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REP. PAUL RYAN (R-WI): Thank you, Chairman.
First of all, I want to thank you for going ahead of -- going ahead with this hearing today. And this is going to be a challenging week.
By my count, we've had nearly 10 hearings on this subject this year. And I don't think there's 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're doing us a great service by having these hearings.
As this committee knows too well, and as Director Orszag's 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's 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's 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 doesn't account for any of the massive entitlement expansions, health care or otherwise, currently being considered by Congress. This will happen at a time when nearly 80 million baby boomers are retired or are 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've all heard this before. We've been aware of this problem for decades. A couple of years ago, we passed the DRA, which saved $40 billion over five years. I'm 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 our presidential -- 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's 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 don't do this right.
So if we want to have a debt-free nation, if we want to give our kids and 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're going to have to think outside the box. We're going to have to reform these programs. And they're going to have to be done a lot differently than they are now if we're going to make right by our kids and our grandkids.
And that's 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've had like it.
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REP. RYAN: Thank you, Chairman.
Peter, let me go into your Table 2 in your book or your -- I think it's in your testimony as well.
And you're 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.
REP. RYAN: Yeah, total spending.
In your projections, do you not project a slowing of the growth of health spending in the out years?
MR. ORSZAG: Yes, we do.
REP. RYAN: And the trustees do the same as well, correct?
MR. ORSZAG: Much more aggressively.
REP. RYAN: Yeah. Why?
MR. ORSZAG: The reason that there's some slowing in our projections is twofold. The first is that there is some scope for regulatory -- that is, non-legislative cost reductions -- and also the higher cost sharing that will come through when -- 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 and households and employers will push back on ongoing health care cost growth when it starts to consume a larger and larger share of their budgets.
REP. RYAN: Okay. So you believe absent any change in law by Congress that consumers are price-sensitive actors.
MR. ORSZAG: That the medical system will ultimately evolve so that health care doesn't crowd out consumption of cars and what have you.
REP. RYAN: Right. But -- so there is a threshold in a consumer's mind at which they don't want to cross. And so when consumers see more of their own out-of-pocket expenses -- their own cash being exposed, they're going to act rationally and cut back on costs. So you believe there's an elasticity here -- there's 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'm going to cut back"? And you're putting that into the assumption and that is slowing the inflation of health care. Is that what you're 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, does reduce health care expenditures and, the evidence suggests, reduces it in a way -- reduces them in a way that doesn't actually harm health outcomes.
REP. 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 it as static analysis and carried that out, what would the share of GDP be then?
MR. ORSZAG: By the end of the 75-year window, health care would be 100 percent of the economy.
REP. RYAN: Right. And in 2050?
MR. ORSZAG: And it would exceed thereafter.
REP. RYAN: And in 2050?
MR. ORSZAG: It'll take me a second to --
REP. RYAN: It's mid-century. I'm just kind of curious.
MR. ORSZAG: Yep, just give me a second.
I'm going to have to -- 2050 I'm going to get -- it's about 50 percent or so --
REP. RYAN: So --
MR. ORSZAG: -- if I drew the line straight.
REP. RYAN: So this assumption -- 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 exposure is basically what we're to read into this baseline.
MR. ORSZAG: CBO's analysis and other official analysis always takes 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.
REP. RYAN: Let me ask you: Since we have -- you know, 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 averaged 3.6 (percent) real 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: A couple comments. First, cross-country comparisons are often very difficult, so I would just urge a little bit of caution in those. But --
REP. RYAN: But that's 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're 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 these exploding government debt path, especially under 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's not a general conclusion that's applicable in all settings.
REP. RYAN: Your predecessor, Doug Holtz-Eakin, used to say that government spending, whether it's 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.
REP. RYAN: Okay, so you have a distinction with that view.
One more question. Your current law revenue baseline assumes that the '01 and '03 tax laws expire, the AMT expands as under current law. That's 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 1,000 (dollars) per child?
MR. ORSZAG: After 2010, it falls back to its previous level of $500.
REP. RYAN: What is the estate tax? What happens to the estate tax?
MR. ORSZAG: The estate tax reverts to its previous level of a threshold of $1 million with a 55 percent tax rate.
REP. RYAN: A million or 600,000 (dollars)? I thought -- is it a million? I thought it was 600(,000 dollars).
MR. ORSZAG: We'll get back --
REP. RYAN: Okay. What happens to cap gains and dividends?
MR. ORSZAG: They revert back to their previous levels also.
REP. 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'd have 75 percent of taxpayers on the -- or households on the --
REP. RYAN: On the AMT.
MR. ORSZAG: -- on the AMT.
REP. RYAN: All right.
Well, I appreciate the generosity of the chairman and the time. Thank you.
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REP. RYAN: Thank you, Dr. Orszag.
Since the big elephant in the room here is health care costs and price increases, let's 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'm wrong -- about 30 percent of the costs could be wiped out without sacrificing quality.
MR. ORSZAG: Those are estimates from noted academic researchers.
REP. RYAN: Right.
MR. ORSZAG: They're not CBO estimates. But there are established and well-known academics who believe the number may even be higher than that.
REP. 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's the opportunity.
REP. 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 don't know what you mean by central planning? (Laughs.)
REP. RYAN: Yeah, I should -- 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 don't 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 doesn't, 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.
REP. RYAN: So to the extent that the federal government has more ability to impact those outcomes and decisions, they have more -- there's a greater ability to achieve these savings? Is that --
MR. ORSZAG: The federal government has the ability, but if you were to change the payment system so that you weren't 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.
REP. RYAN: Okay, since this is -- we're at 16 percent of GDP now, health care?
MR. ORSZAG: That's correct.
REP. RYAN: Given the rest of the economy functions in more of a free market way and in that there's greater and more accurate transparency on price and quality, more consumer activity involved and being sensitive to those things, would not it be -- would not we achieve savings if we brought those kinds of reforms to the health care 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 costs. But the report suggested it might reduce costs by about 5 percent, not as much as the potential that apparently exists, and I think that's because -- well, because of the tension between the concentration of health care 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 health care 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.
REP. RYAN: What I'm trying to get at is: Is there a magic bullet on addressing the root cause of health inflation? Is 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 don't 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 U.S. policymakers 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 didn't let you, you know, didn't give you any food and didn't let you out until you solved the problem. On health care, I think you don't have the information you need to reach those kinds of decisions.
I have not seen, for example -- on Social Security that would work, if you were willing to do it. On health care, it's not clear to me that it would work. I haven't seen, despite the fact that on Social Security I've authored and lots of people have authored all these plans and you have the tables --
REP. RYAN: That's pretty easy. Money in, money out, move the dials, they're 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 don't know exactly what you would do in there.
REP. RYAN: Well, isn't the problem with our health care entitlements, one, that it's basically reimbursing the American health care system? It's what is paying for the health care system we have today, and absent reforming the health care system we have today, you can't solve the problem? With Social Security, it's a finite, containable program within itself.
MR. ORSZAG: Right.
REP. RYAN: Health care -- so basically what we're saying is you can't fix the Medicare and Medicaid problem if you don't fix the health care 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 health care cost inflation under control? And that's a much different set of challenges than the way that the long-term fiscal problem is typically framed.
REP. RYAN: Yeah. I would argue doing more to bring the market reforms and market experiences that exist in the rest of the economy would probably be perhaps the best thing to tame health inflation.
This is 16 percent of our economy, but it doesn't operate like the rest of our economy. It is virtually absent of real transparency on price and quality, and consumers really don't have incentives to act on those things. They're either locked in their HMO -- they're told who and where they've got to go to, and they can't shop because they don't have the information anyway.
REP. SPRATT: Will the gentleman yield?
I think you've just put your finger on the conundrum, that is what you described is not a true market situation and yet you're proposing a market solution to it.
You're saying the correction -- you described something that's not a real market because consumers aren't --
REP. RYAN: That's right.
REP. SPRATT: -- active participants.
REP. RYAN: It is not a true functioning market right now.
REP. SPRATT: And yet you're saying that the best solutions are market solutions.
REP. RYAN: Yes, because they're absent from the system today.
REP. SPRATT: Well, that means you've got to build a market completely here that doesn't exist in terms of classical economics.
REP. RYAN: The rest -- 84 percent of the economy functions in a basic free market system -- transparency in price, transparency in quality and survival in business based on those metrics.
Consumers will move with their feet based on price and quality. Competitors and producers have to compete on those metrics. Health care, you don't.
And so my point is if we bring those kinds of basic market fundamentals to health care, I think we can go so much farther down the road in taming health inflation without sacrificing quality -- in fact, promoting quality -- in wrenching out that 30 percent waste.
Rather than sitting in a committee in Washington or a 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's an oxymoron.
I think that if we get these basic market fundamentals in this system, that's the best thing we can do to achieve what we all want, which is maintain high quality but at a rational price, and we don't have rational pricing right now.
REP. SPRATT: Dr. Orszag?
MR. ORSZAG: I guess what I could say is that I think it's very clear that incentives matter a lot in health care, 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 health care, 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 health care and things like asymmetric information and sorting and what have you.
And then more important or at least as importantly I'd 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 don't 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's 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 payer or a mix system or a consumer-directed health system, more information on what works and what doesn't is absolutely essential to moving the system towards a higher value one.
REP. RYAN: And combining that information with price. 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 of 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're 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's clearly great room for improvement and more market functions in the kind of a system we have today. That's the point I'm trying to make.
But I appreciate this dialogue. It's instructive.
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