Congressional Budget Office
Director’s Blog

The emergence of H5N1, or “avian flu,” motivated the Department of Health and Human Services’ 2005 plan to prepare for and combat an influenza pandemic. Three years ago domestic manufacturers were unable to rapidly produce enough vaccine to protect the more than 300 million people living in the United States. That remains the case today. With current technology, a pandemic could circle the globe more quickly than vaccines could be produced.

HHS’s plan has enlarged the role of the federal government in the influenza vaccine market, and the paper released by CBO today examines that increasingly prominent role — in developing new vaccines, expanding the capacity of the industry to manufacture them, and procuring stockpiles of prepandemic vaccines.

HHS’s plan has multiple objectives, including to:

• Increase manufacturing capacity by refurbishing and expanding plants that produce vaccines using traditional egg-based processes (developed in the 1940s) and increasing more costly cell-based manufacturing technology.
• Make vaccines available more quickly. The plan takes two approaches to this objective. First, stockpile a relatively small amount of prepandemic vaccines that could blunt the worst effects of a pandemic by protecting particularly vulnerable groups and first responders. Second, develop so-called next-generation vaccines that can be produced more rapidly than currently available vaccines to more efficiently  meet long term needs.

Ongoing research has changed the environment in which HHS’s plan was originally formulated in at least one important regard. Adjuvants—substances that may be added to influenza vaccines to reduce the amount of active ingredient (called antigen) needed per dose of vaccine—are showing promise in clinical trials in the United States; some of them have been approved for limited uses in Europe. That promise may offer a basis on which to make adjustments to HHS’s plan.

 Specifically, CBO reached the following conclusions:

• The manufacturers of currently approved vaccines made in the United States cannot produce vaccines of sufficient effectiveness, in sufficient quantities, or in the time required to meet public health needs in the event of an influenza pandemic.
• In the short term, adjuvanted vaccines offer the best hope for achieving HHS’s goal of having enough vaccine to protect 300 million people within six months of the outbreak of an influenza pandemic.
• CBO estimates that it would cost between $1.2 billion and $1.8 billion to build new facilities for producing adjuvanted cell-based vaccines and between $7.6 billion and $11.4 billion to build new production facilities for cell-based vaccines without adjuvants.
• Manufacturing capacity needed to produce pandemic-influenza vaccine exceeds that necessary to make seasonal vaccine; ongoing federal support may be required to meet and maintain necessary capacity.

Adjuvants developed since 2005 could substantially reduce the amount of antigen needed per dose, raising the question about whether HHS’s current policy is the most cost-effective approach to meeting its vaccine production goals. In light of this, the report briefly examines several other options to consider if adjuvanted vaccines prove successful, including reducing capacity targeted for manufacturing cell-based influenza vaccines while expanding resources available to support development of next-generation vaccines, entering into advance supply agreements (an approach used by several European nations that allows countries to make advance payments to manufacturers in exchange for a guaranteed supply of vaccine in the event of a pandemic); and modifying the size of the planned vaccine stockpile.
 

Many of the most dramatic behavioral economics success stories come from work done in retirement research. Researchers have found, for example, that more workers participate in a 401(k) retirement plan if they are automatically enrolled (with the ability to opt out of the plan) than if they have to make an affirmative decision to participate. Researchers have also found that the number of investment options offered changes how participants allocate their assets, and that cues embedded in employer-based retirement plans as well as entitlement programs like Social Security and Medicare shape people’s decision about when to retire. This work has emphasized the power that defaults, framing of decisions, and perceptions of social norms have on how individuals make decisions.

I’ll be giving a speech today at the Retirement Research Consortium conference that highlights the important work done in this arena and explores how some of these behavioral economics lessons could potentially be applied to another crucial policy issue– health care costs and the large portion of those resources that do not result in improved health. The hope is that behavioral researchers will help uncover the same type of policy-relevant insights into improving people’s health — perhaps especially among those on the lowest rungs of the socioeconomic ladder — as has occurred in retirement saving.

I am testifying before the Senate Finance Committe today on overuse, underuse, and misuse of health care.  The webcast is posted here.

Today’s remarks focus on several key points:

1. Rising health care costs represent the central fiscal challenge facing the country, exerting a larger influence on the long-term fiscal balance than other commonly cited concerns such as the aging of the population.
2. Spending for health care varies substantially across the United States, mostly because of variation in the intensity of services provided, but Medicare enrollees in areas with higher spending do not appear to have better health outcomes on average than those in areas with lower spending. Those observations suggest that substantial opportunities exist to reduce costs without harming health overall, but capturing those opportunities will be technically challenging to bring about through changes in policy and may also prove to be controversial.
3. Expanded use of health information technology (IT) and electronic medical records has the potential to improve the quality and efficiency of the care that patients receive, but realizing that potential would require broader changes in the health care system (including, especially, changes in the financial incentives for doctors).
4. One reason that the most appropriate care is not always provided is that, for many conditions, evidence is limited about which treatments work best for which patients and whether the benefits of more expensive therapies warrant their additional costs. More information about the comparative effectiveness of medical treatments would help to address that problem, especially if the findings were linked to Medicare’s payment rates or cost-sharing requirements.
5. A growing body of research on behavioral economics suggests that, in addition to financial incentives, norms and default options can exert a strong influence on individuals’ choices. Such findings could inform efforts to improve efficiency in the health sector.
6. Given the importance of health care issues, CBO is devoting increasing resources to that topic. As part of that effort, CBO is in the process of analyzing a number of options that could improve the efficiency of health care delivery and possibly reduce geographic variation in Medicare spending—including greater bundling of payments and stronger incentives to provide effective care—and plans to release the results of its analysis by the end of the year.

Today I’m delivering testimony before the House Budget Committee on increasing the value of federal spending in health care. The webcast is posted here. This is the first of two hearings this week on health costs — tomorrow I’ll address similar issues before the Senate Finance Committee.

My statements will be familiar to those who have followed CBO’s work on health care: they highlight evidence of the potentially substantial inefficiencies in health care and discuss potential pathways for reducing them.

I am increasingly convinced that a key problem is that our political system does not deal effectively with gradual long-term problems, and that a key impediment to improving the efficiency of our health care system is that most of us don’t realize how much the system is currently costing (because the cost of employer contributions for health insurance is not salient to workers, even though that cost is passed along to workers in the form of reduced take-home pay).

I was on a panel this morning at the Aspen Ideas Festival on the future of health care reform. For video from the panel, see here .

During a session earlier in the conference, David Brooks delivered an important talk about how policymakers should pay more attention to neuroscience, emotion, peer effects, and other related factors in the design of public policies. Many of his themes are echoed in, and reflect, the growing field of behavioral economics (see here for a related discussion).

A major issue in the pharmaceutical world involves the licensing of biological drugs. (Biological drugs are products derived from living organisms.)

CBO has now issued a cost estimate for S. 1695, which would establish an abbreviated regulatory procedure for licensing, by the FDA, of biological drugs that meet certain requirements and that are similar to certain existing biological drugs. Savings to public and private purchasers of biologics would result from the availability of these lower-priced versions that would be approved by FDA for marketing under the bill. Such competing products are commonly referred to as “follow-on biologics (FOBs),” “biosimilars,” or “biogenerics.”

CBO estimates that:

• Enacting S. 1695 would reduce total expenditures on biologics in the United States by $0.2 billion over the 2009-2013 period and by about $25 billion over the 2009-2018 period. (Over that 10-year period, such savings would equal roughly 0.5 percent of national spending on prescription drugs, valued at wholesale prices.)
• Direct spending by the federal government would decrease by $46 million over the 2009-2013 period, and by $5.9 billion over the 2009-2018 period; most of those savings would accrue to the Medicare program. Federal revenues would increase by $6 million over the 2009-2013 period and by $0.8 billion over the 2009-2018 period, because insurance premiums paid by employers would be lower and  taxable wages would consequently be higher. As a result of those changes, CBO estimates that enacting the bill would reduce budget deficits (or increase surpluses) by a total of $52 million over the 2009-2013 period and by $6.6 billion over the 2009-2018 period.
• Implementing S. 1695 would increase federal discretionary spending, on net, by nearly $30 million over the 2009-2013 period and by $5.3 billion over the 2009-2018 period, assuming appropriation of the necessary amounts, mostly because the bill would authorize discretionary spending equal to the estimated amount of savings to the federal government under the legislation. These sums exclude FDA’s costs to administer the new regulatory program established under the bill.

Analyzing this proposal has raised many complicated issues, and Julia Christensen of our Budget Analysis Division and Anna Cook of our Health and Human Resources Division have worked tirelessly on the cost estimate over an extended period of time. In my view, the product reflects CBO at its best!

CBO just released a score of the Medicare legislation (H.R. 6331, with a proposed amendment) under consideration in the House. In total, CBO estimates that the bill would reduce deficits by $0.3 billion over the 2008-2013 period and by less than $50 million over the 2008-2018 period. (The five-year savings would decline to $0.1 billion if the pending supplemental appropriations act is cleared before H.R. 6331.)

On Friday I participated in a briefing sponsored by the Alliance for Health Reform and the Robert Wood Johnson Foundation on the effects of health IT. The video from the event is posted here .

During my remarks, I borrowed an analogy from Laura Adams of the Rhode Island Quality Institute , to the effect that wondering how we are going to achieve more efficiency in health care is like wondering why we don’t have buttered toast. Some people say the key is to plug the toaster in; others say we need to go to the store and buy the bread; others say the key is putting the bread into the toaster and pressing the lever down; and others say the most important step is the final one, applying the butter. (For those of you who like to eat healthy, imagine wheat toast and a high-protein spread instead.) Health IT is like plugging in the toaster — necessary but not sufficient by itself to produce the buttered toast. Obtaining some combination of higher quality and lower cost from health care will also require changing the way we use information and the incentives facing providers, among other steps. In other words, health care contains massive opportunities for efficiency improvements, and health IT can facilitate some of the steps that will be crucial to improving efficiency, but capturing those opportunities will generally require more than just expanded health IT. For more on health IT, see here and here .

I delivered testimony today before the Senate Finance Committee on CBO’s long-term budget outlook and options for slowing the growth of health care costs. To view the hearing, click here.

Under any plausible scenario, the federal budget is on an unsustainable path—that is, federal debt will grow much faster than the economy over the long run. In particular, in the absence of significant changes in policy, rising costs for health care and the aging of the U.S. population will cause federal spending to grow rapidly. If federal revenues as a share of gross domestic product (GDP) remain at their current level, that rise in spending will eventually cause future budget deficits to become unsustainable.

To prevent deficits from growing to levels that could impose substantial costs on the economy, revenues must rise as a share of GDP, or projected spending must fall—or some combination of the two outcomes must be achieved. Future growth in spending per beneficiary for Medicare and Medicaid—the federal government’s major health care programs—will be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation’s central long-term challenge in setting federal fiscal policy.

Our political system unfortunately does not appear to be particularly effective at addressing gradual long-term problems such as rising health care costs and aging. The problems caused by rising health care costs, though, are not just long-term ones. Indeed, health care costs are already reducing workers’ take-home pay to a degree that is both underappreciated and at least partially unnecessary, consuming roughly a quarter of the federal budget, and putting substantial pressure on state budgets (mostly through the Medicaid program), thereby constraining funding for other governmental priorities. Identifying and addressing inefficiencies in the nation’s health care system can yield significant benefits, even in the short term, and focusing attention on those effects that are already occurring may be helpful in developing the consensus necessary to make the needed changes.

Today I am speaking at the Prepare For Launch Health Reform Summit of the Senate Finance Committee. My statement is available here. To view the session, Approaches to “Bending the Growth Curve” of Health Care Spending, I participated in, click here.

Key points from my statement are below:

• The single most important factor influencing the federal government’s long-term fiscal balance is the rate of growth in health care costs, caused largely by rising health care costs per beneficiary.
• The significant geographic variation in per capita health care spending across the United States suggests substantial inefficiencies in health care today and an opportunity for reducing health costs without adversely affecting health outcomes.
• These inefficiencies are perpetuated, in part, by a lack of clarity as to what insurance costs and who ultimately pays those costs– especially with regard to employer-provided health insurance.
• Providing more information on the “comparative effectiveness” of alternative medical treatments, and changing financial incentives that encourage providers to engage in expensive treatments and procedures may help shift professional norms to improve efficiency and restrain cost growth.
• Increased transparency with regard to specific medical services may not lead to reduced health care expenditures, however, because consumers generally don’t make independent decisions about what services to purchase from whom, particularly in an emergency. In addition, many health care markets are relatively concentrated, and in those settings, increased price transparency may lead to higher, rather than lower, prices for specific services by facilitating collusion among providers.