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Archive for June, 2009

Health is an R&D Problem

Our health care system is notoriously inefficient.  Spending is too high, while quality is too low. Some patients undergo expensive treatments that provide little or no benefit. At the same time, other patients don’t receive some inexpensive treatments that could materially improve their health.

When I was CFO of a medical software start-up back in 2000, we diagnosed this problem quite simply: actual medical practice falls far short of best practices. Good treatment regimes are often well-known, yet are overlooked by a large fraction of practicing physicians. (The classic example at the time was that doctors were substantially under-prescribing beta blockers, which can help many patients after a heart attack; I would welcome comments about whether that’s still true.)

The implied treatment for our health care system is also simple: find ways to get patients, physicians, and other providers to adopt best practices. We were focused on information technology as one potential way to do this, but many others have also gotten attention, including:

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Yesterday, I suggested that policymakers should take care in how they pay for any health reform. Paying for reform over the next ten years, which appears to be the consensus budgetary goal, is laudable but not enough.  Policymakers should also make sure that reform doesn’t worsen the longer-run trajectory of our over-stretched federal budget.

As I noted, the Congressional Budget Office made a similar point in an important letter last week. Today, I’d like to emphasis another crucial point that CBO made in that letter — one that I think deserves much greater attention than it has received thus far.

Regarding the offsets that might be used to finance new health-related spending, CBO wrote:

Moreover, any savings in existing federal programs that were used to finance a significant expansion of health insurance would not be available to reduce future budget deficits. In light of the unsustainable path of the federal budget under current law, using savings to finance new programs instead of reducing the deficit would necessitate even stronger policy actions in other areas of the budget.

In other words, it’s likely that policymakers will pick the low-hanging fruit — the least-painful tax increases and spending reductions — to offset the costs of new health spending. That certainly makes sense politically, but unfortunately it may also make it that much harder to address our long-run budget problems.

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Paying for Health Reform

Lawmakers want to be sure that health care reform — if it happens — won’t worsen the deficit over the next ten years.  That’s laudable, but it’s not enough. There’s a risk that reform could be paid for over ten years, yet still worsen our long-run budget crisis.  Policymakers should therefore focus on the long-run trajectory of new spending and offsets, not just the 10-year budget scores.

Faced with a frightening budget situation, lawmakers have rightly decided that health care reform — if it happens — should be budget neutral. In practice, that means that any new spending from health reform should be paid for — by other spending reductions or by increases in tax revenues — over a 10-year budget window.

That’s a laudable goal, but it’s not enough.

We also need to ensure that health reform doesn’t worsen our already grim long-run budget situation. Unfortunately, that could easily happen, even if its costs are paid for over the next ten years.  To illustrate, consider the following stylized example. The red line is a hypothetical path for the net costs of health reform, and the blue line is a hypothetical path for the offsets that would be used to pay for that reform. I’ve chosen the numbers so that health reform costs $1 trillion over ten years, and so that the offsets total to $1 trillion over the same period.

Shape Matters

This combination of policies would satisfy the “budget neutrality” test – the value of the offsets would indeed offset the net costs of the health reform. Nevertheless, it would substantially widen the deficit after several years, since the annual amount of new spending would eventually exceed the annual amount of offsets.  If those trends continued, reform would not really be budget neutral; instead, it would exacerbate the long-term budget crisis.

The importance of this concern was highlighted by the Congressional Budget Office last week.

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Wednesday was a rare day in Washington: the Federal government was actually cash-flow positive.

The reason, of course, is that ten major banks repaid $68 billion in TARP money. Smaller banks had previously repaid about $2 billion, so Wednesday’s action lifted total repayments to $70 billion, almost 30% of TARP support to individual banks.

TARP Peace Sign(For those who don’t get the title, this pie chart reminds me of a peace sign.)

As noted in my previous post on TARP, that means that two firms — Citigroup and Bank of America — now account for the majority of outstanding TARP support to banks.  Citigroup has received $50 billion in three transactions, and B of A has received $45 billion in two transactions. Investments in all other banks now total “only” $79 billion.

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This morning, the Wall Street Journal editorial page questioned the oft-alleged link between health care costs and the competitiveness of American business. Echoing Council of Economic Advisers Chair Christina Romer, it referred to that argument as “schlock.” At the same time, everyone interested in health policy is still absorbing the trillion-dollar price tag that the Congressional Budget Office (CBO) put on the Kennedy health bill.

I’d like to point out that these two issues – any link between health care and competitiveness and the estimated cost of health reform – are closely related. The way that CBO estimated the budget impacts of the Kennedy bill implies that health care has little effect on competitiveness. If you take the contrary view, that health care is a big deal for American competitiveness, then you should also believe that CBO has underestimated the difficulty of paying for health reform.

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I must confess that I find Jim Cramer entertaining and, on occasion, even illuminating.  The key is to Tivo his show and fast forward through the less-than-illuminating parts.  That can trim an hour show down to ten minutes or less.

The highlight of Tuesday night’s show was Cramer’s declaration that the housing market had reached bottom. His evidence?  Tuesday’s data on housing starts, which came in stronger than expected.  That prompted me to take a closer look at the data. Here’s a chart of single-family housing starts since 1970 (when the data begin):

Housing StartsAs the chart shows, Cramer may be on to something, at least as far as starts are concerned.  Single-family starts bounced around the 360,000 level (at a seasonally-adjusted annual rate) in January through March, rose to 373,000 in April, and hit 401,000 in May.  It’s been more than two years since we’ve seen starts increase that much.

That’s good news, but I think we should still expect further pain in housing.

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CBO on the Kennedy Health Bill

On Monday afternoon, the Congressional Budget Office (CBO) released a preliminary analysis of the Affordable Health Choices Act, commonly known as the Kennedy Health Bill.  The draft bill language was distributed last week by the Senate Committee on Health, Education, Labor, and Pensions (HELP) which Senator Kennedy chairs.

Based on work by CBO and the Joint Committee on Taxation (JCT), the analysis provides preliminary estimates of the budget impact of the bill as well as its impacts on health insurance coverage.  Some highlights:

1.  The analysis is preliminary. CBO and JCT have not yet had time to analyze every provision in the bill, some provisions remain in flux, and new provisions may be added.  In short, health policy is a moving target.

2. The bill would have a net budgetary cost of slightly more than $1 trillion over the next ten years (2010 – 2019). To get the bill passed, its proponents will have to find a way to offset most or all of those costs.  That’s why President Obama and others have been talking about various spending reductions (e.g., reduced payment rates for some providers) and revenue increases (e.g., reducing the benefit of itemized deductions) in recent days.  As a political matter, the offsets may turn out to be more difficult than the core policy.

3. The bill would increase Federal spending by $1.3 trillion, which would be partially offset by about $260 billion in higher tax revenues; the net cost is slightly more than $1 trillion. Spending would increase primarily because the Federal government would provide subsidies for individuals and families to purchase health insurance through insurance exchanges (also known as gateways). Revenues would increase because fewer workers would receive employer-sponsored health insurance (which is not subject to income and payroll taxes).  Those workers would still be compensated at market rates, but more of their compensation would be in taxable forms (e.g., wages and salaries).

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