Last week, the Congressional Budget Office (CBO) issued two highly anticipated reports.

The first, Key Issues in Analyzing Major Health Insurance Proposals, provides something of a roadmap for how CBO thinks about far-reaching health reform proposals (available in PDF format here).

The second report, Budget Options Volume I: Health Care, provides a lengthy menu of health-related budgetary options (presumably, another budget options volume dedicated to non-health matters will be released soon). (The health-related budget options volume is available in PDF format here.)

Both reports are full of useful insights and could serve as primary texts for a graduate level economics course on U.S. health care arrangements.

CBO is a sober analytical institution, grounded in data rather than wishful thinking. Those characteristics will be more important than ever this year, as passions around health care can sometimes lead participants in the reform debate to come unhinged from reality.

An important theme of CBO’s new reports is that slowing the pace of rising health care costs will not easy. Some reform measures can help modestly to ease cost pressures, like more widespread adoption of health information technology and more intensive research scrutiny around what constitutes effective medical care (“comparative effectiveness research”).

But no steps will change the trajectory of health care spending without a fundamental reorientation of financial incentives. In effect, rapidly rising costs are the predictable result of existing, heavily subsidized third party insurance payments. Slowing the pace of rising costs will require reworking those arrangements, which means disrupting existing employer-based insurance or Medicare.  Such measures would not be politically popular, to say the least.

CBO is also one of the few agencies in government that regularly reminds audiences that existing health care entitlements—namely Medicare and Medicaid—are on track to push the federal budget deficit to unsustainable levels in coming decades. Ironically, the health care agenda of the incoming administration would pile new entitlement spending (in the form of premium subsidies for low to middle income households) on top of the existing pile, with little prospect that any of it will be affordable in the future.

What’s needed most right now is a serious effort to improve the efficiency of how health care is delivered by doctors and hospitals. That would ease cost pressures and make insurance more affordable for everyone. 

Unfortunately, the Obama team and their allies in Congress seem to think the federal government can engineer a more productive health care sector. It can’t. Political pressures inevitably tilt regulatory efforts toward protecting incumbents and the status quo. 

But a well-structured marketplace can work and force real change. Cost-conscious consumers buying services in a competitive market, with transparent price and quality information, will provide strong incentives for innovation and patient-centered care. That’s the way to get more value for our money, and ensure resources are available to provide ready access for everyone as well.


December 23, 2008