• The CBO is telling us something. Is anybody listening?

    The following is the text (and figures) of my most recent Kaiser Health News column. This post has been cited in the 20 January 2011 edition of Health Wonk Review.

    The Congressional Budget Office’s budgetary scoring of the health reform law hasreturned as a subject of debate. At issue is whether health reform will really reduce the deficit by $143 billion through 2019 as the CBO predicted last year. It’s a legitimate question, but focusing on it misses the most important message conveyed by CBO estimates.

    Republicans in the House, who are intent to repeal the new health law, contend that eliminating it wouldn’t really increase the deficit. It’s an argument that makes sense if one is willing to reject the CBO’s deficit-reducing score of the law, and many are. There are good reasons to be skeptical that the law will in fact reduce the deficit.

    The CBO recognized this and produced not one, but two long-term projections of the overhaul’s impact. Using CBO data, I depict their so-called “baseline scenario” in Figure 1, below. It shows actual and predicted federal government revenue and spending from 1970 through 2085.

    Under the baseline scenario, deficits are negative or very small from 2015 through 2085. However, to accomplish this balancing of the books, government revenue (taxes) must increase dramatically to keep pace with the growth in spending on health care programs. In fact, tax receipts must roughly double in the next 75 years, growing well beyond the stable postwar level, which has been below about 20.5 percent of the gross domestic product in all years since 1945. By the way, don’t assume that the growth in health care costs depicted in the figure is due to health reform. It was predicted at about the same level several years before reform passed.

    Note: Figures exclude interest on the national debt.
    Source: Author’s graph of Congressional Budget Office data.

    Perhaps Americans will be amenable to supplying ever greater revenue to the federal government. After all, tax rates are far higher in many other OECD countries. But I’m skeptical that America will stand for it. The CBO was, too, so they produced a second forecast called the “alternative fiscal scenario.” The long-term implications of it are depicted in Figure 2, below.

    Note: Figures exclude interest on the national debt.
    Source: Author’s graph of Congressional Budget Office data.

    In the alternative fiscal scenario, the CBO assumed that tax revenue would eventually flat-line at about 19 percent of GDP, not far from the historical average. Additionally, they assumed that many of the cost control features of the new health reform law would not be as effective as assumed in the baseline scenario. Thus, deficits grow ever larger due to even faster growing health care costs and constant revenue levels. Deficits would likely grow about as rapidly if health reform were repealed too.

    Here’s the state of the debate over these CBO health-reform estimates: which is right, the baseline scenario or the alternative fiscal scenario? It’s the wrong question! It doesn’t matter which scenario you think is right. Likely neither is when examined in any detail, and both are horrible in broad sweep. Choose your poison: massive taxation or massive debt.

    Actually, though, there’s a third option: recognition of the underlying problem and dealing with it.

    The problem is health care costs. They’ll cause budgetary distress with or without health reform. The CBO’s estimates, both of them, show it clearly. Health care costs have been the source of budgetary woes for decades, and there’s no end in sight under any realistic scoring of any serious health reform proposal.

    Proposals that simply declare that rates of Medicare spending cannot exceed economic growth by a certain amount are not credible unless they also suggest a mechanism by which such spending growth targets will be achieved. Any such mechanism, to be believed, must escape the forces that have caused prior cost control efforts to fail, including congressional meddling driven by the interests of key stakeholders.

    One way to get serious is to embrace the cost control provisions of the new law and to protect them from the likely efforts of future policymakers to undo them. In this, I agree with health economist Henry Aaron, who wrote about the health reform law,

    [T]he bill contains, at least in embryonic form, virtually every idea for cost control that any analyst has come up with. … The most practical cost-control strategy that is now available to Congress is to accelerate the implementation of these provisions, not to stymie them.

    That is, the cost controls on the books should be strengthened, not repealed or demagogued. We need them to work, and to work even better than shown in Figure 1. Changes to Medicare and Medicaid payment systems, the Cadillac tax and the creation of the Independent Payment Advisory Board can all be effective tools to reduce federal, state and private health care costs — if used wisely and to their fullest.

    It won’t be easy, and more laws may need to be passed to give government programs and private insurers additional cost-cutting tools. With each proposal to do so, the CBO may be asked to predict the consequences. When they do, don’t just listen to how politicians and pundits debate the anticipated effect on deficits, but also look closely at the rate of health care cost growth. If the projections look like either Figures 1 or 2 above, CBO is still telling us we’re in trouble. Will anyone quiet down long enough to listen? More importantly, are we willing to do something about it?

    • Either we find a way to decrease the cost structure of medicine or we ration –explicitly or implicitly.

      How we do this? Cut waste, decrease over-utilization and change the mentality of medicine. Costs do matter and need to be considered by providers, patent holders, and patients.

      Cost plus is dead– or should be.

    • I agree that the real problem is the cost of medical care. All of the other current discussion (“job-killing”, deficit, CBO projections) is just a smokescreen to avoid addressing the real problem of out of control costs.
      However, in order to control cost, you would have to go up against insurance companies, doctors, hospitals, pharma, etc. which have enough money to buy all of the politicians they need to kill any real cost reduction. Don’t look to the politicians to take care of this problem.

    • I think we are playing an extended game of chicken. No one wants to be the party that makes the real cuts in Medicare spending that are needed. Just cutting Medicare Advantage helped lose the last election.


    • As you rightly say, the problem is health care costs. But I find it astonishing that price controls are taken seriously. Price controls have failed in every industry in every country where they’ve ever been tried. The reasons why are taught in Econ 101. Why would the health care industry be any different?

      If you want to control health care costs, you must restore consumers’ price awareness. There are different ways to do that, and I’m not going to say I know the best way. But any approach that ignores basic price awareness is doomed to failure.

    • Price controls work for health care in most other developed countries.
      Take Switzerland for example. It is mandatory that everyone purchase health insurance from private companies (similar to what the US system will be in a few years). However, the prices for all health care services are regulated by the government. The result is that they have high quality care (much better than the US) universal access and a per capita cost that is about half of what the US spends.
      If you look at France, Germany, Canada, Denmark, The Netherlands, etc. (all of the other “developed” countries), you will find a similar regime of heavy regulation of prices, services and access. They all have better health care than the US and universal access at less than half of our per capita cost.

    • Mark, as a resident of Canada, I have to disagree with your assessment that we have better health care than the US. As the Supreme Court of Canada has said, “Access to a waiting list is not access to health care.”

    • While it may be personally frustrating to have to go on a wait list for an elective, non life threatening procedure, this is not usually considered a measure of health quality.
      I was referring to the usual indicators of health status such as infant mortality, maternal mortality, life expectancy, potential years of life lost and similar indicators which give a good indication of the quality and access to health care in a country. On these Canada bests the US. In fact, the US is lowest of all the OECD countries in these health status indicators.

    • Mark, waiting times are a much more serious problem than you realize. While they are low for immediately-life-threatening situations, you will wait months or even years for non-elective treatment for long-term life-threatening conditions. People die in Canada waiting for treatment. And you can’t tell me that it’s more equitable, because the rich just go to the US for treatment.

      The US has higher infant mortality rates, but they also have one of the lowest abortion rates in the OECD. Fetuses that may or may not survive are routinely aborted here and in Europe, while in the US they’re delivered. No matter what your beliefs on abortion, that’s going to skew the statistics.

      Another factor that skews the statistics is the US crime rate. The US has a very serious crime problem, and there are far more murders per capita in the US than any other OECD country. But does that suggest a problem in the health care system, or in the criminal justice system?

      Admittedly, it’s very difficult to control for all these non-medical factors. But when attempts are made to control for them, the US is usually found to be average or higher-than-average in the same indicators you cite. For your argument to be true, you have to give a reasonable explanation for why deaths by murder or car accident should be counted against the health care system. You also have to explain why a fetus that is aborted should not count, but the same fetus that is allowed to born and later dies naturally should count. Can you?

    • Scott, you certainly have a number of interesting but far fetched hypotheses to explain difference in health. Fortunately, it would have helped you to do a little research before posting.
      Gunshot deaths in the US total about 31,000 a year (most are suicides). This is an insignificantly small fraction of the 2.5 million total deaths. Similarly for abortion, the Canada rate is somewhat smaller (15%) than the US rate (19%) but most abortions are not for fetal malformations so the effect on total mortality is small.
      Waiting times have been a significant source of FUD over the years but have been well documented. It appears that these exist only for elective procedures and that 90% of people in Canada can see a specialist/surgery within 4 weeks. This is similar to the experience in the US where there is a 4-6 week waiting period to see many specialists.
      I did turn up one paradoxical effect of Canada waiting times. One study in BC reported that during one year, 15 people died waiting for heart surgery. However, the mortality rate for the surgery was high so that if they all had had access to the surgery immediately, then 22 people would have died.

    • If you haven’t figured it out yet, health care decisions are not cost sensitive, this is particularly the case when someone is quite wealthy or if someone else (insurance) is paying.

      Free marketers posit that somehow people will make better decision in a free market health care environment, but refuse to explain exactly what that is. Their description always seems to come out as economic rationing of care–not a completely bad solution. But apparently an unacceptable one particularly for those who demagogue “rationing” and “death panels.”

      The issue is complicated by the out of control costs driven by the complexity of the health care choices; the irrational desire of all of us to live forever; relentless industry hype; and the opaqueness of the actual cost of an intervention.

      Where else would you (or for that matter can you) spend $50-100,000 on a product that works for a median of less than 4 months (chemotherapy for a number of cancers)?

      Regarding outcome statistics, the one to remember is that we spend almost twice as much per capita and have no better outcomes. This in a land that once prided itself on productivity and efficiency.

    • Scott of Canada said, ““Access to a waiting list is not access to health care.”

      We have that fixed here in America: 1/6 of the population has NO access to the queues at all due to lack of insurance, another 1/6th has limited access due to under-insurance or other economic hardship.

      So, if Canada were as smart as us, they’d simply take the low income citizens out of the queues and voila, problem solved! Or, you could increase your spending on health care to a percent or two more of GDP.

    • Mark, despite your snarkiness, I have done “a little” research on this topic. A moment’s reflection should reveal to you that “gun deaths” are but a small subset of the group “deaths not preventable by the health care system”. The US total homicide rate is more than five times the Canadian total homicide rate; similarly, the US traffic fatality rate is 65% higher than the Canadian traffic fatality rate. Considering that homicides and traffic fatalities disproportionately affect young adults, the total effect on life expectancy is higher than you think.

      But why should you believe me? I’m just some guy on the internet. Look up Robert Ohsfeldt and John Schneider. They have done far more research than I, and have done actual research. (As opposed to relying on the research of others, like I do in this area.)

      I’m not sure where you get your abortion numbers, but in Canada there are about 30 abortions per 100 live births, while in the United States, there are about 20 abortions per 100 live births. (I’m not sure if links are allowed in comments here; just google “abortion in Canada” and “abortion in the United States”.)

      I also don’t know where you’re getting your data for Canadian wait times. The local Fraser Institute releases an annual report on wait times, and the median wait time for Canadians in 2010 was 18.2 weeks. That’s nowhere near your claim of 4 weeks. There are some surgeries that are below your claim, such as open heart surgery, which according to the BC provincial government has an average wait time of 3.4 weeks. For comparison, in the 90s my father had open heart surgery in Ohio, and his “wait time” was two days. Here in BC, I’ve known people who waited more than a year for shoulder surgery (one was unable to work during this time because of her injury, and could only sit and wait). It takes 2-3 years for a newcomer to the province to get a family doctor. Wait times are a serious problem, and are far more than “FUD”.

      If you really have done “a little” research in this area (meaning keep your eyes open to arguments from both sides, don’t just search for self-confirming “evidence”), I really don’t see how you can claim that wait times are not a problem.

    • Paul: You say, “Free marketers posit that somehow people will make better decision in a free market health care environment, but refuse to explain exactly what that is.”

      I suggest you check out the websites for CATO and AEI, two large “free marketer” organizations. They have lots of quite explicit suggestions for how they would run the health care system under free market principles. Or, you can just accept the proclamation of state-run health-care advocates that libertarians don’t have any ideas. Up to you, really.

      Regarding costs, I would suggest that you also check out Ohsfeldt and Schneider’s research. The US is by far the richest (per capita) country in the world. If you relax the assumption that the relationship between income and health care spending must be linear (and why would it be?), the US is not necessarily spending any more than another country would at that point on the income scale.

    • cmhmd: The 1/6th number you cite without access to insurance has been widely discredited. I suggest you look into that. Even so, to be fair, there are quite a lot of people in the US without access to insurance. But you are making the same mistake that people here made. Access to insurance is not access to health care, just as access to wait times is not access to health care. Only access to actual health care really matters.

      The best system is very probably a dual system, where those who can afford to pay for their health care do (including saving during good years), while those who cannot afford it are given some regular health-care-access payment, preferably in the form of an HSA or something similar. That way, price awareness is returned to the consumers no matter what they’re income level, and the poor are helped when they need it. Getting back to the point here, price controls just aren’t necessary.

    • Well, Scott, you could say what you do about what would be best, or you could look at the countries that are the best, in which case you’ll find the systems of France, Germany and some others consistently providing high quality, timely, affordable health care day in, day out.

      While you may be right that having insurance is a necessary but not sufficient condition for quality health care, lack of either good insurance or lots of money makes it nearly impossible.

      The ideas of CATO, AEI, and others are non-starters for most of us, because most of us don’t buy into the Ayn Rand BS required to take them seriously.

      And you can’t cite the Stark Raving Looney Party – Ooops! I meant the Frazer Institute – and call anybody’s data into question!

    • Scott,
      I don’t really think that you believe that because our society has wealth, whatever that means, it can afford to spend 17% of GDP and going up on health care. Even CATO and AEI agree we’re spending beyond our means.

      The “free market” approaches they offer don’t get past high deductible, “HSA type” insurance plans with vague subsidies to the poor. They don’t answer the question of how one assures access to an entire population most of whom have incomes in the range of $50,000 and less and no savings. Their solutions are more like economic rationing (if you can pay you get care, if not? go to the ER?) rather than a policy to assure appropriate cost efficient care.

      • Isn’t the big question how to ration covered care, even in the catastrophic range of high-deductible plans? Imagine all Medicare benes were enrolled in such plans. The vast majority of spending would be in the catastrophic range. It hardly matters what happens in the deductible range. That’s not going to bend the cost curve, just shift it a little. Taxpayers would still be on the hook for the vast majority of spending. Will Medicare pay for all manner of therapies, regardless of any cost-benefit considerations?

        One can’t dodge that question by imagining the program contracts out to private plans in a premium support model. What is the premium support level? If the market is to set it (as I advocate) then it requires a minimum benefit standard against which plans bid. That benefits standard has to have the covered therapies built into it. At some point we have to decide these things.

    • cmhmd: I’ve never read Ayn Rand, and don’t plan to anytime soon. I don’t buy into Objectivism at all. Can you counter the health care proposals of CATO, AEI, etc. on their merits rather than based on who you think they’re associated with?

      Similarly, if you have a specific complaint about the Fraser Institute’s methodology, let’s hear it. I’m willing to have that conversation, because I always believe that I might be wrong. But if your only arguments are name-calling and guilt-by-association, it looks like you reject the data simply because it disagrees with your established beliefs. If that’s the case, we’re both wasting our time.

    • From an old post on my blog:

      The Fraser Institute is as reliable as the Cato Institute, the American Enterprise Institute and every other right-wing “think-tank” From Nick Scala, of Physicians for a National Health Plan ( pnhp.org)

      “…data supplied by the Fraser Institute, an ultraconservative PR firm that masquerades as a legitimate research institution. Dr. Robert McMurtry, the Canadian orthopedic surgeon who is a former dean of a Canadian medical school and served on the national waiting times commission tells me that not even the right wing Canadians take them seriously. Their “scientific” method of determining wait times consists of bulk-mailing a list of pro-privatization physicians and asking them how long they think their patients will have to wait to see them. If they return the mailing they are entered in a drawing to win a $2,000 cash prize. It’s pathetic. Unsurprisingly, Fraser comes up with outrageous waiting time estimates (17.8 weeks last year, as I recall), and is quite adept at publicizing them in the American media. Wait times are scientifically measured every year by Statistics Canada (the counterpart to the U.S. Census Bureau). I’m sure most Americans would be surprised at the results of scientific measurement: In 2005, median wait times were 4 weeks for elective surgery, 4 weeks for specialist care, and 3 weeks for diagnostic tests.

      Also, the Canadian Health Services Research Foundation has done a short, scholarly critique of Fraser’s methods and compared them with real studies. (In fact, I think they’re far too kind to Fraser).” (Thanks, Nick!)

    • Paul: You say, “They don’t answer the question of how one assures access to an entire population…”

      I think we can agree that those who can pay for their health care should do so. After all, why should the poor and middle class subsidize the rich? So draw a line somewhere, and no I don’t know exactly where it should be drawn, but above that line, everyone pays for their own care, while below that line, everyone receives some subsidy. That’s how you assure access to an entire population.

      The issue is the structure of that subsidy. I’m saying that any structure that removes price awareness is necessarily going to lead to ballooning prices, and price controls will only make it worse. With price awareness, on the other hand, prices will be brought down in the long run. Rather than the ever-expanding budgets of Medicare and Medicaid, we would see something much more financially sustainable.

      It’s not a one-shot solution to all health care problems, but it’s a great start.

    • cmhmd: Using the StatCan link you provided, the discrepancies are easily explained. From the link: “The median waiting time was about four weeks for visits to specialists, four weeks for non-emergency surgery and three weeks for diagnostic tests.”

      That doesn’t mean median total wait times are 3-4 weeks. That means each step in the process takes 3-4 weeks. If multiple rounds of testing, or multiple visits to the specialist are required, you very quickly get into the range that the Fraser Institute reports.

      But consider your source. Is an organization that describes itself as a “single issue” advocate for a single-payer US system the most unbiased critique of the Fraser Institute’s methods that you could find?

    • Austin: You ask, “Will Medicare pay for all manner of therapies, regardless of any cost-benefit considerations?”

      This, I think, is the advantage of HSAs and similar ideas. When Medicare tries to micromanage benefits, or limit costs, it just ends up driving away doctors who are no longer willing to accept Medicare patients. Instead, give all Medicare beneficiaries a fixed amount to spend through an HSA, and the beneficiaries themselves, in consultation with their own doctor, decide how much to spend and where.

      The question then becomes at what level to set the periodic HSA allowance. Here, I think we can take cues from the market. Set the Medicare HSA allowance to some function of median private insurance premiums, allowed to vary by geography, age, maybe some other factors. We could debate the exact function, but assuming price awareness is restored to private industry as I’ve argued for above, this should keep Medicare costs relatively in check.

    • I always look with a jaundiced eye at organizations whose missions seem to be comforting the comfortable.


      I frankly don’t have time to research the Fraser Institute further, but I have heard them in person make their case:

      “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”
      – John Kenneth Galbraith.

    • Scott said: “After all, why should the poor and middle class subsidize the rich? So draw a line somewhere, and no I don’t know exactly where it should be drawn, but above that line, everyone pays for their own care, while below that line, everyone receives some subsidy.”

      It’s encouraging that you raise the issue of subsidization but it’s my impression that your conservative friends are more concerned about subsidies to the poor and middle class, not the reverse. Furthermore, the tax sheltered benefit of HSA, which you appear to favor, is a direct subsidy to the most wealthy in our population.

      Austin and apparently Scott raise the issue of an arbitrary limit on expenditures. However, unless there is some linkage to cost efficacy, their is no rational way to do this. Consider for example advocates of heart transplants for 70 year olds and aggressive costly drug treatments ($100,000/year) with one or two month’s benefit.

    • Paul: If only the wealthy had access to HSAs, you’d be right. But why would that be the case? Anyway if you don’t like HSA tax shelters, I’m sure there’s some middle ground; I only use HSAs as an example. What’s important is that we move away from third-party payments, where consumers have no knowledge of the price of treatments. If consumers pay for care out of some dedicated account like an HSA, they’re far more likely to shop around and find the best doctor for the money. We don’t need some panel in Washington or Ottawa to decide what’s cost-effective and what isn’t, because consumers will do that on their own.