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Statement of Peter R. Orszag, Director, Increasing the Value of Federal Spending on Health Care, before the Committee on the Budget, U.S. House of Representatives [i] (July 2008)

handle is hein.congrec/cbo9338 and id is 1 raw text is: Chairman Spratt, Ranking Member Ryan, and Members of the Committee, thank you for giving me the opportunity to discuss opportunities for increasing the efficiency of health care. The rate of growth in health care costs is the most important factor influencing the federal government's long-term fiscal situation. The Congressional Budget Office (CBO) projects that, without any changes in federal law, total spending on health care will rise from 16 percent of the gross domestic product (GDP) in 2007 to 25 percent in 2025 and 49 percent in 2082, and net federal spending on Medicare and Medicaid will rise from 4 percent of GDP to almost 20 percent over the same period.' Many of the other factors that will play a key role in determining future fiscal conditions-including the actuarial deficit in Social Security and a decision about extending the 2001 and 2003 tax legislation past its scheduled expiration in 2010- pale by comparison over the long term with the impact and challenges of containing growth in the cost of federal health insurance programs. Both demographic changes and rising health care costs per beneficiary contribute sig- nificantly to our future fiscal challenges, but it seems clear that the latter is more important over the long term. To be sure, among adults, health care spending gener- ally increases with age. As the number of elderly people increases over time, health care spending naturally will grow. Yet the dominance of cost growth in health care over the effect of demographic changes can be seen by comparing the trajectory of cost growth in Social Security with that in Medicare and Medicaid over time (see Figure 1). Given the nature of the programs, a demographic shift will have similar effects on the costs of Social Security and of Medicare and Medicaid. In the next 10 to 20 years, the projected growth of spending in those programs differs but perhaps not all that dra- matically, which suggests that demographics account for a relatively large share of the increase during that period. Beyond that point, however, Social Security spending lev- els off as a share of GDP, while spending on Medicare and Medicaid is projected to grow much more rapidly. Some have interpreted that relative dominance of cost growth per beneficiary in influencing our fiscal future as an excuse for not addressing the higher costs associated with an aging population. That reasoning makes little sense to me; it is a non sequitur. To say that problem A is bigger than problem B is not to say that problem B does not exist or should not be addressed. My statement briefly explores evidence of the potentially substantial inefficiencies in health care and then discusses a few pathways to reducing them. Evidence of Inefficiency Embedded in the nation's long-term fiscal challenge is a substantial opportunity: to reduce health care costs without adversely affecting health outcomes. Perhaps the 1. Congressional Budget Office, The Long- Terrn Outlook for Health Care Spending (November 2007).

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