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Healthcare Is America’s Real Problem

Author: Peter R. Orszag, Adjunct Senior Fellow
January 23, 2013
Financial Times

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Healthcare costs are the core long-term fiscal challenge facing the US – and yet also the best hope for cushioning workers from globalisation. This is why the recent deceleration of these costs is so encouraging – and why we should double down on them.

Given the fragmented medical system in the US and its financial incentives for more – rather than better – care, health costs dominate the long-term fiscal picture.

Official projections show federal health expenditure rising between now and 2050 from 5.5 per cent of gross domestic product to more than 12 per cent. Social Security spending, by comparison, is predicted to rise in the same period from 5 per cent of GDP to 6 per cent.

It is not hard to work out what is driving our long-term fiscal gap. President Barack Obama is right. We do not have a spending problem – we have a healthcare problem.

Improving value in healthcare will not just deliver benefits to our public finances, it will also help America's wage-earners who have lost out in recent years. Thanks mostly to globalisation, labour income's share of GDP has fallen 5 percentage points in the past three decades.

This decline has reduced labour compensation by about $750bn a year, and no one has a credible set of policies for offsetting it. Yet estimates also suggest about $750bn a year in US health spending does not improve outcomes. Both economic theory and evidence suggest workers pay for this waste, either through reduced wages or higher taxes. If we could get rid of it, take-home pay would ultimately rise by the difference – offering the best hope of filling the globalisation hole.

The good news is that recent developments in health costs are better than many appreciate. Cost growth has slowed dramatically, and spending on the Medicare programme for the elderly and disabled has led the way. Last year Medicare spending rose by 3.2 per cent, compared with 4 per cent for total national health spending. With such slow growth rates, health spending as a share of GDP has remained flat in the past three years.

A weak economy in which people do without unnecessary care partly explains this. Yet if it were entirely cyclical, it would be odd for Medicare to slow more than other health spending. Most beneficiaries have some form of supplemental insurance and so face very low out-of-pocket costs. Also, for most, their primary source of income is Social Security, which is protected from economic downturns.

Medicare covers a disproportionately high share of expensive cases – and we would expect structural change to affect such cases most, which would explain the pattern we have seen. Three shifts support this idea: a move to value-based payments; digitisation and associated management changes; and better-informed consumer behaviour.

To see what a big deal slower growth in health costs could be, consider this: if they rose 50 basis points faster than income each year, they would still be rising much faster than the growth rate of the past three years. And yet, with that more moderate growth assumption, our long-term fiscal gap would look almost manageable.

Last year, the Congressional Budget Office estimated that the gap between revenue and expenditure in the next 75 years would amount to 8.7 per cent of GDP. Since then, enacted revenue increases and an improved underlying budget outlook have reduced the gap to perhaps 7.5 per cent.

Achieving the lower health-cost growth would knock another 2.5 per cent of GDP off, bringing the long-term fiscal hole down to 5 per cent of GDP – a greater impact than any policy change currently being debated in Washington. Moderate revenue increases and Social Security reform could then reduce it further, bringing us within reach of long-term fiscal balance.

How do we do this? Three steps would be particularly helpful – starting with the acceleration of the shift from paying for specific services to paying for "value". Second, promote evidence-based medicine by connecting electronic health records with patient registries and by prohibiting malpractice suits when doctors follow professional guidelines.

Finally, we should require any patient admitted to a hospital to fill out an advance directive about their end-of-life care preferences. This reduces costs as some patients choose to skip expensive, often painful procedures towards the end of their lives.

The next decade in healthcare is crucial. Aggressive action today could help to perpetuate slower cost growth and make the system a more effective, efficient one – helping both the budget and our pay cheques.

The writer is Citigroup vice-chairman and a former budget director

This article appears in full on CFR.org by permission of its original publisher. It was originally available here (Subscription required).

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