How Health Care Can Save or Sink America

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How Health Care Can Save or Sink America

The Case for Reform and Fiscal Sustainability

By R. Orszag July/August 2011 Summary:

The United States' fiscal future depends on whether the country can limit

health-care costs. Obama's reforms were a major step in the right direction,

argues the former White House budget director. But to finish the job, the U.S.

medical system must evolve so that it emphasizes evidence and pursues quality

rather than quantity.

PETER R. ORSZAG is Vice Chair of Global Banking at Citigroup, an Adjunct Senior

Fellow at the Council on Foreign Relations, and a columnist for Bloomberg. He

was Director of the White House's Office of Management and Budget in 2009-10 and

Director of the Congressional Budget Office in 2007-8.

Rising health-care costs are at the core of the United States' long-term fiscal

imbalance. The Congressional Budget Office (CBO) projects that between now and

2050, Medicare, Medicaid, and other federal spending on health care will rise

from 5.5 percent of GDP to more than 12 percent. (Social Security costs, by

comparison, are projected to increase from five percent of GDP to six percent

over the same period.) It is no exaggeration to say that the United States'

standing in the world depends on its success in constraining this health-care

cost explosion; unless it does, the country will eventually face a severe fiscal

crisis or a crippling inability to invest in other areas.

The problem is not limited to the federal government. Over the past 25 years,

cost increases in the national Medicare and Medicaid programs have roughly

paralleled (and actually been slightly below) cost increases in the rest of the

health-care system. These trends drive a wide range of problems. State

governments have had to divert funds from education to health care, which is

partly why salaries for professors at public universities are now often 15 to 20

percent lower than those at comparable private universities. Meanwhile, the

rising cost of employer-sponsored health insurance has squeezed take-home pay

for most U.S. workers at the same time as median wages have stagnated and income

inequality has increased.

Another dimension of the problem involves the variation of health-care costs

across the United States. A recent analysis by the Medicare Payment Advisory

Commission found that spending in higher-cost areas of the United States (that

is, those in the 90th percentile ranked by cost), even after controlling for

various factors, was 30 percent higher than in lower-cost areas (those in the

10th percentile). This substantial variation is undesirable both because the

high-cost areas unnecessarily drive up total costs and because the results are

often haphazard for patients. Indeed, higher costs typically do not equal better

care -- and sometimes they mean the opposite....

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