U.S. Budget Outlook Hinges on Volatile Health Spending, a Line Item That Keeps Rewriting Deficit Forecasts

Federal budget projections rise or fall on a single, unusually volatile line item: the nation’s medical bill. Over the past half-century, shifts in health spending have repeatedly rewritten expectations about how much Washington can afford—and how quickly deficits might grow.

The long-run trajectory is clear. Since 1970, the United States has devoted a dramatically larger portion of its economy to medical care, with health spending’s share of gross domestic product nearly tripling over that period. That historical rise has made health programs a central driver of fiscal debates, because even small changes in health spending trends can translate into very large dollar amounts when applied to the entire economy and to large federal programs.

But the more recent pattern complicates any confident forecast. Since about 2010, medical spending growth has only slightly outpaced overall GDP growth. That is a striking departure from the earlier decades when health costs consistently grew much faster than the economy as a whole. The result is a forecasting challenge: if the post-2010 slowdown persists, the budget outlook looks far less dire than if the nation returns to its earlier, faster cost growth.

To explore what might happen next, economist David M. Cutler lays out a set of future scenarios based on the underlying forces that push health spending up or down. One possibility is a new wave of medical advances that improve health but come with high price tags—such as novel therapies and technologies that expand what medicine can do while raising per-patient costs. Under this kind of innovation-driven expansion, spending could once again accelerate relative to GDP.

A very different path is also plausible: technological and organizational changes that reduce costs rather than raise them. In that scenario, innovation would not necessarily mean more expensive care; it could mean doing the same—or better—medicine with fewer resources. Depending on which forces dominate, future spending could range from rapid growth to meaningful restraint.

Cutler’s analysis emphasizes that the stakes are high even in middle-of-the-road outcomes. Even modest increases in medical spending relative to GDP, he argues, are likely to exceed the federal government’s capacity to finance health care using today’s tax tools. In other words, maintaining current commitments through existing revenue mechanisms becomes increasingly difficult if health costs resume anything like their historical tendency to climb faster than the economy.

The work was presented in the context of a Brookings Institution–University of Utah conference on “The Forces Shaping America’s Fiscal Future,” and Cutler notes he benefited from feedback from conference participants. He also underscores that the views are his own and do not necessarily represent the National Bureau of Economic Research (NBER). The NBER, for its part, continues to circulate related research through working papers and a suite of publications and media, including the NBER Reporter, NBER Digest, and topical bulletins on health, the economics of Alzheimer’s, and entrepreneurship, along with research spotlights, lectures, and panel videos.

Why it matters

Federal health spending is large enough that small changes in medical cost growth can reshape taxes, deficits, and the sustainability of major programs. Households, employers, and patients are affected indirectly as federal financing pressures influence policy choices about benefits, eligibility, and payment rates. The key variable to watch is whether the slower growth since 2010 is a durable shift—or a temporary pause before another surge driven by expensive new treatments.