Can artificial intelligence be so transformative that it solves one of the U.S. economy's biggest problems: its skyrocketing budget deficit? According to three economists at the Brookings Institution, the answer is yes – AI could prove to be a positive “critical shock” to the country’s financial health.
A working paper published last month by the Center on Regulation and Markets at Brookings estimates that in the most optimistic scenario, AI could reduce the annual U.S. budget deficit by up to 1.5% of gross domestic product, or about $900 billion in nominal terms, by 2044. This resulted to reduce annual budget deficits by about a fifth at the end of the 20-year period.
“The use of AI provides a rare – potentially unique – opportunity to expand access to health information and services while reducing the burden on the traditional healthcare system,” wrote the paper’s authors, Ben Harris, Neil Mehotra and Eric So.
While the authors identify various channels through which AI can increase productivity, they highlight the potential of AI to dramatically improve healthcare and public health.
In addition to making American health care more efficient, AI could also “democratize” access to the system by giving people more options for preventive medical care – “changing the 'who' and 'where' of health care,” the economists wrote.
AI could reduce deficit pressure
The economic impact of a more efficient health care system and creating better ways for individuals to manage their own health could ease pressure on the government's yawning budget deficit, which topped $1.8 trillion in the fiscal year ended Sept. 30. The national debt is $36 trillion.
But adopting AI in healthcare is not a sure thing. There are numerous obstacles to widespread implementation of AI, most of which are related to regulation and incentives.
Economists' view of AI and healthcare is “a mix of excitement and despair,” said Ajay Agrawal, a professor at the University of Toronto's Rotman School of Management, where he researches the economics of artificial intelligence.
“Excitement because there is probably no sector that will benefit more from AI than healthcare, the risks and liabilities associated with it,” Agrawal said.
“So yes, there are a lot of challenges in implementation and at the same time the price of making it happen is very big,” Agrawal said.
Health care and the deficit
According to the Congressional Budget Office, the federal government spent an estimated $1.8 trillion on health insurance in 2023, about 7% of GDP. From 2024 to 2033, the CBO projects that federal subsidies for health care will total $25 trillion, or 8.3% of GDP.
The problem is that so much healthcare spending in the U.S. is not tied to treatment or patient outcomes. Instead, it is estimated that around a quarter of all public and private spending is spent on administrative tasks.
“Almost every industry in the U.S. has experienced significant productivity gains over the past 50 years, with one major exception: healthcare,” said a report from McKinsey analysts.
This is an area where AI could improve operations, according to economists at the Brookings Institution. Basic tasks like appointment scheduling can be automated, but tasks like patient flow management and preliminary data analysis can also be handled by AI programs.
While the three economists acknowledge that AI's impact on federal spending is still “highly uncertain,” the co-authors believe it could ultimately be more transformative for the economy than previous technological leaps, such as the use of personal computers in the 1990s years. The current AI shock “feels different. This is not a typical technology shock,” Harris told CNBC.
AI impacts “how people receive health care,” how the pharmaceutical industry discovers new products and how researchers make medicine more precise, Harris said.
Illness and death rates
In particular, Harris emphasized AI's impact not only on productivity, but also on its potential to transform the cost of care and morbidity and mortality rates.
“Such changes could have profound effects on spending on Social Security and public health programs,” he and his co-authors wrote.
Of course, there is also the possibility that AI advances could counterintuitively increase federal spending if average life expectancy increases due to the technology. Not only could improved technology lead to people seeking more medical care, but longer life expectancy could also lead to more people being retired.
However, the Brookings paper takes a more optimistic approach, predicting that one of the biggest benefits of AI will come from accelerating the effectiveness of prevention and disease detection. This will create a healthier population that requires fewer medical interventions, the authors wrote – and may also increase employment rates if healthier workers stay employed longer.
“AI’s ability to improve diagnostic accuracy can not only improve patient outcomes but also reduce wasteful spending on inappropriate treatments,” the economists said. “From a more optimistic perspective, existing AI systems could reduce spending across all healthcare expenditures, including Medicare, with cost reductions occurring across multiple channels – with personalized medicine being a prominent example.”
Assessing whether AI can ultimately lead to a positive or negative shock to fiscal policy depends on which phase of the age distribution it affects, Agrawal said. Whether AI “has a greater impact on retirees or on working people” will emerge from the numbers, Agrawal said.
AI is already spreading
To date, diagnostics has shown the greatest progress and potential in the application of AI in healthcare. Agrawal noted AI's influence on almost every step of diagnostic care, from receiving input data to medical images such as X-rays and MRIs to doctor's letters and charts.
“In almost all areas of diagnosis, AI has already demonstrated, in some cases, what they call 'superhuman performance' – better than most doctors,” Agrawal said.
AI has also shown “significant promise” in better optimizing treatment plans for patients through data analysis. According to the paper's authors, machine intelligence can develop more effective and cost-effective plans for individual patients.
Agrawal believes it is still too early to say whether public or private healthcare systems will make better use of AI. In the U.S., private insurers are generally more interested in AI technology related to preventive care, he said. There is less interest in using AI in diagnostic applications, which could potentially lead to an increase in cases and more treatments, he said.
“There are no clear economic incentives for the private sector [implement] This,” Agrawal said. “In the public sector, despite incentives, there are a lot of frictions around privacy on the data side.”
He believes public-private partnerships will be key to adopting AI across healthcare.
The public health sector “will need very strong incentives to drive change, otherwise everyone will remain in their routine. There is a lot of resistance to change,” Agrawal said.
“So to overcome that resistance you need a very strong motivator, and the private sector generally provides a much stronger motivator, either because users are trying to reduce costs or because the developers of the technology are trying to make a profit.” he said continued.
Large technology companies have already pioneered the development of large language models specifically for healthcare services. Google's AI system, Articulate Medical Intelligence Explore (AMIE), mimics diagnostic dialogue. Its Med-Gemini platform uses AI to assist with diagnosis, treatment planning and clinical decision support. Amazon And Microsoft have their own projects underway to expand the application of AI programs in healthcare.
Outlook under Trump
President-elect Donald Trump's second term could transform the adoption of AI in healthcare and ultimately its economic impact. Trump has vowed to reduce government spending and formed an outside panel called the Department of Government Efficiency with the goal of “cutting government bureaucracy, dismantling excessive regulations, cutting wasteful spending and restructuring federal agencies.” Public health funding is one area where funding could be cut, which could hinder the adoption of AI applications.
“Now it’s possible that more efficient AI could help offset the costs of that withdrawal as the federal government’s role in providing people’s health care declines,” Harris said. “If AI means every dollar goes further, then I think we’ve got everything aligned for some kind of windfall.”
There is also the possibility that rolling back regulations under a second Trump administration could accelerate the implementation of AI across healthcare.
“Many people are afraid of reducing regulation because they don’t want immature technologies being introduced into the healthcare system and harming people,” Agrawal said. “And that is a very legitimate concern. But what they often fail to consider is the harm we are causing people by not adopting new technologies,” he added.
“Some areas require much more technical development, but there are some diagnostic areas that are already ready for use and it is only the regulations that prevent their use,” Agrawal said.