Thursday, January 8, 2009

Daschle on Health Care Reform: Will his proposals Change the Trajectory of Health Care Outlays?

I recently read Tom Daschle’s new book, “Critical: What We Can Do About the Health Care Crisis” (co-authored with Jeanne M. Lambrew and Scott S. Greenberger). This book has particular relevance since he will soon be the new czar of health care reform in the Obama administration. Arguing that it would be politically infeasible for the United States to move to a single payer, national health insurance scheme, Daschle and his colleagues argue for providing the option of an alternative health insurance scheme similar to that provided to Federal employees and the Congress. Such an approach would enhance competition with insurance provided by the private sector. They suggest that households unable to afford the purchase of federal insurance coverage might be made eligible for financial assistance through means-tested government subsidies. By extending the reach of the government beyond Medicaid, Medicare and the Veterans Administration, they believe that the combination of Federal insurance programs would also give the Federal government greater ability to influence how the private sector provides health care and its cost. (1)

The authors also call for the creation of a Federal Health Board (FHB) that would have direct authority over Federal health care programs, shaping the framework—as a “standard-setter”--for decisions on coverage and benefits, and introducing an evidence-based approach in considering the cost-effectiveness of drugs, devices, and medical procedures. They call for this agency to be accorded independence similar to that given to the Federal Reserve Board in the sphere of monetary policy (arguing that, as with monetary policy, Congress lacks the competence or flexibility to make micro decisions in the medical sector).

I have little doubt that adoption of Daschle’s proposals would be an important first step in reforming the provision and financing of health care in this country. Simply ensuring that individuals are able to obtain coverage at reasonable cost would be a dramatic step forward in ending the scandal of this rich country having so many of its citizens without medical insurance coverage. Competition will help to some extent in curbing the excessive administrative costs that characterize the private health insurance business in the United States. By moving closer towards universal coverage, the shifting of costs from uninsured to insured would be reduced, removing one source of the present pressure for rising costs. Daschle’s proposal also focuses on the potential for beneficial spillover effects from the Federal system on the approach taken by private insurers in terms of benefit coverage and in the application of cost-effectiveness standards in judging the efficacy or superiority of new drugs, sophisticated diagnostic tests, medical devices, and surgical procedures.

But any health care reform initiative in the U.S. must also address certain basic financial realities about the present situation (many of which are recognized by Daschle in his book), even before we consider an extension of coverage:

• The U.S. spends far more on medical care—by a factor of roughly 1.5:1—than any other industrial country, with health care costs now approaching 17% of GDP;
• All serious scholars suggest that it would be difficult to envisage containing spending at the current share of GDP; the most optimistic scenarios involve expenditures rising at a rate 1 percent faster than the growth of per capita GDP and the more realistic scenarios suggest an even faster rate of growth (see the recent forecast of the Center on Budget and Policy Priorities (CBPP), which largely echoes similar earlier forecasts by the Congressional Budget Office); (2) (3)
• Such a growth in Federal spending would simply not be affordable without dramatic increases in taxes or cuts in spending;
• Such growth in overall health care spending would also weaken the competitiveness of American business and further erode living standards of wage earners; and finally,
• Perhaps even more frightening, despite this high level of spending on medical care, a substantial share of our population is uninsured and our performance on indicators of health are below those of our peer countries.

So this means that any serious reform proposal must provide an answer to the following key questions:

• Will it ensure universal insurance coverage to all Americans?
• Will it contribute to an improvement in basic health indicators in this country?
• What would adoption of the proposal entail in terms of the growth of health care spending? Would it prevent the growth of spending as a share of GDP? Or would it continue to imply a rising share?
• Would there be full transparency as to how any further increases in spending would be paid for? By higher taxes? Cutbacks in other spending? Higher borrowing?

When I read Daschle’s book, I worried about whether his proposed initiative would be sufficient to address the last two questions posed above. I believe that much remains to be determined in judging whether the Daschle proposal will be able to contain the variety of cost pressures. But what gives me some hope is that Daschle’s discussion clearly recognizes most of the key challenges that will need to be addressed if these cost-constraining imperatives are to be tackled. In particular, he comments on the high administrative costs in the insurance industry; the substantial level of spending on pharmaceuticals and medical devices, the significant costs associated with malpractice insurance; the problematic duplication of high cost technologies in many parts of the country; the undesirable incentive of medical practitioners to shift costs to third-party insurers; the substantial proportion of medical expenditures concentrated in the last year of life; the weakness of America’s efforts at prevention (illustrated most starkly by the epidemic of obesity among young Americans); and the relatively high cost of medical manpower relative to that prevailing in other industrial countries.

To give greater confidence that Daschle’s proposals would address the problem of rising medical outlays, I would make the following suggestion. In formulating the role and policy responsibilities of the Federal Health Board, I recommend that its explicit policy mandate should include—in addition to the objectives of universal coverage and a good standard of medical provision—the goal of constraining the trajectory of overall US medical outlays (as a share of GDP) to a given target path. This path would reflect both the dangers to fiscal solvency posed by the current health expenditure trajectory as well as the opportunity costs and competitiveness challenges posed by a rising share of medical outlays in GDP. Adoption of such an explicit policy mandate for the FHB would parallel the recognized need for a policy mandate to guide the difficult monetary policy tradeoffs faced by the Federal Reserve Board (viz., “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”).

Note, I argue that the FHB’s target would not simply be limited to constraining the growth of Federal spending. I share the conviction of the CBPP that reform that does not address the fundamental cost-increasing pressures in the entire medical care sector would be insufficient. The recent CBPP report cites both David Walker (former head of the GAO) and Peter Orszag (the incoming head of the OMB) making this argument. What would be important is that the FHB is in a position, over time, to take the requisite actions in its decisions on coverage and standards to influence the various pressure points underlying the current forecast cost trajectory. Note, I also do not rule out the possibility of some modest rise in the share of total medical spending in GDP. Such an increase might reflect the conscious choice of the American people that the gains afforded in better health would be worth the cost ( a point that has been made by David Cutler of Harvard University), as long as the burden of bearing this cost is equitably and transparently borne. (4)

I should also underscore what I believe should be a final important part of the task of the FHB. Specifically, it should help develop a greater understanding of how other industrial countries—faced with exactly the same set of pressures in terms of the availability of new and more sophisticated technologies in the context of aging populations—have made decisions to keep medical outlays within bounds. It should also work with other US government and private agencies to ensure that there is full transparency to the American people as to how the costs of delivering results in terms of medical care are being borne by different groups within the society. We continue to need a more transparent discussion of what medical care costs, what results and benefits we are getting for our high spending, and what are the difficult decisions that we must confront as we examine the costs and benefits of the ever-improving availability of new technologies of medical care.

(1) They suggest that a government-run insurance program modeled after Medicare could give such a program the “clout to bargain for the lowest prices from providers and push them to improve the quality of care.”
(2) Richard Kogan et all, The Long Term Fiscal Outlook is Bleak: Restoring Fiscal Sustainability Will Require Major Changes to Programs, Revenues, and the Nation’s Health Care System (Center on Budget and Policy Priorities, December 16, 2008)(see They note that for the past 30 years, costs per beneficiary throughout the health care system have been growing approximately 2 percentage points faster per year than per capita GDP.
(3) It is also important to emphasize that the very little of this growth would reflect the aging of America’s population.
(4) David Cutler, Your Money or Your Life (2005).

Saturday, January 3, 2009

(Not Thoughts on Fiscal Policy): Puzzling the meaning of W reading on the ranch

Friends and colleagues. These are not thoughts about fiscal policy. No, this is a short and puzzled musing. Like others of my bent, I have felt anger at the many bad decisions of President Bush and the enormous cost and wasted opportunities of his administration. I have been equally appalled knowing that throughout his Presidency, he spent an inordinate amount of time away from the White House, engaged in the clearing brush or mountain biking. But now I discover that the President has troubled me further with highly conflicted feelings. This discovery was triggered by the recent Wall Street Journal column of Karl Rove that described his competition with the President as to who could read more books in a year.* I should note that unlike John Aloysius Farrell (in his recent blog), I am not bothered that most of the books he read were ones that seemed to justify his self-image as a lonely and embattled President facing up to hard decisions.

No, my difficulties are different. I am a lover of books. My tastes are diverse, ranging from economics to history to natural sciences to fiction. My friends are always asking me what I have read recently. One of the hardest things about having a serious job (I was a senior official at the International Monetary Fund) and a full family life was that I never seemed to have the time to read even a quarter of the books I bought or wanted to read. After I retired from the Fund, I thought I would have more time to dive into my library and read all my wonderful books. Instead, life as a consultant and as a professor still finds me, reading policy briefs, reports, and journal articles relevant to my profession. And now I discover that our President, to whom we have entrusted the responsibility of addressing the most serious challenges facing our country (and world), has found the time to read something like 95 books a year!

So what bothers me? I guess it is my inability to clarify my various emotions concerning this discovery? Should I resent that the President, with all else on his plate, managed to read more than I? Should I be angry at his irresponsibility for devoting so much time to reading as well as other avocations, that he short-changed us in terms of his focus on the job for which he was elected? Or should I feel relief that he was reading, since this time off the job spared us from further bad decisions? But then I reflect that perhaps how he spent his time would not have mattered much: Jane’s Mayer’s recent book suggested that most of his decisions were largely predetermined anyway, being formulated by the Vice President and his staff. I guess all I am left with is the feeling that we are all be better off knowing that any future competitions between Karl Rove and George W. Bush will no longer be our concern.

Also see John A. Farrell’s blog on the competition in US News and World Report,