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“The Federal Burden for Health Care Spending"
Summary of Remarks by
Peter Orszag
Director
Congressional Budget Office
July 18, 2007
Health care costs constitute the nation’s central fiscal challenge. Health costs pose a growing burden for employers, who sponsor most private health insurance coverage, and employees, who ultimately pay for that coverage; for patients; for enrollees; and for taxpayers, as federal health programs are becoming an increasingly large portion of the economy. In his first appearance before the NEC as CBO Director, Dr. Orszag explained the critical health care problems facing the country, the complexities involved in analyzing them, and his plans to restructure the Congressional Budget Office (CBO) in order to discover how health care spending can be reduced.
The first complexity lies in the fact that the analytical, policy, and communications communities have mischaracterized the impact and the sources of the nation’s fiscal pressures. If the average growth rate of health care costs from the past four decades continues, federal health care spending for Medicaid and Medicare will rise from under five percent of Gross Domestic Product (GDP) today to more than twenty percent of GDP in the year 2050. Those projections are independent of Social Security and other spending related to the retirement of the baby boomers, which will have additional impacts on the budget in the years to come. Health care cost growth varies considerably from year to year, but rates of growth in the past have far exceeded increases in the per capita gross domestic product. The key long-term fiscal problem facing the nation is health care, not aging.
Another complexity involves the inextricable linkage of the public and private health care systems--changes in Medicaid and Medicare affect the entire health care system and visa versa. For example, when the federal Medicare program implemented a policy of fixed payments per hospital admission in the early 1980s, practitioners began to shorten hospital stays for all patients—not only those on Medicare. Over long periods of time, cost growth per beneficiary in Medicare and Medicaid has tended to track cost trends in private health care markets. Thus, in order to bend the cost curve for federal health programs downward without creating major access problems, policy makers must look to the overall health care system. Dr. Orszag argues that it is very unlikely that this private-public linkage will break apart.
Dr. Orszag states that many policymakers and analysts try to narrow the problem down to one particular sector, such as prescription drugs, but this is too narrow a view. Changing federal payments to physicians, lowering costs of prescription drugs, or any other policy would have an effect on the overall health system, not only on one part of it. The challenge of rising health care costs is complex in the way that it is spread out through all components of health spending. As Dr. Orszag jokes, it is like the instance in which the economist is looking for his keys but only underneath the lamppost because that is where the light is brightest. In order to attack this problem, CBO is starting to look in the dark corners of health care spending that have not yet been analyzed. To begin this quest, Dr. Orszag is moving more CBO staff into health and has created a panel of health advisers.
On the bright side, the prospects for controlling health costs in the United States are not as depressing as they may seem. We appear to be on the flat or perhaps even the downward sloping curve of the “medical effectiveness” curve that compares health outcomes to cost. Looking at varying costs over regions of the United States, Dr. Orszag argues that costs can be eliminated without lowering the quality of health care or health outcomes. The evidence lies in a map produced by Dartmouth researchers, showing Medicare spending per capita in the United States across regions. No matter which variables and controls this study group accounted for, the map shows that regions spending more on health care do not have better health outcomes. Results were measured using indicators such as life expectancy and reduced morbidity. When the analysis accounted for differences in demographic characteristics across areas, input salaries, and other variables, substantial variation remained that is not associated with health outcome variation. Dr. Orszag infers that costs are likely higher due to ineffective practice norms in high-cost areas.
According to estimates from the Dartmouth group of researchers and others, roughly thirty percent of health care spending can be eliminated, which is the equivalent to five percent of GDP, if it is lowered in the high spending regions. Bringing about this change, however, requires statistical evidence of which services have a significant impact on health care outcomes and which do not and typing providers’ financial incentives to evidence of effectiveness. Dr. Orszag’s argument lies in the fact that there are many procedures that doctors are ordering and patients are following through that result in only slight improvement, or no improvement at all, in the quality of patient care.
Only a small share of health care spending is currently backed by evidence of comparative effectiveness. However, randomized, controlled clinical trials are expensive and lengthy. Econometric analysis of panel data could more readily provide evidence of effectiveness and the Congress has shown interest in funding comparative effectiveness research. Some have suggested that registries and electronic health records could yield the needed data and further reduce costs by cutting paperwork. Such a system, however, would have an even greater potential if it could not only evaluate health problems, claims, and costs, but also the outcome of the treatment received. A member of the audience suggested that insurance claims are already filed electronically, but a barrier still lies in the fact that there is a high turnover rate in insurance. With the many private health insurance providers, it is hard to track the services received by a random selection of patients. Even more problematic, insurance claims do not describe the outcome of treatments received.
Dr. Orszag also noted that the theory that leaving health care decisions up to the patient’s pocketbook may help to reduce costs but is not a panacea. One often reads in the media that out-of-pocket co-pay fees have been increasing over the years, but, in reality, health care spending out-of-pocket has declined from thirty-three percent in 1975, to fifteen percent in 2005. When patients are not required to pay out of pocket, they more likely follow their doctor’s advice to schedule more tests, follow-up appointments, and other procedures without questioning how necessary these processes are and how much of an impact they may have on their overall health. Third-party payments contribute to the increase in health care spending. The RAND experiment and the introduction of Medicare in the 1960s demonstrated that cost sharing influences health care spending. Increased cost-sharing, however, may not have an overwhelming effect on overall health spending, in part, because catastrophic health care events are unlikely to be subjected to such cost-sharing and because such events account for a substantial share of overall spending.
In the Q and A session, a member of the audience suggested that a preventive care focus may significantly reduce health care expenditures by preventing many conditions that require costly treatments later in life. In response, Dr. Orszag stated that a major part of his recent testimony to the Senate centered on disease prevention and healthy living, in that it has a significant effect, perhaps more so that the health care system itself, on quality of health. He argues that there need to be not only incentives for people to eat lower calorie, higher nutrient foods and exercise more, but also it is necessary to eradicate little impediments to healthful activities that create disproportionately large effects. For example, studies have shown that by simply putting fruits and vegetables at the beginning of the cafeteria line, significantly more people ate fruits and vegetables than they would otherwise.
With health care being the central fiscal challenge of the federal government, the CBO is doing all that it can to find the solutions in the “dark corners” to lower health care spending. Dr. Orszag believes that it can be done, but it will take time and substantial effort and it is critical to assemble the empirical data that shows where exactly the costs can be cut.
Dr. Orszag is the Director of the Congressional Budget Office. Before joining CBO, he was a Joseph A. Pechman Senior Fellow at the Brookings Institution where he also served as Deputy Director of Economic Studies, Director of the Hamilton Project, Director of the Retirement Security Project, and Co-director of the Tax Policy Center. He is the co-author of many books including Protecting the Homeland 2006/7 (2006), Aging Gracefully: Ideas to Improve Retirement Security in America (2006), and Saving Social Security: A Balanced Approach (2004). He is a graduate of Princeton University, with both MS and PhD degrees from London School of Economics, which he attended as a Marshall Scholar.
Rapporteur: Nicole Firment
