another dimension of the problem involves the variation of health-care costs across the United States. A recent analysis by the Medicare Payment Advisory Commission found that spending in higher-cost areas of the United States (that is, those in the 90th percentile ranked by cost), even after controlling for various factors, was 30 percent higher than in lower-cost areas (those in the 10th percentile). This substantial variation is undesirable both because the high-cost areas unnecessarily drive up total costs and because the
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