Recently, the Congressional Budget Office (CBO) has been issuing reports challenging conventional thinking about the long-term fiscal problem facing the nation, which holds that it is primarily related to the influence of demographic changes on Social Security and Medicare. These reports draw on the work of researchers and writers who found that the long-term fiscal challenge is almost entirely unrelated to demographics and Social Security, and it is mostly confined to inefficiencies in the private and public health care system. The new thinking expressed in the CBO reports goes like this: most of all, the health care cost issue is about rapidly rising prices. Spending on health care, both by the government and in the private sector, has been growing faster than the economy for many years and is projected to increase to unsustainable levels in the near future. On average, health care consumers are purchasing more than in the past, and what they purchase has increased in cost. It would be one thing if all of this spending was valuable. But a growing body of research suggests a great deal of this spending has not been worth it. Researchers at Dartmouth Medical School have found extreme variation in the price of health care by region within the U.S. Overall, the variation in spending does not correlate with health outcomes, meaning spending more does not necessarily make a person healthier. Many observers have concluded that the price of health care (in 2006, we spent over $2 trillion annually on it) does not reflect its value. A 2007 McKinsey & Company study estimated around $480 billion of total annual health care spending could be eliminated, with no adverse impact on health outcomes for individuals. About half of that inefficient spending may be subsidized by public programs, the biggest being Medicare and Medicaid. Causes and Solutions At the root of the problem, says Arnold Relman, editor emeritus of the New England Journal of Medicine, in his book A Second Opinion, is that markets are bad at providing health care. For markets to be efficient, buyers and sellers need good information about products. But in health care, that information is too often unavailable to doctors and patients. As a result, people are spending money on treatments that are not the best deal. When a patient is buying a health care service, they rarely know if they're getting a good deal and therefore are unable to choose health care efficiently. Doctors, too, are often in the dark about what options are best. CBO Director Peter Orszag has found insufficient research on the "comparative effectiveness" of different options for treating patients. Some doctors choose options that might be more expensive than necessary or less effective than other available procedures. If competition and additional choices are not having an impact on the bottom line of health care costs, the additional overhead and administrative fees charged by companies will make long-term costs significantly higher. Orszag has further concluded that "comparative effectiveness" findings would probably have to be factored into how doctors are paid to bring down costs. Medicaid and Medicare pay doctors on a "fee-for-service" basis, meaning they are reimbursed for services they provide. Government health plans could use financial incentives through the fee-for-services system to encourage the use of treatments research has proven most effective. Relman, as opposed to Orszag, believes the "fee-for-service" system is only a part of a health care system that has been too commercialized. Reforming it is not enough to fix the significant problems facing it. Relman identifies the profits and overhead expenses, made necessary by the competition endemic in the marketplace, as expenses that have not had a substantial return in health outcomes. He advocates reorganizing the system on a not-for-profit basis, which should reduce the competition and race-to-the-bottom mentality that contributes to inefficient health outcomes. Similarly, in her book Overtreated, Shannon Brownlee, a health care journalist, identified a trend in health care provision where patients' consumption is driven by the supply of health care products. Brownlee has found that in regions where there are more hospital beds, for example, patients tended to use them more, but are no healthier. She concludes that greater regulation of the supply of health care services may be appropriate to control costs throughout the system without sacrificing health care outcomes. What's Insurance Got to Do with It? The proliferation of insurance has also likely increased health care costs by enabling people to purchase health care, and through administrative and profit-related cost excesses. But high insurance costs are mostly the result of inefficiencies in the delivery system, and changing the insurance system may have a limited effect on health care spending. Government insurance programs that pay for health care, like Medicare, Medicaid and tax exemptions, have to a large extent financed the long-term increases in health care costs that began in the 1960s. Much of that investment has been in efficient medical care, but most observers, including Princeton economist and New York Times columnist Paul Krugman, believe the U.S. health insurance system itself generates significant inefficiencies on its own. Private insurance companies are forced to take profits and spend considerably on competition with other insurers (advertising, promotions, incentives, discounts, etc.), which drives up costs for consumers. However, there is significant disagreement over whether insurance encourages wasteful behavior by consumers, a tendency economists call "moral hazard." According to Orszag, a landmark RAND study showed when consumers pay higher co-payments, they consume less health care, with little or no adverse effects on health. Increasing co-payments and deductibles might reduce overspending by a small percentage. This reduction would be small for a variety of reasons. The majority of health care expenditures are directed at chronic illness near the end of life, and financial incentives may not discourage buying in life-or-death situations. As noted above, in most situations, patients (and doctors) would still lack the knowledge and expertise to make efficient purchases even if cost concerns forced them to, while overhead in the delivery and insurance system would be unchanged by higher patient costs. What's more, a plan to discourage health care spending would have to take equity into consideration and not discriminate against low-income families, further limiting the extent to which such a plan could reduce costs through discouraging consumption. This point has been made by health care journalist Merill Goozner. The new reports by the CBO give credence to and help to underscore the findings of a growing number of health care experts who have found the long-term fiscal challenge is almost entirely due to rising health care costs due to inefficiencies in the entire health care system.