October 22, 2010
Director Elmendorf spoke to a conference sponsored by the Schaeffer Center for Health Policy and Economics at the University of Southern California. His remarks review CBO's analysis of the economic effects of the health legislation enacted in March. Those effects can be divided into two pieces: the effects on the five-sixths of the economy outside the health sector, and the effects on the health sector itself.
Slides from the Director's Testimony
Potential Costs of Veterans' Health Care
October 7, 2010
Potential Costs of Veterans’ Health Care
The Department of Veterans Affairs (VA) provides health care at little or no charge to more than 5 million veterans annually. Medical services are provided through the inpatient and outpatient facilities run by the Veterans Health Administration. Those services include routine health assessments, readjustment counseling, surgery, hospitalization, and nursing home care.
The Congressional Budget Office (CBO) projects that the future costs for VA to treat enrolled veterans will be substantially higher (in inflation-adjusted dollars) than recent appropriations for that purpose, partly because more veterans are likely to seek care in the VA system but mostly because health care costs per enrolled veteran are projected to increase faster than the overall price level. Under two scenarios that CBO examined, the total real resources (in 2010 dollars) necessary to provide health care services to all veterans who seek treatment at VA would range from $69 billion to $85 billion in 2020, representing cumulative increases of roughly 45 percent to 75 percent since 2010.
Although veterans from recent conflicts will represent a fast-growing share of enrollments in VA health care over the next decade, the share of VA’s resources devoted to the care of those veterans is projected to remain small through 2020, in part because they are younger and healthier than other veterans served by VA.
To provide health care services, VA depends on discretionary funding that the Congress provides in annual appropriation acts. Although eligibility for VA health care is based primarily on veterans’ military service, VA may, and does, adjust enrollment according to the resources available to it.
The Veterans’ Health Care Eligibility Reform Act of 1996 (Public Law 104-262, 110 Stat. 3177) mandated that VA deliver services to veterans who have service-connected conditions, to veterans unable to pay for necessary medical care, and to specific groups of veterans, such as former prisoners of war. The legislation permitted VA to offer services to all other veterans to the extent that resources and facilities were available; it also required VA to develop and implement an enrollment system to facilitate the management and delivery of health care services.
VA’s enrollment system includes eight categories that determine veterans’ eligibility and priority for access to health care. The highest priority is given to veterans who have service-connected disabilities (priority groups 1 through 3, or P1 through P3); the lowest priority is given to higher-income veterans who have no compensable service-connected disabilities, that is, no conditions that are disabling to the degree that VA provides compensation (P8).
The number of veterans treated by VA climbed rapidly following the enactment of the 1996 law, increasing from 2.9 million in fiscal year 1995 to 4.5 million in 2003. By 2003, VA no longer had the capacity to adequately serve all current enrollees, prompting the Secretary of Veterans Affairs to suspend further enrollment of some higher-income veterans (those in P8); VA eased that restriction in 2009 to allow some of those veterans to enroll. (Enrolled veterans typically have more than one source of health care available to them and choose to use VA for only a small portion of their health care, relying on other sources such as Medicare, employer-sponsored insurance, or the Department of Defense’s TRICARE program.)
A total of $44 billion was appropriated to VA for 2009 to provide medical services to veterans and to conduct medical research. That amount was increased by 8 percent, to $48 billion, for 2010. VA has requested an appropriation of $52 billion, an additional 8 percent, for 2011. The average annual increase was more than 9 percent from 2004 through 2009.
One group of veterans—those who have deployed or will deploy to overseas contingency operations (OCO), which include Operation Iraqi Freedom, Operation New Dawn, and Operation Enduring Freedom in Afghanistan and related activities—are of particular interest as policymakers and others attempt to determine the extent of the war-related medical conditions of those veterans and the resources required to treat them. Those veterans accounted for only about 6 percent of all patients in 2009 and 3 percent of the total dollars obligated for veterans’ health care in that year. Of the $43 billion obligated in 2009, VA estimates that it obligated $1.5 billion to care for OCO veterans. VA further estimates that those obligations will rise to $2.0 billion in 2010, $2.6 billion in 2011, and $3.3 billion in 2012.
Projecting Future Costs
This CBO report examines prospective demands on VA and projects the resources the agency would need to provide medical care to all enrolled veterans during the next 10 years, 2011–2020. (The report does not attempt to predict appropriations for VA.) Although the focus of this report is on the resources VA would need to treat all enrolled veterans, CBO has also separately projected the portion of those resources that would be needed to treat the veterans of the ongoing overseas contingency operations.
The recent increases in VA’s medical budget have reflected factors that will probably affect future resource requirements. First, as is true for all U.S. health care, VA’s medical expenditures per enrollee have grown more rapidly than has the overall price level. Second, the ongoing deployments to combat operations in Iraq and Afghanistan have increased the number of veterans seeking care from VA. Third, VA has been easing restrictions on enrolling higher-income veterans (those in P8), in part because of concerns expressed by policymakers and others who believe that restrictions on enrollment have caused some veterans to be denied benefits that they deserve.
To account for some possible policy changes and for uncertainty about the number of veterans who will be enrolled and the growth of medical expenditures per enrollee, CBO presents two scenarios to capture some of the range of possible outcomes. The scenarios differ in their assumptions about the number of enrollees in the VA health care system and the costs of providing medical services. CBO also assumes that there will be no major changes in VA’s policies (except for a possible change in eligibility criteria) and that the enrollment of non-OCO veterans (except for higher-income veterans) and the percentage of total health care that veterans receive from VA as opposed to other sources, referred to as their "reliance on VA," follow current trends.
Scenario 1. The first scenario was crafted using assumptions about enrollment and medical expenditures per enrollee that generate lower resource requirements than Scenario 2. The assumptions about factors affecting enrollment include the following:
- VA’s eligibility, cost-sharing, and other policies are those in effect at the beginning of 2010. Those policies include the easing of enrollment restrictions that began in 2009 for veterans in priority group 8 who have no compensable service-connected disabilities and whose income is 10 percent or less above VA’s income thresholds.
- The number of troops deployed to overseas contingency operations, which currently include the military operations in Iraq and Afghanistan and related activities, drops to 30,000 by 2013 and remains at that number throughout the decade.
- VA’s medical expenditures per enrollee for each priority group grow in nominal terms at slightly more than 5 percent per year, about the same rate as that anticipated in the general population over the decade.
Scenario 2. CBO crafted the second scenario to illustrate potential policy changes and other outcomes that may result in higher resource needs for VA’s health care services. The assumptions for that scenario are as follows:
- VA changes its eligibility rules to allow veterans who have no compensable service-connected disabilities and whose income is 30 percent or less above VA’s income thresholds to enroll. Other than that change, all policies relating to eligibility, cost sharing, and other factors are those in effect at the beginning of 2010.
- The number of troops deployed to overseas contingency operations declines more slowly than in Scenario 1, dropping to 60,000 by 2015 and remaining at that number through the rest of the decade.
- VA’s medical expenditures per enrollee for each priority group grow initially at the rate VA assumed in preparing the Administration’s 2011 budget request that was transmitted in February 2010 and, in subsequent years, at an annual rate that is about 30 percent higher than that anticipated in the general population—a rate that exceeds the average rate experienced by VA from 2003 through 2007, before significant numbers of veterans from the ongoing conflicts had enrolled.
Potential Costs to Treat All VA Enrollees
Under Scenario 1, CBO estimates that total enrollment would grow from 8.0 million in 2009 to more than 8.8 million by 2016—an increase of about 10 percent—but would edge down to 8.7 million in 2020. The resources required to treat all enrolled veterans would be about $69 billion in 2020, nearly 45 percent higher than the $48 billion that has been provided for 2010.
Under Scenario 2, enrollment would be 620,000 higher in 2020 than in Scenario 1, with 340,000 new enrollees resulting from VA’s further relaxation of the restrictions on enrollment and 280,000 from the higher troop deployments. The resources required to treat all enrolled veterans would reach nearly $85 billion in 2020, or 22 percent more than under Scenario 1 and about 75 percent more than the amount provided for 2010.
What factors explain the difference of roughly $15 billion in the potential costs of the two scenarios in 2020? The disparity between the growth rates of medical expenditures per enrollee in the two scenarios accounts for the lion’s share of the difference—$13 billion. Extending eligibility to additional higher-income veterans who have no compensable service-connected disabilities would add just $1 billion to the costs under Scenario 1; because those new enrollees are drawn from a group that historically has cost less to treat than most other veterans, the additional resources VA would require would be relatively small. The higher troop levels for contingency operations under Scenario 2 would also add $1 billion; the increase in the number of enrollees would be small—only about 3 percent—and they too would use fewer resources than the average enrollee.
The projections for both scenarios exceed the baseline projections that CBO constructs in accordance with the provisions set forth in the (now expired) Balanced Budget and Emergency Deficit Control Act of 1985. The baseline projections reflect the assumption that appropriations increase at the same rate as the employment cost index for the wage and salary component of VA’s budget and at the same rate as the gross domestic product price index for all other components.
In making its projections, CBO did not explicitly account for recently enacted health care legislation—in particular, the Patient Protection and Affordable Care Act (P.L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152). Although there is considerable uncertainty regarding how the new legislation will be implemented, CBO conducted a preliminary analysis of how it might affect VA’s resource requirements. That analysis indicates that the new laws may either increase or decrease the number of enrollees—and therefore VA’s resource requirements—but in either case probably by only a small amount. On the one hand, the costs of obtaining health insurance will be lower for some veterans in the latter part of the coming decade, leading some of them to seek less care from VA than they would have without the recent legislation. On the other hand, to avoid financial penalties that may be assessed on people who do not have a required level of health insurance, some veterans who would otherwise neither enroll in VA’s program nor obtain other insurance might choose to enroll with VA. Neither of those effects is likely to be large enough to significantly affect the projections in this report.
Potential Costs to Treat Veterans of Overseas Contingency Operations
As part of its projections for the resources needed to treat all enrolled veterans, CBO separately estimated the portion of resources that would be required to treat veterans of overseas contingency operations. CBO estimates that between the time hostilities began and the end of 2020, VA would enroll a total of 1.4 million or 1.7 million OCO veterans under Scenarios 1 and 2, respectively. The annual resources (in 2010 dollars) required to treat OCO veterans would increase from an estimated $2.0 billion in 2010 to $5.4 billion in 2020 under Scenario 1 and to $8.3 billion under Scenario 2. Because OCO veterans are typically younger and healthier than the average VA enrollee, they are less expensive to treat. Accordingly, the resources devoted to OCO veterans would be a small share of outlays, consuming 8 percent and 10 percent of VA’s resources for health care services in 2020 under Scenario 1 and Scenario 2, respectively. As the OCO veterans age, however, CBO expects that their costs will be similar to those of other older veterans who use VA’s health care services.
Effects of Using Generic Drugs on Medicare's Prescription Drug Spending
September 15, 2010
In 2006, Medicare began offering outpatient prescription drug benefits to senior citizens and people with disabilities in a program called Part D. Unlike other Medicare benefits covered under the traditional fee-for-service program—in which providers are paid an administratively determined price for each covered service (or bundle of services) they provide—prices in Part D are not set by the government. Instead, private plans deliver the drug benefit and negotiate their own drug prices while competing with each other for enrollees.
That framework was intended to provide those plans with incentives to make their drug benefits attractive to potential enrollees and to control their costs. One important way in which they do so is by negotiating with manufacturers of brand-name drugs for rebates. Another important mechanism is managing enrollees’ use of prescription drugs—and in particular, encouraging the use of generic drugs. Using differences in copayments and other methods, plans can encourage enrollees to switch from brand-name drugs to their less expensive generic equivalents—a practice known as generic substitution. Plans can also encourage enrollees to switch from a brand-name drug to the generic form of a different drug that is in the same therapeutic class, which is one form of a practice known as therapeutic substitution. (Therapeutic substitution can also include switching from a higher priced brand-name drug to a lower priced brand-name drug in the same class.)
The Congressional Budget Office (CBO) used data from the Centers for Medicare and Medicaid Services on prescriptions filled in 2007 under Part D to assess how successful plans have been in encouraging the use of generic drugs and how much additional savings could arise from the wider use of such drugs. Developing policy tools to achieve additional savings from greater use of generic drugs is a further challenge not addressed in this study.
Potential Savings from Generic Substitution
In 2007, total payments to plans and pharmacies from the Part D program and its enrollees were about $60 billion. The total number of prescriptions filled under Part D was about 1 billion, of which 65 percent were filled with generic drugs, 5 percent were filled with multiple-source brand-name drugs (brand-name drugs that are also available in generic versions), and 30 percent were filled with single-source brand-name drugs (brand-name drugs for which no chemically equivalent generic versions are available). Even though a majority of prescriptions were filled with generic drugs, their lower prices meant that those prescriptions accounted for only 25 percent of total prescription drug costs.
Using the Part D data, CBO estimates that dispensing generic drugs rather than their brand-name counterparts reduced total prescription drug costs in 2007 by about $33 billion. Thus, total payments to plans and pharmacies from the Part D program and its enrollees would have been about $93 billion—or 55 percent higher—if no generics had been available. That analysis holds several factors constant and reflects CBO’s assessment (discussed below) that generic entry is unlikely to have a substantial effect on either the price of the brand-name drug or the total quantity (including brand-name and generic versions) of the drug sold.
The savings from using generic drugs accrued to Medicare and its enrollees. In 2007, Medicare made 72 percent of the total payments to plans and pharmacies under Part D, and enrollees paid for the remainder through premiums, deductibles, coinsurance, and copayments. A reasonable judgment is that those shares of payments would also apply to the savings from generic utilization—which translates into savings of about $24 billion for the Part D program in 2007 and about $9 billion for its enrollees. The actual share of savings going to each group could have been somewhat higher or lower, however, depending on a number of factors, such as how the savings altered spending across the various coverage phases of the Part D program.
CBO also analyzed the potential for additional savings from increased generic substitution and found that it is comparatively small. If all of the 45 million prescriptions filled with multiple-source brand-name drugs had instead been filled with their generic counterparts, an additional $900 million—representing less than 2 percent of total payments to plans and pharmacies from the Part D program and its enrollees in 2007—would have been saved. Using their shares of payments to plans and pharmacies to allocate those savings, the Part D program would have saved about $650 million, and its enrollees would have saved about $250 million.
Potential Savings from Therapeutic Substitution
Single-source brand-name drugs accounted for 68 percent of total prescription drug costs under Part D in 2007, even though those drugs accounted for only about 30 percent of prescriptions. Plans could have achieved some savings from that group of drugs by encouraging enrollees to switch to the generic form of a different drug in the same therapeutic class—that is, a drug designed to treat the same medical condition.
The potential to reduce costs by promoting such therapeutic substitution depends on the number of single-source prescriptions that it would be medically appropriate to switch. To assess the potential for such savings, CBO examined potential therapeutic substitution for seven therapeutic classes identified by the Medicare program as providing opportunities for such substitution. If all of the single-source brand-name prescriptions in those seven classes had been switched to generic drugs from the same class, prescription drug costs would have been reduced by $4 billion in 2007, or 7 percent of total payments to plans and pharmacies in that year. Again using their overall shares of payments to plans and pharmacies to allocate those savings, Medicare spending would have been reduced by $2.9 billion, and enrollees’ spending would have been reduced by $1.1 billion. As with generic substitution, the actual share of the savings going to either group could have been somewhat higher or lower.
The potential savings from therapeutic substitution to generic drugs could have been higher or lower than those estimates, for two reasons. On the one hand, the reduction in costs in the seven therapeutic classes that feasibly could have been achieved would be less than $4 billion because in many cases it would have been medically inappropriate to switch a prescription from a single-source brand-name drug to the generic form of a therapeutically similar drug. Some drugs in a class either may be more effective than others for some of the population or may not be safe for people with other health conditions. Consequently, a pharmacist must obtain the consent of the prescribing physician before substituting a generic drug for a single-source drug that is in the same therapeutic class but is not chemically equivalent.
On the other hand, savings from therapeutic substitution to generic drugs could have been much higher than $4 billion to the extent that other classes of drugs also would have presented options for substitution. The seven classes that CBO evaluated represented only about one-fifth of total prescription drug costs and 15 percent of the cost of single-source brand-name drugs under Part D. Even if the share of drugs that feasibly could have been switched in those other classes had been lower than in the classes that Medicare highlighted, those switches would generate additional savings. Compared with the potential for additional savings from generic substitution, the potential for additional savings from therapeutic substitution was greater both because the savings per prescription were greater (given the relative prices of the specific drugs involved) and because slightly more prescriptions had the potential to be switched.
Policymakers would face several challenges in developing tools to achieve any additional savings from the expanded use of generic drugs—particularly in the case of therapeutic substitution. About half of Part D spending is on behalf of enrollees who have lower incomes and thus qualify for additional subsidies. Policies that used financial incentives to steer enrollees toward certain drugs might not be effective for that population because Medicare pays nearly all of their costs. In addition, plans must meet certain requirements intended to ensure that enrollees have access to the drugs that they need and to prevent the plans from discouraging beneficiaries with high drug costs from enrolling; those requirements limit plans’ ability to steer drug use. Finally, it could be difficult for policymakers to design policies so that switches from single-source brand-name drugs to generic drugs were made only when medically appropriate.
Implications of Future Developments
The estimates of actual savings from generic substitution in 2007 and potential savings that could have been realized from greater generic and therapeutic substitution during that year illustrate that using generic drugs in the future can reduce spending under Part D. However, the potential for such savings will vary from year to year depending on many factors, including the extent to which generic drugs and new brand-name drugs enter the market.
Over the next several years, entities that pay for prescription drugs will benefit from a wave of brand-name drugs in high-priced therapeutic classes losing patent protection or other periods of exclusivity, which will allow generic drugs to enter those markets for the first time. Also, relatively few new brand-name drug products are expected to reach the market in the near term. If the current rate of generic substitution is maintained, first-time generic entry occurring through 2012 will generate about $14 billion in additional savings from generic substitution, in addition to the $33 billion in savings calculated above (where both figures apply to 2007 spending patterns). However, potential savings from therapeutic substitution for the classes that CBO considered would be reduced from $4 billion to about $2 billion (also based on 2007 spending). That reduction occurs because some of the prescriptions that would have been shifted to a different generic drug (when generating the estimate for therapeutic substitution in 2007) will have their own generic competitor by 2012; those savings are thus included in the $14 billion figure for additional savings from generic substitution.
Two other important considerations stem from the provisions of the recently enacted legislation on health care (the Patient Protection and Affordable Care Act, as modified by the Health and Education Reconciliation Act of 2010). First and foremost, the coverage gap in the Part D benefit—a range of spending in which many enrollees have to pay all of their drug costs—will gradually be closed. As a result, the total amount of drug spending under Part D, the mix of generic and brand-name drugs used, and the federal government’s share of drug spending will all change at least to some degree. In addition, the legislation created a regulatory pathway for approving drugs that are “biosimilar” to brand-name biologic products—drugs that are made from living organisms and that tend to be very expensive. How quickly those biosimilar drugs are developed and used, how they are priced, and whether they will be treated under regulation in the same manner as generic drugs for purposes of closing the coverage gap under Part D will all have important implications for future prescription drug spending.
How Does Obesity in Adults Affect Spending on Health Care?
September 8, 2010
Over the past two decades, the adult population in the United States has, on average, become much heavier. From 1987 to 2007, the fraction of adults who were overweight or obese increased from 44 percent to 63 percent; almost two-thirds of the adult population now falls into one of those categories. The share of obese adults rose particularly rapidly, more than doubling from 13 percent to 28 percent. That sharp increase in the fraction of adults who are overweight or obese poses an important public health challenge. Those adults are more likely to develop serious illnesses, including coronary heart disease, diabetes, and hypertension. As a result, that trend also affects spending on health care.
This Congressional Budget Office (CBO) issue brief examines changes over time in the distribution of adults among four categories of body weight: underweight, normal, overweight, and obese. Those categories are defined in federal guidelines using a measure known as the body-mass indexa measure that standardizes weight for height. CBO analyzes how past changes in the weight distribution have affected health care spending per adult and projects how future changes might affect spending going forward. (In this issue brief, health care spending refers to spending by public and private insurers and out-of-pocket spending by individuals.)
According to CBOs analysis of survey data, health care spending per adult grew substantially in all weight categories between 1987 and 2007, but the rate of growth was much more rapid among the obese (defined as those with a body-mass index greater than or equal to 30). Spending per capita for obese adults exceeded spending for adults of normal weight by about 8 percent in 1987 and by about 38 percent in 2007. That increasing gap in spending between the two groups probably reflects a combination of factors, including changes in the average health status of the obese population and technological advances that offer new, costly treatments for conditions that are particularly common among obese individuals.
A relatively simple set of calculations using survey data indicates that if the distribution of adults by weight between 1987 and 2007 had changed only to reflect demographic changes, such as the aging of the population, then health care spending per adult in 2007 would have been roughly 3 percent below the actual 2007 amount. Similar calculations show the potential effects of different trends in adults body weight on future health care spending. CBO considered three scenarios. In all three, CBO assumed that per capita health care spending will continue to grow faster for adults whose weight is in the above-normal categories than for those whose weight is considered normal. CBOs assumptions and findings for the scenarios are as follows:
- First, CBO assumed that there will be no future changes in the distribution of adults by body weight and, therefore, that the prevalence of obesity will remain at the 2007 rate of 28 percent. If so, per capita spending on health care for adults would rise by 65 percent—from $4,550 in 2007 to $7,500 in 2020, CBO estimates—largely as a result of the continuation of underlying trends in health care that have led to rapidly increasing spending for all adults regardless of weight. (All dollar figures are in 2009 dollars.)
- Alternatively, CBO assumed a rising prevalence of obesitynamely, that recent trends (from 2001 to 2007) in adults body weight will continue. In that scenario, the prevalence of obesity would rise to 37 percent by 2020, and per capita spending would increase to $7,760—about 3 percent higher than spending in the first scenario.
- CBO also assessed the impact of a possible reversal in recent trends by assuming that, by 2027, the distribution of adults body weight will return to the 1987 distribution (essentially reversing what happened from 1987 to 2007). In that scenario, the prevalence of obesity among adults would drop to 20 percent by 2020. Per capita spending would increase to $7,230 in 2020—about 4 percent lower than spending in the first scenario.
Because lower rates of obesity are associated with better health and lower health care spending per capita, there is considerable interest in devising policies that would reduce the fraction of the population that is obese. Research and experimentation in this area are ongoing, but the literature to date suggests that the challenges involved in reducing the prevalence of obesity are significant.
How reducing obesity would affect both total (rather than per capita) spending for health care and the federal budget over time is less clear. To the extent that people, on average, lived longer because fewer individuals were obese, savings from lower per capita spending would be at least partially offset by additional expenditures for health care during those added years of life. Moreover, the impact on the federal budget would include not only changes in federal spending on health care but also changes in tax revenues and in spending for retirement programs such as Social Security, for which costs are directly tied to longevity. As a result, the net impact of reductions in obesity rates on national health care expenditures and on federal budget deficits would depend on the magnitude of those various effects. This brief does not address the changes in longevity that might arise from a changing weight distribution or the potential impact of such changes on total health care expenditures.