CURRENT LAW BRAKES ON HEALTH CARE COST GROWTH

Michael Chernew (Harvard University) addressed concerns about the assumption of current law in forecasting models, which does not square with the policy need to put brakes on runaway health care spending growth. He opened his presentation with a general statement that speeding objects clearly need something to slow them down, and the same applies to health care spending in this country. It is understood that the rapid growth in health care spending cannot continue and that if it does not slow down, there is a problem. The question is: What factors are likely to slow it down?

The Congressional Budget Office (CBO) and the Office of the Actuary (OACT) generate spending projections under the assumption of current law. Chernew emphasized that these are not forecasts in the sense that no one expects actual spending to match the projections. To treat them as forecasts does them a disservice. They are designed to show what would happen if current law did not change and to warn policy makers of the consequences of inaction. He observed that a fundamental issue is what is meant by current law. For example, is it the current benefit structure, that is, how much spending would go up under the current benefit structure? Or is it prices, the current payment rates, or, more broadly, the laws regarding payment rates?

In general equilibrium models, prices adjust and spending growth in any sector slows down because there is a budget constraint that individuals face. However, institutional features of the health care system that are embodied in current law, such as public financing of care and administratively set prices, weaken the budget constraint. As a result, although general equilibrium models may work well for forecasting in other sectors in which prices and incentives are not distorted, they may not work as well for the health care sector.

There are other questions regarding current law and financing. Even though it is understood that people are not going to spend 80 percent of GDP on health care and that the nation certainly cannot finance 80 percent of GDP for health care, making adjustments to projections to achieve a sustainable level of spending may do a disservice to policy makers by not warning them of impending danger.

The key point is that current law weakens many brakes on health care spending. The costs of care are heavily subsidized, and these subsidies weaken the budget constraints that individuals would otherwise face.

What Will Slow Medicare Spending Under Current Law?

Chernew identified two principal factors that may slow the rate of growth of health care spending in the future. The first is cost sharing—that



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