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Orszag: It's time for some optimism about health care spending

Peter Orszag
Peter Orszag
Chip Somodevilla/Getty Images News

Peter Orszag served as director of the Congressional Budget Office from 2007 to 2008, then as director of the Office of Management and Budget from 2009 to 2010. He is currently a vice chairman at Citigroup but, during his time in the Obama administration, worked on the Affordable Care Act. He continues to speak and write on health care, including on his Twitter account.

I asked Orszag to walk through some recent trends in health spending, and explain why the news is so surprising — and so positive. What follows is a transcript of our conversation, edited for length and clarity.

Adrianna McIntyre: Can you set up what's been happening recently with health care spending and why it's such a big deal?

Peter Orszag: We have had incredibly good news over the past three to five years. If I'd been told when I was director of either CBO or OMB that we would have a 12-month period when Medicare spending was basically flat in nominal terms — and therefore on an inflation-adjusted, per-beneficiary basis, significantly negative — I would have thought impossible and yet that's exactly what we're living through.

If this continues, it's massive — everything you think you know about the nation's long-term fiscal gap would be wrong.

AM: Earlier this spring, there were reports that health care spending was spiking again, which caused a stir in the media. What should we make of that?

PO: This debate centers on data released earlier this year on health care spending. We saw a significant uptick in the first quarter of last year, and then especially in the first quarter of this year.

I'm going to be a little critical of the media here: there were a lot of stories written about those numbers in April, suggesting that the slowdown we've been experiencing is over. Done. That it's been reversed.

That misses two things.

First, we would expect some uptick in spending as more people become insured. That doesn't tell us anything about the underlying trend in spending among those who were already insured, which is the more relevant question for whether or not the slowdown is continuing. On that question, we do have the Medicare data, and Medicare has continued to grow very slowly.

The second point is that preliminary GDP numbers are basically a guess. The Bureau of Economic Analysis does not have very much real data upon which to base their projections, but they estimated a 9.9 percent surge in health spending during the first quarter of 2014.

Now, we actually have that data. They show that from the first quarter of 2013 to the first quarter of 2014, health care spending only increased by 2.9 percent. That's before taking out inflation; in real terms, spending growth was basically zero.

Comparing the first quarter of 2014 to the preceding three months — which was the focus of all the anxiety, because of the coverage expansion — it looks like real spending actually declined.

AM: We don't talk about "decline" in health spending very often.

PO: It's shocking! This survey is the basis for the estimates, but there are other elements, so we'll see what happens with the revisions. I am absolutely sure that the 9.9 percent annualized growth that was reported with preliminary estimates will be revised down significantly.

That's very reassuring, and it's surprising, frankly, given the significant expansion in coverage. If you told me that we would insure millions of people and total spending would be flat — or down — in real terms, I would have been shocked.

AM: If you had to speculate, what would you say is driving the slowdown?

PO: I believe three things are driving the deceleration. One is that consumers are playing a bigger role in choosing their own health care and they face higher cost-sharing in the commercial space. That's not relevant to Medicare. Another factor relevant to the commercial space is the economic slowdown. That's also not relevant to Medicare; there's no evidence that Medicare is significantly affected by the state of the business cycle.

So that leaves us asking, what's affecting the slowdown in Medicare? One factor is that the systems are being digitized, so hospital executives have a much better sense of what's going on within the hospital and can target waste. The second thing is that the payment system is changing, and it's expected to continue to change.

The vignette I like to use is that lots of hospitals across the country have succeeded in reducing their readmissions. One example here is Mount Sinai in New York, where I'm on the board. They started a program to screen people at high risk of readmission; they assign social workers to those people. The intervention works very well: emergency room visits and readmissions are down 50 percent for this high-risk population.

Why is Mount Sinai doing this? Right now, it's losing a ton of money on that program — it's bleeding money. Effectively, it's losing revenue on those lost readmissions.

But it's doing this because it expects the payment system to be different within three to five years. In particular, it expects the system to be much more value-based, with a fixed payment per patient. In that situation, incentives get flipped on their head; you really want to reduce readmissions.

There are things being done today in anticipation of what the payment system will look like tomorrow.

AM: How much of a role do you think the Affordable Care Act is playing, if any?

PO: I would say the ACA is a small part of this. If you survey hospital executives, most of them they expect the majority of their revenue to be value-based within five years. Part of that is driven by the ACA, part is driven by private insurers, and part is driven by employers pressuring private insurers to change their payment practices.

I'm not going to try to hazard a guess about exactly what share is due to health reform. I would just say that bundled paymentACOs, and other reforms are directionally consistent with this expectation of value-based payment. The ACA has contributed to a general perception that this is the direction the system's moving.

And therein lies the risk: if those expectations are not realized, a lot of this progress may get reversed.

AM: There are economists who aren't comfortable pointing to the Affordable Care Act when trying to explain the slowdown, because health spending growth is slowing in other nations, too. What's your take on that?

PO: In lots of other countries there have been fiscal policy changes that, in addition to the economic downturn, have constrained health care spending.

I don't find other countries' experience to be that insightful for the deceleration in the United States, except in the commercial space. In the commercial sector, many of the things affecting spending, like the economic slowdown, are relevant to the rest of the world.

In the rest of the world you also have some policy changes. Depending over what time period you go, the movement in pharmaceutical spending toward generics is not only a U.S. phenomenon; that would be affecting other nations as well.

We can look at trends in Medicare and the commercial sector, but the factors that drive those sectors are different. The reason I like to focus on what's been happening to Medicare — where cost trends have looked phenomenally good — is that there's no evidence across states the state of the economy impacts Medicare spending. It's a purer indicator of underlying trends than comparisons to other countries or the commercial part of the market.

AM: What's the big-picture bottom line for the United States, if this is the new normal for health spending?

PO: I think it is the most under-appreciated, under-covered phenomenon in the last five years, because it will be transformational for the federal, state, local governments if these trends continue. More than a trillion dollars in deficit reduction, according to CBO.

I like to say, as a former director of the CBO, that I can assure you the agency doesn't like to update its numbers very rapidly in response to new information. Depending on how you do the calculation, we're talking about a markdown of 900 billion to $1.2 trillion in the ten-year deficit numbers, which shows what a disproportionate effect it could have on our long-term fiscal outlook.