Technological Change and the Growth of Health Care Spending

January 31, 2008

This morning, CBO released a new report, Technological Change and the Growth of Health Care Spending. I am testifying before the Senate Budget Committee on the new report and on our long-term health projections, which we released in November. The report on technological change was authored by Colin Baker of our Health and Human Resources Division. My oral remarks for today's hearing summarize the report as well as our long-term health outlook, and my notes for those remarks are below.

  • The rising costs of health care represent the nation's central long-term fiscal challenge, and this morning CBO is releasing a new study on the factors contributing to health care cost growth.
  • Over the past four decades, health care spending has roughly tripled as a share of the economy - from about 5 percent of GDP in 1960 to more than 15 percent today.
  • A common way of measuring the rate at which health care costs are rising is the growth in cost per beneficiary relative to income per capita. This concept is referred to as "excess cost growth" - which doesn't necessarily mean excessive growth, just that health care costs are rising faster than income.
    • Excess cost growth has averaged slightly more than 2 percent per year over the past 30 years.
    • Note that the rate has been similar in Medicare, in Medicaid, and in the rest of the health system. That's because many of the same forces that drive the growth of federal health care spending also affect private health care spending.
    • Also note that cost growth in the 1990s slowed relative to that of previous decades.
      • Some analysts attribute that lull to greater enrollment in managed care plans as well as to excess capacity among some types of providers, which increased health plans' negotiating leverage.
      • Since the late 1990s, however, a combination of slower economic growth and accelerated spending on health care has led to a sharp increase in health care costs as a share of GDP-from 12.5 percent in 1999 to 14.5 percent in 2005.
  • In explaining why health costs rose over the past several decades, most analysts agree that the most important factor has been the emergence, adoption, and widespread diffusion of new medical technologies and services.
    • Some advances permit the treatment of previously untreatable conditions, introducing new categories of spending. Others, relative to older modes of treatment, improve medical outcomes at added cost, boosting existing types of spending.
    • Available empirical estimates suggest that approximately half of all long-term growth in health care spending has been associated with technological advances. Those estimates are arrived at largely through the process of elimination - that is, trying to explain cost increases caused by all other variables.
    • One example is the aging of the population. Among adults, health care spending generally increases with age. However, the population aged only gradually over the past half century, and aging played only a minor role in the large increases in spending that occurred. Published analyses suggest that aging can account for only about 2 percent of all spending growth from 1940 to 1990, for example.
    • Other examples of factors contributing to spending growth include the growth in personal income and the rising share of health care costs paid by third-party insurers over recent decades; both of those trends contributed to spending growth by increasing demand for medical care. But again these factors, by themselves, explain only a modest part of the long-term rise in health care spending.
    • The rising price of medical goods and services relative to prices outside the health sector - itself perhaps reflecting differential productivity trends - has also played some role in causing relative real per capita costs to increase, although measurement of prices on a quality-adjusted basis can be difficult and in any case this factor seems to explain a fifth or less of the increases.
    • Other factors such as defensive medicine and physician-induced demand do not appear to explain a significant part of the growth in spending, at least according to published analyses.
    • Another factor that has recently raised concern involves the increased prevalence of obesity. The fraction of Americans who are overweight or obese has increased in recent years, and obesity raises an individual's risk of serious illnesses such as cardiovascular disease and diabetes.
      • In 2001, spending for health care per person of normal weight was $2,783, compared with $3,737 per obese person and $4,725 per morbidly obese person.
      • If health care spending per capita remained at 1987 levels for each category of body weight but the prevalence of obesity changed to reflect the 2001 distribution, health care spending would have risen by only 1.4 percent per capita on average. Because actual spending per capita rose by 34.6 percent, this implies that the change in the prevalence of obesity could account for only about 4 percent of all spending growth from 1987 to 2001.
      • In other words, most of the increased spending on obese people occurred not because of greater obesity prevalence, but rather because spending increased on each obese person - which itself likely reflected changes in technology. In 1987, spending per morbidly obese person was about 18 percent higher than spending per person of normal weight, but by 2001 it was 70 percent higher.
    • Stepping back, the bottom line from all these analyses is that the single most important factor driving the long-term increase in health care costs involves medical technology.
      • Technological advances on average have brought major health improvements, but they often then get applied in settings where their benefits seem much less obvious.
  • Turning to the future, in the absence of an unprecedented change in these long-term trends, national spending on health care will grow substantially.
    • CBO's projections of health care spending assume that federal law affecting Medicare or Medicaid does not change. Those projections should thus be interpreted as providing a measure of the scope of the potential problem posed by rising costs rather than a prediction of future developments, because the magnitude of the problem will ultimately necessitate changes in the government's programs.
    • Under CBO's projections, health care spending will double by 2035, reaching 31 percent of GDP. Thereafter, health care costs will continue to account for a steadily growing share of GDP, reaching 41 percent by 2060 and 49 percent by the end of the 75-year projection period.
    • Net federal spending on Medicare and Medicaid now accounts for about 4 percent of GDP. That rises to 12 percent by 2050 and 19 percent by 2082.
    • Most of that increase is due to excess cost growth, not to an aging population.
  • The rise in health care spending is the largest contributor to the growth projected for federal spending over the long term.
  • All of these projections raise fundamental questions of economic sustainability. If outlays increased as projected and revenues did not grow at a corresponding rate, deficits would climb and federal debt would grow significantly.
    • The resultant economic damage could be averted by putting the nation on a sustainable fiscal course, which would require some combination of less spending and more revenues than the amounts now projected. Making such changes sooner rather than later would lessen the risk that an unsustainable fiscal path poses to the economy.
  • So what can be done? Given that future health care spending is the single most important factor determining the nation's long-term fiscal condition, the Congressional Budget Office is devoting increasing resources to assessing options for reducing such spending in the future.
    • Straightforward changes to the Medicare and Medicaid programs-such as more stringent eligibility criteria, greater cost sharing, or changes in provider payments-could reduce federal spending in part by shifting costs from the federal government to households. Ultimately, however, such cost-shifting approaches are unlikely to be sustainable, and controlling federal spending on health care while maintaining broad access to care under these programs will therefore almost certainly need to be associated with slower cost growth in the health care sector as a whole.
  • Two potentially complementary approaches to reducing total health care spending-rather than simply reallocating spending among different sectors of the economy-involve generating more information about the relative effectiveness of medical treatments and changing the incentives for providers and consumers of health care. In addition to those changes, a variety of approaches to changing health-related behavior could improve health outcomes at a given level of costs.
  • Costs appear to vary across the health sector for reasons that are not highly correlated with quality differences.
  • Costly services that are known to be highly effective in some types of patients are sometimes provided to other patients for whom clinical benefits have not been rigorously demonstrated. More information on the "comparative effectiveness" of alternative medical treatments could offer a basis for ensuring that future technologies and existing costly services are used only in cases in which they confer clinical benefits that are superior to those of other, cheaper services.
    • To affect medical treatment and reduce health care spending, though, the results of comparative effectiveness analyses would ultimately have to change the behavior of doctors and patients-that is, to get them to use fewer services or less intensive and less expensive services than are currently projected. Bringing about those changes would probably require action by public and private insurers to incorporate the results into their coverage and payment policies in order to affect the incentives facing doctors and patients.
    • For example, Medicare could tie its payments to providers to the cost of the most effective or most efficient treatment. If that payment was less than the cost of providing a more expensive service, then doctors and hospitals would probably elect not to provide it. Alternatively, enrollees could be required to pay for the additional costs of less effective procedures (although the impact on incentives for patients and their use of care would depend on whether and to what extent they had supplemental insurance coverage that paid some or all of Medicare's cost-sharing requirements).
  • Finally, the ultimate objective of any health care system is to promote health, whether by treating diseases that arise or by preventing them from occurring in the first place. In that context, proposals that encourage more prevention and healthy living can help promote better health outcomes, although their net effects on federal and total health spending are uncertain. Nonetheless, reform proposals could encompass preventive measures and efforts to encourage healthier lifestyles.