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entitled 'Health Care Spending: Public Payers Face Burden of 
Entitlement Program Growth, While All Payers Face Rising Prices and 
Increasing Use of Services' which was released on February 15, 2007. 

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

United States Government Accountability Office: 


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: 


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.[Footnote 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.[Footnote 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. 

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.[Footnote 3] Figure 1 shows 
the substantial contribution of outlays for Social Security, Medicare, 
and Medicaid to this problem. 

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: 

[See PDF for image] 

Source: GAO's January 2007 analysis. 

[End of figure] 

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.[Footnote 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: 

[See PDF for image] 

Sources: U.S. Census Bureau, Annual Estimates of the Population by Sex 
and Five-Year Age Groups for the United States: April 1, 2000, to July 
1, 2003 (NC-EST2003-01) (June 2004), and U.S. Interim Projections by 
Age, Sex, Race, and Hispanic Origin (March 2004). 

[End of figure] 

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, 

[See PDF for image] 

Sources: Office of Management and Budget and the Congressional Budget 

[End of figure] 

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-

[See PDF for image] 

Sources: GAO analysis based on data from the Office of the Chief 
Actuary, Social Security Administration; Office of the Actuary, Centers 
for Medicare and Medicaid Services; and the Congressional Budget 

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. 

[End of figure] 

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: 

[See PDF for image] 

Source: The Centers for Medicare and Medicaid Services, Office of the 

Note: The figure for 2015 is projected. 

[End of figure] 

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, 

[See PDF for image] 

Sources: GAO analysis of data from the Bureau of labor Statistics, the 
Centers for Medicare and Medicaid Services, Office of the Actuary, and 
the Bureau of Economic Analysis. 

[End of figure] 

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.[Footnote 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.[Footnote 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. 

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.[Footnote 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.[Footnote 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.[Footnote 9] 

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.[Footnote 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.[Footnote 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. 

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 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. 



[1] GAO, Long-Term Budget Outlook: Deficits Matter--Saving Our Future 
Requires Tough Choices Today, GAO-07-389T (Washington, D.C.: Jan. 23, 
2007); Long-Term Budget Outlook: Saving Our Future Requires Tough 
Choices Today, GAO-07-342T (Washington, D.C.: Jan. 11, 2007); 21st 
Century: Addressing Long-Term Fiscal Challenges Must Include a Re- 
examination of Mandatory Spending, 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, GAO-05-564T 
(Washington, D.C.: Apr. 27, 2005). 

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

[3] For more information about GAO's simulations see [Hyperlink,]. 

[4] Financial 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. 

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

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

[7] See 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, [Hyperlink,] 
(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). 

[8] Kenneth E. Thorpe et al., "The Impact of Obesity on Rising Medical 
Spending," Health Affairs Web Exclusive, [Hyperlink,] 
(Oct. 20, 2004). 

[9] Klea 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). 

[10] GAO-04-793SP. 

[11] For 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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