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Peter Orszag: Rising healthcare costs pose fundamental risk to U.S.

Increased medical spending may bust future budgets – and won't make Americans healthier, says the head of the Congressional Budget Office.

By / September 18, 2007



Rising healthcare costs are the most pressing budget issue facing the United States, and much more objective data on the effectiveness of medical treatment is needed to help contain those costs.

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That is the view of Peter Orszag, the director of the Congressional Budget Office. He was the guest at Monday's Monitor breakfast. The CBO provides objective and nonpartisan economic analysis to Congress.

Mr. Orszag spoke briefly about the risk to the economy from the slowdown in housing and the upheaval in credit markets. "The risk of a recession is clearly elevated but the most likely scenario appears to be one in which economic growth continues," he said.

But the bulk of Orszag's remarks were focused on healthcare costs, which he views as much more important than the budgetary challenges caused by an aging society in which more citizens draw Social Security.

"The problem has been largely misdiagnosed including by economic analysts and ... many depictions in the media. The long-term fiscal problem truly is fundamentally one involving the rate at which healthcare costs grow.... Social Security and aging are important, but it is not where the money is," Orszag said.

The CBO director argued that the US has reached or is approaching limits to the value of increased medical spending. An economist trained at Princeton University and the London School of Economics, Orszag referred to "the medical effectiveness curve." In essence, it tracks the return on health outcomes from each additional dollar spent on healthcare.

"If you look at spending versus health outcomes like life expectancy or other things, there is some range where you spend more, you improve [health]. But at some point that curve flattens out and might even turn down. A wide variety of evidence suggests we are on the flat part or even the downward sloping part of that curve. And that suggests you can take costs out of the system without harming health and maybe even slightly improving it, although I would be cautious about going that far."

Orszag also argued that there is a need for much more precise information to determine the effectiveness of various medical treatments. "The key challenge from a cost perspective is substantially broadening out the base of information on a clinical basis in terms of what works and what doesn't," Orszag said. "We do very little of that in the United States, and as a result most of what is delivered in terms of healthcare in the United States doesn't actually have solid evidence in terms of [the] comparative or cost effectiveness behind it. And that opens up very substantial opportunities to reduce cost."

The CBO director disputed the theory that medical-malpractice suits play a significant role in raising healthcare costs. "If you look across states, it is there; but it does not seem to be a very substantial force in healthcare costs overall, despite what you might hear to the contrary."

The seventh head of the CBO, Orszag is dramatically increasing the resources the CBO is devoting to health-related issues. He came to the CBO from the Brookings Institution in Washington.

He is the father of two young children and said he carefully protects his time with them despite a busy schedule testifying to congressional committees. This past weekend, he took them to Boston where, Orszag said, they delighted in watching the Boston Red Sox trounce the New York Yankees.

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