Congressional Budget Office
Director’s Blog

Today’s Wall Street Journal quotes me saying that CBO has between 40 and 50 people working “more than full time” on health reform.  Yesterday’s Politico included me in an article about “Names, Faces to Watch for In Debate Over Care,” and the story referred to “Elmendorf and his team of anonymous analysts.”

Clearly, analyzing health reform proposals is a team effort. Indeed, projecting the behavioral consequences and budgetary impact of a variety of proposals to make major changes in a sector that accounts for one-sixth of the U.S. economy poses an enormous analytical challenge.  CBO is meeting that challenge because of the skill, knowledge, and hard work of our talented staff (and of our colleagues on the staff of the Joint Committee on Taxation, with whom we are collaborating in this effort). 

Because CBO believes that its estimating methodology should be as transparent as possible, perhaps our estimating team should be transparent as well.  In that spirit, here are the previously anonymous analysts at CBO who deserve a great deal of credit for their fine work analyzing health reform and related legislative proposals (I realize this list has more than 50 names; that’s because some of these people have other responsibilities beyond health reform):

The current outbreak of swine flu in the United States, Mexico, and other countries has raised concerns among policymakers and public health experts about the possibility of a pandemic and about the nation’s ability to blunt the effects of such an event. (A pandemic arises when a new virus emerges that has not previously circulated among the human population; that virus causes significant illness in humans; and the virus is easily transmitted from one person to another.) Beyond the human suffering that a pandemic would engender, policymakers are also concerned about the potential for economic disruptions that might be layered on top of an economy already in recession.

The current outbreak is evolving rapidly, and the risk that it poses is not yet fully understood.  The World Health Organization has not declared the current outbreak to be a pandemic.  However, if the current strain were to cause a pandemic, it has the potential to slow the pace of the economic recovery that CBO expects to take hold later this year. The consequences of past episodes provide a basis for assessing the potential seriousness of a pandemic, particularly in light of the current economic downturn. In a May 2006 analysis, CBO considered the possible economic effects of a range of influenza pandemics. On the basis of an analysis of past pandemics, CBO devised two scenarios to illustrate the possible economic effects of an influenza pandemic. In a “mild-pandemic” scenario, resembling the pandemics in 1957 and 1968, about 75 million people would be infected in the United States, and about 100,000 of them would die (in a typical year seasonal influenza causes about 36,000 deaths in the United States). In that scenario, the pandemic would reduce real (inflation-adjusted) gross domestic product (GDP) by about 1 percent relative to what would have happened without the pandemic. In a “more severe” scenario, roughly similar to the 1918-1919 Spanish flu outbreak, about 90 million people would become infected, and 2 million people would die in the United States; in CBO’s estimation, real GDP would be about 4-1/4 percent lower over the subsequent year than it would have been had the outbreak not taken place.  Of course, there have been widespread changes since 1918 that may change the severity of an outbreak.  Faster international travel may mean faster transmission, but better antibiotics mean less risk of complications which were often proximate causes of death in the 1918-1919 outbreak.

In a paper released in September 2008, CBO focused on the government’s role in the vaccine market that stems from a 2005 plan by the Department of Health and Human Services (HHS) to prepare for and combat an influenza pandemic. That plan, although developed in response to the threat of the H5N1 virus, or “avian flu,” sheds light on the nation’s ability to respond to the current swine flu outbreak and will probably be the subject of public discussion in the coming months.

Because of the time it takes to produce a flu vaccine using current technology, a pandemic could circle the globe more quickly than vaccines could be produced. For the next several months, the nation’s response to the swine flu outbreak will be limited to measures that might reduce the spread of the virus through “social distancing,” strategic use of antiviral medications from existing stockpiles, and the capacity of the existing public and private health systems to treat infected people.

To improve the nation’s capacity to respond to a pandemic, HHS’s plan calls for an enlarged role of the federal government in promoting private-sector development of new vaccines, expanding the capacity of the industry to manufacture them, and procuring stockpiles of prepandemic vaccines. (Prepandemic vaccines are developed from strains that public health officials believe have the most potential to cause an influenza pandemic.) The prepandemic vaccine that has been stockpiled to date is an H5N1 vaccine and is unlikely to offer protection against the current swine flu outbreak.

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 the availability of  more costly cell-based manufacturing technology and
• Make vaccines available more quickly. The plan takes two approaches to meet this objective. First, it calls for stockpiling a relatively small amount of prepandemic vaccine that could diminish the worst effects of a pandemic by protecting particularly vulnerable groups and first responders. However, none of the stockpiled vaccine is likely to provide protection against the current swine flu outbreak. Second, it aims to 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. If a safe and effective adjuvanted swine flu vaccine can be developed, manufacturers may be able to provide enough vaccine for the entire U.S. population within a span of several months thereafter.

Specifically, CBO reached the following conclusions in its September 2008 paper:

• 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.  The manufacturing capacity that is needed to produce pandemic-influenza vaccine exceeds what is required to make seasonal vaccine; ongoing federal support may be required to meet and maintain the 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 September 2008 paper briefly examined several other options to consider if adjuvanted vaccines prove successful, including reducing the capacity targeted for manufacturing cell-based influenza vaccines while expanding resources available to support the 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.

In yesterday’s blog, I discussed CBO’s projection that the recent decline in consumer prices and low expected inflation during the next few years will mean no COLAs in Social Security benefits until 2013. A zero Social Security COLA would have significant implications for the premiums charged to enrollees in Medicare Part B. 

Part B of the Medicare program covers physician services and outpatient care, including durable medical equipment, laboratory services, some physical and occupational therapists’ services, and some home health care.  Most beneficiaries pay a monthly Part B premium that is set to cover about 25 percent of the costs of Part B, with the balance coming from the general fund of the Treasury. 

Hold Harmless Provision.  Most Medicare enrollees have their Part B premium withheld from their monthly Social Security benefit. For those individuals, a “hold-harmless” provision guarantees that a benefit check will not decrease as a result of an increase in the Part B premium. The dollar increase in the Part B premium for a year is compared to the dollar increase in the Social Security monthly benefit. If the dollar increase in the premium is larger than the dollar increase in the Social Security benefit, then the increase in the Part B premium paid by the beneficiary is limited to the dollar increase in the Social Security benefit.

The hold-harmless provision does not apply to about one-quarter of Part B enrollees:

• New enrollees in Part B (because they did not have the premium withheld from their Social Security benefit in the prior year),
• Higher-income enrollees who are subject to an income-related premium, and
• Individuals who do not have the Part B premium withheld from their Social Security benefit, nearly all of whom have their premiums paid by Medicaid.

In most years, the hold-harmless provision has very little impact. For example, a 2 percent increase in a Social Security benefit of $1,000 per month results in a $20.00 benefit increase. (The average Social Security benefit for a retired worker is about $1,150 per month.) A 7 percent increase in the Part B premium (similar to benefit growth in recent years), applied to the current premium of $96.40, would increase the premium by $6.75—well under that benefit increase—and the hold-harmless provision would have no effect.

Under current law, however, CBO projects no benefit increase for Social Security beneficiaries from 2010 through 2012. As a result, by CBO’s estimate, almost three-quarters of Part B enrollees will have their premiums limited by the hold-harmless provision each year during that period.

The Role of Part B Premiums in Medicare Trust Fund Financing. The major components of income to the Part B trust fund account are premiums and a matching contribution that is transferred from the general fund of the Treasury. For aged enrollees, that matching contribution is $3 for every $1 in premium collections; there is a similar matching contribution for enrollees who are under 65.

The amount of the monthly premium is set so that total annual revenue to the Part B trust fund account (from premiums, matching contributions, and interest) is sufficient to cover annual expenditures from the trust fund and to maintain a contingency reserve of about two months of spending. Under normal circumstances, the premium is set to cover about 25 percent of the average cost per enrollee of Part B benefits (because the matching contribution covers the remainder). 

However, because almost three-quarters of Part B enrollees will be subject to the hold-harmless provision, the increase in premium revenue needed to draw matching contributions sufficient to cover the growth in annual spending and maintain the contingency reserve will have to be collected from the one-quarter of enrollees who are not eligible for the protection of the hold-harmless provision. As a result, the current-law increase in the monthly Part B premium for those individuals will be nearly four times the increase that would be required if no enrollees were subject to the hold-harmless provision.

Projected Part B Premiums in 2010 and Subsequent Years. CBO estimates that the Part B trust fund account will require about $220 billion in income from premium collections and matching contributions in 2010 to cover expenditures and maintain a contingency reserve, with larger premium collections required in subsequent years. CBO estimates that the hold-harmless provision, in conjunction with the zero COLAs projected for Social Security benefits, will result in the monthly Part B premium for beneficiaries not subject to the hold-harmless provision increasing to $119 in 2010, $123 in 2011, and $128 in 2012 (see note below).  Without the hold-harmless provision, CBO estimates that the monthly premium would be $103 in 2010 and would grow to about $109 in 2012, so the interaction of the hold-harmless provision and projected zero COLAs for Social Security will add significantly to the increases called for under current law. There is no effect on Part D premiums because there is no hold-harmless provision in Part D.

CBO expects that monthly premiums will be lower than $128 for a few years after 2012, as the number of beneficiaries subject to the hold-harmless declines. We estimate that the monthly Part B premium will decline to $114.50 in 2016 and then rise in subsequent years, reaching $135 in 2019. 

Note: Under current law, Medicare’s payment rates for physicians’ services are scheduled to be reduced by 21 percent in 2010 and by about 6 percent a year for several years thereafter. CBO’s premium projections assume that the premium for 2010 will be set to maintain an adequate contingency reserve in 2010 in the event that legislation to eliminate that 21 percent reduction is enacted after the premium is announced.  (The premium for 2010 will be announced in September 2009.) The projections also assume that the reductions in payment rates for physicians’ services that are scheduled for 2010 and subsequent years will go into effect, and that premiums in 2011 and subsequent years will reflect those reductions in payment rates.

CBO released a cost estimate yesterday for H.R. 1256, the Family Smoking and Tobacco Control Act. This bill would authorize the Food and Drug Administration (FDA) to regulate tobacco products and require the agency to assess fees on manufacturers and importers of tobacco products to cover the cost of these new regulatory activities.

The effect of these activities on the use of tobacco products is uncertain, in part because ongoing initiatives to reduce the use of tobacco products are expected to continue under current law. In particular, public health efforts by federal, state, and local governments and by private entities have contributed to a substantial reduction in underage smoking in recent years. For example, the recent increase in the federal excise tax on cigarettes, from $0.39 to $1.01 per pack, as a result of the Children’s Health Insurance Program Reauthorization Act is likely to contribute to a continuing decline in smoking. 

H.R. 1256 would affect the use of tobacco products through a combination of regulatory and economic factors. The regulatory changes with the largest potential to reduce smoking include: restricting access to tobacco by youths, requiring an increase in the size of warning labels on certain tobacco packaging (and authorizing the Secretary of HHS to mandate further changes to enhance warning labels), limiting certain marketing and advertising activities (especially those that target youths), and requiring FDA’s permission before manufacturers can market tobacco products that suggest reduced health risks or exposure to particular substances. In addition, tobacco consumption would decline because the assessment of new fees on manufacturers and importers of tobacco products would probably result in higher prices for tobacco products. CBO expects that consumption of tobacco products in the United States would further decline as a result of enacting H. R. 1256.  By 2019, CBO projects a decline of 11 percent among underage tobacco users and about 2 percent among adult users, as a result of this legislation.

CBO anticipates that FDA’s regulation of tobacco products would lead to a decline in smoking among pregnant women, which would slightly decrease federal spending for Medicaid.  A decline in smoking could affect health care spending for many other medical conditions, and CBO continues to examine the impact of smoking-related legislation on public and private payers. Counterintuitively, a reduction in smoking might add to the government’s costs in many cases by enabling some people to live longer and to incur health care costs over longer periods. In those cases, government spending for Social Security, Medicare, and other retirement and mandatory spending programs, would increase.

The Subcommittee on Health of the House Committee on Energy and Commerce invited me to testify this morning about the opportunities and challenges that the Congress faces in trying to make the health care system more efficient—so that it can continue to improve Americans’ health but do so at a lower cost. In my remarks I emphasized serveral points:

Evidence suggests that a substantial share of our national spending on health care contributes little if anything to overall health.  Policymakers could seek to improve efficiency by changing the ways that public programs pay for health care services or by encouraging such changes in private health plans. In both sectors, those changes could in turn exert a strong influence on the delivery of care.

Reducing unnecessary spending without also affecting services that do improve health is challenging, but many analysts think that providing stronger incentives to control costs and generating and disseminating more information about the effectiveness of care could be  important steps.  More information is needed about which treatments work best for which patients and about what quality of care different doctors, hospitals, and other providers deliver. But absent stronger incentives to improve value and efficiency, the effect of information alone will generally be limited. Many analysts would agree that payment systems should move away from a fee-for-service design and should instead provide stronger incentives to control costs and ensure reward value. Many analysts would also agree that the current unlimited tax exclusion for employment-based health insurance dampens incentives for cost control. Those incentives could be changed by restructuring the tax exclusion in ways that would encourage workers to join health plans with higher cost-sharing requirements and tighter management of benefits.

Despite broad support among analysts for moving in these directions, there is substantial uncertainty about the effects of many specific policies. In particular, many policies in these areas might not yield substantial savings within a 10-year window. There are a number of reasons for this. In some cases, savings materialize slowly over time because an initiative is phased in.  In other cases, initiatives that will generate savings—such as prevention efforts or disease management—have substantial costs to implement. In some cases, initiatives cause reductions in national health spending that the federal budget does not capture. In yet other cases, new structures for health care delivery improve health but do not provide incentives to reduce costs. And in other cases, limited evidence about effects on efficiency is available.

This morning I testified before the Senate Finance Committee on CBO’s two major health reports, Key Issues in Analyzing Major Health Insurance Proposals, and Budget Options for Health Care. The first examines the principal elements of reform plans that would affect our estimates of the effect of such plans on federal costs, insurance coverage, and other outcomes. The second comprises 115 discrete options to alter federal programs, affect the private health insurance market, or both. These two reports are the culmination of a tremendous effort by many people at CBO as we’ve redoubled our capacity to analyze these complex issues. (I was recently asked to testify about these volumes before the Senate Budget Committee; click here for the blog summarizing my testimony there.) 

As I emphasized today in my statement before the committee, health care reform is an urgent issue. In contrast with the situation in the economy and financial markets, our system for delivering and paying for health care is not fundamentally different this year from last year. However, the relatively gradual pace of change in health care is rarely seen as an argument for deferring action. Our current health system evolved over years and decades, and while coverage could be substantially expanded in a few years, it could take many years or even decades for the thoroughgoing changes needed to improve the system’s efficiency to come fully to fruition. Because of the lead times involved in realizing these efficiencies, nearly all analysts think that those changes should begin now.  

Yesterday I testified before the Senate Budget Committee about CBO’s recent health volumes, Key Issues in Analyzing Major Health Insurance Proposals and Budget Options Volume 1: Health Care.

Congress faces both opportunities and challenges in pursuing two major policy goals: (1) expanding health insurance coverage, so that more Americans receive appropriate health care without undue financial burden, and (2) making the health care system more efficient, so that it can continue to improve Americans’ health but at a lower cost in both the public and private sectors.

On a broad level, many analysts agree about the direction in which policies would have to go in order to make the health care system more cost-effective: Patients and providers both need stronger incentives to control costs as well as more information about the quality and value of the care that is provided. But much less of a consensus exists about crucial details regarding how those changes are made. Similarly, many analysts would agree that expanding insurance coverage significantly woudl require risk pooling, subsidies, and tools to mandate or facilitate enrollment—but would disagree about the relative importance of these pieces.  In part, those disagreements reflect different values or different assessments of the existing evidence, but often they reflect a lack of evidence about the likely impact of making significant changes to the complex system of health insurance and health care.

With respect to expanding health insurance coverage, my testimony made the following key points:

• Without changes in policy, a substantial and growing number of people under age 65 will lack 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. That projection is consistent with long-standing trends in coverage and largely reflects the expectation that health care costs and health insurance premiums will continue to rise faster than people’s  income—making health insurance more difficult to afford.
• Proposals could achieve near-universal health insurance coverage by combining three key features:   (1) Mechanisms for pooling risks—both to ensure that people who develop health problems can find   affordable coverage and to keep people from waiting until they are sick to sign up for insurance. Options include strengthening the employment-based system, modifying the market for individually purchased insurance, and establishing a new mechanism such as an insurance exchange. (2) Subsidies to make health insurance less expensive for individuals and families, particularly those with lower income who are most likely to be uninsured today. For reasons of equity and administrative feasibility, however, it is difficult for subsidy systems to avoid providing new subsidies to people who already have insurance or would have purchased it anyway. (3) Either an enforceable mandate to obtain insurance or an effective process to facilitate enrollment in a health plan. An enforceable mandate would generally have a greater effect on coverage rates, but without meaningful subsidies, it could impose a substantial burden on many people.
• Many analysts would agree that payment systems should move away from a fee-for-service design and should instead provide stronger incentives to control costs and reward value. A number of alternative approaches could be considered—including fixed payments per patient, bonuses based on performance, or penalties for substandard care—but their precise effects are uncertain. Policymakers may thus want to test various options (for example, using demonstration programs in Medicare).
• Many analysts would agree that the current tax exclusion for employment-based health insurance—which exempts most payments for such insurance from both income and payroll taxes—dampens incentives for cost control because it is open-ended. Those incentives could be changed by replacing the tax exclusion or restructuring it in ways that would encourage workers to join health plans with higher cost-sharing requirements and tighter management of benefits.
• Many analysts would agree that more information is needed about which treatments work best for which patients and about what quality of care different doctors, hospitals, and other providers deliver. But absent stronger incentives to improve efficiency, the effect of information alone on spending will generally be limited.

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.