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Orszag Ramps Up Campaign to Target Rising Health Costs

By John Reichard, CQ HealthBeat Editor

November 13, 2007 -- Relying on a new method of analysis, the Congressional Budget Office (CBO) estimated Tuesday that federal spending on Medicare 75 years from now will be 50 percent higher than previously projected in an already grim forecast released in April by Medicare Trustees. Without changes in current law, federal spending on Medicare and Medicaid combined will balloon to 19 percent of the Gross Domestic Product by 2082, up from 4 percent now, the CBO report added. Total U.S. health care spending will rise to 49 percent of GDP, compared with 16 percent now.

CBO Director Peter Orszag cautioned that media coverage of unsustainable health care spending growth focuses policy makers too much on the aging of the U.S. population. Instead, it should illuminate a more fundamental cause: rising per capita health care expenses for Americans in general that too often go toward paying for unproven treatments.

"The nature of our long-term fiscal problems has largely been misdiagnosed," Orszag said. "It is often referred to or described as being caused mostly by the coming retirement of the baby boomers and the aging of the population. That fact that the population is getting older does affect the federal budget and is a factor in our overall long term fiscal problems. But it is not by any means the main factor." By far the main factor is the rate of cost growth per beneficiary, not the number of beneficiaries, he said.

"The first step is to get the long-term fiscal picture right, and not emphasize aging so much," Orszag told health reporters. The report specifically identifies "excess cost growth" as the main culprit, defining that term as "the extent to which the increase in health care spending for an average individual exceeds the growth in per capita gross domestic product." Too little attention has been paid to what could bend the excess cost growth curve downward, he said.

Excess cost growth accounts for about 90 percent of the projected growth in federal Medicare and Medicaid spending by 2082 and the aging population by only 10 percent. Aging accounts for higher proportions of spending growth in the shorter term, however—around 20 percent in 2050 and about 25 percent through 2030.

It's not news that long-term Medicare and Medicaid spending growth is unsustainable, but CBO's grimmer numbers are likely to call greater attention to the issue. Senate Finance Committee Chairman Max Baucus, D-Mont., issued a statement Tuesday saying he will announce in January an extensive series of hearings on health care costs and a health system overhaul. "Finding ways to make the health care system more efficient and cost-effective will reduce costs for all health care users, public and private, and that will pave the way toward getting federal spending truly under control," Baucus said. "The Finance Committee will dedicate a great amount of time next year toward finding real solutions."

Orszag is ramping up CBO efforts to help lawmakers do that. Starting in December, CBO will start releasing long-term budget projections every year, rather than every two years, and health spending will be a component of those estimates, Orszag said. Tuesday's report represents the health care portion of the December analysis. In coming months, CBO will release a series of reports evaluating "levers and options" for controlling cost growth, Orszag said. The agency also plans to hire 20 to 25 more health analysts during the current fiscal year, beefing up its current health care staff of about 35.

CBO's estimate of Medicare spending is similar to that of the Medicare trustees for the first 25 years of the 75 years, but assumes higher growth rates in the last 50 years projection window. The trustees assume growth rates of one percent in excess of GDP during that period, while CBO estimates a higher growth rate.

At the same time, however, the CBO assumes that Medicare and Medicaid spending won't grow at historical rates. Instead, it relies on an alternative method of estimating future spending that assumes "the rising share of national income devoted to health care creates pressure on households and employers to take potentially painful steps to reduce the growth in health care spending." The projections assume that "to avoid a reduction in real consumption of items besides health care, employers, households and insurance firms will change their behavior in a variety of ways." These include reduced coverage, higher out-of-pocket costs, greater "utilization management" to reduce access to covered services, and greater scrutiny of new technologies.

These changes will spill over from the private sector to Medicare and Medicaid, but under current law won't reduce excess cost growth in those programs as much as they do in the private economy, the report said.

The good news is that there is "significant opportunity . . . to remove costs from the system without harming health outcomes," Orszag said. "Comparative effectiveness" research comparing the cost and medical outcomes of various treatments for the same medical condition is the key to that opportunity. Broader use of health information technology will create the "infrastructure" to allow such comparisons on a large scale. Tying the findings to payment changes will lead to greater use of services and products that provide the greatest value, he said.

Orszag said he regularly asks health care economists and other analysts what share of health care spending could be eliminated without harming medical outcomes. Their estimates range from 5 and 50 percent with 30 percent a common assumption. Thirty percent would amount to five percent of the economy — a huge potential savings, he said. He also pointed to studies by Dartmouth College researchers showing that lower cost areas in the United States, such as the upper Midwest and Northwest, have quality of care at least as good as that of more expensive "interventionist" parts of the country in which far more health care resources are used.

These inefficiencies fostered by greater numbers of providers and larger supplies of health care services thrive in an environment in which research is lacking comparing treatments, he said.

But with more such research, "tiers" could be created in which consumers pay lower co-payments for treatments of greater value and higher co-payments for those of lesser value. Medicare also could vary levels of payment to providers based on the value of treatments, the report said.

CBO plans to release reports in coming months analyzing the spending impact of changes in payment incentives, care coordination, disease management programs, and different types of delivery systems such at that operated by the Veterans Administration, Orszag said.

He acknowledged that creating a more efficient system will require many changes that won't be easy. But that's "all the more reason to be starting yesterday," he said.

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