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Interview: Peter Orszag

What is Congress Going to Do About Long-Term Social Security and Medicare Cost Increases?

Peter Orszag

Peter Orszag is the seventh Director of the Congressional Budget Office (CBO). His four-year term began on January 18, 2007. Before joining CBO, Dr. Orszag was the Joseph A. Pechman Senior Fellow and Deputy Director of Economic Studies at the Brookings Institution. This is an edited transcript from an interview conducted on August 27, 2007.

"Aging matters, but it is not nearly as important in that we are misdiagnosing the nation's long-term fiscal problems by describing it as driven primarily by the retirement of the Baby Boomers."

How would you describe the situation with Social Security in terms of its obligations and its assets?

A lot of what is happening with Social Security is simply cash flow. The main problem is not an analytical one. It is a political choice to choose among the options. Money is coming in, money is going out, some are paying taxes in, others are getting benefits out. The list of things that you can do to address the deficit over the long term is somewhat limited.

Can you explain the present percentage of the American economy that is devoted to healthcare?

Currently, health accounts for about 16% of the overall economy. The federal government programs Medicare and Medicaid account for a little under 5% of the economy. If healthcare costs in those programs grow over the next 40 years as rapidly as they did over the previous 40 years, those two programs will grow from under 5% of the economy today to 20% of the economy by 2050. That is the entire size of the federal government today. That increase of more than 15% of GDP is substantially larger than the increase in social security costs, and is significantly larger than anything else affecting the federal budget. It is the fundamental long-term fiscal challenge facing this country.

This really is the elephant in the living room…

A much harder question is trying to predict what the future rate of growth actually will be under current policy, and what sorts of policy interventions might bend that curve. The things that could help bend that curve could slow the rate of healthcare cost growth over the long term. That is where we really need to be paying most of our attention if we want to have a sound fiscal picture, including for retirement programs like Social Security and the Pension Benefit Guarantee Corporation.

Does paying more for medical care mean you are going to get a lot better healthcare?

Perhaps the most compelling evidence is the very substantial variation that you see in healthcare costs per beneficiary within Medicare across the different parts of the United States. The cost per beneficiary in Miami is substantially higher than in Minneapolis. Cost per beneficiary in Sun City, Arizona is substantially lower than in Sun City, Florida, or Sun City, California for reasons that can not be explained by the underlying riskiness of the patients. It is not that there are sicker people in Miami than in Minneapolis, and here is the kicker. The higher cost regions don't generate better health outcomes than the lower cost regions. So we are spending a lot more money and we are not getting better healthcare in the high cost regions. Estimates from Dartmouth and elsewhere suggest that if we could take the higher cost regions and move them towards practice norms that we see in the lower cost region, we could reduce healthcare costs by 30% without harming health.

Can you give us an example where paying more doesn't necessarily get you better healthcare?

The cost per hospitalization for people with hip fracture diagnoses tend to vary a little bit more than the rate of hip fracture themselves across part of the United States. That is partly because it is fairly clear what needs to happen in the hospital when you fracture your hip. Once you get discharged from the hospital and afterwards no one knows really whether you should go back and see your doctor four times a month or twice a month, should you get an MRI or not, should you do physical therapy or not. In the higher cost regions of the United States, the norm is that you go back and see the doctor a lot. It turns out that because that norm is not backed by any scientific evidence, it doesn't correspond to any better health outcome, but you are paying more money – or the federal government is paying more money for all those visits.

As an economist, that must really be intriguing to you.

We have a system of paying for healthcare in the United States in which individuals don't bear most of the cost, and in fact the share of healthcare spending that comes out of your own pocket is now under 15% of total healthcare spending. When you don't face much cost yourself, you have no strong incentive to be looking into whether that 5th or 6th visit is actually beneficial. The doctor has very little incentive to shut off that 5th or 6th visit because of the financial incentives provided. So the key thing in terms of moving forward will be providing better incentives for providers to only provide high value care rather than just more care; moving toward a fee for value system rather than fee for service one.

What is Congress's response to your concerns about the Medicare problem?

I recently testified before the Senate budget committee on this topic and the reception was very positive in terms of recognizing that this is the central problem facing the budget in the long term and that we need to start moving aggressively toward trying things and seeing what works. Aging matters, but it is not nearly as important in that we are misdiagnosing the nation's long-term fiscal problems by describing it as driven primarily by the retirement of the Baby Boomers. It is driven primarily by the rate at which healthcare costs are going up, and despite all that, there is an opportunity here.

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