By Peter R. Orszag, 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. State and local governments also are feeling this pinch. 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. In health care, unlike in other sectors, higher quality currently seems to be associated with lower cost — not the opposite.
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, mostly due to variation in the volume and intensity of services provided for similar types of patients. The kicker is that Medicare enrollees in areas with higher spending do not appear to have better health outcomes on average than those in areas with lower spending. We don’t seem to be getting anything in exchange for the extra costs except more intensive tests and procedures, and additional days in the hospital — and who would want any of that if the additional tests and procedures do not actually help to promote health?
One study on inpatient knee replacements found three times as many were performed on Medicare beneficiaries in Milwaukee than in Manhattan. 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, the renowned Princeton economist, 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 — doctors, pharmaceutical companies, hospitals, insurers and medical-device manufacturers — confirmed that major efficiency improvements in health-care are possible. They 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. By making this pledge, the providers and insurers made clear that they agreed the system could remove significant costs without harming quality.
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 save substantial sums. It 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. A slower growth rate in overall health-care spending would help to promote and sustain a slowdown in Medicare and Medicaid spending, too. If cost growth slowed by that much in the future, Medicare and Medicaid spending would reach only about 10% of GDP by 2050 — half the level than if historical growth rates continued.
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, so doctors don’t recommend treatments that don’t improve health; 3) prevention and wellness, so that people do the things that keep them healthy and 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. In February, the president signed the American Recovery and Reinvestment Act, which is providing resources for electronic medical records, patient-centered health research, and prevention and wellness interventions so that we have the infrastructure in place to lower health spending in the long run. The president’s budget also put forward a set of quality-enhancing changes in incentives in Medicare and Medicaid, such as paying hospitals less when they don’t get patient treatment right the first time so we can reduce the number of patients who have to endure readmission to a hospital.
But more must be done. To transform our health-care system so that it improves efficiency and increases value, we need to undertake comprehensive health-care reform, and the president is committed to getting that done this year. Once we do, we will put the nation on a sustainable fiscal path and build a new foundation for our economy for generations to come.
Mr. Orszag is director of the White House Office of Management and Budget.
