Congressional Budget Office (CBO) Director Peter R. Orszag is the latest policy thinker to highlight the underlying cause of the long-term fiscal imbalance. Testifying before the Senate Budget Committee on June 21, Orszag emphasized the centrality of health care costs in long-term fiscal imbalances, the reasons for the exploding cost of health care and health care policies that could restrain those costs. (click image to enlarge) Since the 1960s, Medicare and Medicaid costs have outpaced the growth of the economy by 2.5 percent annually. At that rate, spending on these federal programs will increase from 4.5 percent of GDP today to 20 percent of GDP in 2050. Today, the entire federal budget, including all discretionary and mandatory spending, represents roughly 20 percent of the economy. Medicare and Medicaid compose about one-fifth of the entire federal budget. Should federal health care spending increase as projected, the Government Accountability Office predicts that total federal spending will be 40 percent of GDP by 2040, resulting in "a federal debt burden that ultimately spirals out of control." But, as Orszag testified, the rapid growth in federal health care program costs are not inherent in their designs; rather, it is a symptom of a much larger problem: Many analysts believe that significantly constraining the growth of costs for Medicare and Medicaid over long periods of time, while maintaining broad access to health providers under those programs, can occur only in conjunction with slowing cost growth in the health care sector as a whole. Medicare and Medicaid reform that does not address the rapidly rising cost of health care will merely shift the burden of health care expenditures to individuals and private companies. The same worrisome percentage of GDP dedicated to health care spending will persist regardless of who pays for it. Indeed, the outlook is similar for private health care providers, as the growth of health care spending nationwide has paralleled per-beneficiary expenses in Medicare and Medicaid. In 1975, total U.S. health care expenditures represented 8 percent of economic output; by 2016, that number will total almost 20 percent. However, Orszag noted there are several opportunities that will enable health care cost reductions without sacrificing health outcomes. Available evidence suggests that health outcomes in the United States do not track with health care expenditures, indicating outcomes are not directly dependent on expenditures: more money does not buy more health. As the figure below shows, a region-to-region comparison of health care expenditures and quality of health care does not reveal a correlation between the two. Orszag believes further study is necessary to determine the reasons for this disparity. (click image to enlarge) Orszag cited evidence that overall health care cost increases are driven by several factors. The first is the method by which insurers reimburse beneficiaries. As health care costs spiked in the late 1980s, enrollment in managed care plans (HMOs) increased. The shift from fee-for-service plans to HMOs contained cost increases in much of the 1990s, but as consumers complained about restrictions on treatments and other health care constraints, HMOs adopted less aggressive cost-control measures, and health care costs began accelerating again. The second factor that has been pushing up the cost of health care is a decline in out-of-pocket payments by beneficiaries. From 1975 to 2005, the percent of out-of-pocket costs to beneficiaries declined from 33 percent to 15 percent. This disconnect of health care delivery from patient costs increased demand for health care, thereby prompting beneficiaries to consume more health care, which exacerbated cost acceleration. Another explanation is that higher-cost, high-technology treatments have become widely available in the past 30 years. As a result, there are many conditions for which several treatment options exist, all with varying costs, but there is a dearth of information regarding what treatments work best for which patients. Access to data on the effectiveness of the multitude of treatment options, in Orszag's opinion, could carry significant weight in restraining the growth of health care costs. Orszag believes that research on so-called "comparative effectiveness" shows promise in revealing the most effective treatments. Allowing doctors and patients to "use fewer services or less intensive and less expensive services than are currently projected," via comparative effectiveness analysis, Orszag suggests, could be the basis for a range of solutions. Insurers, Medicare and Medicaid could use the data simply as informational guidelines. Citing a health insurance experiment by RAND, Orszag indicated that increased cost sharing results in reduced spending with "little or no evidence of adverse effects on health." The data could therefore be a cornerstone of a financial incentive scheme in which patients may opt for less efficient treatments, but they would pay increased out-of-pocket expenses. Alternatively, Medicare and Medicaid could use the information to tie payments to physicians to the cost of the most effective or most efficient treatment. Orszag's inventory of causes and remedies represents only a subset of the work of the health policy community that analyzes the cost of health care. But more than a comprehensive policy prescription, Orszag's testimony shines a light on where policymakers can look for restraining increases in health care costs, and subsequently for solutions to long-term fiscal challenges.