Romer on Health Care Reform and the Budget Deficit

Yesterday, Council of Economic Advisers Chair Christina Romer spoke at the Center for American Progress on Health Care Reform and the Budget Deficit.

Romer aimed to make the case the health reform was the key to deficit reduction, explaining:

We need to look forward and begin to put the nation on a more sustainable long-run fiscal path. Given the central role of rising health care expenditures, any solution to our long-run budget problem will simply have to include slowing the growth rate of health care costs… Some have argued that it is irresponsible to reform our health care system at a time when the budget deficit is so large and our long-run fiscal problems are so severe. I firmly believe the opposite.

We agree that reforming the health care system can significantly improve the long-term deficits – if the focus is on controlling costs. But done incorrectly, reform also has the potential to worsen the nation’s fiscal picture considerably. We’ve argued that responsible reformers should adhere to a set of principles, the first two of which Christina Romer endorsed in her speech:

Any expansion or improvements in coverage must be completely paid for in the short run. More fundamentally, we have to put in place reforms that will genuinely and significantly slow the growth rate of costs. That is, reform must be at least budget-neutral over the next decade, and significantly budget-improving in the longer run… Even more important than short-run fiscal prudence are the changes under consideration in reform legislation to slow the growth rate of health care costs over time. We must use this reform effort to put in place changes that will improve efficiency and lower cost growth over the long term.

Romer also emphasized the benefits of taxing high-cost insurance (see our analysis here) and creating a Medicare Commission (see our analysis here):

The Senate Finance Committee bill includes a tax on high-priced insurance plans, suggested by Senator Kerry. A policy along these lines, designed carefully, will encourage both employers and employees to be more watchful health care consumers. It will discourage insurance companies from offering high-priced plans that would otherwise eat up larger and larger shares of workers’ wages. A policy such as this is probably the number one item that health economists across the ideological spectrum believe is likely to stem the explosion of health care costs… The President has endorsed the establishment of an Independent Medicare Advisory Council (IMAC). The IMAC would provide Congress each year with cost-saving recommendations that improve care and maintain benefits. By removing some of the political pressure around such reforms, the IMAC would make it easier for improvements to be made year after year. Like the Kerry policy, this is another key innovation that could genuinely slow the growth rate of costs.

Romer closed with some important points (emphases and links added):

Slowing the growth rate of costs will not solve all of our long-run budget problems. Our population is aging and even lowering the growth rate of health care costs quite substantially leaves them growing faster than GDP. As a result, other actions will also need to be taken. While health care reform may not be the “silver bullet,” it clearly must be a significant part of the solution to our deficit woes. It is the key step that we can take right now to bring the long-run budget problem down to manageable proportions…Done correctly, health care reform can genuinely slow the growth rate of health care costs and thus put us on a path to greatly reduced budget deficits in the long run… The credibility we will gain from such bold action will be far greater than anything that could be achieved through small gestures taken in the midst of the worst recession in postwar history.