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Friday, May 15, 2009

"Health Costs Are the Real Deficit Threat"

This shouldn't surprise anyone. The rising cost of health care, not Social Security, is the biggest budget problem:

Health Costs Are the Real Deficit Threat, by Peter Orszag, Commentary, WSJ: This week confirmed two important facts -- that health-care costs are the key to our fiscal future, and that even doctors and hospitals agree that substantial efficiency improvements are possible in how medicine is practiced.

The numbers speak for themselves. The Medicare and Social Security trustees' reports released this week show that health-care costs drive our long-term entitlement problem. An example illustrates the point: If costs per enrollee in Medicare and Medicaid grow at the same rate over the next four decades as they have over the past four, those two programs will increase from 5% of GDP today to 20% by 2050. Despite the attention often paid to Social Security, spending on that program rises much more modestly -- from 5% to 6% of GDP -- over the same time period. Over the long run, the deficit impact of every other fiscal policy variable is swamped by the impact of health-care costs.

Spiraling health-care costs are not just some future abstraction, however. Right now, families across America who have health insurance are seeing their take-home pay reduced and their household budgets strained by high costs and spiraling premiums. ... And the growing weight of health costs on state budgets translates into an inability to make investments in areas such as education, hindering our overall economic growth.

The good news is that there appear to be significant opportunities to reduce health-care costs over time without impairing the quality of care or outcomes. ...

For example, health-care costs vary substantially across regions of the United States and across hospitals and doctors within a region -- even for patients with a similar diagnosis. Medicare spending in 2006 varied more than threefold across U.S. regions... The kicker is that Medicare enrollees in areas with higher spending do not appear to have better health outcomes... Expenditures in the last six months of life have been shown to be nearly twice as high for Medicare patients at certain leading academic medical centers than at others -- again, with no better medical outcomes. Uwe Reinhardt ... put it best: "How can it be that 'the best medical care in the world' costs twice as much as 'the best medical care in the world?'"

The answer is it shouldn't. If we can move our nation toward the proven and successful practices adopted by lower-cost areas and hospitals, some economists believe health-care costs could be reduced by 30% -- or about $700 billion a year -- without compromising the quality of care.

This may all seem academic, but this week a stunning thing happened: Representatives from some of the most important parts of the health-care sector ... met with the president and pledged to take aggressive steps to cut the currently projected growth rate of national health-care spending by an average of 1.5 percentage points in each of the next 10 years. ...

Health-care costs are already so high and the power of compound interest so strong that reducing the growth rate by 1.5 percentage points per year would ... reduce national health expenditures by more than $2 trillion over the next decade -- and could help to put roughly $2,500 in the pockets of the average American family every year. ...

How can we move toward a high-quality, lower-cost system? There are four key steps: 1) health information technology, because we can't improve what we don't measure; 2) more research into what works and what doesn't...; 3) prevention and wellness, so that people ... avoid costs associated with health risks such as smoking and obesity; and 4) changes in financial incentives for providers so that they are incentivized rather than penalized for delivering high-quality care.

Already, the administration has taken important steps in all four of these areas. ... But more must be done ... to ... put the nation on a sustainable fiscal path and build a new foundation for our economy for generations to come.

Some people argue that we should solve the (relatively) easier problems first, if we can, and hence that we should take on Social Security now. But solving problems is not free, it costs political capital to take on a difficult issue, and that capital should be spent where the marginal return per dollar spent is the highest. In addition, if using up all your political capital on health care reform only takes you part to your goal, and hence still means that one more dollar of political capital spent on health care reform - if you had it - would still yield a higher return than spending it on Social Security reform, then Social Security reform should not enter the picture at all. All of your effort should be devoted to health care reform where the return is the highest.

In any case, the political cost of reforming Social Security is very high and the returns are low (because the problem is not very big), so the highest return per dollar of political capital spent is in health care reform, not reforming Social Security, and until that changes health care reform is where our efforts ought to be.

[Note: In more wonkish terms, political capital should be spent where MU/P is the highest, and we should continue to spend political capital on that type of reform until the return from spending one more dollar falls below the return from spending it somewhere else. In equilibrium, of course, MUA/PA = MUB/PB = ..., unless, as above, we are at a corner solution and spend everything on one of the goods.]

Update:

Obama Says U.S. Long-Term Debt Load ‘Unsustainable’, by Roger Runningen and Hans Nichols, Bloomberg: President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting ... outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

The president pledged to work with Congress to shore up entitlement programs such as Social Security and Medicare and said he was confident that the House and Senate would pass health-care overhaul bills by August.

“Most of what is driving us into debt is health care, so we have to drive down costs,” he said. ...

Update:

Health Care Leaders Say Obama Overstated Their Promise to Control Costs: Health care leaders said they promised gradual spending cuts, not the $2 trillion over 10 years the president has cited.

    Posted by on Friday, May 15, 2009 at 12:32 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (100)

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