No Excuse for Democrats' Sticker-Shock on Health Care

Democrats' plans to pass major health care legislation have been stymied, at least for the moment, by the Congressional Budget Office's cost estimates. To the consternation and the apparent surprise of leading Democrats, the CBO scored Senate Finance Chairman Max Baucus' latest offering at $1.6 trillion over 10 years, while it scored the completed sections of Sen. Christopher Dodd's bill at $1 trillion. Presumably, the incomplete sections would cost more.

The senators and the Obama administration might not have been so unpleasantly surprised had they paid closer attention to CBO Director Douglas Elmendorf's testimony to Baucus' committee delivered back on Feb. 25. Elmendorf, by the way, is no leftover hack from the Bush administration; he is a Harvard-trained Ph.D. economist formerly at the Brookings Institution and appointed to his current position by congressional Democrats. My soundings indicate he is highly respected by economists associated with both political parties.

Elmendorf's February testimony in crisp language punctures some of the balloons that have been sent aloft in Democrats' campaign talk about health care. One is the idea that because a lot of health care spending seems to be ineffective, it can be easily reduced by government action. "The available evidence also suggests that a substantial share of spending on health care contributes little if anything to the overall health of the nation," Elmendorf said, agreeing with the first half of the proposition. Then he added, disagreeing with the second half, "But finding ways to reduce such spending without also affecting services that improve health will be difficult." It's like advertising: Half is wasted, but we're never sure which half.

Private-sector competition produces efficiencies and innovations that government bureaucracies almost never produce and can seldom keep up with.

Then there are the assurances by Office of Management and Budget Director Peter Orszag that by using the results of comparative-effectiveness research--studies of the results of treatments in different regions and facilities--we can easily identify the most cost-effective health care procedures and, using the power of government, force all practitioners to do things that way.

Elmendorf conceded that the benefits of such research "suggest a role for the government in funding research on the comparative effectiveness of treatments, in generating measures of quality, and in disseminating the results to doctors and patients." But then he threw some cold water on the proposition that such research could be used by the government to jam down costs. "Absent stronger incentives to control costs and improve efficiency, the effect of information alone on spending will generally be limited."

And what about savings from moving away "from fee-for-service design to providing stronger incentives to control costs or reward value"? In Elmendorf's view, "their precise effects are uncertain." He suggests testing options "to see whether they work as intended or to determine which design features work best." And maybe we should reform Medicare before we try to reshape the entire health care private sector. "Changes made in the Medicare program can also stimulate broader improvements in the health sector."

What about improved information technology? "Requiring that hospitals adopt electronic health records would reduce their costs for treating Medicare patients, but the program's payment rates would have to be reduced in order for the federal government to capture much of those savings." Preventive care? "Those efforts may still fail to generate net reductions in spending on health care because the number of people receiving the services is generally much larger than the number who would avoid expensive treatments as a result."

There are two more general problems, one of which Elmendorf spotlights: "Studies attribute the bulk of cost growth to the development of new treatments and other medical technologies," and so "reducing or slowing spending over the long term would probably require decreasing the pace of adopting new treatments and procedures or limiting the breadth of their application." If you pay less, you get less.

Second, and perhaps beyond the ambit of a data-driven CBO director, is the more general observation that the cost projections for government-run programs like Medicare and Medicare tend to come in low, while the cost projections for programs involving private-sector competition like the 2003 Medicare prescription drug benefit have turned out to be high. Private-sector competition produces efficiencies and innovations that government bureaucracies almost never produce and can seldom keep up with. As Democrats scamper to reduce the projected costs of their health care bills, the rest of us might want to keep that in mind.

Michael Barone is a resident fellow at AEI.

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