Restraining Federal Health Care Spending

April 4, 2011

I spoke this morning to the World Health Care Congress about the challenge of restraining federal health care spending. (Sorry, I didnt use slides.)

I began by explaining that growth in spending on health care programs is one of the central fiscal challenges facing the federal government:

  • In the current fiscal year, the federal government will spend more than $1 trillion on health care. More than half of that will be through Medicare, a little more than a quarter on Medicaid and the Childrens Health Insurance Program, and the remaining fifth on veterans health care, the military health care system, health research, and other programs. Those outlays will represent nearly 7 percent of gross domestic product (GDP).
  • Spending on those programs would increase rapidly under the policies we've had in the past due to both rising costs per person and the aging of the population.In addition, legislation expanding the government's health care programs will push up spending as well.

I also discussed how last years major health care legislation also made important changes to Medicare in an effort to restrain spending:

  • The legislation reduced payments to Medicare providers relative to what would have been paid under prior law. Fee-for-service updates for many types of providers will grow at less than the rate of inflation, in expectation of ongoing productivity improvements. In addition, payments to Medicare Advantage plans will be cut sharply. Whether the reductions will be sustained over a long period of time remains to be seen.
  • The legislation also included numerous provisions intended to identify opportunities and create incentives for providers to make changes to the health care delivery system that will reduce costs and improve the quality of care. Those experiments are important, not just for Medicare but also because improvements in a program as large as Medicare are likely to have positive spillover effects on the efficiency of health care outside of Medicare. However, it is unclear how successful the experiments will be.
  • Even with all those provisions in effectand assuming a 30 percent reduction in physician payments scheduled to occur under the law preceding last years legislationCBOs projections still show spending on federal health programs rising relative to GDP during the next decade, thus putting increasing pressure on the federal budget.

I then talked about how the federal government has other tools for restraining its spending on health care programs, but applying those tools will not be painless. I described five possible approaches that might be taken:

  • One is to reverse the expansion of Medicaid and the subsidies for purchasing insurance that were enacted in last years legislation. As policymakers make decisions about policies that affect insurance coverage, they will inevitably face tradeoffs between the level of insurance coverage and the budgetary cost and intrusiveness of federal policies. Significant numbers of people, especially low-income people, wont purchase insurance at its market price unless they are subsidized, or encouraged in some non-monetary way, or some combination of the two. As a result, achieving near-universal health insurance coverage is not possible without significant subsidies and significant changes in rules from those in place prior to last years legislation. (That does not mean that achieving near-universal coverage should be our goal, which is a judgment for others to make, nor that achieving near-universal coverage requires precisely the combination of subsidies and rules included in last years legislation.)
  • Another approach is to reduce the number of beneficiaries of federal health programs in other ways. One specific possibility of this sort is to gradually raise the eligibility age for Medicare, to 67 for example, to line it up with the full retirement age for Social Security. Another specific possibility is to turn federal Medicaid payments into block grants instead of matching payments, to increase the size of the block grants over time at a rate that is below the rate at which spending would increase under current law, and to give states much greater flexibility in how they spend those funds. As the size of block grants fell over time relative to the amounts that would be provided under current law, state governments presumably would put tighter limits on eligibility for Medicaidor reduce benefits.
  • A third approach is to increase the premiums or cost-sharing amounts paid by beneficiaries. For example, one option we have analyzed would be to increase the basic premium for Medicare Part B on a gradual basis to 35 percent of the programs costs from the current level of 25 percent. Another option would be to change the cost-sharing structures for Medicare and Medigap insurancefor example, by replacing Medicares current mix of cost-sharing requirements with a single combined annual deductible, a uniform coinsurance rate above that, and an annual cap on each enrollees total cost-sharing liabilities; and by also prohibiting Medigap policies from covering any of the Medicare deductible.
  • A fourth approach is for Medicare to take costs into account in its coverage decisions. Currently, Medicare pays the costs of nearly any medical treatment or procedure that a doctor recommends. An alternative would be for Medicare to pay only the cost of existing ways of dealing with a specific health problem unless a more-expensive new treatment or procedure is shown to be better for patients than the existing ways. (Under such an approach, patients would be able to use their own money to pay for the more-expensive care, but the federal government would not pay more unless the more-expensive care was shown to be more valuable than less-expensive care.) Such a system is much easier to describe than to implement. It would be an immense challenge to formally classify treatments and procedures into sets that address the same health problems and to evaluate whether some treatments and procedures are better for some or all patients.
  • A fifth approach is to cut back a tax expenditure rather than a direct outlay. (Tax expenditures are provisions of the tax codedeductions, credits, or exclusions from taxable incomethat are similar to government spending because they provide financial assistance to particular activities or groups of people.) The largest tax expenditure is the exclusion from taxable income of employers contributions for health care, health insurance premiums, and long-term care insurance premiums. Last years legislation changed the tax treatment of employer-sponsored health insurance, but only in 2018 and beyond. That provision could be accelerated and strengthened.

Other approaches than the five Ive described exist as well, and my list is not meant to be comprehensive or to represent any sort of recommendation. (Our role at CBO is simply to analyze alternative ways of addressing budget issues and then to present Congress with that information.) Nevertheless, the daunting long-term budget outlook means that some combination of these or other approaches will ultimately be needed in order put the nation on a sustainable fiscal course.