Senate Aging Committee Hearing on Health Care Costs

The Senate Special Committee on Aging held a hearing yesterday on health care spending. General Motors’ Chairman Richard Wagoner recommended in his testimony

[S]everal key public and private initiatives that deserve attention:

A vigorous and robust competitive prescription drug market in which everyone has access to affordable pharmaceuticals, including generic biopharmaceuticals.

Policies that give consumers and physicians information on the relative effectiveness of different drugs and treatments so that they can compare and distinguish treatment options. Armed with this information, physicians and onsumers can ensure that only the most effective drugs and treatments are provided, and help reduce inappropriate, ineffective, and costly care.

Implementation of National Health IT legislation. S.1472, the Health Care Wired
Act [actually S. 1418], sponsored by Senators Enzi and Kennedy, should be enacted into law this year.

Release of the complete Medicare Claims Database. I have joined my colleagues
at the Business Roundtable asking that the Federal government disclose all
Medicare data on the cost and quality of physicians and hospitals across the
country. By getting price and quality information about physicians, hospitals, and
other providers available to the public, consumers can make better choices about
the health care they receive. This is increasingly important as consumers spend
more of their own money on health care. This information will enhance quality
and efficiency in the delivery of Medicare services as well as health care services

Finally, a stronger focus on high-cost cases. Just one percent of the population
with chronic and serious illnesses accounts for about 30% of total health care
expenditures. These cases pose a significant burden on both private and public
payers. We need a better public/private effort to address these high-cost cases to
improve their care and reduce overall costs, and to create a more competitive health care market/

The Congressional Budget Office provided more enlightening information on the Medicaid Program costs and its opinion on the factors driving health care spending:

In calendar year 2004, the United States spent about $1.9 trillion for health care, an amount nearly five times as great in real terms as was spent in calendar year 1975. Real spending per capita increased from about $1,700 in 1975 to about $6,300 in 2004, an average annual rate of real growth of 4.5 percent. The economy as a whole grew over that period as well but not as quickly, with the result that health care spending as a percentage of GDP doubled–rising from about 8 percent in 1975 to about 16 percent in 2004. The mid-1990s saw a brief slowdown in real spending growth per capita, but higher rates of growth have returned in more recent years: from 2000 to 2004, real health care spending per capita grew at an average annual rate of 5 percent, which is similar to its long-term historical average.

Although the diffusion of new medical technologies is generally considered the primary impetus for the long-term increase in overall spending for medical care, other factors certainly contribute to it as well. One source of cost growth has been the aging of the population. Among adults, average medical spending generally increases with age, so as the share of the population that is elderly grows, health care spending per capita will rise. Over the past half century, however, aging has played a relatively minor role in the very large increases in overall spending that have occurred–accounting for only 2 percent of that growth, by some estimates. The coming retirement of the baby boomers will further increase the elderly’s population share and thus have a larger impact than past aging trends have had. Even so, the growth of medical costs per person is likely to remain the predominant reason that health care spending for the country as a whole continues to climb.

In some cases, advances in medical technology may lead to reductions in spend-
ing. Vaccinations, for example, offer the potential for savings on subsequent treat-
ment costs, and certain types of preventive medical care may help some patients
avoid costly hospitalizations. Overall, however, examples of new therapies for
which long-term savings have been clearly demonstrated are few. As with preventive care, new prescription drugs may help some patients avoid more expensive treatments–but they may also generate new spending for previously untreated cases that would not have become more serious. Improvements in medical care that decrease mortality by helping patients avoid or survive acute health problems may ultimately increase overall spending for health care as those (surviving) patients live to use additional health care services throughout their old age.

Other factors that are contributing to the growth of overall health care spending include real increases in personal income over time and the deepening of health insurance coverage over recent decades. Because medical care is a desirable service demand for it tends to rise as real incomes move upward. At the same time, from the consumer’s perspective, health insurance coverage reduces the cost of care, which leads consumers to demand increasing quantities of services. Although the estimated fraction of Americans who have health insurance has not changed dramatically during the past 20 years, private health insurance has covered an expanding share of all private health care costs; such coverage has thus deepened rather than broadened. Even so, the best estimates of the effects of income and insurance coverage on health care costs indicate that those factors, too, fail to explain much of the surge in spending in recent decades.

Not encouraging.