Will Health Costs Inflate the Deficit?

IN 1990, President Bush and Congress passed a massive tax increase with the goal of reducing the budget deficit. The plan was blown away by a recession and rapid growth in federal health-care costs.

President Clinton's 1993 tax hike faces the same danger. So far, however, revenues have been rising faster than spending, largely because the economy has expanded rapidly. Extra revenues offset rising health costs and interest on the national debt.

Under Bush, the deficit rose from $221 billion in fiscal 1990 to $290 billion in fiscal 1992. Since then the deficit has shrunk to $203 billion in the fiscal year ending last Sept. 30. The new Clinton budget projects a deficit in the current year of $192 billion. But the deficit will remain pretty well level for the next several years, the budget writers predict.

''Health care will continue to consume a larger share of government budgets, leaving fewer resources for such other priorities as education and job training, transportation and telecommunications infrastructure, and research and development,'' complains the budget document released last week. ''In fact, over the next five years, almost 40 percent of the growth in total federal spending will come from health care spending.''

Medicare and Medicaid will cost Washington $271 billion this year, or 17 percent of total federal expenditures, the budget says. The budget assumes Medicare spending will rise at a 9.1 percent annual rate over the next five years; Medicaid costs at a 9.3 percent rate. Those are far higher rates than the anticipated inflation rate or the nominal growth rate for the economy.

But they are an improvement. Medicaid costs, for example, rose 10 percent per year on average in fiscal years 1984 through 1988, and 22 percent a year in the 1988-92 period.

The budget outlines several reasons for projecting slower growth in federal health costs. But will that actually happen?

Joseph Newhouse, a Harvard University economist specializing in health policy and management, and Haiden Huskamp, a doctoral candidate at Harvard, raise some doubts about the much-talked-about slowdown in rising health-care costs (government, business, and individual) in the 1990s.

''Any slowdown in spending is modest at best,'' they conclude in an article in the current issue of Health Affairs.

That's less hopeful than analysis in the same issue by seven staff members of the federal Health Care Financing Administration. They figure the nation spent $884.2 billion on health care in 1993, up 7.8 percent from 1992. The portion of the economy devoted to health care increased from 13.6 percent in 1992 to 13.9 percent in 1993. That 0.3 percentage point increase equaled the average rate of increase recorded since 1960.

The share of total health-care spending made by all levels of government has grown from 41.1 percent in 1990 to 43.9 percent, a hike due to rising Medicare and Medicaid expenditures. The federal share of the total health-care bill grew to 32 percent, the highest since the early 1970s.

Some steam was taken out of Clinton's health-care reform proposal by the assumption that health-care costs were no longer spiraling out of control. Thus, opponents argued, the danger of a ''crisis'' is fading and the system is not in imminent peril.

A national survey released this week of 2,097 employers with at least 10 employees found that their health-care costs fell 1.1 percent last year, the first decline in a decade. The decline, according to Foster Higgins, the benefits consulting firm based in New York that conducted the survey, resulted from a 21 percent jump in enrollment of workers in managed-care insurance plans, rather than higher-cost traditional coverage.

Ms. Huskamp suspects smaller firms would have had ''a different experience'' in health-care costs. Dr. Newhouse says the savings from the coverage switch over could be a one-time factor.

The Huskamp-Newhouse analysis uses a different measure to deflate the hike in current-dollar health-care spending to real spending than do the federal government statisticians. The two say growth in real per capita health-care outlays was 4.6 percent in 1993, down from 4.7 percent in 1992. The comparable government numbers are 3.8 percent and 4.6 percent. If Huskamp and Newhouse are right, the health-cost problem is not going away.