Health Care

Health Reform's Savings Myth

Washington Post| May 31, 2009


"Health-care reform is entitlement reform" has become a mantra of the Obama administration. The idea is that Congress can add a massive health-care program this year -- covering the uninsured -- and use the same measures that pay for the health reform to fix the broader budget problems. If that sounds too good to be true, there's a reason.

Expanding insurance to cover the 46 million Americans who are uninsured would probably cost more than $100 billion a year -- more than the federal government spends on education, training, employment and social services combined. It is an immense undertaking at a time when the budget is under terrible strain. So it's no surprise that Democrats and the Obama administration do not want to portray it simply as another big entitlement program.

Some argue that universal coverage would decrease costs by expanding the risk pool (bringing healthy young people into the system) and by decreasing emergency room costs, because more people would get care before their illnesses become acute. There's truth to both, but the savings are vastly outweighed by the costs of treating so many people who today get little or no care. Expanding insurance coverage would increase health-care spending by those who acquire insurance and add to overall health cost inflation.

Well, then, perhaps expanding coverage can be justified as the necessary "sweetener" in a package of tough measures to control costs? It's true that Congress doesn't much like all-pain-and-no-gain policies. But the administration's proposal, even before Congress gets to work, is to spend $100 billion more on coverage while finding cost-saving measures worth only about a third as much. Another third would be paid for by tax increases. The last third, so far, isn't paid for at all. That's three times as much sweetener as medicine, in other words -- and Congress will be tempted to jettison some of the savings and all of the tax increases.

You doubt Congress would pass a bill that isn't fully paid for and that would make the fiscal situation drastically worse? Just remember the Medicare prescription drug bill, for which Congress and the Bush administration teamed up to add a huge new entitlement without fixing any existing problems in the Medicare system. Even if Congress paid fully for this latest entitlement, it seems exceedingly unlikely that it would do much to improve the longer-term deficit situation. Health-care costs grow at a faster rate than the economy by two percentage points per year. So it's true that if we could get them back in line with overall economic growth, government spending on health care would be so much lower than projected over time that long-term budget woes would ease.

Unfortunately, though many ideas are tossed around, no one really knows how to slow that cost growth. Health information technology, better disease management and preventive care are all good ideas that would almost certainly improve the quality of health care, but they are less certain to slow cost growth. In fact, the Congressional Budget Office has pointed out that each of these would either drive up government costs or have to be paired with other policy changes to create any federal savings.

Two cost-saving measures hold the most promise. First, what's known as comparative effectiveness research, which tracks what works and what doesn't, would also require outside boards directing doctors and hospitals about what procedures they could and couldn't use. Policymakers have tended to dance around the second part of the equation. Second, eliminating the tax break for employer-provided health care could generate a good deal of savings and help bring down health-care inflation. But, again, there's a political challenge; President Obama would have to admit that Sen. John McCain, his GOP opponent in the presidential campaign, was right on this idea.

Here is the bottom line: Most health-care inflation is the result of new technologies. Bending the curve enough to help balance the budget means walking away from some of the new technologies and devices that people want when they are sick. It also means improving consumer cost-consciousness through insurance reform and higher deductibles and co-payments. For most of us, that means paying more, not less. Even then, it is unlikely to be enough to get costs under control.

Health-care reform will have to be an incremental process: Try some things now, and try more in a few years. Maybe we will choose to spend a good deal more on health care, but if so, even more will have to be done to fix the rest of the budget. As much as we might wish it were so, creating an expensive plan to expand coverage, with some measures to get us started on bringing down costs, will not be sufficient to improve America's fiscal health anytime soon -- let alone fix the federal budget.

Copyright 2009, Washington Post

Open Letter to President Obama: A Budget We Can Believe In

Guide to Health Care: The 2008 Presidential Election

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One of the most pressing issues facing policymakers in the United State is rising health care costs. Cost growth is putting ongoing stress on the budgets of families, employers, and governments. The U.S. already spends $2.2 trillion a year - 16 percent of GDP - for health care. Nearly a third of this comes from the federal government.

As health care costs grow, there will be considerable pressure on the federal government's budget. Together, Medicare and Medicaid are expected to rise from 4.2 percent of GDP today to 8.1 percent in 2030 and 18.5 percent in 2082. Yet despite the amount the federal government spends on health care, there are nearly 46 million Americans without insurance and rising costs threaten to grow the rolls of the uninsured. Furthermore, there are many areas of our health care system where the quality lags behind other nations even as we pay a higher price.

Senators McCain and Obama have each proposed a set of reforms to the current health care system. But even accounting for the savings that could be achieved in Medicare, Medicaid, SCHIP, and the employer exclusion, both plans would come at a considerable cost to the U.S. Treasury.

Guide to Health Care: The 2008 Presidential Election hopes to give voters a better understanding of the fiscal implications of the candidates' health care reform proposals. It offers a background of the U.S. health care system, and gives a breakdown of the potential costs and savings for each item in the candidates' health care agendas. The guide is not intended to express a view for or against either candidate or any specific policy proposal.

Promises Promises: A Fiscal Voter Guide to the 2008 Election

Download this document

The United States faces serious fiscal challenges. Large budget deficits have returned, and shifting demographics along with growing health care costs are putting intense pressure on the long-term federal budget outlook. Over time, sustained deficits will weaken the economy and adversely affect the American standard of living.

The two major political parties' presidential candidates are campaigning on a lengthy list of policy initiatives, most of which would have significant impact on the federal budget. While not all of these proposals will become law, they do reflect the candidates' values and priorities, and the policies each candidate is likely to pursue once in office. In addition to these new initiatives, a number of outstanding tax and budget issues exist that will need to be addressed, such as which of the 2001 and 2003 tax cuts should be made permanent, how to fix the Alternative Minimum Tax, what to do about growing entitlement spending, how to control health care cost growth, and how to pay for the wars in Iraq and Afghanistan. The next president will face difficult fiscal challenges. It is therefore critical that voters understand the potential budgetary impacts of the candidates' plans.

US Budget Watch's report, Promises, Promises: A Fiscal Voter Guide to the 2008 Election--with an updated (10/31) section on the candidateswill help voters find their way through the thicket of policy proposals put forward by the likely Republican candidate for president, Senator John McCain, and the likely Democratic candidate for president, Senator Barack Obama. It presents a capsule summary of the candidates' major policy proposals and includes an estimate of the likely fiscal impact of each proposal. The guide is not intended to express a view for or against either candidate or any specific policy proposal. This report will be followed by other more detailed reports on the candidates' tax and spending proposals.

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