[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                     CBO'S LONG-TERM BUDGET OUTLOOK

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, DECEMBER 13, 2007

                               __________

                           Serial No. 110-26

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
       http://www.gpoaccess.gov/congress/house/budget/index.html


                                 ______

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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut,        PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas                    Ranking Minority Member
JIM COOPER, Tennessee                J. GRESHAM BARRETT, South Carolina
THOMAS H. ALLEN, Maine               JO BONNER, Alabama
ALLYSON Y. SCHWARTZ, Pennsylvania    SCOTT GARRETT, New Jersey
MARCY KAPTUR, Ohio                   MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon              MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas               PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida                  CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts     K. MICHAEL CONAWAY, Texas
NIKI TSONGAS, Massachusetts          JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey        PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia  JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina        RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon               ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington              [Vacancy]
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                 Austin Smythe, Minority Staff Director


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, December 13, 2007................     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
    Hon. Paul Ryan, ranking minority member, House Committee on 
      the Budget.................................................     2
    Hon. Adrian Smith, a Representative in Congress from the 
      State of Nebraska, prepared statement of...................     4
    Peter Orszag, Director, Congressional Budget Office..........     4
        Prepared statement of....................................    13
    Hon. Lloyd Doggett, a Representative in Congress from the 
      State of Texas, Wall Street Journal article, ``The Biggest 
      Budget Buster''............................................    42


                     CBO'S LONG-TERM BUDGET OUTLOOK

                              ----------                              


                      THURSDAY, DECEMBER 13, 2007

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. John M. Spratt Jr. 
[chairman of the committee] presiding.
    Present: Representatives Spratt, Cooper, Becerra, Doggett, 
Berry, Boyd, McGovern, Scott, Etheridge, Moore, Ryan, 
Hensarling, McHenry, Conaway, Tiberi, Smith.
    Chairman Spratt. I call the Committee hearing to order. And 
welcome to the Committee today once again, Dr. Peter Orszag.
    We are fortunate to have Dr. Orszag testify today about the 
latest report from the CBO on the long-term budget outlook, 
although I will say that the picture he paints there can get 
rather apocalyptic.
    By my count, this is the ninth time that Dr. Orszag has 
testified before the House Budget Committee. Fortunately for 
him and his able staff at CBO, we will be leaving town soon. 
But when we come back in January, we will be depending on you 
more than ever as we begin to put together a budget for the 
forthcoming fiscal year.
    Last week, the Budget Committee focused on the short-term 
economic projections. With the evidence of an economic slowdown 
or recession mounting, we ask our panelists for their best 
judgments about where the economy is headed, the implications 
of the problems in the housing market, and what can be done in 
our budget to improve the near-term economic situation.
    Today's hearing shifts to the long-term outlook. For the 
past several years, all of the government's fiscal analysts, 
major departments, the Congressional Budget Office, GAO, the 
actuaries or trustees of Social Security and Medicare all have 
painted a pretty gloomy picture of our long-term prospects.
    Using recent trend data and policy preferences, what the 
CBO calls the alternative baseline scenario, CBO projects that 
the fiscal gap over the next 75 years, between now and 2082, we 
will reach 6.9 percent of GDP, the fiscal gap, the situation 
where we are and where we would have to go if we wanted to 
essentially carry forward the current situation.
    At the heart of all of this are healthcare costs. 
Unfettered and based upon historic averages, CBO projects that 
public health spending will literally consume the economy over 
the next 75 years.
    Using more realistic projections of public and private 
healthcare costs, Federal healthcare spending is constrained to 
reach only 50 percent of GDP in 2082. These are figures that 
cannot be ignored.
    Dr. Orszag has noted that there are significant 
opportunities to reduce healthcare costs without harming 
healthcare outlooks. It is important, critical, and vital that 
we begin to explore these opportunities, particularly in 
connection with a system-wide look at both private and public 
healthcare practices. We will talk about more of this in the 
course of the hearing today.
    Dr. Orszag, thank you for your excellent testimony today, 
for your projection, and for CBO's painstaking and path-
breaking work throughout the year. We very much appreciate the 
quality of your work and your forthcoming willingness always to 
tackle these tough topics with us.
    Before turning to you for your testimony, I want to yield 
to our Ranking Member, Mr. Ryan, for any opening statement that 
he would like to make.
    Mr. Ryan. Thank you, Chairman.
    First of all, I want to thank you for going ahead with this 
hearing today, and this is going to be a challenging week. By 
my count, we have had nearly ten hearings on this subject this 
year and I do not think there is any other issue on which our 
time could have been better spent.
    So this is something we should be talking about here in the 
Budget Committee. Long after today's tax and spending economic 
issues have been resolved, this problem will still be with us 
and getting worse each year if we fail to address it.
    So I want to thank you sincerely, Chairman. I think you are 
doing us a great service by having these hearings.
    As this Committee knows too well and as Director Orszag is 
going to remind us today, the single largest threat to our 
nation's long-term economic health is the unsustainable path of 
Federal spending and particularly entitlement spending. So I 
just want to review a couple of facts and then hopefully we can 
move forward with some common principles.
    Spending by the Federal Government consumes about one out 
of every five U.S. dollars. Left on its current path, by 2050, 
Federal spending will absorb nearly one out of every two 
dollars, about half of our entire economy.
    Now, every dollar the government spends is a dollar that is 
no longer available for generating growth in the economy. So if 
we get to that level of spending, whether it is financed by 
taxes or borrowing or some combination of the two, it will 
cripple the U.S. economy and any hope we have to compete, let 
alone lead, in the world market.
    That is why those of us who call ourselves conservatives 
want to leverage more of our economic strengths to fulfill our 
most important domestic priorities rather than relying solely 
on costly government programs that we know right now cannot 
keep their promises.
    As we know, the core problem consists of three major 
programs, Social Security, Medicare, and Medicaid, very 
important programs. And as currently structured, assuming no 
new programs or benefits, these three programs alone by mid 
century will consume as much as the entire Federal Government 
does today.
    And, of course, that does not account for any of the 
massive entitlement expansions, healthcare or otherwise, 
currently being considered by Congress. This will happen at a 
time when nearly 80 million baby boomers are retired or 
retiring, meaning they will be drawing resources from the 
economy rather than contributing to it and there will be a 
shrinking number of workers in the system to support this 
ballooning number of retirees.
    None of this is news. We have all heard this before. We 
have been aware of this problem for decades.
    A couple of years ago, we passed the DRA which saved $40 
billion over five years. I am glad we took the necessary step. 
I was proud of that accomplishment, but it was a small drop in 
the bucket.
    Now, the problem really should be a major part of our 
national debate right now. And I really hope that as our 
presidential campaigns heat up, I hope that this becomes a 
centerpiece issue to be discussed in our presidential 
campaigns. This is something we need to address.
    And at this point, I think we all understand that, number 
one, we have a problem; and, number two, it is our largest 
entitlements that are unsustainable and they need to be 
reformed. And for my money, I think there are three things we 
need to keep our eye on.
    Number one, how do we continue meeting the mission of these 
entitlements? The mission of health and retirement security is 
something we all agree with, that we all believe in. So how do 
we meet the mission of these entitlements?
    Number two, how do we stay globally competitive? How do we 
make sure that our kids and grandkids can get good careers and 
maintain a high standard of living?
    And, number three, how do we see to it that we leave our 
kids with a debt-free nation?
    Those three goals are not necessarily mutually exclusive 
goals, but they could be mutually exclusive goals if we do not 
do this right.
    So if we want to have a debt-free nation, if we want to 
give our kids and our grandkids the American legacy of a higher 
standard of living by getting America competitive in the 21st 
century and give them a competitive economy to grow up in and 
we want to meet the mission of these entitlements, we are going 
to have to think outside the box, we are going to have to 
reform these programs, and they are going to have to be done a 
lot differently than they are now if we are going to make right 
by our kids and our grandkids.
    And that is what I think this Committee ought to be talking 
about. And that, Chairman, is why I thank you for having this 
hearing and the others you have had like it.
    Chairman Spratt. Thank you, Mr. Ryan.
    Dr. Orszag, before turning to your testimony, let me ask 
that all members be allowed to submit an opening statement for 
the record at this point if there is no objection.
    [The prepared statement of Mr. Smith follows:]

 Prepared Statement of Hon. Adrian Smith, a Representative in Congress 
                       From the State of Nebraska

    Good morning and thank you, Chairman.
    Fiscal discipline is one of my greatest concerns. By serving on 
this Committee, my goal is to add restraint to the budget process. 
Congress must use the budget process to promote reforms which will make 
government programs sustainable for the long-term.
    At this point in time, no one in Congress--and certainly no one on 
this Committee--can claim ignorance of the entitlement spending crisis 
facing our nation. We know these safety net programs must be reformed 
in order to survive; and we know the reforms must be substantive and 
immediate.
    We have an obligation to exercise accountability and fiscal 
responsibility in government spending. As this Committee plans for 
future federal budgets, the warnings and information expressed to us 
today are of utmost importance. We should heed the advice of these 
experts, and take action accordingly.
    I appreciate the Committee for holding this hearing today. Thank 
you to Dr. Peter Orszag for highlighting the Congressional Budget 
Office's Long-Term Budget Outlook before the Committee.
    Chairman, I look forward to continuing to work with you on real 
entitlement reforms, and I thank you for your time.

    Chairman Spratt. And, secondly, as to your own testimony, 
you have filed a written copy. We will make that copy a part of 
the record and you can summarize it any way you see fit.
    You are the only witness today, so I would encourage you to 
take your time when you are plowing through. And your efforts 
to explain these new concepts like excess cost growth, I think, 
would be useful as part of your briefing.
    Thank you for coming. Thanks for your testimony. We look 
forward to your presentation.

   STATEMENT OF PETER ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. Orszag. Thank you very much, Mr. Chairman.
    And before I begin, since, as you noted, we are nearing the 
end of the calendar year, let me just recognize and thank the 
outstanding work that CBO staff has put forward through the 
year which makes reports like the one that we are discussing 
today possible.


    In the very short run, over the past few years, as the 
first chart shows, there has been an improvement in the 
nation's fiscal deficit, a reduction from roughly three and 
half percent of GDP to just over one percent of GDP or the size 
of the economy last year. That improvement may generate some 
sense of complacency about the nation's problems.
    And the strong conclusion from the report that we issued 
today is that under any plausible scenario, the Federal budget 
is on an unsustainable path over the long term and that is, as 
both Mr. Spratt and Mr. Ryan have noted, driven primarily by 
rising healthcare spending.
    Let me describe the two scenarios that we present in this 
report and the next chart summarizes the outcomes from them.


    The first scenario is an extended baseline, one in which we 
adopt the assumptions that are embodied in our ten-year budget 
baseline and then extend those same concepts out over time 
after the tenth year.
    Under the scenario, we take a literal interpretation of 
current law. And so, for example, the alternative minimum tax 
is not indexed for inflation and it gradually takes over a 
significant part of the Tax Code. And the 2001 and 2003 tax 
legislation expires as scheduled in 2010 and various other 
parts of literal current law are implemented.
    The alternative fiscal scenario represents one 
interpretation of what observers may believe is the underlying 
thrust of current Federal policy. So, for example, it indexes 
the alternative minimum tax to inflation to avoid the AMT 
taking over the Tax Code.
    And I think you can actually see the big difference between 
these two scenarios is on the revenue side, reflecting the 
factors that I was just describing.
    In particular, under the extended baseline scenario, 
revenue rises from a little under 19 percent of the economy 
last year in 2007 to 25.5 percent of the economy by 2082. Under 
the alternative fiscal scenario by contrast, revenue is roughly 
flat as a share of the economy.
    On the spending side, there are some differences, but the 
major differences between the scenarios or the most important 
ones are on the revenue side. So let me start with the revenue 
projects.


    The next chart shows you what happens under the extended 
baseline scenario to households and in particular how they are 
affected by the alternative minimum tax.
    Roughly three percent of taxpayers are currently subject to 
the AMT. Under the extended baseline scenario in which the 
alternative minimum tax is not indexed to inflation, that share 
would rise to 75 percent by the end of the 75-year projection 
window as that first chart shows you.
    The share of revenue generated by the AMT relative to total 
individual income tax revenue would also rise for some period 
of time. It would then flatten out and actually decline a 
little bit towards the end of the projection window for reasons 
that I could explain if anyone is interested.
    But the bottom line is that under the baseline extended 
scenario, the AMT assumes a much larger role in the Tax Code 
and that generates significant additional revenue along with 
the expiration of the 2001 and 2003 tax legislation and ongoing 
increases in real income which push taxpayers into higher 
marginal tax brackets and that also drives up revenue.


    As we turn to the spending side, the next chart shows you 
the path of spending which is similar under the two scenarios 
with some modest differences. And I think it is almost 
immediately obvious that that light blue area at the top of the 
graph is the primary driver of the increases in spending over 
the projection window. And as I have already mentioned, that is 
those two big health programs, Medicare and Medicaid.
    Total spending is projected to rise from under 20 percent 
of GDP to well over 30 percent of GDP by the end of the 
projection window and under this scenario, closer to 35 
percent. And that excludes interest spending which, of course, 
would start to accumulate very rapidly as debt accumulated.


    The next chart shows you when you put the revenue and 
spending sides together the path of Federal debt under these 
two scenarios. And focusing for a moment on that alternative 
fiscal scenario, you can see debt explodes under the scenario 
very rapidly.
    The peak debt-to-GDP ratio for the United States reached 
109 percent near the end of World War II. We would reach that 
share of GDP under this scenario in 2031 and debt would 
continue rising thereafter. We tried to evaluate the 
macroeconomic consequences of this rise in debt even if it were 
possible to sell additional debt at those kinds of ratios and I 
would note that investors may not be particularly willing to 
buy additional government debt as the debt ratios rose that 
high.
    By 2050, the increase in government debt which crowds out 
private investment and increases borrowing from abroad would 
reduce national income by 25 percent relative to a stable 
fiscal trajectory. That is a very substantial reduction in 
national income.
    Under the extended baseline scenario, largely because of 
the additional revenue that is generated by a literal 
interpretation of current law, the picture actually looks 
somewhat better for several decades and then the ongoing 
increases in healthcare spending starts to drive up debt as a 
share of the economy. And by the end of the projection window, 
you are again on an unsustainable path.


    One way of trying to capture or collapse all of this 
information into a single concept is illustrated on the next 
chart which presents figures for the so-called fiscal gap. And 
the fiscal gap is a way of just collapsing into a single number 
the present value or taking into account the interest cost, the 
time value of money, the future stream of revenue relative to 
the future stream of spending, and looking at the difference 
between the two.
    And focusing on the bottom right-hand side of that, the 
fiscal gap under the alternative fiscal scenario over the next 
75 years amounts to almost seven percent of the economy. What 
that suggests is that you would need an immediate reduction in 
noninterest spending of seven percent of the economy that you 
then sustain out over time or an increase in revenue of seven 
percent of the economy, and, again, permanent and sustained, in 
order to avoid unsustainable rises in debt under that scenario. 
Those are obviously very big numbers.


    Furthermore, the longer you wait, the more painful it gets. 
The next chart shows you what happens if instead of beginning 
those reductions in spending or equivalently increases in 
revenue immediately, you waited until 2020 or 2030 or 2040. The 
required adjustments become even larger the longer you wait 
because of the years that you miss in putting the nation on a 
sounder fiscal path.
    And just to calibrate that, for example, if you waited 
until 2020 and tried to do the adjustments at that point, the 
required reduction in spending outside of interest, if you did 
it on the spending side, would amount to 43 percent. You would 
have to reduce everything that the government did, and I am 
including mandatory entitlement programs and discretionary 
spending, everything other than interest, by 43 percent and 
sustain that to avoid an unsustainable or an explosion in debt 
eventually occurring. That may help to calibrate the cost of 
waiting as you see the size of those bars go up dramatically 
the longer you wait.
    One factor that I have emphasized in previous testimony and 
that I will emphasize briefly again has to do with the relative 
contribution of demographics and other factors, including 
healthcare cost growth, on these long-term budget projections.


    The next chart shows you the pure effect of aging, that is 
allowing the population distribution to evolve towards older 
ages as is projected and how much that contributes to the 
overall fiscal gap.
    And, again, focusing on that 6.9 percent long-term fiscal 
imbalance under the alternative fiscal scenario, you can see 
that the dark blue and light blue lines, which are the effects 
of aging, amount to between 20 and 30 percent of the overall 
fiscal gap.
    In other words, most of this effect is not coming from the 
pure effect of aging and demographics. Most of it arises from 
other things like healthcare spending. And that is the central 
determinant of our nation's long-term fiscal imbalance.
    And since it is the central determinant of especially the 
spending path that we are on and the overall fiscal imbalance, 
I do want to just spend the final moment or two of my oral 
remarks talking about the opportunities that exist to alter the 
path of spending that we are on with regard to healthcare. I 
will repeat some of the graphs that I always walk around with, 
but I think they are worth repeating.
    One indication of the opportunities that we have in 
healthcare spending to potentially reduce spending without 
harming health outcomes comes from the very substantial 
variation in healthcare spending across parts of the United 
States that cannot be explained by the characteristics of the 
patients or price levels in different areas.
    Spending in some areas of the country is a third of other 
areas. In Miami, the cost per beneficiary is twice as high as 
in Minneapolis.


    And as the next chart shows, on average, additional 
spending does not generate higher or better health outcomes for 
beneficiaries than lower spending areas. That opens up the kind 
of opportunity that, for example, researchers at Dartmouth have 
suggested, that we could potentially reduce healthcare spending 
by as much as 30 percent without harming health outcomes if we 
can move the darker areas of the country towards the lighter 
areas and the practice norms in the lighter areas.


    The next chart shows you that most of the variation that 
occurs is not in things that we know work. For example, it is 
recommended practice the closer you are to that vertical line, 
the less variation there is. The further you are, the more 
variation there is.
    It is recommended best practices. For example, to 
administer an aspirin for someone who experienced a heart 
attack upon admission to a hospital, there is not very much 
variation in that across parts of the United States.
    Much less clear when an MRI should be used or other kind of 
imaging and diagnostic tests. There is a lot more variation in 
those kinds of spending areas. Where it is less clear what 
should be done, there is more variation. Where it is less clear 
what should be done, norms in different parts of the country 
vary substantially in ways that affect spending, but apparently 
not average outcomes.
    And then finally, I would note many people have remarked 
that the darker areas in my map contain many of the nation's 
leading medical centers and those leading medical centers are 
among the best in the world.


    I would just point out as the final chart shows that if you 
look at three of our nation's leading medical centers, when you 
rank them by quality, there does not seem to be very 
substantial differences. This is for Medicare beneficiaries in 
the last six months of life. But if you look at cost per 
beneficiary, and remember these are similar types of patients 
near the end of their lives, at some of these facilities, costs 
are twice as high as at others. At one of the facilities, 
$50,000 on average. Another one, about $25,000.
    When cost per beneficiary at the nation's best medical 
centers vary by a factor of two for reasons that do not seem to 
be explainable by the types of patients that are going to those 
facilities and that do not seem to generate differences in 
outcomes, I think there are significant questions about how we 
can potentially capture opportunities to reduce cost without 
harming quality.
    And, again, that is the central long-term fiscal challenge 
facing the United States, how we can get healthcare costs under 
control and bend that cost curve.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Peter Orszag follows:]

    
    
    
    Chairman Spratt. Thank you very much, Dr. Orszag.
    Let me ask you a question about defense. You did not break 
anything out here. Just for clarification, this has become a 
very substantial item in the budget. And the base budget itself 
is substantial, but it is enlarged by the supplementals that we 
have been passing for the last several years.
    What assumptions do you make about future defense growth 
and about the war supplementals in particular?
    Mr. Orszag. In particular with regard to the supplementals 
for operations in Iraq and Afghanistan, we are basing these 
projections off of our March baseline. The amount of spending 
that is involved in the scenarios amounts to about a half a 
percent of the economy. So that is what is embodied in the 
long-term projections.
    Chairman Spratt. We gave you a couple of months ago two 
scenarios to cost out. One assumed a reduction in force levels 
to 75,000 troops in both theaters and a steady state at that 
level for the remainder of the ten-year period of time. I have 
forgotten your exact number, but it was just under a trillion 
dollars for that kind of commitment.
    Is that the level of commitment represented by the half 
percent of GDP that you have incorporated in the forecast?
    Mr. Orszag. It is not exactly equivalent. We have done 
different scenarios for you, we have done scenarios for Senator 
Conrad. This was not based on that kind of scenario analysis 
for the future, but rather just taking the outlays that 
occurred under the March baseline and extrapolating them 
forward.
    You could get slightly different answers using the kinds of 
scenarios that we have prepared for you, but it is not going to 
substantially change, for example, that seven percent number. 
It may move it by a couple tenths of a percent of GDP.
    Chairman Spratt. The reason I ask that is that defense is 
one of those categories in the budget. Half of discretionary 
spending or more goes to defense today. That is one of the 
things that will be unsustainable at today's level if this 
budget indeed goes forward or at least it will be in conflict 
with other priorities in the budget, other budget objectives. 
And what is left over once you put healthcare and Social 
Security together is not much to sustain defense and other 
things that are typically looked upon as the fundamental 
functions of the budget.
    Mr. Orszag. And I would just again say if we stay on the 
same path, especially with regard to healthcare spending, we 
face basically only two alternatives. One is an increase in 
revenue well beyond anything that the United States has seen in 
terms of historical norms and/or some combination with a very 
substantial reduction in the other things that the Federal 
Government does.
    And I would also note you cannot squeeze those other things 
hard enough to actually pay for the projected increases in 
spending. When you look at the whole part of discretionary 
spending, both nondefense and defense, even if you reduce them 
to implausibly low levels, that would not finance the projected 
increases in healthcare spending over the next 75 years.
    Chairman Spratt. There are other projections out there, 
none as recent as yours, but the Government Accountability 
Office has done projections of the economy. They have developed 
a 50- to 75-year fiscal gap number. The Medicare trustees have 
developed their own numbers. And while the differences do not 
look great, over a period of time, they are pretty significant.
    The trustees, for example, of Medicare and Social Security 
project the 75-year Social Security shortfall to be 1.95 
percent, just under two percent of payroll. I believe you have 
got 1.8 percent of payroll.
    Mr. Orszag. Yes, sir.
    Chairman Spratt. How do you account for those differences? 
Where do they differ in projecting the future from how you are 
predicting it?
    Mr. Orszag. I would note first that there had been more 
significant differences several years ago between us and the 
actuaries. The differences now are actually relatively modest 
over a 75-year period and they have to do with different real 
interest rate assumptions, different real wage growth 
assumptions, a whole variety of different things.
    The difference between 1.8 and something closer to two is 
not something that I would stake policy conclusions on. They 
both show some imbalance in Social Security's finances over the 
long term.
    Chairman Spratt. What is the difference in Medicare?
    Mr. Orszag. There is a more substantial difference. For the 
Medicare Hospital Insurance Program, Part A of Medicare, we 
project a 75-year actuarial imbalance of 5.4 percent of taxable 
payroll and the actuaries are at about three and a half.
    That has to do with the fact that as noted in our long-term 
health outlook, we have over the long term a higher trajectory 
for healthcare spending than the trustees do, in part because 
under their assumptions, they constrain that so-called excess 
cost growth factor, which has to do with how rapidly costs are 
rising per beneficiary, to an average of one percent between 
year 25 and year 75. And that is very substantially lower than 
the historical average over the past three or four decades.
    Chairman Spratt. Would you take just a minute, I think 
everybody understands it, but just to address the difference 
between a prediction and a projection?
    Mr. Orszag. Yes, sir.
    Chairman Spratt. In particular, what you are projecting 
here would never be attainable. The markets would fall apart 
and our economy would fall apart before we ever got to the 
percentages you are talking about. What you are doing is 
projecting rather than predicting because realistically those 
predictions we would never attain.
    Mr. Orszag. That is right. We are supposed to present the 
implications of unchanged Federal policy. That unchanged 
Federal policy or current Federal policy is unsustainable and, 
therefore, the implications cannot occur.
    It will not be the case that we will reach debt-to-GDP 
ratios at three, four, five hundred percent of the economy. You 
will not be able to sell additional debt if you come anywhere 
close to that.
    So the point of these scenarios or projections is to 
illustrate the consequences of the path that we are on, not 
suggest that that is what will occur because ultimately the 
Congress and the President will have to act to avoid those 
consequences from occurring.
    Chairman Spratt. Now, let me ask you about something we 
discussed often here and we will be confronted with 
increasingly as we approach the December 31, 2010, and a 
reconsideration of the tax cuts that were passed in 2001 and 
2003.
    At the end of the 1990s, the Federal Government was 
beginning to realize some significant budget surpluses and was 
on the path towards paying down, in fact did over three fiscal 
years pay down the national debt, about three or four hundred 
billion dollars.
    Part of the rationale for accumulating surpluses was to 
save for the entitlement future that we are now facing. The 
surpluses have been dissipated and we have accumulated more 
debt than any time in recent history.
    Can CBO estimate somehow, can you break out somehow the 
significance of the tax cuts? Can you estimate what percentage 
of the fiscal gap that we are now seeing, that you are now 
describing is caused by those tax policies and by leaving those 
tax policies in place over the forthcoming 75 years?
    Mr. Orszag. Well, the answer would be sensitive to whether 
you also assume that alternative minimum tax is reformed or not 
because there is a very important interaction between the 
alternative minimum tax and the 2001 and 2003 tax legislation.
    If the alternative minimum tax remained in place and, 
therefore, increasingly took over the Tax Code, the present 
value of the 2001 and 2003 tax legislation in terms of its 
impact on revenue is something about one percent of the economy 
or maybe one to 1.5 percent of the economy.
    With the AMT not taking over the Tax Code, the total effect 
is closer to two percent of the economy, so you could compare 
those results to the roughly seven percent fiscal gap that we 
presented.
    Chairman Spratt. We may want to get some further 
clarification from you and we will submit something for the 
record.
    I have some more questions, but others have them as well, 
so let me yield now to our Ranking Member.
    Mr. Ryan. Thank you, Chairman.
    Peter, let me go into your table two in your book or I 
think it is in your testimony as well. And you are showing in 
your alternative fiscal scenario in the year 2050 41.8 percent 
of GDP for primary spending with interest, total spending.
    Mr. Orszag. Total spending, right.
    Mr. Ryan. Yes, total spending. In your projections, do you 
not project a slowing of the growth of the health spending in 
the out years?
    Mr. Orszag. Yes, we do.
    Mr. Ryan. And the trustees do the same as well, correct?
    Mr. Orszag. Much more aggressively.
    Mr. Ryan. Yes. Why?
    Mr. Orszag. The reason that there is some slowing in our 
projections is twofold. The first is that there is some scope 
for regulatory, that is nonlegislative cost reductions, and 
also the higher cost sharing that will come through as premiums 
and other things go up will likely constrain cost growth to 
some degree in Medicare.
    In addition, even in the absence of Federal policy changes, 
we believe that ultimately, consumers, households, and 
employers will push back on ongoing healthcare cost growth when 
it starts to consume a larger and larger share of their 
budgets.
    Mr. Ryan. Okay. So you believe absent any change in law by 
Congress that consumers are price sensitive actors?
    Mr. Orszag. The medical system will ultimately evolve so 
that healthcare does not crowd out consumption of cars and what 
have you.
    Mr. Ryan. So there is a threshold in a consumer's mind at 
which they do not want to cross and so when consumers see more 
of their own out-of-pocket expenses, their own cash being 
exposed, they are going to act rationally and cut back on 
costs.
    So you believe there is elasticity here? There is a point 
at which consumers are going to say, look, I have my own skin 
in the game and this is too much and I am going to cut back. 
And you are putting that under the assumption that is slowing 
the inflation of healthcare. Is that what you are basically 
saying?
    Mr. Orszag. Not just consumers, but employers and other 
actors. But, yes, consumers. The evidence does suggest that 
people respond to higher cost sharing, for example, and that 
does reduce healthcare expenditures and the evidence suggests 
it reduces it in a way or reduces them in a way that does not 
actually harm health outcomes.
    Mr. Ryan. Okay. So what would the total spending as a share 
of GDP be if we just took the current baseline and extended it 
without this assumption that consumers are going to--if we just 
do a static analysis and carry that out, what would the share 
of GDP be then?
    Mr. Orszag. By the end of the 75-year window, healthcare 
would be a hundred percent of the economy and then it would be 
there thereafter.
    Mr. Ryan. And in 2050?
    Mr. Orszag. It will take me a second.
    Mr. Ryan. Mid century, I am just kind of curious.
    Mr. Orszag. Just give me a second. It is about 50 percent 
or so if I drew the line straight.
    Mr. Ryan. So this projection, and the trustees as well are 
using some form of a dynamic analysis, which is consumers are 
rational, price-sensitive actors, they and employers as well 
are going to make adjustments when they have exposures 
basically to read into this baseline?
    Mr. Orszag. CBO's analysis and other official analysis 
always take into account some microeconomic response to shifts 
in the world. The word dynamic is sometimes used to apply to a 
macroeconomic response and that is not present in these 
projections.
    Mr. Ryan. Let me ask you. Since we obviously compare, 
percent of GDP is probably the most accurate measurement we 
use. If you take a look at the OECD, which has done a lot of 
work on this, comparing all industrialized nations, they 
generally show that countries with higher total government 
receipts relative to their GDP, which is sort of a proxy for 
the government's footprint on the economy, tend to have slower 
real economic growth.
    Over the past decade, the five countries with the highest 
share of government receipts average about 2.7 percent of real 
GDP growth. The five countries with the lowest share of 
government receipts average 3.6 real GDP growth.
    What do you think about those findings and do these data 
tell you that if we aim to balance the budget, we should do so 
at a lower, rather than a higher level of taxes as a percentage 
of GDP?
    Mr. Orszag. Couple comments. First, cross-country 
comparisons are often very difficult, so I would just urge a 
little bit of caution in those.
    Mr. Ryan. But that is why you go to percentage of GDP is 
the most accurate apples-to-apples comparison; is it not?
    Mr. Orszag. It is the most accurate comparison. But even 
when you are doing shares of GDP, tax systems can vary, the 
types of revenue that is used to finance government spending 
can matter. There are lots of things that can matter.
    What I would say is it is clear that first the path that we 
are on with the exploding government debt path, especially 
under the alternative fiscal scenario, imposes a very large 
cost on the economy.
    Secondly, that in terms of the mix between spending and 
revenue, the results do depend sensitively on the types of 
spending or the types of revenue, but generically it is true 
that reductions in spending usually involve lower macroeconomic 
consequences than increases in revenue. But the details matter 
a lot and that is not a general conclusion that is applicable 
in all settings.
    Mr. Ryan. Okay. Well, your predecessor, Doug Holtz-Eakin, 
used to say that government spending, whether it is paid 
through taxes or borrowing, drains economic resources that 
could otherwise promote growth.
    Do you generally agree with that view?
    Mr. Orszag. It depends on the type of spending.
    Mr. Ryan. Okay. So you have a distinction with that view.
    One more question. Your current law revenue baseline 
assumes that the 2001 and 2003 tax laws expire, the AMT expands 
under current law. That is the revenue baseline that is being 
used for the current PAYGO rule.
    Just to be clear about the effects on the average taxpayer 
under the current PAYGO system, under the current baseline we 
use, what happens to the child tax credit, which is at a 
thousand per child?
    Mr. Orszag. After 2010, it falls back to its previous level 
of $500.
    Mr. Ryan. What is the estate tax? What happens with the 
estate tax?
    Mr. Orszag. The estate tax reverts to its previous level of 
a threshold of a million dollars with a 55 percent tax rate.
    Mr. Ryan. A million or 600,000? Is it a million? I thought 
it was 600.
    Mr. Orszag. We will get back to you.
    Mr. Ryan. Okay. What happens to cap gains and dividends?
    Mr. Orszag. They revert back to their previous levels also.
    Mr. Ryan. And then what percentage of taxpayers would 
ultimately be paying under the AMT under this baseline?
    Mr. Orszag. At the end of the 75-year window, you would 
have 75 percent of taxpayers on the AMT.
    Mr. Ryan. Or households?
    Mr. Orszag. On the AMT.
    Mr. Ryan. All right. Well, I appreciate the generosity of 
the Chairman on the time. Thank you.
    Chairman Spratt. Thank you, Mr. Ryan.
    Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman
    First, two announcements. I would invite any colleague who 
is alarmed by what Peter has told us to cosponsor the so--
called ``Cooper-Wolf Safe Commission Act,'' a bipartisan 
commission to present the next President with a plan for 
solving some of these problems so we can take action. The bill 
number is H.R. 3654. I would invite your participation.
    Also, on December 15th, in just a few days, the U.S. 
Treasury Department will be issuing a financial report for the 
United States government, the only audited numbers we face.
    And the Federal employees in the room may be interested to 
know that still when Peter says that the deficit is only 
slightly above one percent of GDP and we should acknowledge 
that that does not include things like the retirement and 
health liabilities of our own Federal employees, but the 
financial report, the document that is about to come out in a 
few days does address those things, situations that would be 
criminal violations if they occurred in the private sector, but 
we continue to allow this to go on at this level.
    I am glad, Mr. Chairman, you are having this hearing. To 
me, these are the most important issues we face because they 
determine all other issues. They determine all defense 
spending. They determine all healthcare spending. They 
determine the future of America.
    And to me, the most important sentence that Peter used was 
when he said under any plausible scenario, our course is 
unsustainable. In Tennessee language, that would mean you would 
have to be a damn fool not to believe we are sinking fast here.
    Now, Peter cannot use such language. I can. But this is 
real stuff. And the Chairman may call it apocalyptic. Peter 
said under any plausible scenario, our path is unsustainable.
    So you use very erudite percentages of GDP, things like 
that. You are remaining true to your calling and your 
profession. That is great.
    Can you quantify some of this? What is 6.9 percent of GDP? 
How many billion dollars is that?
    Mr. Orszag. Today given an economy of about 14 or $13 
trillion, that would be north of $900 billion.
    Mr. Cooper. So close to a trillion dollars?
    Mr. Orszag. Right.
    Mr. Cooper. And this is a present value number we would 
have to have in the bank today earning interest to pay out the 
shortfall primarily in just a couple of healthcare programs?
    Mr. Orszag. Yes.
    Mr. Cooper. Okay. You also point out in your excellent 
testimony the cost of delay. If we act in 2008, that is a lot 
cheaper than acting in a later year.
    Mr. Orszag. Yes.
    Mr. Cooper. You used 2020. What is the cost of delay? What 
does each year of delay cost us?
    Mr. Orszag. Well, I could calibrate that in different ways. 
I guess delaying from 2020 to 2030 increases the reduction in 
spending by five percentage points. So each year of delay, 
roughly speaking, is another half a percent of reduction that 
is required. There are lots of ways of calibrating these.
    Mr. Cooper. But it is on the order of, if it is a half a 
percent of GDP today, that would be on the----
    Mr. Orszag. Well, that is spending. That is not GDP.
    Mr. Cooper. Okay. But hundreds of billions of dollars of 
cost per year of delay?
    Mr. Orszag. There is no question that each year of delay 
significantly adds to the cost of acting.
    Mr. Cooper. And total congressional discretionary spending 
for this year will be what, 900 and something billion dollars?
    Mr. Orszag. Something like that, yes.
    Mr. Cooper. So just the cost of delay will be a big 
percentage of the total work of Congress every year, just the 
cost of delay.
    I would like to explore with you too. It seems to me a lot 
of my colleagues do not realize that if you use the ship 
analogy, it is not whether we hit the iceberg, we have. The 
only question is, how fast the ship is sinking.
    And I think that we are not noticing some things. For 
example, the Medicare SGR fix. We patch that, year in, year 
out, but the U.S. Treasury Department has estimated a real fix 
for that would cost $5 trillion. That is a big number.
    AMT fix. We fix it, patch it year in, year out. A real fix 
for that is in the trillions.
    So we are not noticing the genuine cost of these problems. 
We are just patching it year in, year out, limping along, 
trying to get by, hoping people do not really notice. That to 
me is deliberate blindness.
    And I see, Mr. Chairman, my time is running out. I hope we 
can have time for a second round of questions. I thank you, Mr. 
Chairman.
    Chairman Spratt. I have the unpleasant duty of announcing 
that there are four votes pending, one of which is a 15-minute 
vote. We will keep going down until about three or four 
minutes, but let us move ahead. And then with the indulgence of 
our witness, we will come back as quickly as we can.
    Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. And, again, let me 
add my voice to the chorus of those thanking you for holding a 
very, very important hearing.
    Dr. Orszag, please forgive me. You had a lot of numbers and 
some very sobering concepts and projections here.
    Just to make sure I understand it, if we by 2050 under 
current baseline were attempting to balance the budget by tax 
increases alone, today I believe the figure is that we are 
taxing at roughly 18.7 percent of our economy, just what is the 
magnitude of the tax increase that would be necessary under 
your projections if we simply wanted to tax our way out of this 
problem?
    Mr. Orszag. Again, it would depend whether you did anything 
before that. But if you did not do anything before that, the 
tax share of the economy would have to be somewhere between 28 
and 42 percent.
    Mr. Hensarling. Between 28 and 42 percent----
    Mr. Orszag. Right.
    Mr. Hensarling [continuing]. From roughly 18.6, 18.7 
percent of the economy?
    Mr. Orszag. That is correct. And that difference depends on 
what you are doing to the revenue code and a few other things 
in between now and then.
    Mr. Hensarling. So if we split the difference between the 
28 and 42 percent, what we would end up concluding is that, 
would we not conclude, that from 18 to, say, 36 that we would 
have to roughly double the level of taxation on American people 
if we simply wanted to tax our way out of this problem? Is that 
a fair conclusion?
    Mr. Orszag. Yes.
    Mr. Hensarling. We often talk about billions and trillions 
here. But if you were to look at the tax burden on the average 
American family making median income, can you translate that 
into a number as far as the tens of thousands of dollars of tax 
increase that may go to a family making median income? Do you 
think you could do a back of the envelope calculation there?
    Mr. Orszag. Sure. A married couple with two kids currently 
pays an income and payroll taxes of approximately 16 percent of 
their income. Their income is about $90,000, so that is what, 
14,000 or so in taxes. And you can then scale that up if you so 
choose.
    Mr. Hensarling. Okay. Thank you. Dr. Orszag, I believe that 
what I am hearing from you is that our greatest fiscal 
challenge does come from entitlement spending, principally the 
healthcare component of that entitlement.
    Mr. Orszag. Yes, sir.
    Mr. Hensarling. Is that a fair assessment? Recently in this 
particular Congress, we have now passed H.R. 976, SCHIP; H.R 
2419, form ``Nutrition Bioenergy Act;'' H.R. 2669, ``Higher 
Education Access Act.'' There appear to be at least six to 
seven different acts that we passed that by my reckoning have 
actually added to the burden of entitlement spending. H.R. 976, 
127 billion; H.R. 2419, 20.8 billion over ten; H.R. 2669, 16.3 
billion over ten.
    Have you looked at the increases in entitlement spending 
that have been passed by this House and, if so, does your 
figure comport with my figure that we have just added to the 
burden over the next ten years of entitlement spending by 
$178.6 billion?
    Mr. Orszag. We have scored legislation that has passed the 
House. I have not added them together in the way that you 
apparently have.
    Mr. Hensarling. If we are just simply looking at the long-
term fiscal challenge of the nation, if this became law, have 
we just made the situation better or worse?
    Mr. Orszag. If what?
    Mr. Hensarling. If these acts become law. You say you have 
scored these. Do you know if you have scored them as adding to 
the entitlement burden or lessening the entitlement burden?
    Mr. Orszag. There are many things that have passed the 
House that increase spending, but are also offset, for example, 
through additional revenue. So the net budget impact typically 
is zero even though both spending and revenue are then higher.
    Mr. Hensarling. I see I am out of time. Thank you, Mr. 
Chairman.
    Chairman Spratt. Thank you, Mr. Hensarling.
    Mr. Becerra.
    Mr. Becerra. Dr. Orszag, thank you very much for your 
testimony and your sobering words.
    Let me ask. I know that during the depression, the great 
depression, we had any number of people in America who were 
destitute, having a difficult time, and that included people 
who were seniors, retired, no longer working, and in many 
cases, suffering worse than those who were of working age 
because they were beyond their years and had to make ends meet 
without any particular financial support.
    President Roosevelt enacted Social Security to address 
those dire circumstances that so many older Americans faced. 
And to this day, Social Security has continued to pay benefits, 
never missing a day of paying benefits to people, and I think 
continues to pay benefits beyond the 75-year threshold with 
some adjustments all the way to the hundred percent benefit 
that most people expect.
    Medicare, which came into being in the mid 1960s, was also 
an effort to try to address the problems that seniors were 
having in coping with the cost of healthcare in their 
retirement so that their entire pension would not be used to 
pay for their healthcare in their golden years.
    These are programs that have become essential, I think, to 
most seniors living in dignity in their retirement. There are 
some pretty scary numbers that we see.
    I want to make sure I understand something. You are not 
saying we should eliminate Social Security and Medicare, are 
you?
    Mr. Orszag. No. I did not use the word should on anything 
other than you should act to avoid this problem.
    Mr. Becerra. And so the crisis here is in our expenditures 
and managing our expenditures. And you had some interesting 
charts at the end that talked about what we have to do to try 
to manage the cost of healthcare, whether it is in the public 
sector, meaning Medicare or Medicaid, which is healthcare for 
low-income individuals, including many seniors, or whether it 
is in the private sector through whatever the marketplace 
offers people for individual insurance or otherwise.
    A question for you. I know that other developing countries 
have far lower cost in their healthcare for their people and 
unlike the U.S. where we have some 47 million who do not have 
health insurance, they are able to provide a hundred percent 
coverage to their people for healthcare access. In many cases, 
we find the standard of living higher in some of these 
industrialized countries, principally in Europe, who offer 
healthcare and other social benefits to their population.
    What are we doing wrong on healthcare that they are doing 
right that their costs in some cases are lower by a factor of 
50 percent? And can you give us any comments about what we 
should be doing to try to reduce our cost?
    Mr. Orszag. First note that on that chart I showed you with 
parts of the United States, there are parts of the United 
States, Minneapolis, for example, that are delivering 
healthcare at costs comparable to many of those comparison 
countries in a quality that is also comparable. So there are 
parts of the U.S. that are delivering healthcare in a way that 
seems relatively good compared to other systems.
    I would say the fundamental problem in the nation's 
healthcare system is that we have financial incentives, strong 
financial incentives for more care rather than better care. And 
that is on both the provider side and the consumer side.
    And until we spend more time and effort figuring out what 
is better care and then aligning financial incentives so that 
we are delivering better care rather than more care, we are 
going to be spending more than we need to to obtain the results 
that we hope for.
    Mr. Becerra. Thank you. Turning now to the debt because I 
want to make sure that as we focus on Social Security, 
Medicare, Medicaid, we do not lose track of the size of the 
debt, the interest payments we make on the debt that we have.
    On Social Security one last point. At least 40 percent of 
today's seniors would be living in poverty if they did not have 
Social Security. Today the poverty rate for our seniors is 
about ten percent. So some 13 million seniors are lifted out of 
poverty simply by the fact that we have provided their health 
and retirement benefits into the future through programs like 
Social Security and Medicare.
    But on the debt, I know over the last five to seven years, 
the size of the national debt has skyrocketed. And I know that 
part of that is due to the fact that we have had tax cuts from 
the President that have been unpaid for, in essence paid for by 
deficit spending, by borrowing.
    If we cannot sustain this level of debt, can we sustain 
programs that continue to go through this Congress, whether tax 
cuts or spending programs, that are not paid for so that we try 
to keep a balance to our budget?
    Mr. Orszag. I guess my response is the logic of the PAYGO 
rules that you have adopted is to avoid making the problem 
worse, in the face of this very substantial long-term fiscal 
problem that you already have. And that is what PAYGO does. It 
at least avoids digging the hole deeper in the face of an 
already substantial long-term hole.
    Mr. Becerra. Thank you.
    Thank you, Mr. Chairman.
    Chairman Spratt. The Committee will stand in recess pending 
the votes on the floor at which point, we will resume. We 
appreciate it.
    [Recess.]
    Chairman Spratt. I believe the last member to pose question 
was Mr. Becerra. Mr. Conaway is not here, so we will go to Mr. 
Doggett.
    Mr. Doggett. Thank you so much for your testimony. I 
realize that you are here more in the diagnosis business than 
the prescription of treatment, but I want to talk a little bit 
since you have been discussing healthcare beginning there, 
focusing on what the effect of some policy alternatives would 
be on the scenario that you have described.
    Now, a number of our colleagues for years followed the 
approach advocated by former Speaker Newt Gingrich that one 
solution was to let Medicare wither on the vine.
    If we take that approach and let Medicare and Medicaid 
perhaps wither on the vine, will that solve our healthcare 
problems in the country or will it simply shift the burden 
greater on to individuals if we significantly limit Medicare 
and Medicaid?
    Mr. Orszag. Well, again, it depends, I suppose, what one 
means by withering on the vine. CBO has previously noted that, 
for example, if all you did was tried to reduce payment rates 
in Medicare and then sustained that out over time that what you 
would likely wind up doing is creating significant access 
problems under the programs because hospitals and doctors would 
be less likely to treat or be willing to treat Medicare and 
Medicaid patients.
    And so ultimately we need to get at that excess cost 
factor, the rate at which healthcare costs are growing, and 
that will require the types of things I mentioned before, 
additional information and changes in financial incentives both 
under Medicare and Medicaid and in the rest of the health 
system.
    And I think it is unrealistic to think that you are going 
to just clamp down on Medicare payments, for example, and then 
sustain that out over a very long period of time without having 
the problem crop up somewhere else.
    Mr. Doggett. We have to focus not just on the whole patient 
but the whole healthcare system in looking at the future of 
health and our ability to sustain that system.
    Mr. Orszag. And in particular, one needs to be thinking 
about the effect of policy changes on Medicare and Medicaid in 
terms of what their impact is on the rest of the system.
    So, for example, when we move to DRG payments, a fixed 
payment per inpatient hospitalization in Medicare, the 
incentive was to then shorten hospital stays for Medicare 
patients. We wound up shortening hospital stays for all 
patients because that changed the way hospitals practiced 
medicine.
    One needs to be thinking about those sort of follow-on 
effects which are crucial to the sustainability of policy 
changes.
    Mr. Doggett. And realizing we cannot solve all of these 
problems with just one proposal, there is no panacea.
    This year, as you know, I serve on the Health Subcommittee 
on Ways and Means dealing with the Medicare portion of this. As 
we have tried to contain cost so that we had what we called our 
CHAMP Bill that you are familiar with and your office would 
have been involved in scoring, we applied PAYGO, we paid for 
all of it, and we did that by addressing where we saw some of 
the most excessive cost, which was in the Medicare Advantage 
Program, and by trying to deal with other particular cost 
issues such as the way kidney patients are handled, such as the 
way oxygen is handled.
    Every one of those efforts that we made to contain cost has 
run into a buzz saw of objection. So it is not as if this 
Congress, particularly the House, has not already attempted to 
deal with some of the cost issues.
    Let me ask you first, over the short run and for that 
matter the long run, do you believe that maintaining our PAYGO 
rules and ensuring when we are dealing with changes in the 
Medicare system that we pay as we go, when we make changes in 
our tax system that we apply PAYGO? Is that important to 
addressing both the short-term and the long-term concerns that 
you have raised in your testimony today and last week?
    Mr. Orszag. Again, PAYGO helps to ensure that the problem 
does not get worse and so it avoids digging the hole deeper.
    Mr. Doggett. And in terms of trying to get out of the hole, 
what are some of the alternatives? We have discussed 
comparative effectiveness on prescriptions. We have looked at 
that and more result-oriented medicine for physicians.
    Are there proposals that you see out there we might begin 
to implement sooner rather than later, might do additional 
demonstration projects in to see if we can find a way to 
contain healthcare costs without significantly reducing either 
the quality of service or the access of those services to 
Medicare recipients?
    Mr. Orszag. Let me say two things. First with regard to 
demonstration projects, I would urge policy makers to consider 
whether the design of the demonstration projects that CMS 
currently does is actually ideal for learning anything about 
what works and what does not. I think a much greater emphasis 
on designing the demo projects in a way that actually then 
teaches us about what works and what does not could prove to be 
significantly beneficial.
    Beyond that, I would also say CBO during 2008 will be 
spending significant resources internally on developing a 
health options volume for you so that we will march down all 
the things that people talk about, care coordination, disease 
management, health information technology, and so on and 
provide some insight into our thinking on what dials can be 
turned in order to generate budgetary effects.
    So I do not have a full answer for you right now, but one 
of the reasons that I am bulking up our health staff is to be 
able to provide better answers to you and better options for 
you next year.
    Mr. Doggett. Just one more, if I may. Yesterday in the op-
ed that you had in the Wall Street Journal, which I would hope 
could be made a part of our record on this, you commented that 
many analysts believe that significantly constraining the 
growth of costs for public programs while maintaining broad 
access to hospitals and doctors under them will be possible 
only in conjunction with slowing costs in the health sector as 
a whole, much as what you said in response to my earlier 
questions.
    Could you just elaborate a little more about the possible 
adverse consequences of trying to constrain growth in the 
public sector health programs like Medicare and Medicaid 
without slowing healthcare costs economy-wide?
    Mr. Orszag. Yes. Again, the objective has to be that when 
you try to slow growth in Medicare and Medicaid, you then also 
achieve slowing of growth in the rest of the health system and 
thinking about that sort of follow-on effect.
    In the absence of that, if you just clamp down on the 
growth rate and payment rate, for example, in Medicare, and 
payment rates in the rest of the health system continue to grow 
unabated, doctors and hospitals will look at the compensation 
for treating a Medicare patient versus other patients and say I 
am not that interested in treating Medicare patients, for 
example.
    Mr. Doggett. Thank you very much.
    [The Wall Street Journal article referred to follows:]

      [From the Wall Street Journal, December 12, 2007, Page A19]

                       The Biggest Budget Buster

                           By Peter R. Orszag

    The nation's economic outlook may look troubling in the short run, 
but these difficulties pale beside the economic consequences that will 
follow if we don't address the nation's long-term fiscal gap--or the 
prospective mismatch between projected spending and revenues.
    The fiscal gap does not arise, as many believe, primarily from the 
coming retirement of the baby boomers. Rather, the rate at which 
health-care costs grow will be the primary determinant of the nation's 
long-term budget picture.
    A congressional hearing tomorrow will focus on new long-term budget 
projections from the Congressional Budget Office. CBO projects that 
under current law, Federal spending on Medicare and Medicaid measured 
as a percentage of gross domestic product will rise to 12% in 2050 and 
almost 20% around 2080 from 4% today. The bulk of that projected 
increase arises from steadily growing health-care costs per 
beneficiary.
    The aging of the population, although a less important factor, will 
exacerbate the fiscal pressures created by rising health-care costs. 
For example, largely reflecting demographic changes, spending on Social 
Security in 30 years will increase to 6% from about 4% of GDP today, 
and then roughly stabilize thereafter.
    Such increases in spending associated with both aging and increased 
health-care costs--unless matched by significant reductions in other 
spending or increases in revenues--would ultimately create outsized 
budget deficits that would raise government debt to unprecedented 
levels.
    Even if substantial future budget deficits could be financed by 
issuing additional debt, they would seriously harm the economy by 
reducing national saving and national income. Averting such economic 
damage will ultimately require some combination of less spending and 
more revenues than what is now projected.
    The bottom line is that while we need to address the effects of the 
coming retirement of the baby boomers and the projected imbalance in 
Social Security, we have to pay even more attention to the health-care 
costs that exert the dominant influence on our fiscal future. Policy 
makers will face both challenges and opportunities in trying to reduce 
these costs.
    Over long periods, the cost growth per beneficiary in the Medicare 
and Medicaid programs has tracked cost trends in private-sector health-
care markets. As a result, many analysts believe that significantly 
constraining the growth of costs for the public programs while 
maintaining broad access to hospitals and doctors under them will be 
possible only in conjunction with slowing cost growth in the health 
sector as a whole. The interactions between Medicare and Medicaid and 
the rest of the health system can complicate long-term efforts to 
reduce costs.
    But it's too soon to conclude that the fiscal picture is hopelessly 
dismal. There remains the promising possibility of restraining health-
care costs without incurring adverse health consequences. It may even 
be possible in some cases to reduce cost growth and improve health at 
the same time. Costs per beneficiary in Medicare, for example, vary 
substantially across the U.S. for reasons that cannot be explained 
fully by the characteristics of the patients or price levels in 
different areas.
    High-spending regions do not generate better health outcomes, on 
average, than the lower-spending ones. When health care at some of the 
nation's leading medical facilities costs half as much as care at other 
top-rated facilities for the same types of patients, something must be 
wrong with the system. Some academic research suggests that national 
costs for health care can be reduced by perhaps 30% without harming 
quality.
    Understanding the reasons for such differences and finding 
effective ways to reduce them while ensuring high-quality care will not 
be easy. Potentially promising approaches include generating more 
information about the relative effectiveness of medical treatments, and 
enhancing the incentives for providers to supply, and consumers to 
demand, better care, rather than just more care.
    Moving the nation toward a more efficient health system inevitably 
will be a process in which policy steps are tried, evaluated and maybe 
reconsidered. Beginning that arduous process now is essential to 
securing the nation's long-term economic future.

    Mr. Orszag is the director of the Congressional Budget Office.

    Chairman Spratt. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Dr. Orszag, we are trying to deal with this AMT problem and 
it seems to me that a lot of the AMT problem was predictable 
because we passed the tax cuts knowing that there would be an 
AMT problem, and that was part of the scheme.
    You pass a trillion dollar tax cut and you phase it in, 
phase it out, do not pay for the AMT, figuring that when the 
time comes, we will fill in the gaps. We put in a down payment 
of about 300 billion on the tax cut and now we are kind of 
filling in the gaps, the AMT being one.
    If the tax cuts were to expire, how much of an AMT problem 
would we have?
    Mr. Orszag. The AMT problem is significantly less extreme 
in the absence of the 2001 and 2003 tax legislation. And the 
reason again is that people wind up on the AMT when their AMT 
liability is higher than their regular income tax liability. So 
as you reduce regular income tax rates, more people are shifted 
on to the alternative minimum tax.
    Mr. Scott. So we could equalize it when we get there and 
make sure that if we have a tax cut, it is paid for without the 
AMT.
    I notice that your analysis did not include interest on the 
national debt. That is one of the fastest-growing parts of the 
Federal budget. It is already what, a couple of hundred billion 
dollars.
    And according to the chart on your testimony at page five, 
by 2030, it goes from 1.7 to 4.8 percent under the alternative, 
page five, under the alternative fiscal scenarios, 2007 is 1.7; 
2030 is 4.8 percent. It triples the interest on the national 
debt which would put it in the 700, 800 percent range.
    How do you do a budget? In your charts on page three, 
shouldn't interest on the national debt be part of that chart?
    Mr. Orszag. You know, you could always add interest 
spending on top of so-called primary spending, that is 
noninterest spending. The reason that analysts sometimes or 
often examine primary spending is that is what drives the debt 
dynamics.
    So if noninterest spending exceeds revenue, you wind up 
with rising debt and vice versa. And the debt dynamics just 
follow. You can present the figures in terms of overall 
government spending. And as you note on table 12, that is what 
we do.
    Mr. Scott. Well, on table two, you also show that the kind 
of so-called primary, we actually have a surplus, but you did 
not have interest on the national debt. But since you have run 
up interest on the national debt, we have actually a deficit, 
so we are adding to the debt.
    Mr. Orszag. Correct.
    Mr. Scott. So I mean, it is not something you can ignore. 
As a matter of fact, it is the first thing you have got to pay.
    You just finished answering a healthcare question where if 
we fix Medicare and Medicaid, others will follow. I have a 
question of kind of who is following who.
    The healthcare problem is not a Medicare and Medicaid 
problem. It is a general problem. Everybody's healthcare, 
everybody in the private sector is going up.
    Is there any credible way to fix to Medicare and Medicaid 
growth curve without doing something about healthcare 
generally?
    Mr. Orszag. Again, only to the extent that the changes you 
make to Medicare and Medicaid spill over and also help to 
constrain growth in the rest of the health sector will those 
changes in Medicare and Medicaid ultimately be sustainable 
because if not, you will create huge access problems.
    Mr. Scott. Who is driving what? I mean, it seems to me the 
private sector healthcare drives the cost of Medicare and 
Medicaid. And as you suggested, if it gets too far out of 
whack, people just will not take Medicare and Medicaid. And you 
have had that scenario plenty of times.
    Mr. Orszag. One of the complexities in health policy is 
these complicated interactions between the public and private 
parts of the system. So it goes in both directions.
    Mr. Scott. Okay. Well, what is the experience and cost 
control in Medicaid and Medicare? Is it better or worse that 
the private sector?
    Mr. Orszag. Over long periods of time over the past three 
to four decades, excess cost growth, which is the best way of 
measuring these things in Medicare and Medicaid, have closely 
tracked cost growth in the rest of the health system. So on 
average, they have been growing at about the same rate.
    Mr. Scott. Is there any way to get hold of it without going 
to a single payer plan?
    Mr. Orszag. Any way to get hold of what?
    Mr. Scott. The growth in healthcare costs.
    Mr. Orszag. Again, I think the answer to that is yes. There 
are different models. The fundamental problem that we face is 
that we lack information, adequate information on what works 
and what does not. And we have financial incentives to provide 
more care both for providers and consumers rather than better 
care.
    And that combination of a lack of knowledge and then 
financial incentives just for more care rather than more 
efficient care or better care leads to rapid growth in spending 
and also to spending levels that are higher than they need to 
be to deliver health quality of whatever level.
    Chairman Spratt. Maybe we should give people some kind of 
bonus if they retire in Minneapolis instead of Miami.
    Mr. McHenry.
    Mr. McHenry. Thank you, Mr. Chairman.
    Dr. Orszag, I appreciate your editorial from yesterday and 
I know it has been referenced. But is there such thing as a 
prohibitive tax rate, a tax rate that reduces productivity, 
stagnates the economy? Is there such thing as a prohibitive tax 
rate?
    Mr. Orszag. I think everyone would agree a hundred percent 
would have a very negative effect on incentives.
    Mr. McHenry. Okay. But short of that.
    Mr. Orszag. Sure. The question becomes where the line is. 
And as tax rates rise, especially marginal tax rates, the 
distortions to incentives become more severe. I do not know 
that I can give you a, you know, cliff where the world falls 
apart as opposed to it just becoming gradually more severe.
    Mr. McHenry. But a jump in tax rates. For instance, taxes 
that may go up 50 percent, does that have a harmful effect on 
the economy and productivity?
    Mr. Orszag. An increase in marginal tax rates does harm 
incentives and does negatively affect productivity. On the 
other hand, one does need to think about what that is 
financing. And to the extent it is reducing a deficit, there is 
a corresponding economic benefit from eliminating that deficit.
    And actually CBO's analysis suggests that the most 
important thing is to get rid of the deficit and exactly how 
you do it is typically of less consequence than the economic 
impact of allowing the kind of runaway deficits that are 
present under the alternative fiscal scenario.
    Or another way of putting it is you typically do not get 
effects on future national income by 2050 of 25 percent, which 
is the impact of the additional debt under the alternative 
fiscal scenario from any plausible way of trying to close that 
gap.
    Mr. McHenry. Okay. Alright. So my next question was going 
to be about the deficit, but you have already touched on that 
very good.
    But going to the debt, you know, we know that the deficit 
has an enormous multiplying effect on the debt. We are adding 
to the debt every day when we have a deficit, thereby if we 
balance the books, the debt scenario long term is less harmful.
    What is the effect of long-term debt, of our long-term 
national debt?
    Mr. Orszag. Yes. Additional debt has a harmful effect both 
on the accumulation of productive investment at home, that is 
like investment in computers and physical plants and equipment, 
and also in terms of how much we borrow from abroad and the 
liability that we then owe to foreign creditors.
    Mr. McHenry. Well, certainly I know that is fact. But in 
terms of productivity, what does our tax structure, our 
structural deficit, and our debt do to productivity in this 
country and what can we do to actually increase productivity 
and investment in increasing productivity?
    Mr. Orszag. The best single thing that we can do to 
increase future national income and, therefore, productivity 
and income growth between now and the future is to increase our 
national saving rate. And part of that has to do with improving 
the nation's fiscal balance, the Federal, state, and local side 
of things.
    Part of it also has to do to encouraging private saving. 
And I think I mentioned at a hearing last week there is a 
growing body of research about what works to get households to 
save. And a lot of it has to do with making it easy and 
automatic for them to do so.
    Mr. McHenry. Easy and automatic. And perhaps eliminating 
the Tax Code of disincentive that we currently have on savings.
    Mr. Orszag. There is some effect from----
    Mr. McHenry. Tax policy.
    Mr. Orszag [continuing]. After tax rates, a return in tax 
policy. The research that I am familiar with suggests a far 
larger, more dominant factor really has to do with ease and 
simplicity, so things like being automatically in a 401(k) plan 
unless you opt out, trying to explore whether that is possible 
in an IRA setting, and other things like that so that 
households are doing what they want to do automatically and it 
is easy for them to do so.
    Mr. McHenry. But certainly as secondary, you would have to 
admit it is tax policy?
    Mr. Orszag. The rate of return and the after tax rate of 
return also does affect saving, yes.
    Mr. McHenry. Okay.
    Mr. Orszag. The question is just the magnitude, but, yes.
    Mr. McHenry. The magnitude is the question?
    Mr. Orszag. Right.
    Mr. McHenry. Okay. Well, is there such thing as raising 
taxes so much that Federal revenue will go down? For instance, 
if we raise taxes in such a large way that the economy 
stagnates and thereby more people are on unemployment and not 
working and thereby not paying taxes, is that a prospect that 
we have to be concerned about?
    Mr. Orszag. That is a theoretical possibility. I think all 
of the available evidence and analysis suggest we are not 
currently anywhere close to that threshold.
    Mr. McHenry. Well, we are not currently, but you would have 
to say if we increase taxes in a massive way, that is one of 
the possibilities?
    Mr. Orszag. Again, I would say it is a theoretical 
possibility, but----
    Mr. McHenry. Theoretical possibility?
    Mr. Orszag [continuing]. We are not close to that in 
reality currently.
    Mr. McHenry. Currently. But then again, we have not raised 
taxes currently and the Tax Code is set in place for another 
two years.
    Mr. Orszag. That is correct.
    Mr. McHenry. Thank you.
    Chairman Spratt. Mr. Etheridge from North Carolina.
    Mr. Etheridge. Thank you, Mr. Chairman.
    Thank you for being here and thank you for your patience 
this morning when we were running about.
    Let me make a quick statement and ask a question that gets 
back to our long-term as it relates to the cost of healthcare.
    But our gross national debt now is what, about a little 
over nine trillion roughly?
    Mr. Orszag. Gross Federal debt, yes.
    Mr. Etheridge. Alright. Since 2001, privately-held debt has 
grown by about 1.8 trillion, close to $2 trillion. Sixty-eight 
percent of that borrowing has been from foreign countries or 
foreign sources outside the United States which means since 
2000, the Federal Government has borrowed $1.2 trillion from 
foreign sources, China, Libya, Saudi Arabia, on and on, 
whomever.
    The Federal Government since 2000 has sent $709 billion 
plus or minus a few billion, I guess, abroad in the form of 
interest payments.
    Now, my question is this, because that interest would have 
built roughly 12,000 new schools in this country, a lot of 
health clinics for our veterans. But my issue is this. As you 
accumulate debt, and part of this debt is for a host of 
reasons, some of it was tax cuts, some of it was spending, 
whatever, as you accumulate that, you send that revenue 
offshore. That bond or debt is held for a long period of time 
and it continues to grow.
    Can you give me any indication of what that does to our 
ability to add to the gross domestic product in this country as 
you are sending dollars overseas? Historically when we sold 
bonds, we sold them to ourselves which internally helped 
growth.
    Mr. Orszag. I guess what I would say is that running 
deficits does impose adverse consequences on the economy. You 
can try to measure that in various different ways. And I know 
that interest payments might be a salient way of doing it.
    But the fundamental economics of it is that Federal 
deficits and the accumulation of Federal debt both crowds out 
investment here and also increases borrowing from abroad both 
of which reduce future national income, either because we are 
less productive in the future, because we do not have as many 
computers, or because we owe liabilities to foreigners and so 
we have to share some of the returns to our computers with 
foreign creditors.
    Mr. Etheridge. So I guess I am trying to get a feel, and 
you might not be able to answer this one today, is debt in 
itself has a weight. But does that weight vary differently 
whether it is handled internally or externally?
    Mr. Orszag. Yes. Not to our first approximation. And, in 
fact, some economists argue that given the history of our 
foreign borrowing that we have been able to effectively pay a 
lower rate of return through changes in the dollar and other 
factors to foreign creditors.
    I would say to a first approximation, the economic 
consequences of running a Federal deficit of X percent of the 
economy are roughly similar regardless of whether those debts 
are domestically financed or externally financed.
    Mr. Etheridge. Okay. Let me move to the healthcare piece 
very quickly in the time left.
    My question, we have been talking about Medicare and 
Medicaid and the growth and we are all aware that we have got 
to deal with it. But I guess my question is, why is the cost of 
healthcare in America rising so much more rapidly than in some 
of the other industrialized nations who really do not expect a 
comparable increase and what are the policy implications in 
other countries? Why are they so different than what they are 
here in the United States?
    Mr. Orszag. Healthcare costs are growing in countries 
across the globe, including in those European countries that 
are often the basis of level comparisons. It is true that the 
United States seems to be growing somewhat more rapidly, for 
example, in terms of excess cost growth, although not extremely 
more rapidly.
    And I think a lot of the reason probably does have to do 
with the speed with which we adopt new technologies and then 
diffuse them. We seem to adopt new technologies more rapidly in 
healthcare and then have them spread, even when again their 
value is not entirely clear in certain settings, more rapidly 
and more widely than in other countries. And partly as a result 
of that, we do wind up somewhat higher.
    But, again, for example, if our average excess cost growth 
is close to 2.0 to 2.5 percentage points per year over the last 
three decades, there are lots of other countries that are, you 
know, between one and a half and two.
    Mr. Etheridge. Okay. All right. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Chairman Spratt. Mr. Berry.
    Mr. Berry. Thank you, Mr. Chairman, and thank you for 
holding this hearing.
    Dr. Orszag, we appreciate you. I do not know how you can 
remember all that stuff, but I admire you for doing it.
    Mr. Orszag. Thank you.
    Mr. Berry. And even though I do not like the answers you 
give us sometimes, I think you are honest about it and I 
appreciate that very much.
    I sit in these meetings day after day, hour after hour and 
hear these discussions. Now, this morning has been a little bit 
different because we talked about healthcare a little bit. But 
generally the discussion is completely centered on tax rates 
and interest rates.
    We had along with you a couple other fellows here the other 
day that are supposed to be sure enough whiz bangs about all 
that stuff. And I have no doubt that they are. I am not making 
any criticism of them.
    And as we go through this discussion, it is like all you 
have got to do to create an economy is to either change the tax 
rate or the interest rate and all of a sudden, jobs and economy 
just start bubbling up out of the ground or falling from the 
sky or they are coming from somewhere that I do not really 
fully understand.
    If we totally eliminated Social Security, and Social 
Security is a program where people do save their money. They 
contribute their own money and their employers contribute money 
to a retirement fund. Social Security is not a gift from the 
government to the people. It just supposedly manages this trust 
fund so it can pay out the benefits to these people at such 
time when they are either qualified for it or need it.
    But if we totally eliminated it, we still would not close 
the fiscal gap that we have, it would not help a whole lot. We 
would put a lot of elderly people into poverty if we were to do 
that.
    If we totally eliminated nondefense discretionary spending, 
we could again close the gap. It would not completely close it, 
but it would make a big difference.
    What would happen to education and infrastructure in this 
country? What would happen to our economy if we did both those 
things or either one of those things?
    Mr. Orszag. Well, you are asking me what would happen if we 
eliminated Social Security?
    Mr. Berry. Yes.
    Mr. Orszag. The fiscal gap would be about .6 or .7 
percentage points of GDP, so about a tenth of the overall 
fiscal gap smaller. And as you noted, especially, you know, 
current retirees and those nearing retirement who were counting 
on Social Security benefits would face fairly extreme hardship.
    Mr. Berry. And if we did away with nondefense discretionary 
spending, we would severely impact our ability to invest in 
education and infrastructure. Would you agree with that?
    Mr. Orszag. All the things that nondefense discretionary 
spending goes to, environmental protection, education, the FBI, 
what have you.
    Mr. Berry. Right. By contrast, who would get the most 
benefit if we extend what we describe on this side of the aisle 
as the Bush tax cuts and AMT relief and who will bear the 
burden of the debt if we do not pay it?
    Mr. Orszag. First with regard to the debt, we all bear the 
burden of an unsustainable fiscal path and precisely who among 
us bears more of the burden depends on how we ultimately 
address it.
    With regard to the tax legislation, as I have said before, 
the best way of measuring the impact on individuals and 
households from changes in the Tax Code is in terms of the 
percentage change in after tax income. And that percentage 
change under the 2001 and 2003 tax legislation is higher for 
high-income households than for low-income households.
    Mr. Berry. Is there value to our economy in having the 
cheapest and safest food supply of any nation in the world by 
quite a bit? It is not just a little percentage point or two. 
It is like 50 percent cheaper than any place else.
    Mr. Orszag. There is obviously a value to consumers to low 
prices on various products. Although, actually, I would say as 
a consumer myself, sometimes I wish the prices of nonhealthy 
food were a little higher to discourage me from eating them, 
but I will leave that aside.
    Mr. Berry. Yes, me too. I would probably pay the price 
anyway. I like it.
    Thank you, sir.
    Mr. Orszag. Thank you.
    Chairman Spratt. Mr. Ryan.
    Mr. Ryan. Thank you, Dr. Orszag.
    Since the big elephant in the room here is healthcare costs 
and price increases, let us talk about that for a second.
    Your last two charts show the geographic disparities and 
then you go a great length doing a great service talking about, 
you know, the bulk of the problem is in the costs.
    You also say that, I think, correct me if I am wrong, about 
30 percent of the costs could be wiped out without sacrificing 
quality.
    Mr. Orszag. Those are estimates from noted academic 
researchers. They are not CBO estimates. But there are 
established and well-known academics who believe the number may 
even be higher than that.
    Mr. Ryan. If we had more rational and accurate utilization, 
if we had the right alignment of preventative services, we 
could wrench out of the system about 30 percent if the system 
worked perfectly rationally, right?
    Mr. Orszag. That is the suggestion. That is the 
opportunity.
    Mr. Ryan. Is it your belief and intention that if 
legislation can be written in such a way that central planning 
could achieve that, do you believe that and do you intend to 
score that?
    Mr. Orszag. I do not know what you mean by central 
planning.
    Mr. Ryan. Yes. Do you believe that better direction of 
care, management of care, coordination of care by government, 
by HHS could achieve those efficiencies and is there a scenario 
in your mind in which you would score that as achieving such 
savings?
    Mr. Orszag. Two things quickly. One is that there is a 
significant potential. I do not know without seeing the exact 
policies that are proposed, you know, how much of that 
potential would be captured by a set of policies.
    But we have already said, and I will say again, expanding 
out the information on what works and what does not and then 
using both Federal policy and hopefully private insurance also 
to steer incentives towards the higher value care has 
substantial potential to reduce costs over the long term.
    Mr. Ryan. So to the extent that the Federal Government has 
more ability to impact those outcomes and decisions, there is a 
greater ability to achieve these savings?
    Mr. Orszag. The Federal Government has the ability by if 
you were to change the payment system so that you were not just 
on a fee-for-service basis, paying for more care, but rather 
paying for sort of fee-for-value, paying for higher value care 
to substantially affect the way medicine is practiced in the 
United States.
    Mr. Ryan. We are at 16 percent of GDP now for healthcare?
    Mr. Orszag. That is correct.
    Mr. Ryan. Given the rest of the economy functions in more 
of a free market way and in that there is greater and more 
accurate transparency on price and quality, more consumer 
activity involved and being sensitive to those things, would 
not we achieve savings if we brought those kinds of reforms to 
the healthcare sector, namely the kinds of transparency on 
price and quality and shopping incentives for consumers that we 
have in virtually all other aspects of the economy?
    Mr. Orszag. There would be some effect. And CBO, for 
example, in December 2006 put out a report on consumer-directed 
health plans and noted that a universal system of consumer-
directed health plans would reduce cost. But the report 
suggested it might reduce costs by about five percent, not as 
much as the potential that apparently exists.
    And I think that is because of the tension between the 
concentration of healthcare costs in catastrophic cases and the 
reluctance not to provide generous insurance against those 
catastrophic cases. Insurance, after all, is designed to help 
cover those high-cost cases and they account for such a large 
share of overall healthcare costs that the traction you get 
from additional cost sharing on the consumer side is often not 
as great as one would hope or expect.
    Mr. Ryan. What I am trying to get at is, is there a magic 
bullet on addressing the root cause of health inflation? Are 
there two or three things that can be done to go at the root 
cause of health inflation that we believe we can achieve real 
scoring if we do this?
    Mr. Orszag. I do not know that there are two or three magic 
bullets. I think financial incentives matter a lot. I think 
additional information and transparency matter a lot. The 
delivery system probably matters to some degree.
    We will be trying to provide more clarity to you as policy 
makers throughout next year in terms of the size of the dials 
on these various different things. But one of the frustrations 
that people often say, we would solve our long-term fiscal 
problem if we just locked you all in a room and did not, you 
know, give you any food and did not let you out until you 
solved the problem.
    On healthcare, I think you do not have the information you 
need to reach those kinds of decisions. For example, on Social 
Security, that would work if you were willing to do it. On 
healthcare, it is not clear to me that it would work.
    I have not seen, despite the fact that on Social Security I 
have authored and lots of people have authored all these plans 
and you have the tables----
    Mr. Ryan. Right. It is pretty easy. Money in, money out, 
move the dials. They are all finite and known.
    Mr. Orszag. I have not seen a credible plan to restore 
long-term actuarial balance to Medicare and Medicaid that has 
been sort of fully evaluated and that you could choose from if 
we locked you in that room. And in the absence of that, I do 
not know exactly what you would do in there.
    Mr. Ryan. Well, is not the problem with our healthcare 
entitlements one that it is basically reimbursing the American 
healthcare system? We are just paying for the healthcare system 
we have today and absent reforming the healthcare system we 
have today, you cannot solve the problem. With Social Security, 
it is a finite, containable program within itself.
    Mr. Orszag. Right.
    Mr. Ryan. So basically what we are saying is you cannot fix 
the Medicare and Medicaid problem if you do not fix the 
healthcare problem and that problem being the health inflation.
    Mr. Orszag. I agree with that. And I also think, therefore, 
the fundamental nature of our long-term fiscal problem, which 
is typically framed from the Social Security perspective in 
terms of like one generation paying more and what have you, is 
present for a small share of this long-term fiscal gap, but the 
fundamental political economy and the underlying analytics and 
the sort of difficulty is what you just described, how do we 
get healthcare cost inflation under control. And that is a much 
different set of challenges than the way that the long-term 
fiscal problem is typically framed.
    Mr. Ryan. Yes. I would argue doing more to bring the market 
reforms and market experiences that exist in the rest of the 
economy would probably be the best thing to tame health 
inflation. This is 16 percent of our economy, but it does not 
operate like the rest of our economy. It is virtually absent of 
real transparency on price and quality and consumers really do 
not have incentives to act on those things. They are either 
locked in their HMO, they are told where they have got to go 
to, and they cannot shop because they do not have the 
information anyway.
    Chairman Spratt. Will the gentleman yield? I think you just 
put your finger on the conundrum, that is what you described is 
not a true market situation and, yet, you are proposing a 
market solution to it. You described something that is not a 
real market because consumers are not----
    Mr. Ryan. That is right.
    Chairman Spratt [continuing]. Active participants.
    Mr. Ryan. It is not a true functioning free market right 
now.
    Chairman Spratt. And, yet, you are saying that the best 
solutions are market solutions.
    Mr. Ryan. Yes, because they are absent from the system 
today.
    Chairman Spratt. Well, that means you have got to build a 
market completely here that does not exist in terms of 
classical economics.
    Mr. Ryan. Eighty-four percent of the economy functions in a 
basic free market system, transparency on price, transparency 
on quality, and survival on business based on those metrics. 
Consumers will move their feet based on price and quality. 
Competitors and producers have to compete on those metrics. 
Healthcare you do not.
    And so my point is if we bring those kinds of basic market 
fundamentals to healthcare, I think we can go so much farther 
down the road in taming health inflation without sacrificing 
quality, in fact promoting quality, and wrenching out that 30 
percent waste.
    Rather than sitting in a Committee in Washington or 
bureaucracy down the street and trying to direct how the system 
ought to operate, I would rather have every mind in America 
working on solving the problem through the use of consumer 
actions rather than a few elites in Washington trying to figure 
out how we can direct and micromanage this enormous sector of 
our economy.
    To be rational, I think that is an oxymoron. I think that 
if we get these basic market fundamentals in this system, that 
is the best thing we can do to achieve what we all want which 
is maintain high quality but at a rational price. And we do not 
have rational pricing right now.
    Chairman Spratt. Dr. Orszag.
    Mr. Orszag. I guess what I could say is that I think it is 
very clear that incentives matter a lot in healthcare both for 
consumers and especially for providers. And the incentives 
currently are not very well aligned to delivering high value 
care.
    And the only other thing I would say is that in a vision of 
consumer-directed healthcare, one does need to, and I know that 
Mr. Ryan is very sensitive to this, one does need to take into 
account the particular nature of healthcare and things like 
asymmetric information and sorting, what have you.
    And then more important or at least as importantly that I 
would also note, for me as a consumer, I currently do not have 
the information that I need in order to choose whether this 
intervention is better than that intervention. And I do not 
think that we have strong enough, we probably will never have 
strong enough private incentives, purely private incentives to 
deliver or create that kind of information because it has the 
nature of a public good. When you create information like that, 
it is useful for all consumers.
    In the absence of that kind of information, consumers are 
hampered in their ability to choose intelligently. And so 
regardless of whether one's vision is a single payor or a mixed 
system or consumer-directed health system, more information on 
what works and what does not is absolutely essential to moving 
the system towards a higher value one.
    Mr. Ryan. And combining that information with price. I will 
give you one example. In Milwaukee as of two years ago, the 
latest data, the cost of bypass surgery ranges from $47,000 to 
$120,000.
    A couple proprietary studies on outcomes shows us that a 
hospital that charges 65 grand is the best place to go. Nobody 
knows that. Nobody knows that the place that charges you 65 
grand is where you are more likely to have a better outcome for 
your bypass, but most people are going to the place that 
charges $120,000.
    So when you have such enormous disparities, disconnects 
between price and quality, there is clearly great room for 
improvement and more market functions in the kind of system we 
have today.
    That is the point I am trying to make. But I appreciate 
this dialogue. It is constructive.
    Chairman Spratt. Mr. McHenry, do you have further 
questions?
    Just if you have no questions, Dr. Orszag, let me go back 
to this thing about PAYGO and whether or not it has a positive 
effect on the situation we are in. As I understand your 
baseline extended scenario, it could be seen as a PAYGO 
scenario as part of it?
    Mr. Orszag. Yes, sir.
    Chairman Spratt. And it seemed to show that adherence to 
PAYGO, if you will look at figure two on page four, your curve, 
those two exploding curves, it seems to show that if we stick 
with the extended baseline scenario, which includes PAYGO, we 
have got about a 20-year period there, until 2032, before the 
debt as a percentage of GDP really begins to spike upward.
    Is this credited to PAYGO or is it something else at work 
in the curve there?
    Mr. Orszag. No. That could again be interpreted as if you 
strictly abided by PAYGO over that period what the projections 
suggest the outcome would be.
    Chairman Spratt. Now, your favorite chart, which has almost 
become a signature of CBO, is this chart on the front here, 
which shows the revelations you presented today that you have 
long known but most people have not understood, namely this is 
not a demographic problem. This is a healthcare delivery cost 
problem.
    Is there some way you could devise a simple model so that 
you could tell how significant proposals, not minor adjustment, 
but significant proposals in Medicare, Medicaid, and, for that 
matter, the other healthcare programs paid for by the Federal 
Government from the Veterans Administration to TRICARE, to 
FEHV, somehow we would have a model so you could tell, you 
could plug it in, a proposal into that model and tell what the 
future consequences are going to be, the extent to which it 
adhered to the parameter that you have set out, that is growth, 
that it does not exceed GDP growth and I guess beneficiary 
population growth?
    Mr. Orszag. That is obviously a very difficult undertaking. 
If we think ten-year scoring is hard, evaluating----
    Chairman Spratt. Part of our problem here with five- and 
ten-year scoring is that most of what you are looking at is 
beyond the ten-year horizon.
    Mr. Orszag. Absolutely. What I am trying to do, for 
example, in that health options volume that we will be doing 
throughout next year is give some indication, even if I cannot 
give you an exact number, of whether over the long term 
something is meaningful or likely to be meaningful if you do it 
this way.
    We have done that, for example, with regard to comparative 
effectiveness research and said that if it is undertaken 
aggressively and if it is tied to financial incentives, the 
result could be significant reductions over the long term in 
healthcare costs. We are going to try to provide more 
information like that, although I cannot commit to saying 
something will be $27.7 billion change in 2042 kind of 
precision.
    Chairman Spratt. Well, thank you very much for your good 
work and to your staff as well for their excellent work as 
always. And this is an enormous problem, but it is one that 
really affects the future of this country. It goes to the very 
essence of what we are all about. We appreciate your 
contribution this morning and your forbearance in answering our 
questions. Thank you very much indeed.
    Mr. Orszag. Thank you, Mr. Chairman.
    Chairman Spratt. I ask for unanimous consent that all 
members who did not have the opportunity to ask questions of 
the witness be given seven days to submit questions for the 
record. There is nobody here to object, so it is ordered.
    [Whereupon, at 12:18 p.m., the Committee was adjourned.]

                                  
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