Congressional Budget Office
Douglas W. Elmendorf
Director’s Blog

Today, CBO is releasing two volumes that focus on health care issues:  Key Issues in Analyzing Major Health Insurance Proposals and Budget Options, Volume 1:  Health Care.  These two volumes build upon CBO’s previous analytical work on health insurance and health care financing issues and are intended to assist the Congress as it contemplates possible changes– both large and small– to federal health programs and the nation’s health insurance and health care systems.  In keeping with CBO’s mandate to provide objective, impartial analysis, neither volume makes any recommendations. 

The first document, Key Issues in Analyzing Major Health Insurance Proposals, focuses on large-scale proposals, provides extensive background information, and explains CBO’s analysis of numerous issues that could arise should the Congress seek to enact major changes in the health insurance system.  Key Issues does not provide analyses of specific proposals; rather, it provides an overview of CBO’s approach to major questions and issues that would likely arise in the context of such legislation.  Its main conclusions are as follows:

• The rising costs of health care and health insurance pose a serious threat to the future fiscal condition of the United States. Under current policies, CBO projects that federal spending on Medicare and Medicaid will rise from about 4 percent of gross domestic product (GDP) in 2009 to nearly 6 percent in 2019 and 12 percent by 2050.  Most of that increase will result from rising per capita costs, rather than from the aging of the population.
• Without changes in policy, a substantial number of nonelderly people (those younger than 65) are likely to be without health insurance. CBO estimates that the average number of nonelderly people who are uninsured will rise from at least 45 million in 2009 to about 54 million in 2019.
• Those problems cannot be solved without making major changes in the financing or provision of health insurance and health care. In considering such changes, policymakers face difficult trade-offs between the objectives of expanding insurance coverage and controlling both federal spending and total costs for health care.
• By themselves, premium subsidies or mandates to obtain health insurance would not achieve universal coverage.  Proposals could, however, achieve near-universal coverage using a combination of approaches. One option, for example, would be to establish an enforceable mandate for individuals to obtain insurance and provide subsidies for lower-income households to help them pay their required premiums. Another option, under a voluntary system, would be to provide subsidies that cover a very large share of the expected costs of insurance for every enrollee and establish a process to facilitate enrollment (as is done in Medicare). Other policies could achieve substantial reductions in the number of people who are uninsured at a lower budgetary cost.
• Serious concerns exist about the efficiency of the health care system, but no simple solutions are available to reduce the level or control the growth of health care costs. Steps to restructure the insurance market and to encourage people to purchase less extensive coverage could reduce the use of treatments that provide minimal benefits, but enrollees would face higher cost sharing or tighter management of their care.
• Other approaches—such as the wider adoption of health information technology or greater use of preventive medical care—could improve people’s health but would probably generate either modest reductions in the overall costs of health care or increases in such spending within a 10-year budgetary window. 
• In many cases, the current health care system does not give doctors, hospitals, and other providers of health care incentives to control costs.  Significantly reducing the level or slowing the growth of health care spending would require substantial changes in those incentives.

The second document, Budget Options, Volume I: Health Care, is much more specific and focused on discrete changes. It presents 115 discrete options, encompassing a broad array of issues related to the financing and delivery of health care.  (Volume 2 of Budget Options, which will address policy options in other areas of the federal budget, will be issued in 2009.) The health care volume includes some options that would reduce spending and others that would increase it, as well as changes that would reduce or raise revenues. Those options were culled from a wide variety of sources. Many variants are possible, and many other options exist but are not included in the report. The inclusion or exclusion of a particular policy option does not represent an endorsement or rejection by CBO, which does not make policy recommendations.

The options in the volume are organized by thematic chapters:

• The private health insurance market
• The tax treatment of insurance
• Changing the availability of health insurance through existing federal programs
• The quality and efficiency of health care
• Geographic variation in spending for Medicare
• Paying for Medicare services
• Financing and paying for services in Medicaid and SCHIP
• Premiums and cost sharing in federal health programs
• Long-term care
• Health behavior and health promotion
• Closing the gap between Medicare’s spending and receipts.

The Budget Options volume presents CBO’s estimates of year-by-year costs or savings for five years, as well as a 10-year total. The options are not additive; a package of multiple options would, in many cases, have a budgetary effect that differs from the sum of the individual effects because of interactions among them.  Subsequent cost estimates by CBO or revenue estimates by the Joint Committee on Taxation may differ from the estimates in the volume – either because the policy proposal differs from the option as described, or because of additional data and analysis.

These projects involved an enormous amount of effort by more than three dozen CBO staff over a period of many months, and we are grateful to the health policy group of the staff of the Joint Committee on Taxation, which prepared estimates for the various tax provisions.  

The reports provide a foundation for the CBO’s work in the next Congress. New issues will arise, however, and more analysis will be necessary, so CBO will continue its own energetic research efforts and will follow carefully the research of others on health care issues.  

Today, I will be delivering the Eighth Annual Marshall J. Seidman Lecture on Health Policy at Harvard Medical School.  (Here are the slides from my talk.)  The title of the lecture is “New Ideas About Human Behavior in Economics and Medicine,” and it builds upon a theme I have been speaking about over the past few months:  that just as the field of economics suffered for ignoring psychology for too long, so too has much of medical science and health policy largely ignored the crucial role of expectations, beliefs, and norms.  (The broader lesson is that the allure of pure science — which works beautifully in physics and some other fields — can go astray when the subject involves human beings.)  The placebo effect is perhaps the most compelling example — one that tends to be dismissed as a statistical annoyance rather than examined in and of itself, even though it is often more potent empirically.

Greater emphasis on the psychological and sociological influences on human health could lead to improvements in many areas of health care and medicine.  For example, ICU doctors in Michigan drastically reduced the rate of infections associated with catheterizations through a shift in professional norms brought about by the institution of a simple five-step checklist.  Setting default rules that are more in tune with the realities of human behavior in such diverse settings as doctors’ offices and federal nutrition programs might help to improve a range of health outcomes, from the adherence of patients to their doctors’ medication regimens to the proportion of Americans eating a healthier diet and exercising more.

Just as economists have put behavioral insights to use in the retirement and pensions fields to boost personal savings, especially among those at the lower ends of the socioeconomic spectrum, thinking carefully about these intersections between psychology and health care is vitally important because of a pair of disturbing trends in the United States today:  the rapidly rising share of the nation’s income devoted to health care costs, and the growing gap in life expectancy between those at the top of the socioeconomic distribution and those at the bottom.  Greater attention to the insights of behavioral economics in medical science and health policy may help to mitigate both of these trends.

In many settings, prizes can be an efficient way of encouraging new breakthroughs.  (For a paper exploring the use of prizes to encourage technological innovation, see here.)  I was therefore particularly encouraged to see that the X-Prize Foundation and Wellpoint have created a competition with a prize of at least $10 million for innovative approaches to addressing health care problems and improving the sector’s efficiency — which is a key issue for our long-term fiscal and economic future.  Wellpoint has committed to testing the ideas in its state markets.  Details about the competition will be finalized in early 2009.  CBO will be watching the results closely.

The Institute of Medicine of the National Academies of Sciences announced its new members this morning. I’m quite honored to be included in this group — along with Jose Escarce, who is on CBO’s Panel of Health Advisers. I view my inclusion as testimony to what the outstanding CBO health staff has taught me about health care and health policy, and look forward to continuing to learn from them and other innovators in the field.

While I’m on the topic of health care, I’d like to make a point related to the current turmoil in financial markets. Many observers have noted that addressing the problems in financial markets and the risks to the economy may displace health care reform on the policy agenda — and that may well be the case for some period of time. (As a small example, I know that over the past few months I have been spending less time on health care because the turmoil in financial markets and associated issues have consumed much more of our time and attention at CBO. This displacement is a matter of finite time and energy, not budgetary resources.)

Although it may not seem immediately relevant given our current difficulties, it will be crucial to address the nation’s looming fiscal gap — which is driven primarily by rising health care costs — as the economy eventually recovers from this current downturn. Indeed, our ability to address our current economic difficulties (through both financial market interventions and potential additional fiscal stimulus) would be severely impaired if investors were not so willing to invest substantial sums in Treasury securities without charging much higher interest rates. That willingness reflects the (currently accurate) view among investors that Treasury securities are extremely safe investments.

If we fail to put the nation on a sounder fiscal course over the next few decades, though, we will ultimately reach a point where investors would lose confidence and no longer be as willing to purchase Treasury debt at anything but exorbitant interest rates. If that were to occur, we would lack the kind of maneuvering room that we currently enjoy to address problems in the financial markets and the economy. So if you think the current economic crisis is serious, and it is, imagine what it would be like if we didn’t have the ability to undertake aggressive and innovative policy interventions because creditors were effectively unwilling to lend substantial additional sums to the Federal government…

I spoke today at the 10th anniversary of the Center for Health Policy (CHP) and the Center for Primary Care and Outcomes Research (PCOR) at Stanford University.  The webcast of the lecture is available here. (Here are the slides from the talk.)  My remarks touched upon a theme that I will be discussing in more detail in other lectures later this fall: that just as the field of economics suffered because it mostly ignored psychology for too long, so too much of medical science and health policy has been largely ignoring the crucial role of expectations, beliefs, and norms.  Perhaps the most compelling example involves the placebo effect, which tends to be dismissed as a statistical annoyance rather than examined in and of itself as a powerful force — often more potent empirically than the ‘medical’ intervention formally being studied.

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).