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CBO’S LONG–TERM

BUDGET OUTLOOK

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, DECEMBER 13, 2007

Serial No. 110–26

Printed for the use of the Committee on the Budget

(

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/budget/index.html 

(II)

COMMITTEE ON THE BUDGET 

JOHN M. SPRATT, JR., South Carolina, Chairman 

ROSA L. DELAURO, Connecticut, 

CHET EDWARDS, Texas 

JIM COOPER, Tennessee 

THOMAS H. ALLEN, Maine 

ALLYSON Y. SCHWARTZ, Pennsylvania 

MARCY KAPTUR, Ohio 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL BLUMENAUER, Oregon 

MARION BERRY, Arkansas 

ALLEN BOYD, Florida 

JAMES P. MCGOVERN, Massachusetts 

NIKI TSONGAS, Massachusetts 

ROBERT E. ANDREWS, New Jersey 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

BOB ETHERIDGE, North Carolina 

DARLENE HOOLEY, Oregon 

BRIAN BAIRD, Washington 

DENNIS MOORE, Kansas 

TIMOTHY H. BISHOP, New York 

GWEN MOORE, Wisconsin 

PAUL RYAN, Wisconsin, 

Ranking Minority Member 

J. GRESHAM BARRETT, South Carolina 

JO BONNER, Alabama 

SCOTT GARRETT, New Jersey 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

DANIEL E. LUNGREN, California 

MICHAEL K. SIMPSON, Idaho 

PATRICK T. MCHENRY, North Carolina 

CONNIE MACK, Florida 

K. MICHAEL CONAWAY, Texas 

JOHN CAMPBELL, California 

PATRICK J. TIBERI, Ohio 

JON C. PORTER, Nevada 

RODNEY ALEXANDER, Louisiana 

ADRIAN SMITH, Nebraska 

[Vacancy] 

PROFESSIONAL STAFF

THOMAS S. KAHN, Staff Director and Chief Counsel 

AUSTIN SMYTHE, Minority Staff Director 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, December 13, 2007 ......................................... 1

Statement of: 

Hon. John M. Spratt, Jr., Chairman, House Committee on the Budget ..... 1

Hon. Paul Ryan, ranking minority member, House Committee on the 

Budget ............................................................................................................ 2

Hon. Adrian Smith, a Representative in Congress from the State of 

Nebraska, prepared statement of ................................................................ 4

Peter Orszag, Director, Congressional Budget Office .................................... 4

Prepared statement of ............................................................................... 13

Hon. Lloyd Doggett, a Representative in Congress from the State of 

Texas, Wall Street Journal article, ‘‘The Biggest Budget Buster’’ ............ 42

(1)

CBO’S LONG–TERM BUDGET OUTLOOK 

THURSDAY, DECEMBER 13, 2007

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to call, at 10:00 a.m., in room 210, 

Cannon House Office Building, Hon. John M. Spratt Jr. [chairman 

of the committee] presiding. 

Present: Representatives Spratt, Cooper, Becerra, Doggett, Berry, 

Boyd, McGovern, Scott, Etheridge, Moore, Ryan, Hensarling, 

McHenry, Conaway, Tiberi, Smith. 

Chairman SPRATT. I call the Committee hearing to order. And 

welcome to the Committee today once again, Dr. Peter Orszag. 

We are fortunate to have Dr. Orszag testify today about the latest report from the CBO on the long-term budget outlook, although 

I will say that the picture he paints there can get rather apocalyptic. 

By my count, this is the ninth time that Dr. Orszag has testified 

before the House Budget Committee. Fortunately for him and his 

able staff at CBO, we will be leaving town soon. But when we come 

back in January, we will be depending on you more than ever as 

we begin to put together a budget for the forthcoming fiscal year. 

Last week, the Budget Committee focused on the short-term economic projections. With the evidence of an economic slowdown or 

recession mounting, we ask our panelists for their best judgments 

about where the economy is headed, the implications of the problems in the housing market, and what can be done in our budget 

to improve the near-term economic situation. 

Today’s hearing shifts to the long-term outlook. For the past several years, all of the government’s fiscal analysts, major departments, the Congressional Budget Office, GAO, the actuaries or 

trustees of Social Security and Medicare all have painted a pretty 

gloomy picture of our long-term prospects. 

Using recent trend data and policy preferences, what the CBO 

calls the alternative baseline scenario, CBO projects that the fiscal 

gap over the next 75 years, between now and 2082, we will reach 

6.9 percent of GDP, the fiscal gap, the situation where we are and 

where we would have to go if we wanted to essentially carry forward the current situation. 

At the heart of all of this are healthcare costs. Unfettered and 

based upon historic averages, CBO projects that public health 

spending will literally consume the economy over the next 75 years. 

2

Using more realistic projections of public and private healthcare 

costs, Federal healthcare spending is constrained to reach only 50 

percent of GDP in 2082. These are figures that cannot be ignored. 

Dr. Orszag has noted that there are significant opportunities to 

reduce healthcare costs without harming healthcare outlooks. It is 

important, critical, and vital that we begin to explore these opportunities, particularly in connection with a system-wide look at both 

private and public healthcare practices. We will talk about more of 

this in the course of the hearing today. 

Dr. Orszag, thank you for your excellent testimony today, for 

your projection, and for CBO’s painstaking and path-breaking work 

throughout the year. We very much appreciate the quality of your 

work and your forthcoming willingness always to tackle these 

tough topics with us. 

Before turning to you for your testimony, I want to yield to our 

Ranking Member, Mr. Ryan, for any opening statement that he 

would like to make. 

Mr. RYAN. Thank you, Chairman. 

First of all, I want to thank you for going ahead with this hearing today, and this is going to be a challenging week. By my count, 

we have had nearly ten hearings on this subject this year and I do 

not think there is 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 are 

doing us a great service by having these hearings. 

As this Committee knows too well and as Director Orszag is 

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 is 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 is 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 beneVerDate 0ct 09 2002 17:54 Mar 17, 2008 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 J:\DOCS\HEARINGS\110TH\110-26\HBU347.000 HBUD1 PsN: DICK
3

fits, these three programs alone by mid century will consume as 

much as the entire Federal Government does today. 

And, of course, that does not account for any of the massive entitlement expansions, healthcare or otherwise, currently being considered by Congress. This will happen at a time when nearly 80 

million baby boomers are retired or 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 have all heard this before. We have 

been aware of this problem for decades. 

A couple of years ago, we passed the DRA which saved $40 billion over five years. I am 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 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 is 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 do not do this 

right. 

So if we want to have a debt-free nation, if we want to give our 

kids and our 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 are going to have to 

think outside the box, we are going to have to reform these programs, and they are going to have to be done a lot differently than 

they are now if we are going to make right by our kids and our 

grandkids. 

And that is 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 have had like it. 

Chairman SPRATT. Thank you, Mr. Ryan. 

Dr. Orszag, before turning to your testimony, let me ask that all 

members be allowed to submit an opening statement for the record 

at this point if there is no objection. 

[The prepared statement of Mr. Smith follows:]

4

PREPARED STATEMENT OF HON. ADRIAN SMITH, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEBRASKA

Good morning and thank you, Chairman. 

Fiscal discipline is one of my greatest concerns. By serving on this Committee, 

my goal is to add restraint to the budget process. Congress must use the budget 

process to promote reforms which will make government programs sustainable for 

the long-term. 

At this point in time, no one in Congress—and certainly no one on this Committee—can claim ignorance of the entitlement spending crisis facing our nation. We 

know these safety net programs must be reformed in order to survive; and we know 

the reforms must be substantive and immediate. 

We have an obligation to exercise accountability and fiscal responsibility in government spending. As this Committee plans for future federal budgets, the warnings 

and information expressed to us today are of utmost importance. We should heed 

the advice of these experts, and take action accordingly. 

I appreciate the Committee for holding this hearing today. Thank you to Dr. Peter 

Orszag for highlighting the Congressional Budget Office’s Long-Term Budget Outlook before the Committee. 

Chairman, I look forward to continuing to work with you on real entitlement reforms, and I thank you for your time.

Chairman SPRATT. And, secondly, as to your own testimony, you 

have filed a written copy. We will make that copy a part of the 

record and you can summarize it any way you see fit. 

You are the only witness today, so I would encourage you to take 

your time when you are plowing through. And your efforts to explain these new concepts like excess cost growth, I think, would be 

useful as part of your briefing. 

Thank you for coming. Thanks for your testimony. We look forward to your presentation. 

STATEMENT OF PETER ORSZAG, DIRECTOR, CONGRESSIONAL 

BUDGET OFFICE 

Mr. ORSZAG. Thank you very much, Mr. Chairman. 

And before I begin, since, as you noted, we are nearing the end 

of the calendar year, let me just recognize and thank the outstanding work that CBO staff has put forward through the year 

which makes reports like the one that we are discussing today possible.


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In the very short run, over the past few years, as the first chart 

shows, there has been an improvement in the nation’s fiscal deficit, 

a reduction from roughly three and half percent of GDP to just over 

one percent of GDP or the size of the economy last year. That improvement may generate some sense of complacency about the nation’s problems. 

And the strong conclusion from the report that we issued today 

is that under any plausible scenario, the Federal budget is on an 

unsustainable path over the long term and that is, as both Mr. 

Spratt and Mr. Ryan have noted, driven primarily by rising 

healthcare spending. 

Let me describe the two scenarios that we present in this report 

and the next chart summarizes the outcomes from them.

The first scenario is an extended baseline, one in which we adopt 

the assumptions that are embodied in our ten-year budget baseline 

and then extend those same concepts out over time after the tenth 

year. 

Under the scenario, we take a literal interpretation of current 

law. And so, for example, the alternative minimum tax is not indexed for inflation and it gradually takes over a significant part of 

the Tax Code. And the 2001 and 2003 tax legislation expires as 

scheduled in 2010 and various other parts of literal current law are 

implemented. 

The alternative fiscal scenario represents one interpretation of 

what observers may believe is the underlying thrust of current 

Federal policy. So, for example, it indexes the alternative minimum 

tax to inflation to avoid the AMT taking over the Tax Code. 

And I think you can actually see the big difference between these 

two scenarios is on the revenue side, reflecting the factors that I 

was just describing. 

In particular, under the extended baseline scenario, revenue 

rises from a little under 19 percent of the economy last year in 

2007 to 25.5 percent of the economy by 2082. Under the alternative 

fiscal scenario by contrast, revenue is roughly flat as a share of the 

economy. 


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On the spending side, there are some differences, but the major 

differences between the scenarios or the most important ones are 

on the revenue side. So let me start with the revenue projects.

The next chart shows you what happens under the extended 

baseline scenario to households and in particular how they are affected by the alternative minimum tax. 

Roughly three percent of taxpayers are currently subject to the 

AMT. Under the extended baseline scenario in which the alternative minimum tax is not indexed to inflation, that share would 

rise to 75 percent by the end of the 75-year projection window as 

that first chart shows you. 

The share of revenue generated by the AMT relative to total individual income tax revenue would also rise for some period of time. 

It would then flatten out and actually decline a little bit towards 

the end of the projection window for reasons that I could explain 

if anyone is interested. 

But the bottom line is that under the baseline extended scenario, 

the AMT assumes a much larger role in the Tax Code and that 

generates significant additional revenue along with the expiration 

of the 2001 and 2003 tax legislation and ongoing increases in real 

income which push taxpayers into higher marginal tax brackets 

and that also drives up revenue.


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As we turn to the spending side, the next chart shows you the 

path of spending which is similar under the two scenarios with 

some modest differences. And I think it is almost immediately obvious that that light blue area at the top of the graph is the primary 

driver of the increases in spending over the projection window. And 

as I have already mentioned, that is those two big health programs, Medicare and Medicaid. 

Total spending is projected to rise from under 20 percent of GDP 

to well over 30 percent of GDP by the end of the projection window 

and under this scenario, closer to 35 percent. And that excludes interest spending which, of course, would start to accumulate very 

rapidly as debt accumulated.

The next chart shows you when you put the revenue and spending sides together the path of Federal debt under these two scenarios. And focusing for a moment on that alternative fiscal scenario, you can see debt explodes under the scenario very rapidly. 

The peak debt-to-GDP ratio for the United States reached 109 

percent near the end of World War II. We would reach that share 


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of GDP under this scenario in 2031 and debt would continue rising 

thereafter. We tried to evaluate the macroeconomic consequences of 

this rise in debt even if it were possible to sell additional debt at 

those kinds of ratios and I would note that investors may not be 

particularly willing to buy additional government debt as the debt 

ratios rose that high. 

By 2050, the increase in government debt which crowds out private investment and increases borrowing from abroad would reduce 

national income by 25 percent relative to a stable fiscal trajectory. 

That is a very substantial reduction in national income. 

Under the extended baseline scenario, largely because of the additional revenue that is generated by a literal interpretation of current law, the picture actually looks somewhat better for several 

decades and then the ongoing increases in healthcare spending 

starts to drive up debt as a share of the economy. And by the end 

of the projection window, you are again on an unsustainable path.

One way of trying to capture or collapse all of this information 

into a single concept is illustrated on the next chart which presents 

figures for the so-called fiscal gap. And the fiscal gap is a way of 

just collapsing into a single number the present value or taking 

into account the interest cost, the time value of money, the future 

stream of revenue relative to the future stream of spending, and 

looking at the difference between the two. 

And focusing on the bottom right-hand side of that, the fiscal gap 

under the alternative fiscal scenario over the next 75 years 

amounts to almost seven percent of the economy. What that suggests is that you would need an immediate reduction in noninterest 

spending of seven percent of the economy that you then sustain out 

over time or an increase in revenue of seven percent of the economy, and, again, permanent and sustained, in order to avoid 

unsustainable rises in debt under that scenario. Those are obviously very big numbers.


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Furthermore, the longer you wait, the more painful it gets. The 

next chart shows you what happens if instead of beginning those 

reductions in spending or equivalently increases in revenue immediately, you waited until 2020 or 2030 or 2040. The required adjustments become even larger the longer you wait because of the 

years that you miss in putting the nation on a sounder fiscal path. 

And just to calibrate that, for example, if you waited until 2020 

and tried to do the adjustments at that point, the required reduction in spending outside of interest, if you did it on the spending 

side, would amount to 43 percent. You would have to reduce everything that the government did, and I am including mandatory entitlement programs and discretionary spending, everything other 

than interest, by 43 percent and sustain that to avoid an 

unsustainable or an explosion in debt eventually occurring. That 

may help to calibrate the cost of waiting as you see the size of 

those bars go up dramatically the longer you wait. 

One factor that I have emphasized in previous testimony and 

that I will emphasize briefly again has to do with the relative contribution of demographics and other factors, including healthcare 

cost growth, on these long-term budget projections.


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The next chart shows you the pure effect of aging, that is allowing the population distribution to evolve towards older ages as is 

projected and how much that contributes to the overall fiscal gap. 

And, again, focusing on that 6.9 percent long-term fiscal imbalance under the alternative fiscal scenario, you can see that the 

dark blue and light blue lines, which are the effects of aging, 

amount to between 20 and 30 percent of the overall fiscal gap. 

In other words, most of this effect is not coming from the pure 

effect of aging and demographics. Most of it arises from other 

things like healthcare spending. And that is the central determinant of our nation’s long-term fiscal imbalance. 

And since it is the central determinant of especially the spending 

path that we are on and the overall fiscal imbalance, I do want to 

just spend the final moment or two of my oral remarks talking 

about the opportunities that exist to alter the path of spending that 

we are on with regard to healthcare. I will repeat some of the 

graphs that I always walk around with, but I think they are worth 

repeating. 

One indication of the opportunities that we have in healthcare 

spending to potentially reduce spending without harming health 

outcomes comes from the very substantial variation in healthcare 

spending across parts of the United States that cannot be explained by the characteristics of the patients or price levels in different areas. 

Spending in some areas of the country is a third of other areas. 

In Miami, the cost per beneficiary is twice as high as in Minneapolis.


ltboc-8.eps
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And as the next chart shows, on average, additional spending 

does not generate higher or better health outcomes for beneficiaries 

than lower spending areas. That opens up the kind of opportunity 

that, for example, researchers at Dartmouth have suggested, that 

we could potentially reduce healthcare spending by as much as 30 

percent without harming health outcomes if we can move the darker areas of the country towards the lighter areas and the practice 

norms in the lighter areas.

The next chart shows you that most of the variation that occurs 

is not in things that we know work. For example, it is recommended practice the closer you are to that vertical line, the less 

variation there is. The further you are, the more variation there is. 

It is recommended best practices. For example, to administer an 

aspirin for someone who experienced a heart attack upon admission to a hospital, there is not very much variation in that across 

parts of the United States. 

Much less clear when an MRI should be used or other kind of 

imaging and diagnostic tests. There is a lot more variation in those 


ltboc-9.eps ltboc-11.eps
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kinds of spending areas. Where it is less clear what should be done, 

there is more variation. Where it is less clear what should be done, 

norms in different parts of the country vary substantially in ways 

that affect spending, but apparently not average outcomes. 

And then finally, I would note many people have remarked that 

the darker areas in my map contain many of the nation’s leading 

medical centers and those leading medical centers are among the 

best in the world.

I would just point out as the final chart shows that if you look 

at three of our nation’s leading medical centers, when you rank 

them by quality, there does not seem to be very substantial differences. This is for Medicare beneficiaries in the last six months 

of life. But if you look at cost per beneficiary, and remember these 

are similar types of patients near the end of their lives, at some 

of these facilities, costs are twice as high as at others. At one of 

the facilities, $50,000 on average. Another one, about $25,000. 

When cost per beneficiary at the nation’s best medical centers 

vary by a factor of two for reasons that do not seem to be explainable by the types of patients that are going to those facilities and 

that do not seem to generate differences in outcomes, I think there 

are significant questions about how we can potentially capture opportunities to reduce cost without harming quality. 

And, again, that is the central long-term fiscal challenge facing 

the United States, how we can get healthcare costs under control 

and bend that cost curve. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Peter Orszag follows:]


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Chairman SPRATT. Thank you very much, Dr. Orszag. 

Let me ask you a question about defense. You did not break anything out here. Just for clarification, this has become a very substantial item in the budget. And the base budget itself is substantial, but it is enlarged by the supplementals that we have been 

passing for the last several years. 

What assumptions do you make about future defense growth and 

about the war supplementals in particular? 

Mr. ORSZAG. In particular with regard to the supplementals for 

operations in Iraq and Afghanistan, we are basing these projections 

off of our March baseline. The amount of spending that is involved 


ltbo-18.eps
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in the scenarios amounts to about a half a percent of the economy. 

So that is what is embodied in the long-term projections. 

Chairman SPRATT. We gave you a couple of months ago two scenarios to cost out. One assumed a reduction in force levels to 

75,000 troops in both theaters and a steady state at that level for 

the remainder of the ten-year period of time. I have forgotten your 

exact number, but it was just under a trillion dollars for that kind 

of commitment. 

Is that the level of commitment represented by the half percent 

of GDP that you have incorporated in the forecast? 

Mr. ORSZAG. It is not exactly equivalent. We have done different 

scenarios for you, we have done scenarios for Senator Conrad. This 

was not based on that kind of scenario analysis for the future, but 

rather just taking the outlays that occurred under the March baseline and extrapolating them forward. 

You could get slightly different answers using the kinds of scenarios that we have prepared for you, but it is not going to substantially change, for example, that seven percent number. It may 

move it by a couple tenths of a percent of GDP. 

Chairman SPRATT. The reason I ask that is that defense is one 

of those categories in the budget. Half of discretionary spending or 

more goes to defense today. That is one of the things that will be 

unsustainable at today’s level if this budget indeed goes forward or 

at least it will be in conflict with other priorities in the budget, 

other budget objectives. And what is left over once you put 

healthcare and Social Security together is not much to sustain defense and other things that are typically looked upon as the fundamental functions of the budget. 

Mr. ORSZAG. And I would just again say if we stay on the same 

path, especially with regard to healthcare spending, we face basically only two alternatives. One is an increase in revenue well beyond anything that the United States has seen in terms of historical norms and/or some combination with a very substantial reduction in the other things that the Federal Government does. 

And I would also note you cannot squeeze those other things 

hard enough to actually pay for the projected increases in spending. When you look at the whole part of discretionary spending, 

both nondefense and defense, even if you reduce them to implausibly low levels, that would not finance the projected increases in 

healthcare spending over the next 75 years. 

Chairman SPRATT. There are other projections out there, none as 

recent as yours, but the Government Accountability Office has done 

projections of the economy. They have developed a 50- to 75-year 

fiscal gap number. The Medicare trustees have developed their own 

numbers. And while the differences do not look great, over a period 

of time, they are pretty significant. 

The trustees, for example, of Medicare and Social Security 

project the 75-year Social Security shortfall to be 1.95 percent, just 

under two percent of payroll. I believe you have got 1.8 percent of 

payroll. 

Mr. ORSZAG. Yes, sir. 

Chairman SPRATT. How do you account for those differences? 

Where do they differ in projecting the future from how you are predicting it? 

32

Mr. ORSZAG. I would note first that there had been more significant differences several years ago between us and the actuaries. 

The differences now are actually relatively modest over a 75-year 

period and they have to do with different real interest rate assumptions, different real wage growth assumptions, a whole variety of 

different things. 

The difference between 1.8 and something closer to two is not 

something that I would stake policy conclusions on. They both 

show some imbalance in Social Security’s finances over the long 

term. 

Chairman SPRATT. What is the difference in Medicare? 

Mr. ORSZAG. There is a more substantial difference. For the 

Medicare Hospital Insurance Program, Part A of Medicare, we 

project a 75-year actuarial imbalance of 5.4 percent of taxable payroll and the actuaries are at about three and a half. 

That has to do with the fact that as noted in our long-term 

health outlook, we have over the long term a higher trajectory for 

healthcare spending than the trustees do, in part because under 

their assumptions, they constrain that so-called excess cost growth 

factor, which has to do with how rapidly costs are rising per beneficiary, to an average of one percent between year 25 and year 75. 

And that is very substantially lower than the historical average 

over the past three or four decades. 

Chairman SPRATT. Would you take just a minute, I think everybody understands it, but just to address the difference between a 

prediction and a projection? 

Mr. ORSZAG. Yes, sir. 

Chairman SPRATT. In particular, what you are projecting here 

would never be attainable. The markets would fall apart and our 

economy would fall apart before we ever got to the percentages you 

are talking about. What you are doing is projecting rather than 

predicting because realistically those predictions we would never 

attain. 

Mr. ORSZAG. That is right. We are supposed to present the implications of unchanged Federal policy. That unchanged Federal policy or current Federal policy is unsustainable and, therefore, the 

implications cannot occur. 

It will not be the case that we will reach debt-to-GDP ratios at 

three, four, five hundred percent of the economy. You will not be 

able to sell additional debt if you come anywhere close to that. 

So the point of these scenarios or projections is to illustrate the 

consequences of the path that we are on, not suggest that that is 

what will occur because ultimately the Congress and the President 

will have to act to avoid those consequences from occurring. 

Chairman SPRATT. Now, let me ask you about something we discussed often here and we will be confronted with increasingly as 

we approach the December 31, 2010, and a reconsideration of the 

tax cuts that were passed in 2001 and 2003. 

At the end of the 1990s, the Federal Government was beginning 

to realize some significant budget surpluses and was on the path 

towards paying down, in fact did over three fiscal years pay down 

the national debt, about three or four hundred billion dollars. 

Part of the rationale for accumulating surpluses was to save for 

the entitlement future that we are now facing. The surpluses have 

33

been dissipated and we have accumulated more debt than any time 

in recent history. 

Can CBO estimate somehow, can you break out somehow the significance of the tax cuts? Can you estimate what percentage of the 

fiscal gap that we are now seeing, that you are now describing is 

caused by those tax policies and by leaving those tax policies in 

place over the forthcoming 75 years? 

Mr. ORSZAG. Well, the answer would be sensitive to whether you 

also assume that alternative minimum tax is reformed or not because there is a very important interaction between the alternative 

minimum tax and the 2001 and 2003 tax legislation. 

If the alternative minimum tax remained in place and, therefore, 

increasingly took over the Tax Code, the present value of the 2001 

and 2003 tax legislation in terms of its impact on revenue is something about one percent of the economy or maybe one to 1.5 percent 

of the economy. 

With the AMT not taking over the Tax Code, the total effect is 

closer to two percent of the economy, so you could compare those 

results to the roughly seven percent fiscal gap that we presented. 

Chairman SPRATT. We may want to get some further clarification 

from you and we will submit something for the record. 

I have some more questions, but others have them as well, so let 

me yield now to our Ranking Member. 

Mr. RYAN. Thank you, Chairman. 

Peter, let me go into your table two in your book or I think it 

is in your testimony as well. And you are 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. 

Mr. RYAN. Yes, total spending. In your projections, do you not 

project a slowing of the growth of the health spending in the out 

years? 

Mr. ORSZAG. Yes, we do. 

Mr. RYAN. And the trustees do the same as well, correct? 

Mr. ORSZAG. Much more aggressively. 

Mr. RYAN. Yes. Why? 

Mr. ORSZAG. The reason that there is some slowing in our projections is twofold. The first is that there is some scope for regulatory, 

that is nonlegislative cost reductions, and also the higher cost sharing that will come through 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, households, and employers will 

push back on ongoing healthcare cost growth when it starts to consume a larger and larger share of their budgets. 

Mr. RYAN. Okay. So you believe absent any change in law by 

Congress that consumers are price sensitive actors? 

Mr. ORSZAG. The medical system will ultimately evolve so that 

healthcare does not crowd out consumption of cars and what have 

you. 

Mr. RYAN. So there is a threshold in a consumer’s mind at which 

they do not want to cross and so when consumers see more of their 

own out-of-pocket expenses, their own cash being exposed, they are 

going to act rationally and cut back on costs. 

34

So you believe there is elasticity here? There is 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 am going to cut back. And you are putting that under the assumption that is slowing the inflation of 

healthcare. Is that what you are 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, and that does reduce 

healthcare expenditures and the evidence suggests it reduces it in 

a way or reduces them in a way that does not actually harm health 

outcomes. 

Mr. 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 

a static analysis and carry that out, what would the share of GDP 

be then? 

Mr. ORSZAG. By the end of the 75-year window, healthcare would 

be a hundred percent of the economy and then it would be there 

thereafter. 

Mr. RYAN. And in 2050? 

Mr. ORSZAG. It will take me a second. 

Mr. RYAN. Mid century, I am just kind of curious. 

Mr. ORSZAG. Just give me a second. It is about 50 percent or so 

if I drew the line straight. 

Mr. RYAN. 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 exposures basically to read into 

this baseline? 

Mr. ORSZAG. CBO’s analysis and other official analysis always 

take 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. 

Mr. RYAN. Let me ask you. Since 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 average 3.6 real GDP 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. Couple comments. First, cross-country comparisons 

are often very difficult, so I would just urge a little bit of caution 

in those. 

Mr. RYAN. But that is 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 are doing shares of GDP, tax systems can vary, the types of 

35

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 the exploding government debt path, especially under the 

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 is not 

a general conclusion that is applicable in all settings. 

Mr. RYAN. Okay. Well, your predecessor, Doug Holtz-Eakin, used 

to say that government spending, whether it is 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. 

Mr. RYAN. Okay. So you have a distinction with that view. 

One more question. Your current law revenue baseline assumes 

that the 2001 and 2003 tax laws expire, the AMT expands under 

current law. That is 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 a thousand per 

child? 

Mr. ORSZAG. After 2010, it falls back to its previous level of $500. 

Mr. RYAN. What is the estate tax? What happens with the estate 

tax? 

Mr. ORSZAG. The estate tax reverts to its previous level of a 

threshold of a million dollars with a 55 percent tax rate. 

Mr. RYAN. A million or 600,000? Is it a million? I thought it was 

600. 

Mr. ORSZAG. We will get back to you. 

Mr. RYAN. Okay. What happens to cap gains and dividends? 

Mr. ORSZAG. They revert back to their previous levels also. 

Mr. 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 would have 

75 percent of taxpayers on the AMT. 

Mr. RYAN. Or households? 

Mr. ORSZAG. On the AMT. 

Mr. RYAN. All right. Well, I appreciate the generosity of the 

Chairman on the time. Thank you. 

Chairman SPRATT. Thank you, Mr. Ryan. 

Mr. Cooper. 

Mr. COOPER. Thank you, Mr. Chairman 

First, two announcements. I would invite any colleague who is 

alarmed by what Peter has told us to cosponsor the so—called 

‘‘Cooper-Wolf Safe Commission Act,’’ a bipartisan commission to 

present the next President with a plan for solving some of these 

problems so we can take action. The bill number is H.R. 3654. I 

would invite your participation. 

36

Also, on December 15th, in just a few days, the U.S. Treasury 

Department will be issuing a financial report for the United States 

government, the only audited numbers we face. 

And the Federal employees in the room may be interested to 

know that still when Peter says that the deficit is only slightly 

above one percent of GDP and we should acknowledge that that 

does not include things like the retirement and health liabilities of 

our own Federal employees, but the financial report, the document 

that is about to come out in a few days does address those things, 

situations that would be criminal violations if they occurred in the 

private sector, but we continue to allow this to go on at this level. 

I am glad, Mr. Chairman, you are having this hearing. To me, 

these are the most important issues we face because they determine all other issues. They determine all defense spending. They 

determine all healthcare spending. They determine the future of 

America. 

And to me, the most important sentence that Peter used was 

when he said under any plausible scenario, our course is 

unsustainable. In Tennessee language, that would mean you would 

have to be a damn fool not to believe we are sinking fast here. 

Now, Peter cannot use such language. I can. But this is real 

stuff. And the Chairman may call it apocalyptic. Peter said under 

any plausible scenario, our path is unsustainable. 

So you use very erudite percentages of GDP, things like that. 

You are remaining true to your calling and your profession. That 

is great. 

Can you quantify some of this? What is 6.9 percent of GDP? How 

many billion dollars is that? 

Mr. ORSZAG. Today given an economy of about 14 or $13 trillion, that would be north of $900 billion. 

Mr. COOPER. So close to a trillion dollars? 

Mr. ORSZAG. Right. 

Mr. COOPER. And this is a present value number we would have 

to have in the bank today earning interest to pay out the shortfall 

primarily in just a couple of healthcare programs? 

Mr. ORSZAG. Yes. 

Mr. COOPER. Okay. You also point out in your excellent testimony the cost of delay. If we act in 2008, that is a lot cheaper than 

acting in a later year. 

Mr. ORSZAG. Yes. 

Mr. COOPER. You used 2020. What is the cost of delay? What 

does each year of delay cost us? 

Mr. ORSZAG. Well, I could calibrate that in different ways. I 

guess delaying from 2020 to 2030 increases the reduction in spending by five percentage points. So each year of delay, roughly speaking, is another half a percent of reduction that is required. There 

are lots of ways of calibrating these. 

Mr. COOPER. But it is on the order of, if it is a half a percent 

of GDP today, that would be on the——

Mr. ORSZAG. Well, that is spending. That is not GDP. 

Mr. COOPER. Okay. But hundreds of billions of dollars of cost per 

year of delay? 

Mr. ORSZAG. There is no question that each year of delay significantly adds to the cost of acting. 

37

Mr. COOPER. And total congressional discretionary spending for 

this year will be what, 900 and something billion dollars? 

Mr. ORSZAG. Something like that, yes. 

Mr. COOPER. So just the cost of delay will be a big percentage 

of the total work of Congress every year, just the cost of delay. 

I would like to explore with you too. It seems to me a lot of my 

colleagues do not realize that if you use the ship analogy, it is not 

whether we hit the iceberg, we have. The only question is, how fast 

the ship is sinking. 

And I think that we are not noticing some things. For example, 

the Medicare SGR fix. We patch that, year in, year out, but the 

U.S. Treasury Department has estimated a real fix for that would 

cost $5 trillion. That is a big number. 

AMT fix. We fix it, patch it year in, year out. A real fix for that 

is in the trillions. 

So we are not noticing the genuine cost of these problems. We 

are just patching it year in, year out, limping along, trying to get 

by, hoping people do not really notice. That to me is deliberate 

blindness. 

And I see, Mr. Chairman, my time is running out. I hope we can 

have time for a second round of questions. I thank you, Mr. Chairman. 

Chairman SPRATT. I have the unpleasant duty of announcing 

that there are four votes pending, one of which is a 15-minute vote. 

We will keep going down until about three or four minutes, but let 

us move ahead. And then with the indulgence of our witness, we 

will come back as quickly as we can. 

Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. And, again, let me 

add my voice to the chorus of those thanking you for holding a 

very, very important hearing. 

Dr. Orszag, please forgive me. You had a lot of numbers and 

some very sobering concepts and projections here. 

Just to make sure I understand it, if we by 2050 under current 

baseline were attempting to balance the budget by tax increases 

alone, today I believe the figure is that we are taxing at roughly 

18.7 percent of our economy, just what is the magnitude of the tax 

increase that would be necessary under your projections if we simply wanted to tax our way out of this problem? 

Mr. ORSZAG. Again, it would depend whether you did anything 

before that. But if you did not do anything before that, the tax 

share of the economy would have to be somewhere between 28 and 

42 percent. 

Mr. HENSARLING. Between 28 and 42 percent——

Mr. ORSZAG. Right. 

Mr. HENSARLING [continuing]. From roughly 18.6, 18.7 percent of 

the economy? 

Mr. ORSZAG. That is correct. And that difference depends on 

what you are doing to the revenue code and a few other things in 

between now and then. 

Mr. HENSARLING. So if we split the difference between the 28 and 

42 percent, what we would end up concluding is that, would we not 

conclude, that from 18 to, say, 36 that we would have to roughly 

38

double the level of taxation on American people if we simply wanted to tax our way out of this problem? Is that a fair conclusion? 

Mr. ORSZAG. Yes. 

Mr. HENSARLING. We often talk about billions and trillions here. 

But if you were to look at the tax burden on the average American 

family making median income, can you translate that into a number as far as the tens of thousands of dollars of tax increase that 

may go to a family making median income? Do you think you could 

do a back of the envelope calculation there? 

Mr. ORSZAG. Sure. A married couple with two kids currently pays 

an income and payroll taxes of approximately 16 percent of their 

income. Their income is about $90,000, so that is what, 14,000 or 

so in taxes. And you can then scale that up if you so choose. 

Mr. HENSARLING. Okay. Thank you. Dr. Orszag, I believe that 

what I am hearing from you is that our greatest fiscal challenge 

does come from entitlement spending, principally the healthcare 

component of that entitlement. 

Mr. ORSZAG. Yes, sir. 

Mr. HENSARLING. Is that a fair assessment? Recently in this particular Congress, we have now passed H.R. 976, SCHIP; H.R 2419, 

form ‘‘Nutrition Bioenergy Act;’’ H.R. 2669, ‘‘Higher Education Access Act.’’ There appear to be at least six to seven different acts 

that we passed that by my reckoning have actually added to the 

burden of entitlement spending. H.R. 976, 127 billion; H.R. 2419, 

20.8 billion over ten; H.R. 2669, 16.3 billion over ten. 

Have you looked at the increases in entitlement spending that 

have been passed by this House and, if so, does your figure comport 

with my figure that we have just added to the burden over the next 

ten years of entitlement spending by $178.6 billion? 

Mr. ORSZAG. We have scored legislation that has passed the 

House. I have not added them together in the way that you apparently have. 

Mr. HENSARLING. If we are just simply looking at the long-term 

fiscal challenge of the nation, if this became law, have we just 

made the situation better or worse? 

Mr. ORSZAG. If what? 

Mr. HENSARLING. If these acts become law. You say you have 

scored these. Do you know if you have scored them as adding to 

the entitlement burden or lessening the entitlement burden? 

Mr. ORSZAG. There are many things that have passed the House 

that increase spending, but are also offset, for example, through 

additional revenue. So the net budget impact typically is zero even 

though both spending and revenue are then higher. 

Mr. HENSARLING. I see I am out of time. Thank you, Mr. Chairman. 

Chairman SPRATT. Thank you, Mr. Hensarling. 

Mr. Becerra. 

Mr. BECERRA. Dr. Orszag, thank you very much for your testimony and your sobering words. 

Let me ask. I know that during the depression, the great depression, we had any number of people in America who were destitute, 

having a difficult time, and that included people who were seniors, 

retired, no longer working, and in many cases, suffering worse than 

those who were of working age because they were beyond their 

39

years and had to make ends meet without any particular financial 

support. 

President Roosevelt enacted Social Security to address those dire 

circumstances that so many older Americans faced. And to this 

day, Social Security has continued to pay benefits, never missing 

a day of paying benefits to people, and I think continues to pay 

benefits beyond the 75-year threshold with some adjustments all 

the way to the hundred percent benefit that most people expect. 

Medicare, which came into being in the mid 1960s, was also an 

effort to try to address the problems that seniors were having in 

coping with the cost of healthcare in their retirement so that their 

entire pension would not be used to pay for their healthcare in 

their golden years. 

These are programs that have become essential, I think, to most 

seniors living in dignity in their retirement. There are some pretty 

scary numbers that we see. 

I want to make sure I understand something. You are not saying 

we should eliminate Social Security and Medicare, are you? 

Mr. ORSZAG. No. I did not use the word should on anything other 

than you should act to avoid this problem. 

Mr. BECERRA. And so the crisis here is in our expenditures and 

managing our expenditures. And you had some interesting charts 

at the end that talked about what we have to do to try to manage 

the cost of healthcare, whether it is in the public sector, meaning 

Medicare or Medicaid, which is healthcare for low-income individuals, including many seniors, or whether it is in the private sector 

through whatever the marketplace offers people for individual insurance or otherwise. 

A question for you. I know that other developing countries have 

far lower cost in their healthcare for their people and unlike the 

U.S. where we have some 47 million who do not have health insurance, they are able to provide a hundred percent coverage to their 

people for healthcare access. In many cases, we find the standard 

of living higher in some of these industrialized countries, principally in Europe, who offer healthcare and other social benefits to 

their population. 

What are we doing wrong on healthcare that they are doing right 

that their costs in some cases are lower by a factor of 50 percent? 

And can you give us any comments about what we should be doing 

to try to reduce our cost? 

Mr. ORSZAG. First note that on that chart I showed you with 

parts of the United States, there are parts of the United States, 

Minneapolis, for example, that are delivering healthcare at costs 

comparable to many of those comparison countries in a quality that 

is also comparable. So there are parts of the U.S. that are delivering healthcare in a way that seems relatively good compared to 

other systems. 

I would say the fundamental problem in the nation’s healthcare 

system is that we have financial incentives, strong financial incentives for more care rather than better care. And that is on both the 

provider side and the consumer side. 

And until we spend more time and effort figuring out what is 

better care and then aligning financial incentives so that we are 

delivering better care rather than more care, we are going to be 

40

spending more than we need to to obtain the results that we hope 

for. 

Mr. BECERRA. Thank you. Turning now to the debt because I 

want to make sure that as we focus on Social Security, Medicare, 

Medicaid, we do not lose track of the size of the debt, the interest 

payments we make on the debt that we have. 

On Social Security one last point. At least 40 percent of today’s 

seniors would be living in poverty if they did not have Social Security. Today the poverty rate for our seniors is about ten percent. 

So some 13 million seniors are lifted out of poverty simply by the 

fact that we have provided their health and retirement benefits 

into the future through programs like Social Security and Medicare. 

But on the debt, I know over the last five to seven years, the size 

of the national debt has skyrocketed. And I know that part of that 

is due to the fact that we have had tax cuts from the President 

that have been unpaid for, in essence paid for by deficit spending, 

by borrowing. 

If we cannot sustain this level of debt, can we sustain programs 

that continue to go through this Congress, whether tax cuts or 

spending programs, that are not paid for so that we try to keep a 

balance to our budget? 

Mr. ORSZAG. I guess my response is the logic of the PAYGO rules 

that you have adopted is to avoid making the problem worse, in the 

face of this very substantial long-term fiscal problem that you already have. And that is what PAYGO does. It at least avoids 

digging the hole deeper in the face of an already substantial longterm hole. 

Mr. BECERRA. Thank you. 

Thank you, Mr. Chairman. 

Chairman SPRATT. The Committee will stand in recess pending 

the votes on the floor at which point, we will resume. We appreciate it. 

[Recess.] 

Chairman SPRATT. I believe the last member to pose question 

was Mr. Becerra. Mr. Conaway is not here, so we will go to Mr. 

Doggett. 

Mr. DOGGETT. Thank you so much for your testimony. I realize 

that you are here more in the diagnosis business than the prescription of treatment, but I want to talk a little bit since you have been 

discussing healthcare beginning there, focusing on what the effect 

of some policy alternatives would be on the scenario that you have 

described. 

Now, a number of our colleagues for years followed the approach 

advocated by former Speaker Newt Gingrich that one solution was 

to let Medicare wither on the vine. 

If we take that approach and let Medicare and Medicaid perhaps 

wither on the vine, will that solve our healthcare problems in the 

country or will it simply shift the burden greater on to individuals 

if we significantly limit Medicare and Medicaid? 

Mr. ORSZAG. Well, again, it depends, I suppose, what one means 

by withering on the vine. CBO has previously noted that, for example, if all you did was tried to reduce payment rates in Medicare 

and then sustained that out over time that what you would likely 

41

wind up doing is creating significant access problems under the 

programs because hospitals and doctors would be less likely to 

treat or be willing to treat Medicare and Medicaid patients. 

And so ultimately we need to get at that excess cost factor, the 

rate at which healthcare costs are growing, and that will require 

the types of things I mentioned before, additional information and 

changes in financial incentives both under Medicare and Medicaid 

and in the rest of the health system. 

And I think it is unrealistic to think that you are going to just 

clamp down on Medicare payments, for example, and then sustain 

that out over a very long period of time without having the problem 

crop up somewhere else. 

Mr. DOGGETT. We have to focus not just on the whole patient but 

the whole healthcare system in looking at the future of health and 

our ability to sustain that system. 

Mr. ORSZAG. And in particular, one needs to be thinking about 

the effect of policy changes on Medicare and Medicaid in terms of 

what their impact is on the rest of the system. 

So, for example, when we move to DRG payments, a fixed payment per inpatient hospitalization in Medicare, the incentive was 

to then shorten hospital stays for Medicare patients. We wound up 

shortening hospital stays for all patients because that changed the 

way hospitals practiced medicine. 

One needs to be thinking about those sort of follow-on effects 

which are crucial to the sustainability of policy changes. 

Mr. DOGGETT. And realizing we cannot solve all of these problems with just one proposal, there is no panacea. 

This year, as you know, I serve on the Health Subcommittee on 

Ways and Means dealing with the Medicare portion of this. As we 

have tried to contain cost so that we had what we called our 

CHAMP Bill that you are familiar with and your office would have 

been involved in scoring, we applied PAYGO, we paid for all of it, 

and we did that by addressing where we saw some of the most excessive cost, which was in the Medicare Advantage Program, and 

by trying to deal with other particular cost issues such as the way 

kidney patients are handled, such as the way oxygen is handled. 

Every one of those efforts that we made to contain cost has run 

into a buzz saw of objection. So it is not as if this Congress, particularly the House, has not already attempted to deal with some 

of the cost issues. 

Let me ask you first, over the short run and for that matter the 

long run, do you believe that maintaining our PAYGO rules and 

ensuring when we are dealing with changes in the Medicare system that we pay as we go, when we make changes in our tax system that we apply PAYGO? Is that important to addressing both 

the short-term and the long-term concerns that you have raised in 

your testimony today and last week? 

Mr. ORSZAG. Again, PAYGO helps to ensure that the problem 

does not get worse and so it avoids digging the hole deeper. 

Mr. DOGGETT. And in terms of trying to get out of the hole, what 

are some of the alternatives? We have discussed comparative effectiveness on prescriptions. We have looked at that and more resultoriented medicine for physicians. 

42

Are there proposals that you see out there we might begin to implement sooner rather than later, might do additional demonstration projects in to see if we can find a way to contain healthcare 

costs without significantly reducing either the quality of service or 

the access of those services to Medicare recipients? 

Mr. ORSZAG. Let me say two things. First with regard to demonstration projects, I would urge policy makers to consider whether 

the design of the demonstration projects that CMS currently does 

is actually ideal for learning anything about what works and what 

does not. I think a much greater emphasis on designing the demo 

projects in a way that actually then teaches us about what works 

and what does not could prove to be significantly beneficial. 

Beyond that, I would also say CBO during 2008 will be spending 

significant resources internally on developing a health options volume for you so that we will march down all the things that people 

talk about, care coordination, disease management, health information technology, and so on and provide some insight into our thinking on what dials can be turned in order to generate budgetary effects. 

So I do not have a full answer for you right now, but one of the 

reasons that I am bulking up our health staff is to be able to provide better answers to you and better options for you next year. 

Mr. DOGGETT. Just one more, if I may. Yesterday in the op-ed 

that you had in the Wall Street Journal, which I would hope could 

be made a part of our record on this, you commented that many 

analysts believe that significantly constraining the growth of costs 

for public programs while maintaining broad access to hospitals 

and doctors under them will be possible only in conjunction with 

slowing costs in the health sector as a whole, much as what you 

said in response to my earlier questions. 

Could you just elaborate a little more about the possible adverse 

consequences of trying to constrain growth in the public sector 

health programs like Medicare and Medicaid without slowing 

healthcare costs economy-wide? 

Mr. ORSZAG. Yes. Again, the objective has to be that when you 

try to slow growth in Medicare and Medicaid, you then also achieve 

slowing of growth in the rest of the health system and thinking 

about that sort of follow-on effect. 

In the absence of that, if you just clamp down on the growth rate 

and payment rate, for example, in Medicare, and payment rates in 

the rest of the health system continue to grow unabated, doctors 

and hospitals will look at the compensation for treating a Medicare 

patient versus other patients and say I am not that interested in 

treating Medicare patients, for example. 

Mr. DOGGETT. Thank you very much. 

[The Wall Street Journal article referred to follows:]

[From the Wall Street Journal, December 12, 2007, Page A19]

The Biggest Budget Buster

By PETER R. ORSZAG

The nation’s economic outlook may look troubling in the short run, but these difficulties pale beside the economic consequences that will follow if we don’t address 

the nation’s long-term fiscal gap—or the prospective mismatch between projected 

spending and revenues. 

43

The fiscal gap does not arise, as many believe, primarily from the coming retirement of the baby boomers. Rather, the rate at which health-care costs grow will be 

the primary determinant of the nation’s long-term budget picture. 

A congressional hearing tomorrow will focus on new long-term budget projections 

from the Congressional Budget Office. CBO projects that under current law, Federal 

spending on Medicare and Medicaid measured as a percentage of gross domestic 

product will rise to 12% in 2050 and almost 20% around 2080 from 4% today. The 

bulk of that projected increase arises from steadily growing health-care costs per 

beneficiary. 

The aging of the population, although a less important factor, will exacerbate the 

fiscal pressures created by rising health-care costs. For example, largely reflecting 

demographic changes, spending on Social Security in 30 years will increase to 6% 

from about 4% of GDP today, and then roughly stabilize thereafter. 

Such increases in spending associated with both aging and increased health-care 

costs—unless matched by significant reductions in other spending or increases in 

revenues—would ultimately create outsized budget deficits that would raise government debt to unprecedented levels. 

Even if substantial future budget deficits could be financed by issuing additional 

debt, they would seriously harm the economy by reducing national saving and national income. Averting such economic damage will ultimately require some combination of less spending and more revenues than what is now projected. 

The bottom line is that while we need to address the effects of the coming retirement of the baby boomers and the projected imbalance in Social Security, we have 

to pay even more attention to the health-care costs that exert the dominant influence on our fiscal future. Policy makers will face both challenges and opportunities 

in trying to reduce these costs. 

Over long periods, the cost growth per beneficiary in the Medicare and Medicaid 

programs has tracked cost trends in private-sector health-care markets. As a result, 

many analysts believe that significantly constraining the growth of costs for the 

public programs while maintaining broad access to hospitals and doctors under 

them will be possible only in conjunction with slowing cost growth in the health sector as a whole. The interactions between Medicare and Medicaid and the rest of the 

health system can complicate long-term efforts to reduce costs. 

But it’s too soon to conclude that the fiscal picture is hopelessly dismal. There remains the promising possibility of restraining health-care costs without incurring 

adverse health consequences. It may even be possible in some cases to reduce cost 

growth and improve health at the same time. Costs per beneficiary in Medicare, for 

example, vary substantially across the U.S. for reasons that cannot be explained 

fully by the characteristics of the patients or price levels in different areas. 

High-spending regions do not generate better health outcomes, on average, than 

the lower-spending ones. When health care at some of the nation’s leading medical 

facilities costs half as much as care at other top-rated facilities for the same types 

of patients, something must be wrong with the system. Some academic research 

suggests that national costs for health care can be reduced by perhaps 30% without 

harming quality. 

Understanding the reasons for such differences and finding effective ways to reduce them while ensuring high-quality care will not be easy. Potentially promising 

approaches include generating more information about the relative effectiveness of 

medical treatments, and enhancing the incentives for providers to supply, and consumers to demand, better care, rather than just more care. 

Moving the nation toward a more efficient health system inevitably will be a process in which policy steps are tried, evaluated and maybe reconsidered. Beginning 

that arduous process now is essential to securing the nation’s long-term economic 

future.

Mr. Orszag is the director of the Congressional Budget Office.

Chairman SPRATT. Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Dr. Orszag, we are trying to deal with this AMT problem and it 

seems to me that a lot of the AMT problem was predictable because 

we passed the tax cuts knowing that there would be an AMT problem, and that was part of the scheme. 

You pass a trillion dollar tax cut and you phase it in, phase it 

out, do not pay for the AMT, figuring that when the time comes, 

we will fill in the gaps. We put in a down payment of about 300 

44

billion on the tax cut and now we are kind of filling in the gaps, 

the AMT being one. 

If the tax cuts were to expire, how much of an AMT problem 

would we have? 

Mr. ORSZAG. The AMT problem is significantly less extreme in 

the absence of the 2001 and 2003 tax legislation. And the reason 

again is that people wind up on the AMT when their AMT liability 

is higher than their regular income tax liability. So as you reduce 

regular income tax rates, more people are shifted on to the alternative minimum tax. 

Mr. SCOTT. So we could equalize it when we get there and make 

sure that if we have a tax cut, it is paid for without the AMT. 

I notice that your analysis did not include interest on the national debt. That is one of the fastest-growing parts of the Federal 

budget. It is already what, a couple of hundred billion dollars. 

And according to the chart on your testimony at page five, by 

2030, it goes from 1.7 to 4.8 percent under the alternative, page 

five, under the alternative fiscal scenarios, 2007 is 1.7; 2030 is 4.8 

percent. It triples the interest on the national debt which would 

put it in the 700, 800 percent range. 

How do you do a budget? In your charts on page three, shouldn’t 

interest on the national debt be part of that chart? 

Mr. ORSZAG. You know, you could always add interest spending 

on top of so-called primary spending, that is noninterest spending. 

The reason that analysts sometimes or often examine primary 

spending is that is what drives the debt dynamics. 

So if noninterest spending exceeds revenue, you wind up with 

rising debt and vice versa. And the debt dynamics just follow. You 

can present the figures in terms of overall government spending. 

And as you note on table 12, that is what we do. 

Mr. SCOTT. Well, on table two, you also show that the kind of socalled primary, we actually have a surplus, but you did not have 

interest on the national debt. But since you have run up interest 

on the national debt, we have actually a deficit, so we are adding 

to the debt. 

Mr. ORSZAG. Correct. 

Mr. SCOTT. So I mean, it is not something you can ignore. As a 

matter of fact, it is the first thing you have got to pay. 

You just finished answering a healthcare question where if we fix 

Medicare and Medicaid, others will follow. I have a question of 

kind of who is following who. 

The healthcare problem is not a Medicare and Medicaid problem. 

It is a general problem. Everybody’s healthcare, everybody in the 

private sector is going up. 

Is there any credible way to fix to Medicare and Medicaid growth 

curve without doing something about healthcare generally? 

Mr. ORSZAG. Again, only to the extent that the changes you make 

to Medicare and Medicaid spill over and also help to constrain 

growth in the rest of the health sector will those changes in Medicare and Medicaid ultimately be sustainable because if not, you 

will create huge access problems. 

Mr. SCOTT. Who is driving what? I mean, it seems to me the private sector healthcare drives the cost of Medicare and Medicaid. 

And as you suggested, if it gets too far out of whack, people just 

45

will not take Medicare and Medicaid. And you have had that scenario plenty of times. 

Mr. ORSZAG. One of the complexities in health policy is these 

complicated interactions between the public and private parts of 

the system. So it goes in both directions. 

Mr. SCOTT. Okay. Well, what is the experience and cost control 

in Medicaid and Medicare? Is it better or worse that the private 

sector? 

Mr. ORSZAG. Over long periods of time over the past three to four 

decades, excess cost growth, which is the best way of measuring 

these things in Medicare and Medicaid, have closely tracked cost 

growth in the rest of the health system. So on average, they have 

been growing at about the same rate. 

Mr. SCOTT. Is there any way to get hold of it without going to 

a single payer plan? 

Mr. ORSZAG. Any way to get hold of what? 

Mr. SCOTT. The growth in healthcare costs. 

Mr. ORSZAG. Again, I think the answer to that is yes. There are 

different models. The fundamental problem that we face is that we 

lack information, adequate information on what works and what 

does not. And we have financial incentives to provide more care 

both for providers and consumers rather than better care. 

And that combination of a lack of knowledge and then financial 

incentives just for more care rather than more efficient care or better care leads to rapid growth in spending and also to spending levels that are higher than they need to be to deliver health quality 

of whatever level. 

Chairman SPRATT. Maybe we should give people some kind of 

bonus if they retire in Minneapolis instead of Miami. 

Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Dr. Orszag, I appreciate your editorial from yesterday and I 

know it has been referenced. But is there such thing as a prohibitive tax rate, a tax rate that reduces productivity, stagnates the 

economy? Is there such thing as a prohibitive tax rate? 

Mr. ORSZAG. I think everyone would agree a hundred percent 

would have a very negative effect on incentives. 

Mr. MCHENRY. Okay. But short of that. 

Mr. ORSZAG. Sure. The question becomes where the line is. And 

as tax rates rise, especially marginal tax rates, the distortions to 

incentives become more severe. I do not know that I can give you 

a, you know, cliff where the world falls apart as opposed to it just 

becoming gradually more severe. 

Mr. MCHENRY. But a jump in tax rates. For instance, taxes that 

may go up 50 percent, does that have a harmful effect on the economy and productivity? 

Mr. ORSZAG. An increase in marginal tax rates does harm incentives and does negatively affect productivity. On the other hand, 

one does need to think about what that is financing. And to the extent it is reducing a deficit, there is a corresponding economic benefit from eliminating that deficit. 

And actually CBO’s analysis suggests that the most important 

thing is to get rid of the deficit and exactly how you do it is typically of less consequence than the economic impact of allowing the 

46

kind of runaway deficits that are present under the alternative fiscal scenario. 

Or another way of putting it is you typically do not get effects 

on future national income by 2050 of 25 percent, which is the impact of the additional debt under the alternative fiscal scenario 

from any plausible way of trying to close that gap. 

Mr. MCHENRY. Okay. Alright. So my next question was going to 

be about the deficit, but you have already touched on that very 

good. 

But going to the debt, you know, we know that the deficit has 

an enormous multiplying effect on the debt. We are adding to the 

debt every day when we have a deficit, thereby if we balance the 

books, the debt scenario long term is less harmful. 

What is the effect of long-term debt, of our long-term national 

debt? 

Mr. ORSZAG. Yes. Additional debt has a harmful effect both on 

the accumulation of productive investment at home, that is like investment in computers and physical plants and equipment, and 

also in terms of how much we borrow from abroad and the liability 

that we then owe to foreign creditors. 

Mr. MCHENRY. Well, certainly I know that is fact. But in terms 

of productivity, what does our tax structure, our structural deficit, 

and our debt do to productivity in this country and what can we 

do to actually increase productivity and investment in increasing 

productivity? 

Mr. ORSZAG. The best single thing that we can do to increase future national income and, therefore, productivity and income 

growth between now and the future is to increase our national saving rate. And part of that has to do with improving the nation’s fiscal balance, the Federal, state, and local side of things. 

Part of it also has to do to encouraging private saving. And I 

think I mentioned at a hearing last week there is a growing body 

of research about what works to get households to save. And a lot 

of it has to do with making it easy and automatic for them to do 

so. 

Mr. MCHENRY. Easy and automatic. And perhaps eliminating the 

Tax Code of disincentive that we currently have on savings. 

Mr. ORSZAG. There is some effect from——

Mr. MCHENRY. Tax policy. 

Mr. ORSZAG [continuing]. After tax rates, a return in tax policy. 

The research that I am familiar with suggests a far larger, more 

dominant factor really has to do with ease and simplicity, so things 

like being automatically in a 401(k) plan unless you opt out, trying 

to explore whether that is possible in an IRA setting, and other 

things like that so that households are doing what they want to do 

automatically and it is easy for them to do so. 

Mr. MCHENRY. But certainly as secondary, you would have to 

admit it is tax policy? 

Mr. ORSZAG. The rate of return and the after tax rate of return 

also does affect saving, yes. 

Mr. MCHENRY. Okay. 

Mr. ORSZAG. The question is just the magnitude, but, yes. 

Mr. MCHENRY. The magnitude is the question? 

Mr. ORSZAG. Right. 

47

Mr. MCHENRY. Okay. Well, is there such thing as raising taxes 

so much that Federal revenue will go down? For instance, if we 

raise taxes in such a large way that the economy stagnates and 

thereby more people are on unemployment and not working and 

thereby not paying taxes, is that a prospect that we have to be concerned about? 

Mr. ORSZAG. That is a theoretical possibility. I think all of the 

available evidence and analysis suggest we are not currently anywhere close to that threshold. 

Mr. MCHENRY. Well, we are not currently, but you would have 

to say if we increase taxes in a massive way, that is one of the possibilities? 

Mr. ORSZAG. Again, I would say it is a theoretical possibility, 

but——

Mr. MCHENRY. Theoretical possibility? 

Mr. ORSZAG [continuing]. We are not close to that in reality currently. 

Mr. MCHENRY. Currently. But then again, we have not raised 

taxes currently and the Tax Code is set in place for another two 

years. 

Mr. ORSZAG. That is correct. 

Mr. MCHENRY. Thank you. 

Chairman SPRATT. Mr. Etheridge from North Carolina. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. 

Thank you for being here and thank you for your patience this 

morning when we were running about. 

Let me make a quick statement and ask a question that gets 

back to our long-term as it relates to the cost of healthcare. 

But our gross national debt now is what, about a little over nine 

trillion roughly? 

Mr. ORSZAG. Gross Federal debt, yes. 

Mr. ETHERIDGE. Alright. Since 2001, privately-held debt has 

grown by about 1.8 trillion, close to $2 trillion. Sixty-eight percent 

of that borrowing has been from foreign countries or foreign 

sources outside the United States which means since 2000, the 

Federal Government has borrowed $1.2 trillion from foreign 

sources, China, Libya, Saudi Arabia, on and on, whomever. 

The Federal Government since 2000 has sent $709 billion plus or 

minus a few billion, I guess, abroad in the form of interest payments. 

Now, my question is this, because that interest would have built 

roughly 12,000 new schools in this country, a lot of health clinics 

for our veterans. But my issue is this. As you accumulate debt, and 

part of this debt is for a host of reasons, some of it was tax cuts, 

some of it was spending, whatever, as you accumulate that, you 

send that revenue offshore. That bond or debt is held for a long period of time and it continues to grow. 

Can you give me any indication of what that does to our ability 

to add to the gross domestic product in this country as you are 

sending dollars overseas? Historically when we sold bonds, we sold 

them to ourselves which internally helped growth. 

Mr. ORSZAG. I guess what I would say is that running deficits 

does impose adverse consequences on the economy. You can try to 

48

measure that in various different ways. And I know that interest 

payments might be a salient way of doing it. 

But the fundamental economics of it is that Federal deficits and 

the accumulation of Federal debt both crowds out investment here 

and also increases borrowing from abroad both of which reduce future national income, either because we are less productive in the 

future, because we do not have as many computers, or because we 

owe liabilities to foreigners and so we have to share some of the 

returns to our computers with foreign creditors. 

Mr. ETHERIDGE. So I guess I am trying to get a feel, and you 

might not be able to answer this one today, is debt in itself has a 

weight. But does that weight vary differently whether it is handled 

internally or externally? 

Mr. ORSZAG. Yes. Not to our first approximation. And, in fact, 

some economists argue that given the history of our foreign borrowing that we have been able to effectively pay a lower rate of return through changes in the dollar and other factors to foreign 

creditors. 

I would say to a first approximation, the economic consequences 

of running a Federal deficit of X percent of the economy are roughly similar regardless of whether those debts are domestically financed or externally financed. 

Mr. ETHERIDGE. Okay. Let me move to the healthcare piece very 

quickly in the time left. 

My question, we have been talking about Medicare and Medicaid 

and the growth and we are all aware that we have got to deal with 

it. But I guess my question is, why is the cost of healthcare in 

America rising so much more rapidly than in some of the other industrialized nations who really do not expect a comparable increase 

and what are the policy implications in other countries? Why are 

they so different than what they are here in the United States? 

Mr. ORSZAG. Healthcare costs are growing in countries across the 

globe, including in those European countries that are often the 

basis of level comparisons. It is true that the United States seems 

to be growing somewhat more rapidly, for example, in terms of excess cost growth, although not extremely more rapidly. 

And I think a lot of the reason probably does have to do with the 

speed with which we adopt new technologies and then diffuse 

them. We seem to adopt new technologies more rapidly in 

healthcare and then have them spread, even when again their 

value is not entirely clear in certain settings, more rapidly and 

more widely than in other countries. And partly as a result of that, 

we do wind up somewhat higher. 

But, again, for example, if our average excess cost growth is close 

to 2.0 to 2.5 percentage points per year over the last three decades, 

there are lots of other countries that are, you know, between one 

and a half and two. 

Mr. ETHERIDGE. Okay. All right. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Chairman SPRATT. Mr. Berry. 

Mr. BERRY. Thank you, Mr. Chairman, and thank you for holding 

this hearing. 

Dr. Orszag, we appreciate you. I do not know how you can remember all that stuff, but I admire you for doing it. 

49

Mr. ORSZAG. Thank you. 

Mr. BERRY. And even though I do not like the answers you give 

us sometimes, I think you are honest about it and I appreciate that 

very much. 

I sit in these meetings day after day, hour after hour and hear 

these discussions. Now, this morning has been a little bit different 

because we talked about healthcare a little bit. But generally the 

discussion is completely centered on tax rates and interest rates. 

We had along with you a couple other fellows here the other day 

that are supposed to be sure enough whiz bangs about all that 

stuff. And I have no doubt that they are. I am not making any criticism of them. 

And as we go through this discussion, it is like all you have got 

to do to create an economy is to either change the tax rate or the 

interest rate and all of a sudden, jobs and economy just start bubbling up out of the ground or falling from the sky or they are coming from somewhere that I do not really fully understand. 

If we totally eliminated Social Security, and Social Security is a 

program where people do save their money. They contribute their 

own money and their employers contribute money to a retirement 

fund. Social Security is not a gift from the government to the people. It just supposedly manages this trust fund so it can pay out 

the benefits to these people at such time when they are either 

qualified for it or need it. 

But if we totally eliminated it, we still would not close the fiscal 

gap that we have, it would not help a whole lot. We would put a 

lot of elderly people into poverty if we were to do that. 

If we totally eliminated nondefense discretionary spending, we 

could again close the gap. It would not completely close it, but it 

would make a big difference. 

What would happen to education and infrastructure in this country? What would happen to our economy if we did both those things 

or either one of those things? 

Mr. ORSZAG. Well, you are asking me what would happen if we 

eliminated Social Security? 

Mr. BERRY. Yes. 

Mr. ORSZAG. The fiscal gap would be about .6 or .7 percentage 

points of GDP, so about a tenth of the overall fiscal gap smaller. 

And as you noted, especially, you know, current retirees and those 

nearing retirement who were counting on Social Security benefits 

would face fairly extreme hardship. 

Mr. BERRY. And if we did away with nondefense discretionary 

spending, we would severely impact our ability to invest in education and infrastructure. Would you agree with that? 

Mr. ORSZAG. All the things that nondefense discretionary spending goes to, environmental protection, education, the FBI, what 

have you. 

Mr. BERRY. Right. By contrast, who would get the most benefit 

if we extend what we describe on this side of the aisle as the Bush 

tax cuts and AMT relief and who will bear the burden of the debt 

if we do not pay it? 

Mr. ORSZAG. First with regard to the debt, we all bear the burden of an unsustainable fiscal path and precisely who among us 

50

bears more of the burden depends on how we ultimately address 

it. 

With regard to the tax legislation, as I have said before, the best 

way of measuring the impact on individuals and households from 

changes in the Tax Code is in terms of the percentage change in 

after tax income. And that percentage change under the 2001 and 

2003 tax legislation is higher for high-income households than for 

low-income households. 

Mr. BERRY. Is there value to our economy in having the cheapest 

and safest food supply of any nation in the world by quite a bit? 

It is not just a little percentage point or two. It is like 50 percent 

cheaper than any place else. 

Mr. ORSZAG. There is obviously a value to consumers to low 

prices on various products. Although, actually, I would say as a 

consumer myself, sometimes I wish the prices of nonhealthy food 

were a little higher to discourage me from eating them, but I will 

leave that aside. 

Mr. BERRY. Yes, me too. I would probably pay the price anyway. 

I like it. 

Thank you, sir. 

Mr. ORSZAG. Thank you. 

Chairman SPRATT. Mr. Ryan. 

Mr. RYAN. Thank you, Dr. Orszag. 

Since the big elephant in the room here is healthcare costs and 

price increases, let us 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 am wrong, about 30 

percent of the costs could be wiped out without sacrificing quality. 

Mr. ORSZAG. Those are estimates from noted academic researchers. They are not CBO estimates. But there are established and 

well-known academics who believe the number may even be higher 

than that. 

Mr. 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 is the opportunity. 

Mr. 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 do not know what you mean by central planning. 

Mr. RYAN. Yes. 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 do not 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 does not and then using 

both Federal policy and hopefully private insurance also to steer inVerDate 0ct 09 2002 17:54 Mar 17, 2008 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-26\HBU347.000 HBUD1 PsN: DICK
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centives towards the higher value care has substantial potential to 

reduce costs over the long term. 

Mr. RYAN. So to the extent that the Federal Government has 

more ability to impact those outcomes and decisions, there is a 

greater ability to achieve these savings? 

Mr. ORSZAG. The Federal Government has the ability by if you 

were to change the payment system so that you were not 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. 

Mr. RYAN. We are at 16 percent of GDP now for healthcare? 

Mr. ORSZAG. That is correct. 

Mr. RYAN. Given the rest of the economy functions in more of a 

free market way and in that there is greater and more accurate 

transparency on price and quality, more consumer activity involved 

and being sensitive to those things, would not we achieve savings 

if we brought those kinds of reforms to the healthcare 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 cost. But the report suggested it might 

reduce costs by about five percent, not as much as the potential 

that apparently exists. 

And I think that is because of the tension between the concentration of healthcare 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 healthcare 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. 

Mr. RYAN. What I am trying to get at is, is there a magic bullet 

on addressing the root cause of health inflation? Are 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 do not 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 you as policy makers 

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 did not, you know, give you any food and 

did not let you out until you solved the problem. 

On healthcare, I think you do not have the information you need 

to reach those kinds of decisions. For example, on Social Security, 

that would work if you were willing to do it. On healthcare, it is 

not clear to me that it would work. 

I have not seen, despite the fact that on Social Security I have 

authored and lots of people have authored all these plans and you 

have the tables——

52

Mr. RYAN. Right. It is pretty easy. Money in, money out, move 

the dials. They are 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 do not know exactly what 

you would do in there. 

Mr. RYAN. Well, is not the problem with our healthcare entitlements one that it is basically reimbursing the American healthcare 

system? We are just paying for the healthcare system we have 

today and absent reforming the healthcare system we have today, 

you cannot solve the problem. With Social Security, it is a finite, 

containable program within itself. 

Mr. ORSZAG. Right. 

Mr. RYAN. So basically what we are saying is you cannot fix the 

Medicare and Medicaid problem if you do not fix the healthcare 

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 healthcare cost inflation 

under control. And that is a much different set of challenges than 

the way that the long-term fiscal problem is typically framed. 

Mr. RYAN. Yes. I would argue doing more to bring the market reforms and market experiences that exist in the rest of the economy 

would probably be the best thing to tame health inflation. This is 

16 percent of our economy, but it does not operate like the rest of 

our economy. It is virtually absent of real transparency on price 

and quality and consumers really do not have incentives to act on 

those things. They are either locked in their HMO, they are told 

where they have got to go to, and they cannot shop because they 

do not have the information anyway. 

Chairman SPRATT. Will the gentleman yield? I think you just put 

your finger on the conundrum, that is what you described is not 

a true market situation and, yet, you are proposing a market solution to it. You described something that is not a real market because consumers are not——

Mr. RYAN. That is right. 

Chairman SPRATT [continuing]. Active participants. 

Mr. RYAN. It is not a true functioning free market right now. 

Chairman SPRATT. And, yet, you are saying that the best solutions are market solutions. 

Mr. RYAN. Yes, because they are absent from the system today. 

Chairman SPRATT. Well, that means you have got to build a market completely here that does not exist in terms of classical economics. 

Mr. RYAN. Eighty-four percent of the economy functions in a 

basic free market system, transparency on price, transparency on 

quality, and survival on business based on those metrics. Consumers will move their feet based on price and quality. CompetiVerDate 0ct 09 2002 17:54 Mar 17, 2008 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-26\HBU347.000 HBUD1 PsN: DICK
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tors and producers have to compete on those metrics. Healthcare 

you do not. 

And so my point is if we bring those kinds of basic market fundamentals to healthcare, I think we can go so much farther down 

the road in taming health inflation without sacrificing quality, in 

fact promoting quality, and wrenching out that 30 percent waste. 

Rather than sitting in a Committee in Washington or 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 is an oxymoron. I think that if we 

get these basic market fundamentals in this system, that is the 

best thing we can do to achieve what we all want which is maintain high quality but at a rational price. And we do not have rational pricing right now. 

Chairman SPRATT. Dr. Orszag. 

Mr. ORSZAG. I guess what I could say is that I think it is very 

clear that incentives matter a lot in healthcare 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 healthcare, 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 healthcare and things like asymmetric information and sorting, what have you. 

And then more important or at least as importantly that I would 

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 do not 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 is 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 payor or a mixed system or consumer-directed health system, more information on what works 

and what does not is absolutely essential to moving the system towards a higher value one. 

Mr. RYAN. And combining that information with price. I will 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 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 are 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 is clearly great room for improvement and more market functions in the kind of system we have 

today. 

54

That is the point I am trying to make. But I appreciate this dialogue. It is constructive. 

Chairman SPRATT. Mr. McHenry, do you have further questions? 

Just if you have no questions, Dr. Orszag, let me go back to this 

thing about PAYGO and whether or not it has a positive effect on 

the situation we are in. As I understand your baseline extended 

scenario, it could be seen as a PAYGO scenario as part of it? 

Mr. ORSZAG. Yes, sir. 

Chairman SPRATT. And it seemed to show that adherence to 

PAYGO, if you will look at figure two on page four, your curve, 

those two exploding curves, it seems to show that if we stick with 

the extended baseline scenario, which includes PAYGO, we have 

got about a 20-year period there, until 2032, before the debt as a 

percentage of GDP really begins to spike upward. 

Is this credited to PAYGO or is it something else at work in the 

curve there? 

Mr. ORSZAG. No. That could again be interpreted as if you strictly abided by PAYGO over that period what the projections suggest 

the outcome would be. 

Chairman SPRATT. Now, your favorite chart, which has almost 

become a signature of CBO, is this chart on the front here, which 

shows the revelations you presented today that you have long 

known but most people have not understood, namely this is not a 

demographic problem. This is a healthcare delivery cost problem. 

Is there some way you could devise a simple model so that you 

could tell how significant proposals, not minor adjustment, but significant proposals in Medicare, Medicaid, and, for that matter, the 

other healthcare programs paid for by the Federal Government 

from the Veterans Administration to TRICARE, to FEHV, somehow 

we would have a model so you could tell, you could plug it in, a 

proposal into that model and tell what the future consequences are 

going to be, the extent to which it adhered to the parameter that 

you have set out, that is growth, that it does not exceed GDP 

growth and I guess beneficiary population growth? 

Mr. ORSZAG. That is obviously a very difficult undertaking. If we 

think ten-year scoring is hard, evaluating——

Chairman SPRATT. Part of our problem here with five- and tenyear scoring is that most of what you are looking at is beyond the 

ten-year horizon. 

Mr. ORSZAG. Absolutely. What I am trying to do, for example, in 

that health options volume that we will be doing throughout next 

year is give some indication, even if I cannot give you an exact 

number, of whether over the long term something is meaningful or 

likely to be meaningful if you do it this way. 

We have done that, for example, with regard to comparative effectiveness research and said that if it is undertaken aggressively 

and if it is tied to financial incentives, the result could be significant reductions over the long term in healthcare costs. We are 

going to try to provide more information like that, although I cannot commit to saying something will be $27.7 billion change in 

2042 kind of precision. 

Chairman SPRATT. Well, thank you very much for your good 

work and to your staff as well for their excellent work as always. 

And this is an enormous problem, but it is one that really affects 

55

the future of this country. It goes to the very essence of what we 

are all about. We appreciate your contribution this morning and 

your forbearance in answering our questions. Thank you very much 

indeed. 

Mr. ORSZAG. Thank you, Mr. Chairman. 

Chairman SPRATT. I ask for unanimous consent that all members 

who did not have the opportunity to ask questions of the witness 

be given seven days to submit questions for the record. There is nobody here to object, so it is ordered. 

[Whereupon, at 12:18 p.m., the Committee was adjourned.]

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