United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Military 

Construction, Veterans Affairs, and 

Related Agencies, Committee on 

Appropriations, House of Representatives

HEALTH CARE SPENDING

Public Payers Face Burden 

of Entitlement Program 

Growth, While All Payers 

Face Rising Prices and 

Increasing Use of Services 

Statement of A. Bruce Steinwald, 

Director, Health Care 

For Release on Delivery

Expected at 10:00 a.m. EST 

Thursday, February 15, 2007

 

GAO-07-497T 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here as you consider the challenges involved in 

financing health care. We at GAO have been particularly concerned about

the federal government’s long-term fiscal sustainability and the 

contribution of health care spending to this troubling picture. For the past 

several years, we have consistently reported that in just a few decades, the 

government will face a serious fiscal imbalance driven by known 

demographic trends and escalating health care cost growth.1 Over the next 

several decades, growth in spending on federal retirement and health 

entitlements will encumber an escalating share of the government’s 

resources. These entitlement programs primarily include Social Security, 

which provides, among other things, retirement income to individuals aged 

62 and older; Medicare, which provides health care coverage primarily for 

individuals 65 and older; and Medicaid, which is a joint federal-state 

program providing health care and long-term care for low-income 

individuals.

This Subcommittee’s concern about the challenges involved in financing 

health care is consistent with the fact that certain spending pressures 

faced by Medicare and Medicaid are faced by all health care payers, 

including the Departments of Veterans Affairs (VA) and Defense, as well as 

private payers of health care. To provide an overview of the situation, my 

remarks will focus on (1) the long-term outlook for the federal budget and 

implications for the national economy, (2) health care spending increases

system-wide and drivers of spending growth, and (3) cost containment 

challenges health care payers face now and in the future. My remarks are 

based largely on issued GAO work and relevant literature on health care 

spending.2

 In February 2007, we updated prior work by including more 

recent data from GAO’s budget simulation model, the Centers for 

Medicare & Medicaid Services, and the U.S. Census Bureau. All of our 

 1

GAO, Long-Term Budget Outlook: Deficits Matter—Saving Our Future Requires Tough

Choices Today, GAO-07-389T (Washington, D.C.: Jan. 23, 2007); Long-Term Budget 

Outlook: Saving Our Future Requires Tough Choices Today, GAO-07-342T (Washington,

D.C.: Jan. 11, 2007); 21st Century: Addressing Long-Term Fiscal Challenges Must Include

a Re-examination of Mandatory Spending, GAO-06-456T (Washington, D.C.: Feb. 15,

2006); and Long-Term Care Financing: Growing Demand and Cost of Services Are 

Straining Federal and State Budgets, GAO-05-564T (Washington, D.C.: Apr. 27, 2005). 

2

GAO-07-389T; GAO-07-342T; GAO-05-564T; GAO, The Nation’s Long-Term Fiscal Outlook: 

September 2006 Update, GAO-06-1077R (Washington, D.C.: September 2006); and Health

Care: Unsustainable Trends Necessitate Comprehensive and Fundamental Reforms to 

Control Spending and Improve Value, GAO-04-793SP (Washington, D.C.: May 2004). 

Page 1 GAO-07-497T
work was done in accordance with generally accepted government 

auditing standards. 

In summary, projections show that the federal budget is on a path that is 

fiscally unsustainable, in large part because of growth in spending for 

Medicare and Medicaid. Mandatory spending for these entitlements, 

together with spending for Social Security, threatens to crowd out 

discretionary spending for a vast array of domestic programs. It is largely

the public payers who will bear the cost burden associated with the baby

boom generation, whereas both public and private payers must contend 

with the escalating costs associated with medical technology, population 

risk factors leading to expensive chronic conditions, and an imperfect 

market in which consumers and providers lack the information and 

incentives needed to achieve the best value for the dollars spent. 

Since 1992, we have provided the Congress with simulations of the longterm fiscal outlook, projecting spending as a share of the nation’s output, 

or gross domestic product (GDP), and revenues for several decades, using 

certain assumptions. One simulation assumes that all expiring tax 

provisions are extended, revenue remains constant as a share of GDP, and 

federal discretionary spending keeps pace with the economy. Under these 

assumptions, we project that, by 2040, federal revenues may be adequate 

to pay little more than interest on the federal debt and a fraction of 

entitlements.3

 Figure 1 shows the substantial contribution of outlays for 

Social Security, Medicare, and Medicaid to this problem. 

Burden of Entitlement 

Growth Worsens 

Long-Term Federal 

Fiscal Outlook 

 3

For more information about GAO’s simulations see www.gao.gov/special.pubs/longterm/. 

Page 2 GAO-07-497T
Figure 1: Composition of Spending as a Share of GDP Assuming Discretionary 

Spending Grows with GDP After 2007 and All Expiring Tax Provisions Are Extended 

Percent of GDP

Fiscal year

All other spending

Medicare and Medicaid

Social Security

Net interest

Source: GAO’s January 2007 analysis.

0

10

20

30

40

50

2006 2015 2030 2040

Revenue

Absent substantive reform of entitlement programs, federal spending will

grow to unprecedented levels. Our projections are in part driven by 

demographic trends in coming decades. In 2000, individuals aged 65 and 

older numbered about 35 million people—about 12 percent of our nation’s 

total population. By 2020, that percentage will increase to about 

16 percent—1 in 6 Americans—and will represent nearly 20 million more 

elderly than there were in 2000. By 2040, the number of elderly aged 

85 years and older is projected to increase more than 250 percent, from 

slightly over 4 million in 2000 to slightly over 15 million (see fig. 2). Social 

Security and a large portion of Medicare are financed as pay-as-you-go 

systems in which current workers’ payroll taxes pay current retirees’ 

Page 3 GAO-07-497T
benefits.4

 Therefore, these programs are directly affected by the relative

size of populations of covered workers and beneficiaries. Historically, this

relationship has been favorable. In the future, however, the overall 

worker-to-retiree ratio will change in ways that threaten the financial 

solvency and sustainability of these entitlement programs. In 2000, there 

were 4.7 working-age persons (20 to 64 years) per elderly person, but by 

2040, this ratio is projected to decline to 2.6. 

Figure 2: Elderly Population, 2000 through 2040 

0

10

20

30

40

50

60

70

80

2000 2020 2040

Number (in millions)

Year

85 and older

65 to 84 years old

Sources: U.S. Census Bureau, Annual Estimates of the Population by Sex and Five-Year Age Groups for the

United States: April 1, 2000, to July 1, 2003 (NC-EST2003-01) (June 2004), and U.S. Interim Projections by

Age, Sex, Race and Hispanic Origin (March 2004).

4.3

30.8

7.3

47.4

15.4

64.6

 4

Financial transactions of the Medicare program operate through two trust funds, the

Federal Hospital Insurance (HI) trust fund and the Supplementary Medical Insurance (SMI)

trust fund. For both Social Security and Medicare’s HI trust fund, the main source of 

income is taxes on wages and self-employment income. Medicare’s SMI trust fund is 

financed by a combination of general revenues and beneficiary premiums. 

Page 4 GAO-07-497T
Absent significant policy changes in federal spending, federal revenue, or 

both, the growth in mandatory spending on federal retirement (Social 

Security) and especially health entitlements (Medicare and Medicaid) will 

encumber an escalating share of the government’s resources, leaving

fewer and fewer dollars for spending on discretionary programs, including 

the health care provided by VA. (See fig. 3.) 

Figure 3: Federal Spending for Mandatory and Discretionary Programs, 1962-2017

Percent of total outlays

Sources: Office of Management and Budget and the Congressional Budget Office.

Year

Net Interest

Discretionary

Mandatory (net of offsetting receipts)

0

20

40

60

80

100

80

60

40

20

1962 1970 1980 1990 2000 2008 2017

CBO’s January 2007

projections

Social Security and Medicare’s Hospital Insurance Trust Funds Face C

Figure 3 suggests that this current fiscal path will increasingly constrain 

the government’s ability to address emerging and unexpected budgetary 

needs and increase the burdens that will be faced by future generations. 

Indeed, entitlement spending will have significant implications for the 

economy as a whole. Figure 4 shows the total future draw on the economy 

represented by federal spending for Social Security, Medicare, and 

Medicaid. Federal spending for these entitlement programs combined is 

projected to grow to 15.5 percent of GDP in 2030 from today’s 9 percent.

Page 5 GAO-07-497T
Figure 4: Social Security, Medicaid, and Medicare as Share of GDP, 2000-2080 

Percent of GDP

Sources: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration; Office of the Actuary,

Centers for Medicare and Medicaid Services; and the Congressional Budget Office.

Year

Medicare

Medicaid

Social Security

0

5

10

15

20

25

30

2000 2010 2020 2030 2040 2050 2060 2070 2080

Note: Social Security and Medicare projections are based on the intermediate assumptions of the 

2006 Trustees’ Reports. Medicaid projections are based on CBO’s January 2007 short-term Medicaid 

estimates and CBO’s December 2005 long-term Medicaid projections under midrange assumptions. 

Although Social Security is a major part of the fiscal challenge, it is far 

from our biggest challenge. Over the past several decades, health care 

spending on average has grown much faster than the economy, and this 

rapid growth is projected to continue. As figure 4 shows, Social Security 

grows as a share of the economy and then levels off, whereas Medicare 

and Medicaid growth continues to rise without abatement. 

Health care spending system-wide—that is, for both public and private 

payers—is absorbing an increasing share of GDP. As shown in figure 5,

from 1975 through 2005, aggregate public and private spending on health 

care grew from about 8 percent to 16 percent of GDP. In 2005, public and 

private spending totaled $2 trillion. Aggregate health care spending is 

projected to grow to 20 percent of GDP by 2015.

Growth in Health 

Care Spending 

System-wide Driven 

by Certain Factors 

Page 6 GAO-07-497T
Figure 5: Aggregate Public and Private Health Care Spending, as a Percentage of

GDP 

0

5

10

15

20

25

1975 1985 1995 2005 2015

Percentage of GDP 

Source: The Centers for Medicare & Medicaid Services, Office of the Actuary.

Year

8.1

10.4

13.7

16.0

20.0

Note: The figure for 2015 is projected. 

Such health care spending increases threaten the ability of the nation to 

remain competitive in the global economy. 

Aggregate health care spending continues to rise because of increased 

medical prices and increased utilization due to growth in the number, or 

volume, of services per capita, and use of more intense, or complex, 

services. Figure 6 shows the relative importance of price and utilization 

with respect to spending growth. From 2000 through 2005, inflation in 

medical prices—as represented by the medical component of the 

Consumer Price Index (CPI)—grew by 4.4 percent on average, whereas 

health care spending per capita—which includes increases in both medical 

prices and utilization—grew by 6.9 percent on average. By comparison, 

during this time, GDP grew at an average annual rate of 4.9 percent. These 

rates of growth suggest that growth in the economy cannot offset the 

growth in health care spending per capita. 

Page 7 GAO-07-497T
Figure 6: Comparison of Cumulative Growth in General Inflation, Medical Inflation,

Gross Domestic Product, and Health Care Spending Per Capita, 2000-2005 

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005

Cumulative percentage

Sources: GAO analysis of data from the Bureau of Labor Statistics, the Centers for Medicare & Medicaid

Services, Office of the Actuary, and the Bureau of Economic Analysis.

Year

Health care spending per capita

Medical inflation (CPI-Medical)

Gross domestic product (GDP)

General inflation (CPI-Urban consumers)

39.81

26.88

23.93

13.41

Medical technology is a major contributor to growth in health care 

spending. For example, one study found that the average amount spent per 

heart attack case increased nearly $10,000 per case after controlling for 

inflation, or 4.2 percent per year between 1984 and 1998.5

 Nearly half of the 

cost increases resulted from people getting more intensive technologies—

such as cardiac catheterization—over time. Moreover, the proportion of 

people receiving catheterization in the surgical treatment of heart attacks 

rose from slightly over 10 percent in 1984 to slightly over 50 percent in 

1998. Another study discusses what we characterize as a multiplier effect.

6

 5

David M. Cutler and Mark McClellan, “Is Technological Change in Medicine Worth It?”

Health Affairs, vol. 20, no. 5 (September/October 2001). 

6

See Richard A. Deyo, “Cascade Effects of Medical Technology,” Annual Review of Public

Health, vol. 23 (May 2002). 

Page 8 GAO-07-497T
That is, the diffusion of new diagnostic technology, such as advances in

imaging, increases diagnostic capability, which, in turn, increases the 

identification and treatment of diseases or conditions. In some cases, the 

multiplier effect can lead to overdiagnosis and the excessive use of 

resources. The study cites the use of spinal magnetic resonance imaging 

(MRI) as one example. Researchers find that diagnostic spinal MRI 

sometimes reveals abnormalities (such as bulging discs) having no clinical 

relevance. Some physicians, the study contends, act on this information 

and perform unnecessary surgery, which can sometimes lead to 

complications. 

Obesity, smoking, and other population risk factors can lead to expensive 

chronic conditions; the increased prevalence of such conditions—for 

example, diabetes and heart disease—drives growth in the utilization of 

health care resources and therefore in spending. Obesity has been the

subject of several recent studies focusing on associated health care cost 

increases.7

 For example, one study attributes 27 percent of the growth in 

inflation-adjusted per capita spending between 1987 and 2001 to the rising

prevalence of obesity and higher relative per capita spending among obese 

individuals.8

 Specifically, these factors accounted for slightly over 

38 percent of the rise in spending for diabetes and 41 percent of the rise in

spending for heart disease. Other studies focus on the effect of population 

risk factors on utilization of services. For example, one study found that 

obese patients had significantly higher numbers of primary care visits and 

diagnostic services compared to nonobese patients.9

 7

See Kenneth E. Thorpe, “The Rise in Health Care Spending and What to Do About It,” 

Health Affairs, vol. 24, no. 6 (November/December 2005); Roland Sturm, “The Effects of 

Obesity, Smoking, and Drinking on Medical Problems and Costs,” Health Affairs, vol. 21, 

no. 2 (March/April 2002); Kenneth E. Thorpe et al., “The Impact of Obesity on Rising 

Medical Spending,” Health Affairs Web Exclusive, 

http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.480 (Oct. 20, 2004); and 

Marsha A. Raebel et al., “Health Service Use and Health Care Costs of Obese and Nonobese

Individuals,” Archives of Internal Medicine, vol. 164, no. 19 (Oct. 25, 2004). 

8

Kenneth E. Thorpe et al., “The Impact of Obesity on Rising Medical Spending,” Health

Affairs Web Exclusive, http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.480

(Oct. 20, 2004). 

9

Klea D. Bertakis and Rahman Azari, “The Influence of Obesity, Alcohol Abuse, and 

Smoking on Utilization of Health Care Services,” Family Medicine, vol. 38, no. 6 (June 

2006). 

Page 9 GAO-07-497T
Both public and private payers face fundamental challenges in the struggle 

to contain health care spending growth. One of the challenges involves the

unbridled use of technology and society’s unmanaged expectations. For 

example, cutting-edge drugs and other medical technologies can be very 

expensive but offer no advantage over their alternatives. Experts note that

the nation’s general tendency is to treat patients with available technology 

when there is the slightest chance of benefit to the patient, even though 

the costs may far outweigh the benefit to society as a whole. They note

that the discipline of technology assessment has not kept pace with 

technology advancements.10

Health Care Payers 

Face Challenges 

System-wide 

Today’s employers, which finance a substantial share of the health care of

the privately insured population, are seeking more information on health

care technology costs and benefits. Public agencies seldom use such 

information in discharging their responsibilities and lack an independent

source of cost-benefit analyses. Although the Food and Drug 

Administration (FDA), for example, evaluates new medical products based 

on safety and efficacy data submitted by manufacturers, it does not 

evaluate whether the new products are cost-effective compared with 

existing products used for the same treatment indications. In turn, 

Medicare, which generally relies on FDA approval decisions, does not 

evaluate whether new technologies are superior, either clinically or 

economically, compared with technologies already covered and paid for 

by the program. 

Another cost containment challenge for all payers relates to the market 

dynamics of health care compared with other economic sectors. In an 

ideal market, informed consumers prod competitors to offer the best 

value. Without good comparative information, however, consumers are 

less able to determine the best value. Insurance masks the actual costs of 

goods and services, providing little incentive for consumers to be costconscious. Similarly, clinicians must often make decisions in the absence 

of universal medical standards of practice. Under these circumstances, 

medical practices vary across the nation, as evidenced by wide geographic 

variation in per capita spending, even after controlling for patient 

differences in health status. A seminal study on Medicare spending shows 

that, counterintuitively, Medicare beneficiaries living in higher-spending 

areas appear to experience slightly worse outcomes relative to 

 10GAO-04-793SP. 

Page 10 GAO-07-497T
beneficiaries in lower-spending areas.11 At the same time, to the extent that

providers are paid for each service rendered, an incentive exists to 

maximize revenue through increased volume. Together, the lack of 

transparency with regard to cost and quality and perverse incentives with 

regard to the use of care combine in the health care system to preclude 

market forces from achieving the best value for the dollars spent. As a 

consequence, health care spending continues to experience annual 

inflation that threatens the economic prosperity of the nation in both 

public and private sectors. 

Mr. Chairman, this concludes my prepared remarks. I will be happy to 

answer any questions you or other Members of the Subcommittee may 

have. 

For future contacts regarding this testimony, please call A. Bruce 

Steinwald at (202) 512-7101 or at steinwalda@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found on

the last page of this statement. Other individuals who made key 

contributions include Phyllis Thorburn, Assistant Director; Jessica Farb; 

Hannah Fein; and Gregory Giusto. 

Contact and 

Acknowledgments 

 11For example, in a cohort of Medicare beneficiaries treated for hip fractures, the study

found that beneficiaries in three regions with higher end-of-life spending had a higher risk 

for death than beneficiaries living in regions with lower spending. E.S. Fisher et al., “The 

Implications of Regional Variations in Medicare Spending. Part 2: Health Outcomes and 

Satisfaction with Care,” Annals of Internal Medicine, vol. 138, no. 4 (2003). 

(290606) Page 11 GAO-07-497T
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