CBO on Health Care Reform and Costs

The CBO sent a Letter to Senator Kent Conrad and the Judd Gregg on health costs and options for the government, here is a quick breakdown:

From the CBO:

The federal government’s budgetary commitments to health care (including both spending programs and tax preferences) total more than $1 trillion in 2009. Many proposals to significantly expand health insurance coverage would add to federal costs by providing large subsidies to help lower-income individuals and families purchase insurance. Such proposals could permanently boost the government’s budgetary commitments to health care by something in the vicinity of 10 percent. Improving the long-term budget outlook would require addressing that added cost in addition to the budgetary strains anticipated under current law. Health care legislation might include provisions that would make it budget neutral over the first 10 years, but such legislation might nevertheless add to budget deficits in later years.

How they would make it deficit neutral is an interesting question and having read a great deal about these programs the most likely way would be the taxing of health insurance benefits, a politically explosive idea.

However, large reductions in spending will not actually be achieved without fundamental changes in the financing and delivery of health care. The government could spur those changes by transforming payment policies in federal health care programs and by significantly limiting the current tax subsidy for health insurance. Those approaches could directly lower federal spending on health care and indirectly lower private spending on it as well. Yet, many of the specific changes that might ultimately prove most important cannot be foreseen today and could be developed only over time through experimentation and learning. Modest versions of such efforts—which would have the desirable effect of allowing policymakers to gauge their impact—would probably yield only modest results in the short term.

As for the general health of the programs, its a disaster:

The federal budget is on an unsustainable path, primarily because of rapidly rising spending on health care. Federal outlays for Medicare and Medicaid have increased from 1 percent of gross domestic product (GDP) in 1970 to more than 5 percent in 2009; and the Congressional Budget Office (CBO) projects that under current policy, they will exceed 6 percent of GDP in 2019 and about 8 percent in 2029. Most of that increase will result from rising costs per capita, rather than from the aging of the population. As a result, the country faces difficult and fundamental trade-offs between limiting the growth of Medicare and Medicaid relative to GDP, accepting a continuing increase in taxes relative to GDP, and reducing other spending relative to GDP, possibly to levels not experienced in this country in more than 40 years.¹

Moreover, serious fiscal imbalances are not a far-off problem. Under current law, CBO projects, Medicare’s Part A trust fund—which pays for inpatient services, post-acute care, and hospice services and receives revenues principally from the payroll tax—will have insufficient funds to pay for all covered services starting in 2017. More broadly, federal debt held by the public is set to jump from 41 percent of GDP at the end of 2008 to more than 60 percent by the end of 2010, the highest level since the mid-1950s. Under CBO’s March baseline projection, the debt would fall back below 60 percent of GDP in the second half of the decade, but the baseline assumes that currently scheduled increases in tax rates will be allowed to occur, even though policymakers seem intent on extending at least some of the 2001 and 2003 tax cuts. If those and all other expiring provisions were extended and the alternative minimum tax was indexed for inflation, the debt would continue to rise relative to GDP throughout the next decade, reaching 86 percent by 2019. Debt held by the public has not been that high since the years immediately following World War II.

Tax increases will not solve the fiscal issues of this country, as for the tax cuts the President and the democrats will most likely let the upper bracket increase go ahead and maintain the Bush tax cuts that were in affect for the rest of the country. As for the AMT patch it would be political suicide to not continue or scrap it.

The Ten Percent Increase:

The federal government’s financing of health care will total more than $1 trillion in 2009, all told. Federal outlays for Medicare and Medicaid are about $700 billion; tax preferences for health care (especially the exclusion of premiums for employment-based health insurance from income and payroll taxes) amount to more than $250 billion; and the federal government also pays for veterans’ health care, public health initiatives, and other health programs. Already, those direct and indirect payments for health care account for nearly 60 percent of total health expenditures for the nation.

Many proposals to significantly expand insurance coverage would add to federal costs by providing large subsidies to help lower-income individuals and families purchase insurance. Those proposals would take several years to implement, but it is useful to consider the budgetary implications if they were up and running now so as to compare those costs to existing obligations. Depending on the specific policies selected, the added cost could be on the order of $100 billion. In the absence of specific constraints on growth, the new spending (or revenue losses, if tax credits were used to provide subsidies) would probably increase over time roughly with the underlying costs of health care and, thus, would grow about as fast as spending on other federal health care programs.²

From that perspective, a large-scale expansion of insurance coverage would represent a permanent increase of roughly 10 percent in the federal budgetary commitment to health care. Improving the budget outlook therefore would require that other aspects of an initiative on health care reduce the federal resources devoted to it by more than that amount (or that other federal spending or revenues be adjusted to accomplish the same end).

As for cost cutting and policy initiatives, the easiest way is to cut Medicare spending, a politically fraught decision, and one that can only be done so much, as you can't get water from a stone no matter how hard you squeeze. The CBO does seems interested in is the disparities in health care spending that exists throughout the country:

Significant savings seem possible because the available evidence implies that a substantial share of spending on health care contributes little if anything to the overall health of the nation. Therefore, experts generally agree that changes in government policy have the potential to produce substantial savings in both national and federal spending on health care without harming health. However, turning that potential into reality in a sector that accounts for one-sixth of the U.S. economy is likely to be a prolonged and difficult process.

Perhaps the most compelling evidence about the extent of inefficiency in the health sector is that Medicare spending varies widely across different regions of the country, but the variation is not correlated with available measures of the quality of care or health outcomes. Researchers affiliated with the Dartmouth Atlas of Health Care have compared the Medicare spending for enrollees across the nation, controlling for demographic characteristics such as age, sex, and race. According to those researchers’ calculations, Medicare spending could be reduced by almost 30 percent if outlays in medium- and high-spending regions were reduced to the average level in the lowest-spending decile.⁶

But even here there are questions:

Comparisons of that sort are sensitive to the method of calculation. Some studies have expressed skepticism about the Dartmouth researchers’ estimate.⁷ CBO’s own informal comparison of per capita Medicare spending in metropolitan areas, controlling for both the health status of individuals and the prices of health care inputs, implies that the savings from turning medium- and high-spending areas into low-spending areas might be roughly half of the estimate by the Dartmouth researchers. In addition, much less is known about regional comparisons of spending for and the health of patients outside the Medicare program. Still, most experts conclude that both formal analysis and extensive anecdotal evidence of regional differences in medical care and costs imply that a significant portion of spending on health care is not serving its intended purpose. Moreover, the delivery of health care in low-cost regions is not completely efficient now, so further savings might be achievable even in those areas.

It makes sense, why couldn't costs be leveled out across the country, yes there are cost disparities across this country, but it appears they are far greater in regards to health care expenses, higher then the norm at least. Of course this is easier said then done, some experts think ironing out these expenses in itself could cover the 10% increase to the budget planned by the expansion of coverage, color me skeptical on that one. Once again the primary way would be reducing medicare payments and raising taxes, especially in regards to the benefits. Preventive care and technology may be good ideas and in some circumstances reduce costs, but not at the level needed. Another idea, increase the costs of patients:

Increasing the cost-sharing obligations that individuals face in government health programs and private insurance would strengthen the incentives for them to use medical care prudently. Research has shown that patients are responsive to the price they pay for many aspects of care.¹⁶ To be sure, the rationale for insurance is to limit patients’ out-of-pocket costs, so people with significant health problems or with low income and few assets could not pay a large share of their health costs themselves; cost sharing could be designed to maintain appropriate financial protection while still creating some sensitivity to cost. In addition, maintaining lower cost sharing for certain preventive services, medications to treat chronic conditions, and other care that would reduce future spending (which falls under the rubric of “value-based insurance design”) may make sense. Still, ensuring that patients have some financial stake in decisions about treatment methods would lead them to ask their doctors more questions about the effectiveness of different tests and treatments and to make better-informed and more cost-sensitive decisions about their care.

If people have to pay more they are less likely to waste the doctors time and demand every test in the book. Of course this would put more of a burden on people, but there are many people who do abuse the system since going to the emergency room for a cold or minor illness is "costless". The biggest problem would be what people expect verse what is the likely health care reality.

In short we can :

1. Raise or taxes or change the tax code to increase revenues, with special attention being applied to a health care benefit tax.
2. Reduce federal payments to the health care industry, a difficult proposal but one that might provide significant savings if the cost differences across the country were leveled out.
3. Make patients more responsible through increased payments. Revenue would be generated, and just as important people would make rational choices about health care.
4. Increased technology and preventive care, good ideas but unlikely to provide the savings needed.