The Office of Management and Budget head Peter Orszag talks about health care reform
The economics of health care reform
The economics of health care reform
By Jonathan Gramling
While there has been contentious debate over how health care reform will be implemented and what its components will look like, there
has been little debate — if any — over the fact that health care reform is needed. Currently, health care is a $2.5 trillion business in the United
States that eats up 15 percent of the gross domestic product. And while many of the developed countries spend up to half per person on health
care, the United States lags behind many of them in health quality.
Earlier this month, Dr. Peter Orszag, the White House’s director of the Office of Management and Budget, held a telephone conference call
with regional reporters to discuss the economics of health care. At the beginning of his remarks, Orszag talked about why the United States
cannot sustain its current pace in spending on health care.
“If health care costs rose at the same rate over the next four decades as they did over the past four decades, Medicare and Medicaid will
go from five percent of the economy today to 20 percent of the economy by 2050, which is the entire size of the federal government last year,”
Orszag said. “If one succeeds in reducing the growth rate of Medicare and Medicaid spending by just 15 basis points per year, that’s 0.15
percent per year, the impact on the federal government’s long-term fiscal gap is as large as eliminating the entire actuarial deficit of Social
Security.”
Rising health care costs have a double whammy, at the state as well as the federal level. “For state government, rising health care costs
are crowding out other priorities like higher education,” Orszag said. “Indeed if you look at starting assistant professor salaries at comparable
private and public universities, 20 years ago, they were roughly in line with one another. Now the public university salaries are about 15-20
percent lower than a comparable private university’s because state government support for higher education has been crowded out by rising
health care costs.”
And it is also having a huge impact on workers and private companies. “For workers, rising health care costs eat into take home pay and
at the same time, workers face rift in the insurance market if they switch jobs or need new coverage and have pre-existing conditions,” Orszag
said. “So we need to move to a system in which it is easier to get health insurance, even as you move in between jobs or move from state to
state and in which there is less discrimination against those who have various kinds of pre-existing conditions. Most every firm with maybe
over 1,000 employees offers health insurance currently. And one of the key things that is driving many business decisions is the rising cost of
health care.” Escalating health care costs are distorting labor and business markets.
As the Obama Administration’s health care reform efforts seek to expand coverage to most — if not all — of the 46 million people who are
currently uninsured, it has to find other ways to reduce costs of expand revenues in order to make health care reform “deficit-neutral” over the
next ten years. If expanded coverage for the uninsured is going to cost $750 billion to $1 trillion, then offsetting cost reductions and increased
revenues need to cover the new costs. One of the major areas of cost reduction would be savings instituted in the Medicare and Medicaid
system. The Obama Administration insists that its proposals do not reduce or limit Medicare coverage, but rather create cost savings.
“We have put roughly $600 billion over 10 years on the table in the form of Medicare and Medicaid savings,” Orszag said. “Let me give you
a few examples. Currently about 20 percent of Medicare beneficiaries are enrolled in what are called Medicare Advantage plans, which all
evidence suggests, are overpaid relative to traditional Medicare. We propose eliminating those overpayments by introducing competitive
bidding into the Medicare Advantage plan. That would save $177 billion over 10 years. We also propose changing the way that reimbursement
rates under Medicare are updated each year to take into account productivity improvements. That would save north of $100 billion over 10
years. Basically, we add up all of those Medicare and Medicaid savings and they equal over $600 billion over 10 years.”
“Then we put a set of revenue proposals on the table, the biggest of which is our proposal to limit itemized deductions, the rate at which
high-income taxpayers can itemize the deductions they claim on their tax returns,” Orszag continued. “And the revenue proposals would bring in
somewhat north of $300 billion. In other words, we fully cover that $750 billion to $1 trillion cost through the proposals that we put on the table.
The House and Senate are largely in line with most of the Medicare and Medicaid proposals that we have put on the table. The House and Senate
committees have dialed some of the things up and some of the things back. One of the things that is most currently under discussion in both the
House and the Senate is the revenue piece. The House has adopted one approach, which involves a surtax on high income taxpayers. The
Senate Finance Committee seems to be evolving to a different approach in which there is a variety of revenue proposals that are put together,
including perhaps a fine or fee on insurance companies for very high cost plans.”
Orszag emphasized that the purpose of health care reform isn’t just to expand health insurance to the currently uninsured. Its objective is
to curb or reduce costs while increasing quality in the health care system.
“I think there are three main elements to reducing health care cost growth over time,” Orszag said. “One involves moving to a digitized
health care system. It is difficult to get major productivity advances in any industry without an IT backbone. It is striking that IT backbone is
much less prevalent in the health care system than other sectors of the economy. We had $19 billion in the recovery act to fund moving to a
universal IT health system. Second, we need much more information about what works and what doesn’t so that firms are no longer being
charged by their insurance companies for things that don’t actually help beneficiaries. And the same thing for us as taxpayers, we’re no longer
financing procedures that aren’t actually helping. Finally we need better incentives for providers. Right now, we have very strong incentives to
provide more care rather than better care. And that is what we end up with. The challenge in the final category is that it is often difficult to know
exactly how one should design paying for value and paying for quality currently. It’s a reflection on the point that I was making earlier that we
need a continual effort in this area. It’s one reason why with regard to Medicare policy we are putting forward what we call the high max, the
Independent Medicare Advisory Council, so that policy can more easily keep up with changes in the health system and we can tweak and refine
changes in the payment system over time as we are learning what works and what doesn’t with regard to that aspect of health care.”
The Obama Administration is also looking at how the financial structure of health care creates incentives for inefficiencies and high cost
that do not contribute to quality care. “About 20 percent of Medicare beneficiaries are readmitted to a hospital after being discharged from a
hospital within 30 days,” Orszag said. “Most analyses suggest a significant share of those readmissions could be avoided by hospitals currently
don’t have an incentive to reduce those readmissions because they are often getting paid again for the readmission. And who would want to get
readmitted to the hospital unnecessarily. So we have these very skewed incentives which feed into potential overcapacity because clearly the
incentive to build a new hospital or to expand an existing hospital are exacerbated when you have those sorts of incentives for more volume
rather than better care. One of the proposals that we have to get at that kind of problem specifically on readmission rates is to penalize hospitals
that have very high readmission rates in those categories of care where it is most plausible that you could avoid readmissions.”
Whatever the cure for rising health care costs may be, it needs to be administered before the rising costs kill the patient, the federal budget
and the U.S. economy.
