A Few Thoughts on the New CBO Health Care Report

The Congressional Budget Office yesterday officially released its new report on the "Long-Term Outlook for Health Care Spending". Its bottom line is that left unchecked, the pace at which health care spending exceeds economic growth will, over the next 75 years, make the health sector nearly half our economy. Medicare and Medicaid alone will consume 20 percent of GDP, making those two programs alone as large as our entire federal budget is now.

To paraphrase Richard Nixon's economic adviser Herbert Stein (father of economic pundit Ben Stein): "Things that can't be sustained won't be."

Peter Orszag made much the same point yesterday at a New America Foundation forum where he discussed the report. Washington think tanks have devoted far too much attention to the Social Security problem, he said, and far too little to the health care problem. He promised a number of new reports as early as December for legislators on Capitol Hill wrestling with how to rein in runaway health care costs.

A couple of his arguments are worth highlighting, one that precisely identifies the nature of the problem and one that misses the point.

First, he presented a chart that compared three of the top hospitals in the U.S. in terms of health care outcomes: UCLA, Massachusetts General and the Mayo Clinic in Rochester, Minnesota. I'll only deal with the numbers from UCLA and Mayo because they are the outliers. UCLA spends twice as much as Mayo for each Medicare beneficiary in the last six months of life. Why? Even when the health of the patients is held constant, UCLA put its patients in the hospital for 19 days on average over those six months compared to 12 days at Mayo. Physician visits were similarly skewed: 52 in Los Angeles versus 24 in Minnesota.

"We have been largely misdiagnosing the problem," Orszag said. "In the media the health care problem has been described as the aging of the Baby Boomers. While that's a factor, it's not the major factor. It's the variation in costs around the country that don't correspond to outcomes. If anything, the higher spending states have worse outcomes than the lower spending states."

Nearly a third of health care spending could be eliminated without jeopardizing health, he said, an echo of the core claim in Shannon Brownlee's new book, "Overtreated."

But in his talk, Orszag also emphasized the role that "declining" out-of-pocket spending has had on rising health care costs. He used the statistic that those costs went from a third of health care spending in 1975 to just 13 percent today. On the surface, that seems to be a strong argument for raising co-pays or moving to a system of making consumers pick up first-dollar coverage for health as a way of reining in unnecessary spending. Make patients cost-sensitive, the argument goes, and let the market work its magic.

Wrong. First, when out-of-pocket costs were a third of health care spending, health care only consumed six percent of gross domestic product. That meant individuals were paying about two percentage points of GDP for health care out of their own pockets. Today, health consumes 16 percent of GDP. Multiply that by the 13 percent picked up by consumers and you still get two percent picked up out-of-pocket.

In other words, average folks whose income has only kept pace with inflation over the the past 30 years are paying on average the same portion of their incomes for health as they always have. And, given the rising number of people who are uninsured, a majority of Americans are probably paying more out of pocket for health today or are going without.

More significantly, raising co-pays or making consumers pick up first dollar coverage is a terrible way to control costs. The first thing to get eliminated will be preventive care, a prescription for increasing long-term health care costs. It also won't rein in the most expensive parts of the system because the decisions to operate or order pricey imaging tests are controlled by physicians and are largely picked up by insurers. Or, if the expensive co-pays on those expensive operations and imaging tests force lower income Americans to forgo that care, it will take the nation farther down the road toward a two-tier society where health care will be rationed by price sensitivity, not need.

With this new report, Orszag and the CBO add their voices to the call for a new agency to conduct comparative effectiveness research and analysis to inform payment decisions. He said that payment policies must be aligned with this new information as it is generated.

But he also recognized that it will take many years to put this new infrastructure in place. So what will get done in the short run? I would hate to see the impartial CBO adding its voice to the simplistic notion, favored by economists who don't have a lot of knowledge about public health, that making consumers have "more skin in the game" is a fruitful way to slow the long-term growth rate of health care costs.

Posted by gooznews at November 14, 2007 08:59 AM