In the past several months, health-care costs outside Medicare may have accelerated, even as Medicare spending growth remains remarkably low. This is why Sylvia Mathews Burwell (who is a friend of mine) has the opportunity to be a transformational secretary of Health and Human Services. If over the next three years she can take the bold steps needed to reinforce better value in health care, she will drastically alter prospects for everything from the federal budget to state and local priorities (including education) and the take-home pay of America’s workers.
After several years of very slow growth, total health-care spending picked up in the fourth quarter of 2013, data from the Bureau of Economic Analysis show. This has led some commentators to declare an end to the era of slower health-cost increases, which has lasted for the past several years. Yet Medicare spending growth is still low, even through last month. Indeed, in the first half of this fiscal year, nominal Medicare spending was only 0.6 percent higher than in the corresponding period a year earlier.
The combined acceleration in total health-care spending (which should be expected to pick up as the economy continues to recover) and continued low growth in Medicare highlights why leadership is needed from Health and Human Services. If the secretary provides a clear glide path for shifting away from fee-for-service payments, then low health-cost increases will be much more likely.
Perhaps the most important thing Burwell could do is to declare a specific goal for payment reform -- I favor aiming to have 75 percent of Medicare costs paid in some way other than fee-for-service by 2020 -- and then lay out a timetable for how to get there. Such clarity is crucial because health-care providers already anticipate a shift toward value-based payment mechanisms and are poised to respond, but the timing is unclear, as is exactly which new payment model will prevail. This ambiguity impedes strategic planning and action.
With a better sense of how they will be paid for value rather than quantity, providers could do much to limit cost growth -- as demonstrated by the results from the many new payment systems (such as the Alternative Quality Contract in Massachusetts) currently being tested. Lower cost growth, in turn, would have multiple benefits, as a series of papers presented at the Brookings Institution last week illustrate.
Two of these reports examined what would happen if health-care costs grow a) at the same rate as income per person or b) 2.5 percentage points faster. Economists Alan Auerbach of Berkeley and William Gale and Benjamin Harris of Brookings found that, under the lower-growth scenario, stabilizing the federal debt between now and 2040 would require tax and spending changes amounting to 1.3 percent of gross domestic product -- a challenge, but a manageable one.
Under the higher health-spending scenario, in contrast, immediate tax increases or spending cuts equal to a whopping 4 percent of GDP would be needed to stabilize debt as a share of the economy through 2040. Over longer periods, the differences are even greater; under the more rapid spending scenario, no plausible traditional tax increases or spending reductions would be sufficient to stabilize our fiscal trajectory.
As for state and local governments, the low-growth scenario is “unlikely to pose particularly difficult decisions," Donald Boyd, a fellow at the Rockefeller Institute of Government, found. But high growth would impose severe stress: Over the next two decades, state and local governments would have to either cut all nonhealth spending by 20 percent or increase taxes to a level 20 percent higher than they have been in 70 years, as a share of GDP.
Clearly, much is riding on whether we can improve value and maintain low cost growth in health care. Sylvia Burwell, an inspired choice to be the next secretary of Health and Human Services, has the opportunity to boldly lead the system toward a brighter future in which our dollars buy better health care, not just more of it.
(Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Barack Obama administration.)
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