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Health Care Costs: A Principal Driver of Long-Term Deficits

Posted Jan 14 2009 7:18pm
On January 13, Barack Obama's nominee for Director of the Office of Management and Budget, Peter Orszag, testified that health care costs are a "principal driver of our long-term deficits".

Orszag advocated for " expanding the use of health information technology (IT) and electronic medical records, which is a necessary, but not sufficient, measure to improving the quality and efficiency of the health care system". Orszag outlined other steps that can contribute to reductions in health care costs including research on comparative effectiveness of treatment options, incentives for "better care rather than more care", and incentives for prevention and healthy living.

Orszag, a recent director of the Congressional Budget Office, is well respected in economic and political circles. His pronouncements regarding the impact of health information technology bring gravitas to this discussion.



Orszag's discussion of health care costs follows:

" The principal driver of our long-term deficits is rising health care costs... Let me provide just one telling fact: If costs per enrollee in our two main federal health care programs, Medicare and Medicaid, grow at the same rate as they have for the past 40 years, those two programs will increase from about five percent of GDP to 20 percent by 2050. That’s roughly the entire size of the federal government today. (As the Congressional Budget Office and others have noted, there are reasons to expect cost growth to slow in the future relative to the past even in the absence of policy changes. But the point remains that slowing health care cost growth is key to our fiscal future.)

Rising costs for Medicare and Medicaid, in turn, reflect rising health care costs across the public and private sectors. Therefore, we need to be thinking about ways to slow overall health care cost growth, rather than just reducing the rate of growth in Medicare and Medicaid. Indeed, were we to try to slow Medicare and Medicaid spending alone without slowing the rate of growth in health care costs system-wide, we would simply create massive access problems for Medicare and Medicaid beneficiaries, since providers would be increasingly unwilling to serve those populations relative to others. Medicare and Medicaid policy changes can help to lead the way. But those changes will not be sustainable over time unless they also help to drive down cost growth in the rest of the system.

Improving the efficiency of the health system, however, has benefits that extend well beyond the budget. Health care costs are already imposing severe burdens on state governments – on average, health care absorbs about a third of state budgets, even more than is taken up by education. Moreover, health care costs are reducing workers’ takehome pay to a degree that is both unnecessarily large and perhaps under-appreciated.

There is a ray of hope. We appear to have massive opportunities to reduce health care costs without harming health outcomes. Significant evidence suggests that higher cost does not always mean higher-quality care. As I have noted before, perhaps the most compelling evidence of this fact is that per-capita health care spending varies widely across the United States, but the very substantial variation in cost per beneficiary is not correlated with overall health outcomes. Thus, embedded in the country’s fiscal challenge and the current burdens on state governments and workers are opportunities to reduce costs without impairing health outcomes overall.

Some of the many steps that would help to improve the efficiency of the health system include the following:


  • expanding the use of health information technology (IT) and electronic medical records, which is a necessary, but not sufficient, measure to improving the quality and efficiency of the health care system;

  • expanding research on “comparative effectiveness” of different options for treating a given medical condition, which could provide information on both medical benefits as well as costs;

  • providing financial incentives for better care rather than more care (currently, financial incentives for providers and patients encourage or facilitate expensive treatment and procedures, even when there is little evidence that they are more effective than existing therapies); and

  • providing incentives for prevention (such as immunizations and screening tests) and healthy living (such as avoiding obesity and smoking) so that people have fewer health care problems throughout their lives."
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