Peter Orzag on the Obama health care proposal

A plan to boost America’s fiscal health

By Peter Orszag

Published: June 15 2009 19:26 | Last updated: June 15 2009 19:26

As the healthcare debate picks up in the US, there has been much discussion about how to pay for it. Coinciding with this debate are vocal concerns about the country’s underlying fiscal position – which some have suggested as a reason to delay healthcare reform.

What this argument ignores is that healthcare is central to the long-term fiscal and economic prospects of the US. 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 programmes will increase from 5 per cent of gross domestic product today to 20 per cent by 2050.

Healthcare cost growth dwarfs any of the other long-term fiscal challenges the US faces. Nothing else we do on the fiscal front will matter much if we fail to address rapidly rising healthcare costs.

The US spends almost 50 per cent more per person on healthcare than the next most costly nation, but our health outcomes lag those of most industrialised countries. For families, after adjusting for inflation, health insurance premiums have increased 58 per cent while wages have risen only 3 per cent since 2000. For states, rising healthcare costs are squeezing their budgets, leading to cuts in essential services and tax rises. And for the economy as a whole, if healthcare costs grow at the rate they are now, healthcare will consume one-fifth of GDP by 2017.

That is why Barack Obama is committed to undertaking healthcare reform this year. Based on estimates by Dartmouth College and others, the US spends about $700bn (£428bn, €505bn) a year on healthcare that does nothing to improve Americans’ health outcomes.

Reducing the number of tests, procedures and other medical costs that do not improve health presents an enormous opportunity. Our fiscal future is so dominated by healthcare that if the US can slow the rate of cost growth by just 15 basis points a year (0.15 percentage points), the savings for Medicare and Medicaid would equal the impact from eliminating Social Security’s entire 75-year shortfall. If we slow the rate of healthcare cost growth by 1.5 percentage points per year, by 2030 we could reduce the federal budget deficit by 2.5 per cent of GDP, which is about $350bn relative to today’s economy.

So what must be done? As he made clear in his speech to the American Medical Association on Monday, Mr Obama is firmly committed to making healthcare reform deficit neutral over the next decade, using real savings or revenue proposals that can be scored by the Congressional Budget Office. The offsets are not theoretical; they are specific proposals determined by outside, impartial arbiters such as the CBO to cut spending or raise revenue.

In particular, Mr Obama has put forward in his budget proposals to generate $635bn for healthcare reform with roughly half coming from Medicare and Medicaid efficiencies (such as reducing Medicare overpayments to private insurers) and half from tax provisions limiting the itemised deduction rate for the wealthiest Americans to what it was when Ronald Reagan was president. On Saturday, Mr Obama also proposed an extra $313bn in Medicare and Medicaid savings proposals including a proposal that will generate about $106bn in savings over 10 years by reducing payments that help hospitals with the cost of treating patients without insurance because as we expand coverage, the need for such payments is reduced. Taken together, these “pay-fors” total about $950bn over 10 years, an amount that puts us in a good position to fully fund health reform in a deficit neutral way.

We must also address the forces making the healthcare system unaffordable and inefficient. The system creates incentives for doctors and hospitals to provide more care, not the best care. A lack of information on what works leads to huge variations in the quality of care and its cost. As Atul Gawande has described in the New Yorker, there are cities such as McAllen, Texas, that spend close to twice the national average on healthcare and do not get better results than lower cost, high-quality cities even in their own state or region.

The US must move towards a higher-quality, lower-cost system in which best practices are universal – rather than concentrated only in some parts of the country. The administration has therefore put forward initiatives such as health IT, research into what works, prevention and wellness, and changes in provider incentives. We must also change the process of policymaking so that policy can keep pace with a dynamic health market, for example by expanding the role of bodies such as the Medicare Payment Advisory Commission.

It is partially because of the unnecessarily high costs of our system that too many Americans lack insurance and are exposed to big financial and health risks. Mr Obama has said that healthcare reform must reduce costs and expand coverage since doing the latter without the former is fiscally unsustainable.

This is not the end of our commitment to fiscal responsibility. Once healthcare reform is in place, the US can then focus on other aspects of fiscal sustainability, including Social Security reform. But the bottom line is that healthcare reform is a necessity both for millions of American families and the long-term fiscal and economic health of the nation.