CBO's Peter Orszag Releases Study on Rising Cost of Health Care

Congressional Budget Office Director Details How Health Care Will Affect the Federal Budget

On Nov. 13, 2007, Maya MacGuineas, director of the Fiscal Policy Program at the New America Foundation and President of the Committee for a Responsible Federal Budget, hosted an event featuring Dr. Peter Orszag, director of the Congressional Budget Office. At the event, Orszag released a CBO paper entitled “The Long-Term Outlook for Health Care Spending.” This paper precedes the regular release of the long-term budget outlook, of which health care is a major component.
Introducing Orszag, MacGuineas praised the CBO for taking the lead in developing an understanding of the fiscal impact of the health care system, both in terms of short-term policy options and long-term projections. These efforts give fiscal experts, who recognize the importance of health care to the long term picture but are less certain of the options to address the problems, more substance with which to work. She also praised the CBO for its clear, concise reports, which make a variety of public policy issues accessible to policy analysts and the public.
Orszag began by explaining the new methods of health care cost projections. Health care costs are “the key” to understanding the long-term fiscal outlook. CBO’s projections begin with growth rates based on the past 30 years of cost growth, a window long enough to smooth out one-time shocks to growth and that begins sufficiently after the introduction of Medicare and Medicaid to avoid distortions associated with the ramping up of those programs.
Recognizing that simply projecting those 30-year average growth rates into the future could eventually push overall health care spending above 100 percent of GDP, the CBO next accounts for that fact that as total costs as a share of GDP rise, various private and state-level adjustments will curb growth rates even without a change in federal policy. These non-federal adjustments, in turn, are assumed to some have spillover effects on federal cost growth, through changes in practice norms and technology.
In prior long-term health care cost projections, the CBO had used a 2.5 percent growth rate and a 1.0 percent growth rate to illustrate a range of possible outcomes. The new estimate, taking the spillovers into account, lies between these two estimates. It tracks the Medicare Trustees’ long-term projections for the next couple decades but then winds up significantly higher. Despite the long-term differences between CBO and the Trustees, both projections make the same basic prediction: a continuous rise in health care spending under current law will consume ever-larger portions of the budget and GDP.
Orszag then covered several steps that can be taken to bend the growth curve and get costs under control in the long run. Options included: 
  1. basing treatment decisions on reliable information. Comprehensive data from a team of researchers at Dartmouth shows that the variation between high- and low-cost markets arises less from variations in the costs of reliable treatments than the intensity of potentially questionable treatments in the higher-cost markets. It appears that many of these treatments could be scaled down with little if any adverse effect on outcomes; 
  2. reforming the fee-for-service system to discourage unnecessary or unproven treatments; 
  3. increasing cost-sharing by consumers to encourage more cost-consciousness. This final option would have little effect on heavily-insured catastrophic costs, which make up a majority of total health care costs, but could reduce non-catastrophic costs significantly.
He concluded his remarks by saying that the most auspicious approach to stemming cost growth involves generating information and aligning incentives to produce “higher value care, rather than just more care.”
MacGuineas opened the question-and-answer session by asking how important reforming health care is to fixing the overall fiscal picture as compared with reforming other entitlements or revenues. Orszag responded that he believed the ultimate solution to the overall fiscal problem would be a combination of reforms, but that solving every other problem without touching health care would not fix the overall situation. Health is far and away the most important component of the problem. “We are significantly overinvested in writing books about social security reform,” he asserted, “and significantly underinvested in writing books about bending the curve” of health care costs.
In response to the next three questions, Orszag discussed measures that have not been demonstrated to lower costs, and also addressed the CBO’s method of scoring. Increased longevity, first, does not necessarily lower overall costs, as end-of-life costs remain high. A longer average lifespan could, however, increase tax revenue as people work longer, making it easier to finance a given level of spending. In response to the next question, he asserted that some widely supported cost-saving measures (like preventative care and care coordination) often have little rigorous evidence suggesting that they generally succeed in lowering costs, which is why the CBO is often unable to score them as savings. To the third question, about how the breakdown of healthcare provision was predicted to change in CBO’s projections, Orszag replied that the CBO had assumed that the share of non-Medicare, non-Medicaid spending in the form of employer sponsored health care would remain constant at around 60% of total costs.
The next question concerned the extent of current research into best practices. Orszag replied that current efforts by some insurance companies and a small agency in the Department of Health and Human Services were important, but not nearly as extensive as is warranted or would be beneficial. Since best-practice findings are essentially a public good, insurance companies have little incentive to research them. Incentives are further decreased by customer turnover in the employer sponsored system which may prevent insurance companies from benefiting from best-practices that only pay off in the long term. Federal support may therefore be necessary to encourage such research. Once such research is completed, it would be more effectively applied if doctors were given incentives to choose the proven treatments more often.
MacGuineas asked the next two questions, inquiring whether Orszag had an ideal set of cost-lowering incentives, and whether he favored incentives on the consumer side of the provider side. Orszag replied that financial incentives affect both consumers and providers, and that we can use “both sides of the scissors” to cut costs. He then said that we do not yet have the information or infrastructure necessary to know exactly which incentives will work best.
New America Fellow Shannon Brownlee agreed with Orszag that more best-practice information is needed, but doubted that comparative effectiveness studies could reduce costs in the short-run, and whether they could ever address problems of over-supply. Orszag replied that he felt the problem lay in the payment system, of which the over-supply of medical care was a symptom rather than a cause. Moreover, the political economy of a “command and control” style of health care that statutorily limits care is difficult. The most auspicious course of action, he concluded, is to make the infrastructure and research investments that will put us in a position to reduce costs without reducing quality through evidence-based medicine.
The next question concerned the importance of Health Information Technology (HIT) in lowering costs. Orszag replied that the greatest benefit of HIT is that it provides data on which to base best-practice research. Simply installing an HIT system, however, without including an incentive structure to lower costs, would be unlikely to significantly reduce medical expenses.
The final question concerned how the CBO evaluated the potential for best-practice research to save money. Orszag said that they had brought in experts from Britain’s National Institute for Clinical Effectiveness to help them understand the process. He also pointed out the little noted fact that, while overall American health care costs are higher than those in most European countries, there are many American markets where costs are similar or even lower than in Europe. Following this answer, MacGuineas thanked Orszag, and the talk concluded.