December 10, 2007
Later this week, CBO will be releasing its new Long-Term Budget Outlook. Perhaps the single most important variable affecting the nation's long-term fiscal outlook is the rate at which health care costs will grow in the future. Over the past 30 years, total national spending on health care has more than doubled as a share of GDP. According to the projections we released last month in our Long-Term Outlook for Health Care Spending, that share will double again by 2035, claiming more than 30 percent of GDP. Federal spending on Medicare and Medicaid, which accounts for 4 percent of GDP today, is projected to triple as a share of GDP (to 12 percent) by 2050 under current law.
Although the aging of the population is frequently cited as the major factor contributing to the large projected increase in federal spending on Medicare and Medicaid, by itself it accounts for only a small fraction of the growth that CBO projects. A more important factor is excess cost growth: the extent to which the increase in health care spending for an average individual exceeds the growth of per capita GDP. The gains from higher spending are not always clear, however. Substantial evidence exists that more expensive care does not always mean higher-quality care. Medicare costs per beneficiary, for example, vary substantially across the United States for reasons that cannot be fully explained by the characteristics of the patients or other factors -- and the higher-spending regions don't generate better health outcomes, on average, than the lower-spending ones. These types of research findings suggest that embedded in the countrys central long-term fiscal challenge are opportunities to reduce health costs without impairing health outcomes overall.
Since rising health care costs and their consequences for Medicare and Medicaid constitute the nation's most fundamental long-term fiscal challenge, one of my highest priorities as CBO director is to augment our work on health care -- while still continuing our outstanding and crucial work in other areas as well.
CBO's health work spans all the analytical divisions of the agency and is divided into two broad categories: (1) estimating the budgetary impact of federal health programs and proposed legislation, and (2) preparing studies on health policy issues.
- The Health Cost Estimates Unit in the Budget Analysis Division estimates the cost of proposed health legislation and prepares spending projections for federal health programs.
- The Health and Human Resources Division conducts studies of health issues, including Medicare, Medicaid, pharmaceuticals, public health, and private health markets; it also develops models that underlie cost estimates.
- The National Security Division conducts studies of the health care provided by the Departments of Defense and Veterans Affairs.
- The Tax Analysis Division examines aspects of the tax system and its interactions with health care.
- The Microeconomic Studies Division also analyzes health issues, especially those related to competition or market structure, including most recently prescription drug pricing and research and development in the pharmaceutical industry.
- The Macroeconomic Analysis Division also does work on the economic effects of health care and insurance programs.
In addition to dedicating more staff to work on health care, we've also appointed a panel of health advisers to complement our panel of economic advisers, and I have been spending a significant share of my own time on the topic. The goal is to provide policymakers and others with more analyses of health care issues and options for reducing health care costs over the long term -- and you should expect to see a significant number of publications on the topic from CBO in the coming months and years.
For easy reference, we also have a new Web page that collects many of the agency's activities in the area.