Health Care Spending: Public Payers Face Burden of Entitlement	 
Program Growth, While All Payers Face Rising Prices and 	 
Increasing Use of Services (15-FEB-07, GAO-07-497T).		 
                                                                 
GAO testified about the challenges involved in financing health  
care. GAO has been particularly concerned about the federal	 
government's long-term fiscal sustainability and the contribution
of health care spending to this troubling picture. For the past  
several years, we have consistently reported that in just a few  
decades, the government will face a serious fiscal imbalance	 
driven by known demographic trends and escalating health care	 
cost growth. Over the next several decades, growth in spending on
federal retirement and health entitlements will encumber an	 
escalating share of the government's resources. These entitlement
programs primarily include Social Security, which provides, among
other things, retirement income to individuals aged 62 and older;
Medicare, which provides health care coverage primarily for	 
individuals 65 and older; and Medicaid, which is a joint	 
federal-state program providing health care and long-term care	 
for low-income individuals. Congress's concern about the	 
challenges involved in financing health care is consistent with  
the fact that certain spending pressures faced by Medicare and	 
Medicaid are faced by all health care payers, including the	 
Departments of Veterans Affairs (VA) and Defense, as well as	 
private payers of health care. To provide an overview of the	 
situation, GAO discussed (1) the long-term outlook for the	 
federal budget and implications for the national economy, (2)	 
health care spending increases system-wide and drivers of	 
spending growth, and (3) cost containment challenges health care 
payers face now and in the future. This testimony is based	 
largely on issued GAO work and relevant literature on health care
spending. In February 2007, we updated prior work by including	 
more recent data from GAO's budget simulation model, the Centers 
for Medicare & Medicaid Services, and the U.S. Census Bureau.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-497T					        
    ACCNO:   A65969						        
  TITLE:     Health Care Spending: Public Payers Face Burden of       
Entitlement Program Growth, While All Payers Face Rising Prices  
and Increasing Use of Services					 
     DATE:   02/15/2007 
  SUBJECT:   Cost analysis					 
	     Entitlement programs				 
	     Federal social security programs			 
	     Financial analysis 				 
	     Future budget projections				 
	     Health care cost control				 
	     Health care costs					 
	     Health care programs				 
	     Medicaid						 
	     Medicare						 

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GAO-07-497T

   

     * [1]Burden of Entitlement Growth Worsens Long-Term Federal Fisca
     * [2]Growth in Health Care Spending System-wide Driven by Certain
     * [3]Health Care Payers Face Challenges System-wide
     * [4]Contact and Acknowledgments

          * [5]Order by Mail or Phone

Testimony

Before the Subcommittee on Military Construction, Veterans Affairs, and
Related Agencies, Committee on Appropriations, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EST

Thursday, February 15, 2007

HEALTH CARE SPENDING

Public Payers Face Burden of Entitlement Program Growth, While All Payers
Face Rising Prices and Increasing Use of Services

Statement of A. Bruce Steinwald,
Director, Health Care

GAO-07-497T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here as you consider the challenges involved in
financing health care. We at GAO have been particularly concerned about
the federal government's long-term fiscal sustainability and the
contribution of health care spending to this troubling picture. For the
past several years, we have consistently reported that in just a few
decades, the government will face a serious fiscal imbalance driven by
known demographic trends and escalating health care cost growth.1 Over the
next several decades, growth in spending on federal retirement and health
entitlements will encumber an escalating share of the government's
resources. These entitlement programs primarily include Social Security,
which provides, among other things, retirement income to individuals aged
62 and older; Medicare, which provides health care coverage primarily for
individuals 65 and older; and Medicaid, which is a joint federal-state
program providing health care and long-term care for low-income
individuals.

This Subcommittee's concern about the challenges involved in financing
health care is consistent with the fact that certain spending pressures
faced by Medicare and Medicaid are faced by all health care payers,
including the Departments of Veterans Affairs (VA) and Defense, as well as
private payers of health care. To provide an overview of the situation, my
remarks will focus on (1) the long-term outlook for the federal budget and
implications for the national economy, (2) health care spending increases
system-wide and drivers of spending growth, and (3) cost containment
challenges health care payers face now and in the future. My remarks are
based largely on issued GAO work and relevant literature on health care
spending.2 In February 2007, we updated prior work by including more
recent data from GAO's budget simulation model, the Centers for Medicare &
Medicaid Services, and the U.S. Census Bureau. All of our work was done in
accordance with generally accepted government auditing standards.

1GAO, Long-Term Budget Outlook: Deficits Matter--Saving Our Future
Requires Tough Choices Today, [6]GAO-07-389T (Washington, D.C.: Jan. 23,
2007); Long-Term Budget Outlook: Saving Our Future Requires Tough Choices
Today, [7]GAO-07-342T (Washington, D.C.: Jan. 11, 2007); 21st Century:
Addressing Long-Term Fiscal Challenges Must Include a Re-examination of
Mandatory Spending, [8]GAO-06-456T (Washington, D.C.: Feb. 15, 2006); and
Long-Term Care Financing: Growing Demand and Cost of Services Are
Straining Federal and State Budgets, [9]GAO-05-564T (Washington, D.C.:
Apr. 27, 2005).

2 [10]GAO-07-389T ; [11]GAO-07-342T ; [12]GAO-05-564T ; GAO, The Nation's
Long-Term Fiscal Outlook: September 2006 Update, [13]GAO-06-1077R
(Washington, D.C.: September 2006); and Health Care: Unsustainable Trends
Necessitate Comprehensive and Fundamental Reforms to Control Spending and
Improve Value, [14]GAO-04-793SP (Washington, D.C.: May 2004).

In summary, projections show that the federal budget is on a path that is
fiscally unsustainable, in large part because of growth in spending for
Medicare and Medicaid. Mandatory spending for these entitlements, together
with spending for Social Security, threatens to crowd out discretionary
spending for a vast array of domestic programs. It is largely the public
payers who will bear the cost burden associated with the baby boom
generation, whereas both public and private payers must contend with the
escalating costs associated with medical technology, population risk
factors leading to expensive chronic conditions, and an imperfect market
in which consumers and providers lack the information and incentives
needed to achieve the best value for the dollars spent.

Burden of Entitlement Growth Worsens Long-Term Federal Fiscal Outlook

Since 1992, we have provided the Congress with simulations of the
long-term fiscal outlook, projecting spending as a share of the nation's
output, or gross domestic product (GDP), and revenues for several decades,
using certain assumptions. One simulation assumes that all expiring tax
provisions are extended, revenue remains constant as a share of GDP, and
federal discretionary spending keeps pace with the economy. Under these
assumptions, we project that, by 2040, federal revenues may be adequate to
pay little more than interest on the federal debt and a fraction of
entitlements.3 Figure 1 shows the substantial contribution of outlays for
Social Security, Medicare, and Medicaid to this problem.

3For more information about GAO's simulations see
www.gao.gov/special.pubs/longterm/ .

Figure 1: Composition of Spending as a Share of GDP Assuming Discretionary
Spending Grows with GDP After 2007 and All Expiring Tax Provisions Are
Extended

Absent substantive reform of entitlement programs, federal spending will
grow to unprecedented levels. Our projections are in part driven by
demographic trends in coming decades. In 2000, individuals aged 65 and
older numbered about 35 million people--about 12 percent of our nation's
total population. By 2020, that percentage will increase to about 16
percent--1 in 6 Americans--and will represent nearly 20 million more
elderly than there were in 2000. By 2040, the number of elderly aged 85
years and older is projected to increase more than 250 percent, from
slightly over 4 million in 2000 to slightly over 15 million (see fig. 2).
Social Security and a large portion of Medicare are financed as
pay-as-you-go systems in which current workers' payroll taxes pay current
retirees' benefits.4 Therefore, these programs are directly affected by
the relative size of populations of covered workers and beneficiaries.
Historically, this relationship has been favorable. In the future,
however, the overall worker-to-retiree ratio will change in ways that
threaten the financial solvency and sustainability of these entitlement
programs. In 2000, there were 4.7 working-age persons (20 to 64 years) per
elderly person, but by 2040, this ratio is projected to decline to 2.6.

Figure 2: Elderly Population, 2000 through 2040

4Financial transactions of the Medicare program operate through two trust
funds, the Federal Hospital Insurance (HI) trust fund and the
Supplementary Medical Insurance (SMI) trust fund. For both Social Security
and Medicare's HI trust fund, the main source of income is taxes on wages
and self-employment income. Medicare's SMI trust fund is financed by a
combination of general revenues and beneficiary premiums.

Absent significant policy changes in federal spending, federal revenue, or
both, the growth in mandatory spending on federal retirement (Social
Security) and especially health entitlements (Medicare and Medicaid) will
encumber an escalating share of the government's resources, leaving fewer
and fewer dollars for spending on discretionary programs, including the
health care provided by VA. (See fig. 3.)

Figure 3: Federal Spending for Mandatory and Discretionary Programs,
1962-2017

Figure 3 suggests that this current fiscal path will increasingly
constrain the government's ability to address emerging and unexpected
budgetary needs and increase the burdens that will be faced by future
generations. Indeed, entitlement spending will have significant
implications for the economy as a whole. Figure 4 shows the total future
draw on the economy represented by federal spending for Social Security,
Medicare, and Medicaid. Federal spending for these entitlement programs
combined is projected to grow to 15.5 percent of GDP in 2030 from today's
9 percent.

Figure 4: Social Security, Medicaid, and Medicare as Share of GDP,
2000-2080

Note: Social Security and Medicare projections are based on the
intermediate assumptions of the 2006 Trustees' Reports. Medicaid
projections are based on CBO's January 2007 short-term Medicaid estimates
and CBO's December 2005 long-term Medicaid projections under midrange
assumptions.

Although Social Security is a major part of the fiscal challenge, it is
far from our biggest challenge. Over the past several decades, health care
spending on average has grown much faster than the economy, and this rapid
growth is projected to continue. As figure 4 shows, Social Security grows
as a share of the economy and then levels off, whereas Medicare and
Medicaid growth continues to rise without abatement.

Growth in Health Care Spending System-wide Driven by Certain Factors

Health care spending system-wide--that is, for both public and private
payers--is absorbing an increasing share of GDP. As shown in figure 5,
from 1975 through 2005, aggregate public and private spending on health
care grew from about 8 percent to 16 percent of GDP. In 2005, public and
private spending totaled $2 trillion. Aggregate health care spending is
projected to grow to 20 percent of GDP by 2015.

Figure 5: Aggregate Public and Private Health Care Spending, as a
Percentage of GDP

Note: The figure for 2015 is projected.

Such health care spending increases threaten the ability of the nation to
remain competitive in the global economy.

Aggregate health care spending continues to rise because of increased
medical prices and increased utilization due to growth in the number, or
volume, of services per capita, and use of more intense, or complex,
services. Figure 6 shows the relative importance of price and utilization
with respect to spending growth. From 2000 through 2005, inflation in
medical prices--as represented by the medical component of the Consumer
Price Index (CPI)--grew by 4.4 percent on average, whereas health care
spending per capita--which includes increases in both medical prices and
utilization--grew by 6.9 percent on average. By comparison, during this
time, GDP grew at an average annual rate of 4.9 percent. These rates of
growth suggest that growth in the economy cannot offset the growth in
health care spending per capita.

Figure 6: Comparison of Cumulative Growth in General Inflation, Medical
Inflation, Gross Domestic Product, and Health Care Spending Per Capita,
2000-2005

Medical technology is a major contributor to growth in health care
spending. For example, one study found that the average amount spent per
heart attack case increased nearly $10,000 per case after controlling for
inflation, or 4.2 percent per year between 1984 and 1998.5 Nearly half of
the cost increases resulted from people getting more intensive
technologies--such as cardiac catheterization--over time. Moreover, the
proportion of people receiving catheterization in the surgical treatment
of heart attacks rose from slightly over 10 percent in 1984 to slightly
over 50 percent in 1998. Another study discusses what we characterize as a
multiplier effect.6 That is, the diffusion of new diagnostic technology,
such as advances in imaging, increases diagnostic capability, which, in
turn, increases the identification and treatment of diseases or
conditions. In some cases, the multiplier effect can lead to overdiagnosis
and the excessive use of resources. The study cites the use of spinal
magnetic resonance imaging (MRI) as one example. Researchers find that
diagnostic spinal MRI sometimes reveals abnormalities (such as bulging
discs) having no clinical relevance. Some physicians, the study contends,
act on this information and perform unnecessary surgery, which can
sometimes lead to complications.

5David M. Cutler and Mark McClellan, "Is Technological Change in Medicine
Worth It?" Health Affairs, vol. 20, no. 5 (September/October 2001).

6See Richard A. Deyo, "Cascade Effects of Medical Technology," Annual
Review of Public Health, vol. 23 (May 2002).

Obesity, smoking, and other population risk factors can lead to expensive
chronic conditions; the increased prevalence of such conditions--for
example, diabetes and heart disease--drives growth in the utilization of
health care resources and therefore in spending. Obesity has been the
subject of several recent studies focusing on associated health care cost
increases.7 For example, one study attributes 27 percent of the growth in
inflation-adjusted per capita spending between 1987 and 2001 to the rising
prevalence of obesity and higher relative per capita spending among obese
individuals.8 Specifically, these factors accounted for slightly over 38
percent of the rise in spending for diabetes and 41 percent of the rise in
spending for heart disease. Other studies focus on the effect of
population risk factors on utilization of services. For example, one study
found that obese patients had significantly higher numbers of primary care
visits and diagnostic services compared to nonobese patients.9

7See Kenneth E. Thorpe, "The Rise in Health Care Spending and What to Do
About It," Health Affairs, vol. 24, no. 6 (November/December 2005); Roland
Sturm, "The Effects of Obesity, Smoking, and Drinking on Medical Problems
and Costs," Health Affairs, vol. 21, no. 2 (March/April 2002); Kenneth E.
Thorpe et al., "The Impact of Obesity on Rising Medical Spending," Health
Affairs Web Exclusive, http://
content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.480 (Oct.
20, 2004); and Marsha A. Raebel et al., "Health Service Use and Health
Care Costs of Obese and Nonobese Individuals," Archives of Internal
Medicine, vol. 164, no. 19 (Oct. 25, 2004).

8Kenneth E. Thorpe et al., "The Impact of Obesity on Rising Medical
Spending," Health Affairs Web Exclusive, http://
content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.480 (Oct.
20, 2004).

9Klea D. Bertakis and Rahman Azari, "The Influence of Obesity, Alcohol
Abuse, and Smoking on Utilization of Health Care Services," Family
Medicine, vol. 38, no. 6 (June 2006).

Health Care Payers Face Challenges System-wide

Both public and private payers face fundamental challenges in the struggle
to contain health care spending growth. One of the challenges involves the
unbridled use of technology and society's unmanaged expectations. For
example, cutting-edge drugs and other medical technologies can be very
expensive but offer no advantage over their alternatives. Experts note
that the nation's general tendency is to treat patients with available
technology when there is the slightest chance of benefit to the patient,
even though the costs may far outweigh the benefit to society as a whole.
They note that the discipline of technology assessment has not kept pace
with technology advancements.10

Today's employers, which finance a substantial share of the health care of
the privately insured population, are seeking more information on health
care technology costs and benefits. Public agencies seldom use such
information in discharging their responsibilities and lack an independent
source of cost-benefit analyses. Although the Food and Drug Administration
(FDA), for example, evaluates new medical products based on safety and
efficacy data submitted by manufacturers, it does not evaluate whether the
new products are cost-effective compared with existing products used for
the same treatment indications. In turn, Medicare, which generally relies
on FDA approval decisions, does not evaluate whether new technologies are
superior, either clinically or economically, compared with technologies
already covered and paid for by the program.

Another cost containment challenge for all payers relates to the market
dynamics of health care compared with other economic sectors. In an ideal
market, informed consumers prod competitors to offer the best value.
Without good comparative information, however, consumers are less able to
determine the best value. Insurance masks the actual costs of goods and
services, providing little incentive for consumers to be cost-conscious.
Similarly, clinicians must often make decisions in the absence of
universal medical standards of practice. Under these circumstances,
medical practices vary across the nation, as evidenced by wide geographic
variation in per capita spending, even after controlling for patient
differences in health status. A seminal study on Medicare spending shows
that, counterintuitively, Medicare beneficiaries living in higher-spending
areas appear to experience slightly worse outcomes relative to
beneficiaries in lower-spending areas.11 At the same time, to the extent
that providers are paid for each service rendered, an incentive exists to
maximize revenue through increased volume. Together, the lack of
transparency with regard to cost and quality and perverse incentives with
regard to the use of care combine in the health care system to preclude
market forces from achieving the best value for the dollars spent. As a
consequence, health care spending continues to experience annual inflation
that threatens the economic prosperity of the nation in both public and
private sectors.

10 [18]GAO-04-793SP.

Mr. Chairman, this concludes my prepared remarks. I will be happy to
answer any questions you or other Members of the Subcommittee may have.

Contact and Acknowledgments

For future contacts regarding this testimony, please call A. Bruce
Steinwald at (202) 512-7101 or at [email protected] . Contact points
for our Offices of Congressional Relations and Public Affairs may be found
on the last page of this statement. Other individuals who made key
contributions include Phyllis Thorburn, Assistant Director; Jessica Farb;
Hannah Fein; and Gregory Giusto.

(290606)

11For example, in a cohort of Medicare beneficiaries treated for hip
fractures, the study found that beneficiaries in three regions with higher
end-of-life spending had a higher risk for death than beneficiaries living
in regions with lower spending. E.S. Fisher et al., "The Implications of
Regional Variations in Medicare Spending. Part 2: Health Outcomes and
Satisfaction with Care," Annals of Internal Medicine, vol. 138, no. 4
(2003).

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References

Visible links
6. http://www.gao.gov/cgi-bin/getrpt?GAO-07-389T
7. http://www.gao.gov/cgi-bin/getrpt?GAO-07-342T
8. http://www.gao.gov/cgi-bin/getrpt?GAO-06-456T
9. http://www.gao.gov/cgi-bin/getrpt?GAO-05-564T
  10. http://www.gao.gov/cgi-bin/getrpt?GAO-07-389T
  11. http://www.gao.gov/cgi-bin/getrpt?GAO-07-342T
  12. http://www.gao.gov/cgi-bin/getrpt?GAO-05-564T
  13. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1077R
  14. http://www.gao.gov/cgi-bin/getrpt?GAO-04-793SP
  18. http://www.gao.gov/cgi-bin/getrpt?GAO-04-793SP
*** End of document. ***