Council Of Economic Advisers Identifies New Savings From Health Care Reform

Today, the President’s Council of Economic Advisers released a report which found that slowing health care spending by 1.5 percentage points (from 6 percent a year to 4.5 percent) would create “as many as 500,000 jobs a year” and increase “annual income for the average family of four by $2,600.”

As Tim Foley explains, the report is a political win for the White House:

Simply put, Obama now has a political frame that’s going to be tough to beat.  On the one hand, you have Obama and the reformers.  If you give them $150 billion a year to make health care reform happen, you’ll get a productivity boost to the economy of your money back +$100 billion, half a million jobs, and your own personal windfall of $2,600.  By 2030, the report will propose, the extra money and productivity per family will be $10,000… oh, and we’ll have no one without the care they need.  On the other hand, you have the proponents of the status quo, or “anything but this.”  According to the report, health care will jump from 16% to 34% of our economy by 2040, we won’t get any of the goodies in terms of jobs or productivity bonuses, and we’ll likely have 72 million uninsured (or more) by 2040.  Gosh, which of those sides do you want to be on?

The CEA estimates assume the 1.5 percentage point reduction; policy makers are now stuck with the tough work of adopting reforms that would actually reduce health care spending and produce the $2,600 in savings. This is more feasible now than it was before. Yesterday, the health insurance industry released a 28-page report on cost containment options which, while largely uninspired, reiterates the industry’s belief (or concession) that we can lower the growth of health care spending by eliminating the waste already in the system.

Moreover, David Cutler recently authored a report for CAP in which he explains how to lower spending by 1.5 percentage points (he calls this “health care modernization”). Cutler writes, “health care modernization involves four broad steps: investing in infrastructure; measuring what is done and how well it is performed; rewarding high-value care, not just high-volume care; and realigning consumer incentives to encourage better health behavior.” You can read the policy details here, but the consequences of ‘modernization’ are quite substantial:

Health system modernization could increase productivity growth in health care by 1.5 to 2.0 percentage points annually starting in four to five years. The impact of such productivity improvement would be substantial. The federal government would save nearly $600 billion in health spending over the next decade, and $9 trillion over the next 25 years.

All this supplements any savings the Congressional Budget Office identifies for the federal budget, and presents a more complete picture of the savings produced by health care reform.