The Unsustainable 

Cost of Health Care

Social Security Advisory Board

	 September 2009
Social Security Advisory Board

Sylvester J. Schieber, Chairman

Dana K. Bilyeu

Dorcas R. Hardy

Marsha Rose Katz

Barbara B. Kennelly

Mark J. Warshawsky

Social Security Advisory Board

An independent bipartisan Board created by the Congress and appointed by the President and the 

Congress to advise the President, the Congress, and the Commissioner of Social Security on matters 

related to the Social Security and Supplemental Security Income programs. 
The Unsustainable Cost of 

Health Care

Social Security Advisory Board

September 2009

Message From The Board

As the nation once again turns its attention to 

the debate surrounding the reform of our country’s 

health care system, there are abundant resources 

that policymakers can consult to inform their 

deliberations. Yet, this Board believes it is necessary to offer our own perspectives, not because 

we are particular experts in health care policy, 

but because we believe that the rising cost of 

health care represents perhaps the most significant threat to the long-term economic 

security of workers and retirees. Because of 

this concern, we have spent considerable time 

over the last year consulting with experts in the 

fields of health care financing and delivery systems, researching the issues that influence both 

the cost and quality of health care, and discussing 

various prospects for reform. It is our sincere hope 

that our study as detailed in this report will assist 

policymakers as they seek to find lasting solutions 

to improve America’s health care system, increase 

access to health care, and contain health care costs.

Our approach to the discussion of health care 

is somewhat different from the perspectives taken 

by experts in the health care field. First, concern 

with retirement security requires this Board to 

seriously consider long term trends and the long 

range implications of policies that affect income 

security. Current projections indicate that health 

care costs will increase by more than 70  percent 

over the next ten  years and will continue thereafter to consume an increasingly greater portion 

of personal income. For today’s retirees, for those 

retiring in 2009 who are expected to live another 

20 years, and for younger workers in their 30s who 

will not begin their retirements until mid-century, 

unrestrained health care costs would likely mean a 

decline in their standard of living.

Second, we are acutely aware that over the 

next 20  years, the United States population will 

become significantly older as the baby boom generation leaves the workforce and enters retirement. 

However, an aging population is not the whole 

story. Health care costs are growing across the 

economy, and many of the same factors that are 

spurring overall health care growth, whether new 

technologies or inefficient delivery systems, are 

also driving up the cost of Medicare and Medicaid 

to unprecedented levels. The burden of health care 

costs on the country as a whole will continue to 

grow unless and until we alter the efficiency and 

efficacy of our health care systems.

For these reasons and more, we believe that 

it is essential that policymakers take action to 

restrain the rising cost of health care in ways that 

also lead to better quality of care. It is an issue 

that is at the very heart of the long-term economic 

security of the American public. It is urgent that 

action be taken and the time for action is now.

Sylvester J. Schieber, Chairman

Dana K. Bilyeu

Dorcas R. Hardy

Marsha Rose Katz

Barbara B. Kennelly

Mark J. Warshawsky

Table Of Contents 

The Cost Of Health Care Threatens Retirement Security 1

Trends in Health Care Spending 1

Are We Spending Too Much? 4

The Extent of Geographic Variation in Health Care Spending 4

Explaining the Sources of Geographic Variation in Health Care Spending 5

The Impact of Rising Health Care Costs on Retirees, Workers, Employers and Governments 7

Impact on Retirees 7

The Impact on Workers 7

The Impact on Employers 9

The Impact on Government Finances 9

Why Health Care Costs Are High And Growing Rapidly 11

Technology 11

Insurance 11

Aging and Demographics 12

Health Status of the Population 12

Income 13

Administrative Costs 13

Changes in Health Care Prices 13

Medical Malpractice Liability 13

What Can Be Done About Health Care Costs? 15

Improving the Efficiency of the Health Care Delivery System 15

Process Improvement 15

Organized Systems of Care 17

Coordination of Care 18

Diagnostic and Treatment Tools 19

Informed Patient Choice and Shared Decision Making 21

Emphasis on Wellness 21

Health Information Technology 21

Aligning Financial Incentives to Reward More Effective and Efficient Care 22

The Current System: Volume Rather Than Value 22

Managed Competition 23

Pay for Outcomes 23
Incentives for Consumers of Health Care 23

Consumer-directed Health Care 24

Incentives for Providers of Health Care 24

Dealing with Unwarranted Variations 25

Conclusion 27

Appendices 29

Appendix A: Long-term Care 31

Appendix B: International Comparisons 33

Appendix C: Organizations and People Consulted 37

Establishment Of The Social Security Advisory Board 39
The Unsustainable Cost of Health Care 1

Trends in Health Care Spending

The cost of health care in the United States is 

growing more rapidly than the incomes of those 

who pay for it. If these costs continue to rise as 

rapidly into the future, the standards of living and 

economic security of retirees and workers alike will 

be put in jeopardy. Employers will increasingly shift 

health care costs to their employees. Government 

budgets will be dominated by the need to finance 

the cost of Medicare and Medicaid benefits. 

Spending on health care is growing faster 

than national income. Since 1960, total health 

care expenditures have grown by an average of 

2.5 percentage points faster per year than the 

nation’s Gross Domestic Product (GDP), as shown 

in Figure 1. Figure 2 illustrates the result: health 

care spending has grown from 5 percent of GDP in 

1960 to about 17 percent, or $2.4 trillion, in 2008. 

In their most recent 10-year projection, the actuaries of the Centers for Medicare and Medicaid 

Services (CMS) expect health care spending will 

nearly double to $4.4 trillion by 2018 and comprise 

fully one fifth (20 percent) of GDP.1 On a per capita 

basis, spending is expected to grow almost 70 percent from $7,800 per person in 2008 to $13,100 per 

person in 2018.

1 U.S. Centers for Medicare and Medicaid Services, Office of 

the Actuary, National Health Expenditure Projections 2008–2018. 

http://www.cms.hhs.gov/NationalHealthExpendData/

downloads/proj2008.pdf. The actuaries assume total health 

expenditure will exceed GDP growth by an average of 2.1 percentage points per year from 2008 to 2018.

The Cost Of Health Care Threatens Retirement Security

Figure 1: Cumulative growth rates of GDP and health care spending: United States, 1960-2007 and 

projected for 2008-2018

Source: Office of the Actuary, Centers for Medicare and Medicaid Services, 2008

0%

2,000%

4,000%

6,000%

8,000%

10,000%

12,000%

14,000%

16,000%

18,000%

Cumulative Growth Rate of Health Care Spending

Cumulative Growth Rate of GDP

196019621964196619681970197219741976197819801982198419861988199019921994199619982000200220042006200820102012201420162018

projected
2 The Unsustainable Cost of Health Care

Although long-range projections are by nature 

difficult and carry a larger degree of uncertainty, 

the Congressional Budget Office (CBO) makes projections of total health care expenditures over the 

next 75 years. Extrapolating the historical rate 

of health care spending growth relative to GDP 

growth into the future, however, produces projections that are implausible: by growing 2  percent 

faster than GDP over 75 years, spending on health 

care would consume virtually the entirety of our 

national income.2 In order to make more plausible projections, CBO assumes that the growth in 

spending will eventually slow down over the period 

of 2020 to 2083, to an average of about 0.8 percent 

faster than the growth of the GDP.3 Under these 

assumptions, CBO projects that health care’s share 

of the GDP will double from 15.2 percent in 2007 

to 31 percent by 2035, grow steadily to 37 percent

2 For a discussion of improvements to long-range projections of 

health care spending see: Brown, Jason D. and Ralph M. Monaco, 

Possible Alternatives to the Medicare Trustees’ Long-Term Projections 

Of Health Spending. U.S. Department of the Treasury, Office of 

Economic Policy, Technical Working Paper, September 2004.

3 See U.S. Congressional Budget Office (CBO), Long Term Budget 

Outlook, 2009 for a complete explanation of the assumptions 

underlying the long-term projections. CBO assumes that growth 

in excess of GDP growth would slow down as “households overall 

would be unwilling to spend so much more on health care that, 

from one year to the next, the increase in such spending alone 

was greater than the total increase in consumption.”

Figure 2: Health care spending as a percent of GDP: United States, 1960-2007 and projected for 2008-2018

Source: Office of the Actuary, Centers for Medicare and Medicaid Services, 2008

0%

5%

10%

15%

20%

25%

196019621964196619681970197219741976197819801982198419861988199019921994199619982000200220042006200820102012201420162018

Historical

Projected

Percent Share of GDP

by 2050, and to an astounding 46 percent of the 

total economy by 2080.4

Spending on health care is rising more 

rapidly than incomes for Medicare beneficiaries. Between 1997 and 2005 the median annual 

out-of-pocket health care expenses of Medicare 

beneficiaries—including premiums and supplemental insurance—grew by 64  percent from 

$1,670 to $2,740. Over the same period, their 

median income grew by only 25  percent, from 

$12,000 to $15,000.5 As a result, out-of-pocket 

health care spending has grown as a  percentage 

of income from 12  percent in 1997 to just over 

16  percent in 2005. The burden of out-of-pocket 

spending is not distributed equally. The share of 

income consumed by out-of-pocket costs is considerably higher for those who are older, poorer, and 

in worse health.

4 The CBO measures of total health expenditures differs from 

the U.S. Centers for Medicare and Medicaid Services’ National 

Health Expenditure (NHE) measure because it excludes amounts 

invested in research and in structures and equipment. In 1960, 

total health expenditures were 5.2 percent of GDP by the NHE 

measure and 4.7 percent by CBO’s measure. In 2007, total health 

expenditures were 16.2 percent of GDP by the NHE measure, and 

15.2 percent by CBO’s measure.

5 Neuman, Tricia, Juliette Cubanski, and Anthony Damico, 

Revisiting ‘Skin in the Game’ Among Medicare Beneficiaries An Updated 

Analysis of the Increasing Financial Burden of Health Care Spending 

From 1997 to 2005. Kaiser Family Foundation, February 2009. 

Out-of-pocket health spending is defined to include all personal 

expenditures for medical and long-term care services, including 

premiums for Medicare and supplemental insurance.
The Unsustainable Cost of Health Care 3

One quarter of all Medicare beneficiaries 

spent nearly one-third of their income (31  percent) on health care in 2005, up from 24 percent 

in 1997. The 10 percent of Medicare beneficiaries 

with the greatest financial burdens spent 60 percent or more of their income on health care in 

2005 up from 48  percent in 1997. If the relative 

growth rates from 1997 through 2005 continue 

for another 20 years, by 2025 total out-of-pocket 

costs will consume 30 percent of the median beneficiary’s income. One quarter of all beneficiaries 

will face costs reaching 50 percent of their income, 

and the 10 percent with the greatest financial burdens would see their entire income consumed by 

their out-of-pocket expenses.

Most retirees rely on Social Security for a 

majority of their income. And although initial 

Social Security benefits increase with average wages 

in the economy, and once received are adjusted 

each year for inflation, out-of-pocket costs for 

Medicare are growing much faster. The Medicare 

trustees include in their annual report an illustration of how much of a typical Social Security check 

will be consumed by the typical level of out-ofpocket costs from Medicare Supplemental Medical 

Insurance (Part B) and Prescription Drug coverage 

(Part D) over the next 75  years.6 Today, average 

out-of-pocket costs for Medicare Parts B and D 

(but excluding cost sharing under Part A Hospital 

Insurance) consume about 25 percent of the average Social Security benefit. By 2030 those costs 

will consume about 40 percent of the typical initial 

retirement benefit check. By 2080, two-thirds, or 

67 percent, of the average Social Security benefit 

would go just to paying out-of-pocket costs for a 

portion of Medicare covered services. 

Spending on health care is rising more 

rapidly than earnings for workers and their 

families. For the roughly 60  percent of workers 

who receive some form of health care coverage 

from their employers, the cost of their health 

insurance premiums and out-of-pocket expenses 

6 “The average cost-sharing payments are based on beneficiaries in the traditional ‘fee-for-service’ Medicare program. 

Medicare Advantage enrollees currently have lower cost-sharing 

requirements on average, but detailed data on such amounts 

is not available.” Memo entitled: “Additional Information 

Regarding Comparisons of Beneficiary Income and Out-of-Pocket 

Costs for Medicare Supplementary Medical Insurance” from 

Richard Foster , Chief Actuary, U.S. Centers for Medicare and 

Medicaid Services, and Kent Clemens, Actuary, CMS, March 25, 

2008. http://www.cms.hhs.gov/ReportsTrustFunds/downloads/

Beneficiaryoop.pdf.

have increased significantly faster than their 

own wages. Between 1999 and 2008, both average health insurance premiums and out-of-pocket 

costs for deductibles, co-payments for medications, and co-insurance for physician and hospital 

visits more than doubled.7 During the same period, 

worker’s wages increased by only 34 percent, family 

incomes rose only about 29  percent, and overall 

inflation was 29 percent.8 As a consequence, health 

care expenses for workers and their families are 

rising as a share of income.

According to recent calculations by the 

Commonwealth Fund, the cost of the average insurance premium for family coverage—counting both 

the employee and employer shares together—rose 

from 11  percent of the median family’s income to 

18  percent by 2008.9 Assuming premiums grow 

at the same rate as the projections for total health 

expenditures (as shown in Figures  1 and 2), the 

authors of the Commonwealth study estimate the 

cost of premiums for family coverage would increase 

to almost one quarter of the median family income 

by 2020.10

The distribution of spending is not uniform. 

Older workers, those with lower incomes not covered by Medicaid, and those with the highest levels 

7 The total premium (employer plus employee share) for those 

with single coverage increased 114 percent from 1999 to 2008 or 

from $2,196 to $4,704. The employee share increased from $318 

to $721, an increase of 127 percent. The total premium (employer 

plus employee share) for those with family coverage increased 

119 percent from 1999 to 2008 or from $5,791 to 12,680. The employee share increased from $1,543 to $3,354, an increase of 117 

percent. Note that while the employee’s share of total premiums 

remained stable over the period, those with family coverage must 

contribute almost twice the share of total premiums as those 

with single coverage (26 percent vs. 14.5 percent).

See The Henry J. Kaiser Family Foundation, Survey of Employer 

Sponsored Health Benefits 2000–2008.

8 U.S. Bureau of Labor Statistics, Consumer Price Index, “U.S. 

City Average of Annual Inflation (April to April), 2000–2008;” 

U.S. Bureau of Labor Statistics, Seasonally Adjusted Data from the 

Current Employment Statistics Survey, 2000-2008 (April to April); 

U.S. Bureau of the Census, Current Population Survey. 9 Commonwealth Fund, Paying the Price: How Health Insurance 

Premiums Are Eating Up Middle-Class Incomes. August 2009. 10 The Milliman Medical Index measures average annual medical 

spending for a typical American family of four covered by an 

employer sponsored preferred provider organization (PPO) program. Total family spending, $16,771 in 2009, is composed of the 

employer’s share of premiums (59 percent); the employee’s share 

of premiums (24 percent) and the employee’s other out-of-pocket 

costs (17 percent), for example, for deductibles or co-payments. 

For the average family, estimates of the employee’s share of costs 

(24% + 17% = 41%) are about half the estimates of the total premium costs (59% + 24% = 83%). See Milliman Research Report, 

Milliman Medical Index, May 2009 available at: http://www.

milliman.com/expertise/healthcare/products-tools/mmi/pdfs/

milliman-medical-index-2009.pdf.
4 The Unsustainable Cost of Health Care

of spending on medical services tend to spend 

more on health care as a share of their income.11

Are We Spending Too Much?

Studies have examined whether increases in 

medical spending have provided a good value: 

whether advances in medical care have led to 

large enough improvements in health and life 

expectancy to be worth the expense. Harvard 

health economist David Cutler and his co-authors 

found that averaging across all ages, increases in 

medical spending between 1960 and 2000 provided reasonably good value, with an average cost 

per  life-year gained of $19,900.12 For individuals age 65 and over, however, the average cost of 

adding one more year of life had increased from 

the 1970s to the 1990s from $46,800 to $145,000. 

The authors note that their estimates for the 

1990s would fail many cost—benefit criteria. 

Other studies suggest that at current high levels 

of spending, additional dollars are not improving 

outcomes.13

Many studies have drawn attention to the 

fact that the United States spends roughly twice 

as much on health care—as a fraction of GDP and 

on a per  person basis—than the average of other 

economically developed nations without achieving 

substantially better health outcomes (see Appendix 

B).14 Such comparisons, however, are complicated by 

11 U.S. Department of Labor, Consumer Expenditure Survey, 2007, 

Washington, D.C.: U.S. Bureau of Labor Statistics, 2007a. As of 

August 4, 2009: “Table 47. Age of Reference Person: Shares of 

Average Annual Expenditures and Sources of Income,” http://

www.bls.gov/cex/2007/share/age.pdf; and “Table 46. Income 

Before Taxes: Shares of Average Annual Expenditures and Sources 

of Income,” http://www.bls.gov/cex/2007/share/income.pdf.

12 Cutler, David M., Allison B. Rosen, and Sandeep Vijan, “The 

Value of Medical Spending in the United States, 1960–2000,” 

New England Journal of Medicine, vol. 355, no. 9. August 31, 2006, 

pp. 920-927.

13 Fuchs, Victor, “Perspective: More Variation in Use of Care, 

More Flat of the Curve Medicine,” Health Affairs Web Exclusive, 

October 7, 2004; Skinner, J., D. Staiger, and E. Fisher, “Is 

Technological Change in Medicine Always Worth It? The Case 

of Acute Myocardial Infarction,” Health Affairs Web Exclusives, 

February 2, 2006; New England Healthcare Initiative, How Many 

More Studies Will It Take? February 25, 2008. 14 OECD Health Data, June 2009; McKinsey Global Institute, 

Accounting for the Cost of U.S Health Care: A New Look at Why 

Americans Spend More, December 2008; U.S. Congressional 

Research Service, U.S. Health Care Spending: Comparison with 

Other OECD Countries, September 17, 2007; Garber, Alan M. 

and Jonathan Skinner, “Is American Health Care Uniquely 

Inefficient?” Journal of Economic Perspectives, 2008; Nolte, 

Ellen and C. Martin McKee, Measuring The Health Of Nations: 

Updating An Earlier Analysis, Health Affairs, 27, no. 1 (2008): 

58-71.

the fact that there are many differences among countries that are hard to account for comprehensively.

Perhaps more important to understanding the 

challenges facing American workers, retirees and 

taxpayers, are data that show that per capita health 

care spending as well as utilization of specific procedures can vary by geographic region within the 

United States by as much as a factor of three without 

being associated with better health outcomes.15 An 

even wider range of spending exists across treatment settings, such as individual hospitals. The 

degree of variation in spending for similar patients 

with similar outcomes across regions strongly suggests there is a considerable amount of inefficiency 

in the U.S health care delivery system.

The Extent of Geographic Variation in Health 

Care Spending

Figure  3 illustrates the full range of spending variation across the nation for all Medicare 

enrollees in a single year, and for those in the last 

two years of life. These differences reflect not just 

differences in the cost of services but differences 

in the intensity with which health care resources 

are used.

To illustrate the extremes, in 2006 Medicare 

payments in the most expensive city, Miami, were 

over $16,000 per enrollee compared to only $5,300 

per enrollee in the least expensive city, Honolulu.16

To reduce the sources of variation that have to do 

with the severity of illness, the Dartmouth Atlas 

researchers examined total spending during the 

last two  years of Medicare enrollee’s lives among 

those who died from 2001 to 2005. While per person 

spending levels are much higher towards the end of 

life, the differences persist. Spending in Miami was 

about $72,000 per patient over the last two years 

of life and only about $43,000 in Honolulu. 

These data on average Medicare expenditures 

15 Wennberg, J.E., E. F. Fisher and J. Skinner, “Geography 

and the Debate Over Medicare Reform,” Health Affairs 21(2) 

(2002) Web Exclusive. Reprinted in J.K. Iglehart (ed.) Debating 

Health Care: A Health Affairs Retrospective, Millwood, Virginia: 

Project Hope (2007); Fisher, E.F, J.E. Wennberg, T.A. Stukel, 

D.J. Gottlieb, F.L. Lucas, E.L. Pinder, “The Implications of 

Regional Variations in Medicare Spending, I: the Content, 

Quality, and Accessibility of Care,” Annals of Internal Medicine, 

2003,138 (4):273-287; Baicker, Katherine and Amitabh Chandra, 

“Medicare Spending, The Physician Workforce, and Beneficiaries’ 

Quality Of Care,” Health Affairs Web Exclusive, April 7, 2004. 16 The data refer to spending for Medicare Parts A and B on 

enrollees in the traditional Medicare fee-for-service plan in the 

“Hospital Referral Regions” of Miami and Honolulu.
The Unsustainable Cost of Health Care 5

per  enrollee and the expenditures on enrollees 

near the end of life highlight the concentration 

of health expenses late in life. This phenomenon 

sometimes gets translated into a false conclusion 

that most health spending is concentrated on endof-life care and that much of the problem with the 

health care system is associated with the nature of 

care provided to people as they approach death. The 

fact is that under Medicare most health spending 

goes to provide goods and services to individuals 

who will live well beyond the next two years. The 

data compiled by the researchers at the Dartmouth 

Atlas Project suggest that potential savings from 

all across the health spectrum can be achieved by 

reducing the provision of medical goods and services that are not improving the health conditions 

of those consuming them.

Explaining the Sources of Geographic Variation 

in Health Care Spending

The major source of the variation illustrated 

in Figure 3 is the extent of “supply sensitive care” 

delivered. The data show that the amount and type 

of care that patients receive depends largely on 

the capacity of the region to deliver that type of 

care. For example, half of the regional variation in 

hospitalization, visits to medical specialists, and 

use of coronary angiography can be explained by 

the per capita supply of beds, specialists, and angiography units. This type of variation most affects 

patients with progressive chronic illnesses, and 

may reflect the often mistaken assumption that 

more care is better. Table 1 shows how large the 

differences are in resource utilization among the 

highest and lowest spending hospital regions.

Providing more services does not necessarily 

lead to better outcomes. Populations of patients 

with progressive chronic conditions in high-spending regions do not have higher survival rates or 

better quality of life. Although the quantity of care 

may be greater, the quality of care is not better. In 

fact, more care may actually be worse. Chronically 

ill patients are actually at greater risk of dying in 

higher-spending regions.17

The Dartmouth Atlas researchers have examined the costs of organized practices such as the 

Mayo Clinic and Intermountain Healthcare and 

the quality of care they deliver. They estimate that 

if all providers could achieve the same level of 

17 Wennberg, et al., An Agenda for Change: Improving Quality 

and Curbing Health Care Spending: Opportunities for the 

Congress and the Obama Administration, Dartmouth Atlas 

White Paper, December 2008, pp. 2-3.

Figure 3: Geographic variation in Medicare spending: Total Medicare payments per enrollee in 2006 [blue 

columns, left axis] and total payments during the last two years of life, for deaths 2001-2005 [grey dots, 

right axis], by selected Hospital Referral Regions

Source: Dartmouth Atlas Project

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

Honolulu, HI

Grand Junction, CO

Cedar Rapids, IA

Billings, MT

Des Moines, IA

Portland, OR

Minneapolis, MN

Albuquerque, NM

Peoria, IL

Salt Lake City, UT

Lincoln, NE

Arlington, VA

Atlanta, GA

Buffalo, NY

Seattle, WA

El Paso, TX

Indianapolis, IN

Milwaukee, WI

Kansas City, MO

Wichita, KS

Charlotte, NC

Memphis, TN

Phoenix, AZ

Fresno, CA

Raleigh, NC

Cincinnati, OH

Washington, DC

San Francisco, CA

New Orleans, LA

Pittsburgh,PA

Cleveland, OH

Oklahoma City, OK

Fort Worth, TX

Tampa, FL

Ann Arbor, MI

Boston, MA

Boulder, CO

Baltimore, MD

Las Vegas, NV

Chicago, IL

Philadelphia, PA

Houston, TX

Detroit, MI

Dallas, TX

Manhattan, NY

Los Angeles, CA

McAllen, TX

Miami, FL

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Spending per Enrollee 2006 Spending in Last 2 Years of Life 2001-2005
6 The Unsustainable Cost of Health Care

efficiency for inpatient spending on supply-sensitive care, Medicare hospital spending could be 

reduced by 28 percent to 43 percent while quality of care could be maintained or improved.18

The second major source of variation in the 

cost of health is the amount of “preference sensitive” care delivered. Preference sensitive care 

involves treating conditions where there are several legitimate treatment options, and the decision 

over which treatment to use involves tradeoffs.19

Ideally, the choice of treatment should be the choice 

of a fully informed patient, in partnership with 

the physician. Most often, however, the provider’s 

judgment or preference often determines which 

treatment is used. The data show wide geographic 

variations across a range of treatments. For exam18 Wennberg, et al., An Agenda for Change: Improving Quality 

and Curbing Health Care Spending: Opportunities for the Congress 

and the Obama Administration, Dartmouth Atlas White Paper, 

December 2008, p. 5.

19 There are many other conditions in which patients need to 

consider the tradeoffs of treatment options, such as hip and knee 

arthritis (joint replacement versus pain medications), carotid 

artery stenosis (surgery versus aspirin), herniated disc (surgery 

versus other strategies), chronic stable angina (percutaneous 

coronary intervention versus surgery versus other methods), to 

name but a few. Seven conditions involving preference-sensitive 

surgical decisions together account for 45 percent of Medicare’s 

surgery costs.

ple, doctors in Fort Myers, Florida are more likely to 

recommend surgical management of osteoarthritis 

of the knee, while doctors in Miami prefer medical management. Fort  Myers’ Medicare patients 

receive 2.3  times as many knee replacements per 

capita as do Miami’s. Similarly, back surgery is 2.2 

times greater in Palo  Alto than in San  Francisco, 

both homes to major university teaching hospitals. 

As the Dartmouth researchers explain, “It isn’t 

because [San Francisco] physicians aren’t treating 

back pain, but rather that they treat it differently, 

relying on more conservative treatments.”20

There are two reasons for the variation in 

treatments used. First, for many of the conditions 

for which surgery is used, clinical science has not 

established the efficacy of other treatment options 

and so physicians rely on some combination of 

subjective opinion, personal experience, anecdote, 

or less than adequately tested theory. Second, the 

decision often consists of the patient delegating 

choice to the physician.21 Studies show, however, 

that when patients are fully informed about their

20 Wennberg, et al., p. 8. 21 ibid, p. 9.

Table 1: Practice patterns in managing chronic illness in Hospital Referral Regions for Medicare patients in 

their last two years of life (2001-2005) by highest and lowest quintile of spending levels

Hospital Referral Regions

Lowest 20% in 

spending

Highest 20%in 

spending

Ratio of highest 

to lowest

Medicare spending per capita $38,300 $60,800 1.59

Resource input/utilization

Physician labor per 1000 patients:

All physicians 16.6 29.5 1.78

Medical specialists 5.6 13.1 2.34

Primary care physicians 7.4 11.5 1.55

Terminal care in the last six months:

Hospital days 8.5 15.6 1.84

Hospital physician visits 12.9 36.3 2.81

Percentage seeing 10 or more physicians 20.8 43.7 2.10

Percentage of death in ICUs 14.3 23.2 1.62

Source: Dartmouth Atlas
The Unsustainable Cost of Health Care 7

options, they often make different, and less costly, 

decisions than their physicians.22

The Impact of Rising Health Care Costs on Retirees, Workers,Employers and Governments

Impact on Retirees23

The major threat to economic security for 

today’s retirees is that rising Medicare premiums 

and out-of-pocket health care expenses will rapidly 

consume their relatively fixed sources of income, 

leaving them more vulnerable to large unanticipated expenses and reducing their consumption of 

all other goods and services. The threat is greatest 

for those with lower incomes who are not covered 

by Medicaid, and those with the highest medical 

expenses. Declining standards of living are also 

more likely the longer a person lives and as assets 

are spent down or eroded by inflation, reliance on 

Social Security increases, and health care costs 

grow to ever higher levels.24

Health care cost growth is also eroding the 

affordability of supplemental insurance that covers 

22 O’Connor, Annette M., Hilary A. Llewellyn-Thomas, and 

Ann Barry Flood, “Modifying Unwarranted Variations In Health 

Care: Shared Decision Making Using Patient Decision Aids,” 

Health Affairs Web Exclusive, October 7, 2004. See http://content.

healthaffairs.org/cgi/reprint/hlthaff.var.63v1.pdf.

23 We use the term “retirees” somewhat loosely since Medicare beneficiaries have no restrictions whatsoever on whether they work. 

While the trend is toward higher labor force participation at older 

ages, a relatively small share of those 65 and older are working.

24 Most retirees rely on Social Security as their largest source of 

income in retirement. Six out of ten Americans over age 65 rely 

on Social Security for more than half of their total income. Three 

out of ten rely on Social Security for over 90 percent of their 

income. Among those with the lowest incomes who are age 65 

and over, Social Security provides about 80 percent of their total 

income. Social Security benefits provide an inflation-protected 

stream of income for a retiree’s entire remaining lifespan and can 

provide benefits to spouses and survivors. Only about one-half 

of retirees receive significant income from pensions or personal 

savings. Although the total value of those private pension assets 

is as large as that disbursed by Social Security, typically those 

assets are not protected from inflation and are increasingly likely 

to be exhausted the longer a person lives. U.S. Social Security 

Administration, Income of the Population 55 or Older, 2006, 

released February 2009. The reports notes: “The survey on which 

these data are based does not include some potentially important 

resources as income, including lump-sum pension payments 

and capital gains. In addition, these statistics do not take into 

consideration noncash benefits that supplement money income 

(housing and energy subsidies or Food Stamps) or the amount 

of savings available to supplement monthly income. This could 

overstate the relative importance of earnings or Social Security 

and understate the relative importance of pensions and assets as 

resources.” For further discussion see, “Measuring the Relative 

Importance of Social Security Benefits to the Elderly,” by T. Lynn 

Fisher, Social Security Bulletin, vol. 67, no. 2, 2007.

about 30 percent of Medicare enrollees’ expenses. 

In 2005, about 89 percent of beneficiaries obtained 

such additional coverage, including through 

former employers (33 percent), “Medigap” policies 

(25  percent), Medicare Advantage plans (13  percent), Medicaid (16  percent), or other programs 

(1 percent).25 But as health care costs rise, employers are increasingly curtailing or eliminating their 

retiree health benefits, and the cost of other forms 

of supplemental coverage is increasing.

Some portion of the increased spending by retirees will undoubtedly improve health and result in a 

longer life for some, but too much spending is not 

buying better health. As overall medical expenses 

become more difficult to bear for some, one concern 

is that they will decide to forgo the additional cost 

of necessary care to the detriment of their health. 

The Impact on Workers

Most economists believe that health benefits 

provided by employers are funded as part of the 

total compensation paid to workers. To the extent 

that employers’ share of health insurance premiums 

have become more expensive over time, employers 

will tend to reduce other elements of an employee’s 

compensation, including cash wages and retirement benefits. Employers may also pass on the 

higher cost of health benefits to their employees 

by requiring higher premium contributions and/or 

higher out-of-pocket expenditures, such as higher 

deductibles or co-payments. In the more extreme 

cases employers may stop providing health benefits 

altogether or may reduce the number of employees 

who would qualify for benefits. Under all of these 

scenarios, workers will have less disposable income 

and/or less left over for consumption of other 

goods and services besides health care. They are 

getting squeezed on several fronts.

Employees of small businesses are less likely to 

have employer provided insurance coverage in the 

first place,26 and if they do they are likely to pay 

higher prices than employees of large firms for comparable insurance plans, and likely face higher cost 

sharing burdens.27 Some workers facing premium 

increases will no longer afford the coverage and will 

25 MedPAC, 2008. A Data Book: Health care spending and the 

Medicare program.

26 While nearly all firms with over 200 employees offer coverage, 

just 49 percent of those with 3 to 9 employees do.

27 Council of Economic Advisers, The Effects of Health Care Reform 

on Small Business and their Employees, July 25, 2009.
8 The Unsustainable Cost of Health Care

be exposed to an increased risk of financial ruin as a 

result of major illness, injury or chronic disease; as 

many as 50 percent of personal bankruptcies result 

in part from accumulated medical expenses.28

An additional source of insecurity, especially 

in the current deep recession, is job loss for those 

nearing retirement.29 The law allows workers to 

stay enrolled in an employer’s health plan for 

up to two  years after separating from a job, but 

they must pay the full cost of the premium themselves.30 Purchasing insurance individually can be 

even more expensive, prohibitively so for those 

with poorer health or those who would face higher 

premiums because of their age.

A relatively simple simulation illustrates the 

pressure on worker’s wages. Assume total compensation starts at its 2008 level and grows at the 

recent historical rate of about 2 percent reflecting 

average gains in an employee’s productivity. If total 

health care costs – the employer’s and employee’s 

share of premium and employee’s out-of-pocket 

costs—grow at twice the rate of compensation 

(4 percent) per year, all other compensation grows 

but only slightly. If health care costs grow at four 

28 Himmelstein, D., E. Warren, D. Thorne, and S. Woolhander, 

“Illness and Injury as Contributors to Bankruptcy,” Health Affairs 

Web Exclusive W5-63, February 2, 2005. 29 During the current recession the unemployment rate among 

workers aged 55-64 has more than doubled from 2.7 percent in 

November 2007 to 5.9 percent in February 2009.

30 The Consolidated Omnibus Budget Reconciliation Act (COBRA) 

gives workers and their families who lose their health benefits 

the right to choose to continue group health benefits provided by 

their group health plan for limited periods of time under certain 

circumstances such as voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, 

and other life events. Qualified individuals may be required to 

pay the entire premium for coverage up to 102 percent of the cost 

to the plan (the full premium plus a 2 percent administrative 

charge). U.S. Department of Labor website. http://www.dol.gov/

dol/topic/health-plans/cobra.htm. See also: An Employee’s Guide 

to Health Benefits Under COBRA, U.S. Department of Labor, 2006.

times the rate of compensation (8  percent) over 

a ten-year period, all other compensation net of 

health care actually falls by 11 percent.31

Researchers have estimated that a 65 year old 

couple will need to have saved roughly $220,000-

$240,000 on average to afford the stream of 

out-of-pocket health care expenses and premiums 

they will face over the rest of their lifetimes. The 

amount of savings needed is rising as costs rise, 

and it can be considerably higher for those who 

lack supplemental insurance or for those with the 

highest prescription drug cost sharing expenses.32

The ability to save, just as the ability to consume, will be adversely impacted by slower wage 

growth and/or the increasing share of income 

devoted to current health care needs. Sylvester 

Schieber estimated the amount of a worker’s total 

pay that would have to be set aside each year to fund 

his or her own retirement and health care needs as 

well as the public retirement and retiree health care 

systems, Social Security and Medicare, through 

payroll taxes. Table 2 compares the annual needs 

31 The time it takes for non-health compensation to fall depends 

on the share of total compensation that health care costs 

represents and the difference in growth rates between total 

compensation and health care costs. See examples of similar simulations by earnings level in Polsky, Daniel and David 

Grande, “The Burden of Health Care Costs for Working Families, 

Implications for Reform,” New England Journal of Medicine, 

July 29, 2009.

32 Fronstin, Paul, Dallas Salisbury, and Jack VanDerhei “Savings 

Needed for Health Expenses in Retirement: An Examination 

of Persons Ages 55 and 65 in 2009,” EBRI Notes, vol. 30, no. 6, 

June 2009; Munnell, Alicia H., Mauricio Soto, Anthony Webb, 

Francesca Golub-Sass, and Dan Muldoon, Issue Brief: Health 

Care Costs Drive Up the National Retirement Risk Index, Center for 

Retirement Research at Boston College, February 2008; Fidelity 

Investments, Fidelity Investments Estimates $240,000 Needed 

To Pay Health Care Costs In Retirement, March 26, 2009. In the 

Fidelity study costs broke down as 41 percent on co-pays, coinsurance, and deductibles, 30 percent on out-of-pocket expenses 

for prescriptions, and 29 percent for Medicare Part B and D 

premiums.

Table 2: Annual cost to workers of funding retirement and health care: 1960, 2005, 2030

Worker's annual costs (as a percentage of pay) associated with:

Date of 

retirement

Age at 

retirement

Expected 

yrs of life

remaining

Own 

retirement 

savings

Own 

health 

insurance

Own 

Social

Security

Medicare

and Medicaid Total

1960 65 14.3 4.3% 1.2% 5.0% 0.0% 10.5%

2005 65 18.8 4.9% 9.1% 12.4% 4.9% 31.3%

2030 65 19.7 5.7% 17.9% 15.0% 13.8% 52.4%

Source: Sylvester Schieber, “Beyond the Golden Age of Retirement,” 2008
The Unsustainable Cost of Health Care 9

for retirement and health care for a person retiring 

at age 65 in 1960, 2005, and 2030.33

A person who retired at age 65 in 2005 would 

have had to set aside, during their working lifetime, 

three times as much of their compensation each 

and every year as a person retiring 45  years ago 

in 1960 would have (31 percent vs. 10 percent). A 

large part of the increase is due to greater longevity 

and expansion of Social Security, but a much larger 

part is due to the cost of health care including the 

advent of Medicare and Medicaid. By 2030 the 

annual burden on workers will be extraordinary. 

The total needed to be set aside each year and not 

available for consumption will have risen to over 

one-half (52.4 percent) of annual pay. The implication is stark: rising productivity in the future will be 

much less likely to result in higher living standards. 

The burden of supporting an aging society and the 

rising cost of health care will “siphon off” much of 

workers’ productivity improvements for years to 

come.34 Schieber calculates that for a person wishing to retire at age 65 in 2030, disposable income 

will likely peak around 2025 and decline thereafter. 

Between 2005 and 2025, 83  percent of the fruits 

of a worker’s productivity will have gone to pay for 

the growing cost of one’s own health care needs and 

the growing burden of our public health and retirement systems.35 The earlier one wishes to retire, 

the less likely they will keep any of the gains from 

their increased productivity. Furthermore, people 

at the lower end of the earnings scale who are not 

covered by Medicaid face greater risks of declining

33 This simulation assumes a hypothetical worker starts working 

at age 22 at an initial salary of 30,000 per year, works steadily 

until retirement receiving pay increases of 4 percent per year 

and investment returns of 7 percent per year. At retirement the 

individual will receive a pension that will provide a flat dollar benefit throughout the remainder of the retiree’s lifetime. 

Sylvester Schieber, Beyond the Golden Age of Retirement, 2008. 

The individual saves to fund a retirement income that provides 

75 percent of pre-retirement earnings including Social Security. 

The working population is assumed to pay for about threequarters of the total cost of the Medicare and Medicaid programs 

which are projected by the U.S. Congressional Budget Office to 

rise from 4.2 percent of GDP in 2005 to 12 percent in 2030.

34 The U.S. Congressional Budget Office’s Long-range Budget 

Projections contains a similar finding. “In 2009, total consumption per person is expected to average about $26,000, of which 

about $6,000 will be spent on health care. Under CBO’s projections, spending per person by 2035 would have grown by more 

than $14,000 (in 2009 dollars), but more than 80 percent of that 

extra money would be spent on health care. Although spending for other goods and services would grow by just 14 percent, 

spending for health care would nearly triple.”

35 Sylvester J. Schieber, “The End of the Golden Years,” Milken 

Institute Review, 2008.

 living standards since health care costs would be 

expected to comprise a larger share of their income.

The Impact on Employers

In the long run, most of the impact of rising 

health care costs on employers can be shifted to 

their workers by reducing wage growth, hiring 

fewer workers, or hiring more part-time workers 

who are typically not eligible for health insurance 

coverage. Others have modified health plans to 

require employees to pay a larger share of premiums, and some firms have reduced the generosity 

of their benefits or eliminated them altogether.36

For firms that are more constrained in hiring 

or pay (perhaps by long-term contractual arrangements), or who largely employ minimum wage 

workers, the increased costs at least in the short 

term represent a higher cost of business. Small 

businesses feel the impact more acutely than large 

ones as they pay roughly 18 percent more to provide insurance for their employees.37

Employers who offer generous health benefits to retirees, however, are bearing increasingly 

heavy costs. Some employers have moved to reduce 

or eliminate those benefits altogether. Others, like 

some U.S. automakers, are being forced into economic restructuring.

The Impact on Government Finances

In 2008, the public share of total national health 

expenditures was about 47  percent, of which the 

Federal government’s share is almost three-quarters. 

Medicare, funded primarily by the Federal government (as well as enrollees’ premiums), accounts for 

about 20  percent of total health expenditures in 

2008, while Medicaid, funded by both Federal and 

State governments, accounts for about 15 percent.38

The cost of Medicare and Medicaid is expected 

to grow rapidly and steadily over the long-term. 

The seventy-five year projections from the CBO are 

that the two  programs combined will grow from 

5 percent of GDP today, to 10 percent by 2035 and 

17 percent by 2080. In other words, as a share of 

36 Economic Report of the President, 2005, p. 98. 37 Council of Economic Advisers, The Effects of Health Care Reform 

on Small Businesses and Their Employees, July 25, 2009. 38 The Federal tax revenue forgone due to the tax-exempt status 

of employment based health insurance benefits – about $150 billion in 2008 – represents about 6.3 percent of total health care 

spending.
10 The Unsustainable Cost of Health Care

the total national income, the cost of just Medicare 

and Medicaid in 75 years will be 85 percent as large 

as the entire Federal government is today.39

The part of Medicare that provides insurance 

against hospitalization (known as HI or Part  A) 

already has significant financing issues. Outlays of 

the hospital insurance program currently exceed its 

payroll tax revenue. If the HI program costs grow as 

the Medicare Trustees assume, the HI  Trust Fund 

assets will be exhausted by 2017. Over the next 

75 years the HI Trust Fund is projected to have an 

actuarial deficit of 3.5 percent of payroll, approximately twice the size of the Social Security deficit 

over that same time period (see Figure 4).40

Medicare Supplemental Medical Insurance 

(SMI) that covers out-patient care and prescription drugs, also known as Parts B and D, is funded 

automatically by general revenues and is by definition “adequately financed.” Projected SMI cost 

growth over the long term, however, “will require 

increases in enrollee premiums and general revenue funding that will average about 6.4  percent 

annually, placing a growing burden on benefi39 The historical long-run average of government spending as 

a percentage of GDP is about 20 percent.

40 “The actuarial deficit can be interpreted as the percentage 

points that could be either added to the current law income rate 

or subtracted from the cost rate for each of the next 75 years 

to bring the funds into actuarial balance. Actuarial balance is 

achieved if Trust Fund assets at the end of the period are equal to 

the following year’s expenditures.” See Status of the Social Security 

and Medicare Programs, A Summary of The 2009 Annual Reports, 

Social Security and Medicare Boards of Trustees. April 2009.

ciaries and Federal revenues.”41 In order to fund 

this extraordinary growth, the Federal government will have to increase revenue either through 

additional taxes or greater cost sharing by beneficiaries, reduce the cost of the program, or reduce 

spending on other programs in the Federal budget. 

The challenges of financing Medicare and 

Medicaid will play a major role in the health and 

economic welfare of workers and retirees. Under 

the current trajectory of cost growth, workers will 

have to pay substantially higher tax rates to fund 

the continued well-being of retirees, in effect sacrificing some of their own consumption and ability 

to save. If deep cuts in spending that affect the 

quality of care are made instead, the well-being of 

retirees could suffer.

41 Status of the Social Security and Medicare Programs, Social 

Security and Medicare Boards of Trustees, 2009. The next 

sentence adds the warning: “...Part B cost projections are understated (by 18-21 percent in 2015, and by up to 10 percent in 2030 

and beyond) as a result of incorporating substantial reductions in 

physician fees that would be required under current law, but are 

very unlikely to occur.”

Figure 4: Medicare costs as a percentage of GDP, by revenue source, 1970-2083

Source: Chart D, Status of the Social Security and Medicare Programs, a Summary of the 2009 Annual Reports, Social Security and Medicare 

Boards of Trustees. April 2009

0%

2%

4%

6%

8%

10%

12%

HI Deficit

General Revenue

State Transfers

Premiums

Tax on Benefits Payroll Taxes

19701975198019851990199520002005201020152020202520302035204020452050205520602065207020752080

Total Program Payments
The Unsustainable Cost of Health Care 11

The major factors contributing to high and 

rapidly growing health care costs are reasonably 

well understood even as there is still some debate 

about the magnitude and relative importance of 

some of those factors. Some contribute to the high 

level of spending, others drive growth, and some 

play a role in both. 

In trying to explain what factors drive the 

unsustainable trajectory of health care spending, it 

is certainly the case that there are both good and bad 

categories of spending. Many of the resources used 

in health care are devoted to necessary care that can 

save lives, relieving suffering and finding innovative 

ways to treat illnesses. Some degree of this spending, however, adds little to the quality of care, has 

negligible impact on well-being or longevity, and 

can result in more expensive though not necessarily 

more effective ways of treating illness. The level and 

growth of spending are also inevitable outcomes of 

demographic or economic forces that cannot really be 

classified as belonging to categories of either effective 

or wasteful. Below we highlight some of the major 

factors influencing trends in health care spending.

Technology

The most frequently cited cause of sustained 

growth of health care costs is the development, 

diffusion and increased use of new technology 

broadly defined as encompassing the use of any new 

procedures, drugs, or devices. The Congressional 

Budget Office estimates that technology so defined 

accounts for anywhere between 38 percent to more 

than 65 percent of health care cost growth.42 Some 

new technologies allow for treatments of diseases 

42 U.S. Congressional Budget Office, Technological Change and the 

Growth of Health Care Spending, January 2008. Estimates vary 

because of the difficulty in estimating the amount of growth 

attributable to new technology and the various ways technology 

spending is defined by experts.

where there were none before. Other advances are 

made to replace existing treatments. Some technology may provide tremendous value while other 

forms are simply more expensive ways of producing similar outcomes. Some new therapies may 

result in savings by reducing the length of hospital 

stays or avoiding more serious consequences, but 

most new technology tends to increase spending. 

Evaluating whether new technology contributes 

value as well as cost is difficult because there is 

little empirical evidence that demonstrates how a 

new drug, device or procedure affects health outcomes compared to the existing technology. 

Insurance

The purpose of health insurance is to make 

needed health care financially accessible and to 

provide protection against unanticipated large 

out-of-pocket expenses. But patients who are 

more insulated from the true costs of their care, 

are likely to use more care.43 Since 1965, as the 

total cost of health care has risen dramatically, 

out-of-pocket spending by individuals as a share 

of the total actually fell from 43 percent to 12 percent.44 Tax subsidies for employer sponsored 

health insurance, and publicly funded coverage 

such as Medicare, Medicaid, the State Children’s 

Insurance Program (SCHIP) have reduced the outof-pocket cost of care to individuals below what it 

would have been in the absence of any insurance. 

The Congressional Budget Office estimates that 5 

to 20 percent of total health care cost growth may 

be due to more extensive health insurance cover43 Newhouse, Joseph P., Insurance Experiment Group, Free 

for All? Lessons from the RAND Health Insurance Experiment, 

Cambridge, Massachusetts, Harvard University Press, 1993.

44 U.S. Centers for Medicare and Medicaid Services, Office of the 

Actuary, National Health Expenditure (NHE) Amounts by Type of 

Expenditure and Source of Funds: Calendar Years 1965–2018.

Why Health Care Costs Are High and Growing Rapidly
12 The Unsustainable Cost of Health Care

age.45 Some recent research suggests that changes 

in health insurance that affect a large number of 

people could have a more profound influence on 

spending trends. MIT economist Amy Finkelstein 

estimates that increased coverage of a relatively 

large share of the population, mainly due to the 

introduction of Medicare, may explain half the 

increase in health care spending from 1950 to 

1990.46

Aging and Demographics

Most research on the effect of aging on health 

care spending has found relatively small effects. A 

CBO review of the literature estimates that from 

1940 to 1990 population aging only accounted 

for about 2  percent of overall health care cost 

growth.47 The aging of the baby boom generation 

over the next 25  years, however, is expected to 

play a large role in the increased cost of Medicare 

and Medicaid. According to the CBO’s most recent 

Long-Term Budget Outlook projections, aging 

will account for about 44 percent of growth in the 

two  programs through 2035, with “excess cost 

growth” accounting for the remainder. From 2035 

through 2080, the effect attenuates and aging 

accounts for about 30  percent of the projected 

growth in the two programs.48

Health Status of the Population

A healthy population should need to spend less 

on medical care than a less healthy population. 

Then again, many medical interventions that can 

improve health, or more precisely effectively treat 

or even cure diseases can be very costly. In addition, 

successful treatment of life-threatening condition 

could lower near-term costs, but those savings may 

be offset by subsequent spending over a longer 

period of time. It is difficult to make summary 

claims about healthiness. In many ways the U.S. 

population is getting healthier. Life spans continue 

to increase and disability at older ages is declining. Mortality rates from some chronic diseases 

45 U.S. Congressional Budget Office, Technological Change and the 

Growth of Health Care Spending, January 2008. 46 Finklestein, A., “The Aggregate Effects of Health Insurance: 

Evidence from the Introduction of Medicare,” Quarterly Journal of 

Economics, vol. CXXII, no. 1, February 2007. 47 U.S. Congressional Budget Office, Technological Change and the 

Growth of Health Care Spending, January 2008. 48 U.S. Congressional Budget Office, Long-term Budget Outlook, 

June 2009, Box 1-2.

have improved while other causes of death and 

some chronic conditions have increased. People are 

living longer with conditions that would have led 

to an earlier death only several decades ago. 

Research by Harvard health economist David 

Cutler finds that the United  States is becoming 

collectively healthier, largely due to decreased 

smoking, and better control of blood pressure. This 

trend, however, may reverse as obesity becomes 

more prevalent. Between 1997 and 2007 the 

prevalence of obesity among adults aged  20 and 

over rose steadily from 19 to 27  percent.49 Some 

estimates show that nearly one-third of those 

over age  20 are obese.50 Thorpe estimated that 

increased prevalence of obesity increased spending 

from 1987 to 2001 by 12 percent,51 while the CBO 

found an increase of 4 percent.52 A 2006 study by 

Thorpe and Howard also concludes that the health 

of Americans has improved, but that more people 

live longer with several chronic conditions.53

It could be the case that medical professionals are treating healthier patients; treatments 

are improving health, or both. The authors point 

out that the number of individuals on Medicare 

receiving treatment for five or more conditions has 

increased from 31 percent of beneficiaries in 1987 

to 50 percent in 2002.54 The increasing number of 

“treatable” conditions drives a portion of health 

care cost growth. Thorpe attributes virtually all 

of the Medicare cost growth from 1987 to 2002 to 

patients treated for five or more conditions.55

49 U.S. Centers for Disease Control and Prevention, National 

Health Interview Survey, various years. 50 U.S. Centers for Disease Control and Prevention, National 

Health and Nutrition Examination Survey 2001–2004. 51 Thorpe, K.E., C.S. Florence, D.H. Howard, P. Joski, “Trends: 

The Impact of Obesity on Rising Medical Spending,” Health Affairs 

Web Exclusive, October 20, 2004. 52 U.S. Congressional Budget Office, Technological Change and the 

Growth of Health Care Spending, January 2008, p. 10, Box 1. 53 Thorpe, K.E. and Howard, 2006, The Rise in Spending Among 

Medicare Beneficiaries: The Role of Chronic Disease Prevalence And 

Changes In Treatment Intensity, p. w383. The report is specific to 

Medicare and concludes that healthier patients are receiving 

treatment, or treatments are improving health outcomes, or a 

combination of the two. 

54 Thorpe and Howard, 2006, p. w381. 55 Thorpe and Howard, 2006, p. w385.
The Unsustainable Cost of Health Care 13

Income

Rising personal income leads to higher spending on health care because medical care is a desired 

service. As individuals become better off, spending 

on extending life and improving health and wellbeing may be more attractive than spending on 

other goods. Just how responsive changes in health 

care spending are to change in income is debatable. A recent CBO study surveying the empirical 

literature suggests a 10 percent increase in income 

may increase health care spending by roughly 2 

to 4 percent, and so they estimate that growth in 

the average income per capita in the United States 

may account for about 5 to 20 percent of long-term 

spending growth.56

Beyond some point, devoting an increasing 

share of income to health care without concomitant 

improvements in health and well-being becomes 

unsustainable. As discussed in the previous section, that trend will reduce individual standards of 

living and swamp government budgets.

Administrative Costs

Historical estimates of administrative costs 

on health care spending range from 3 to 10  percent of long term spending growth, with the 

maximum estimate57 at 13  percent of aggregate 

cost growth.58 The CBO found that from 1995 to 

2005, spending on administrative services grew by 

around 7 percent per year.59

56 U.S. Congressional Budget Office, Technological Chance and the 

Growth of Health Care Spending, January 2008. Because people 

with better health tend to have higher income but lower health 

care spending than those with worse health, these estimates 

might understate the impact of observed rising income relative to 

what would happen if income rose across the board. Although estimates based on cross national comparisons tend to find a much 

higher increase in spending from a given increase in income, the 

difficulty of such comparison suggests they overstate the true 

response. 

57 According to the Robert Wood Johnson Foundation, “the 

maximum estimate is an estimate of the largest possible impact 

that administrative costs could have had on long term spending 

growth.”

58 Predictions vary because, as the U.S. Congressional Budget 

Office states, “reliable comprehensive data are hard to find, making it hard to gauge cost growth.” Technological Chance and the 

Growth of Health Care Spending, January 2008, p. 11. 59 U.S. Congressional Budget Office, Technological Chance and the 

Growth of Health Care Spending, January 2008, p. 4.

Changes in Health Care Prices

CBO estimates that between 10 and 20  percent of long-term growth in per-capita spending 

was attributable to higher prices. Complicating 

such estimates is accounting properly for changes 

in quality. A new test may be twice as expensive, 

but may supply vastly superior diagnostic information, or information that did not exist previously

Medical Malpractice Liability

Real or perceived increases in liability for 

medical malpractice could potentially raise health 

care spending directly through higher malpractice 

insurance premiums and indirectly by leading doctors to attempt to limit their risk of being sued by 

ordering more tests or procedures than is necessary. The direct effect of malpractice insurance 

premiums on health care spending is estimated 

to be rather small because those premiums represent only 1 to 2  percent of total health care 

expenditures.60 In their recent review of health 

care reform options, CBO estimated that imposing 

limits on malpractice awards would lower malpractice premiums by about 6 percent nationwide, 

but that those savings would have a very modest 

impact on total health care expenditures of less 

than 0.2 percent.61

The evidence that more costly malpractice liability increases overall spending due to the practice 

of defensive medicine is less clear. One reason is 

that it is difficult to separate the practice of defensive medicine from the effects of other factors that 

lead to more intensive use of resources including 

the diffusion of new technology, the incentives 

in the fee-for-service form of reimbursement, 

and the factors accounting for regional variation 

in spending discussed earlier. A second reason is 

that the findings of research studies have not yet 

reached a consensus. For example, a frequently 

cited series of studies by Kessler and McClellan of 

Medicare beneficiaries with serious heart disease 

found reducing malpractice liability led to reduc60 Between 1970 and 2000, malpractice premiums increased 

from 5.5 percent to 7.5 percent of total physician practice 

expenses. Sloan, F. and L. Chepke, “From Medical Malpractice to 

Quality Assurance,” Issues in Science and Technology, Spring 2008. 61 U.S. Congressional Budget Office, Budget Options, Volume 1: 

Health Care, December 2008. Available at: http://www.cbo.gov/

ftpdocs/99xx/doc9925/12-18-HealthOptions.pdf.
14 The Unsustainable Cost of Health Care

tions in expenditures of 4 to 9  percent.62 When 

analysts at the CBO attempted to replicate those 

results over a wider range of conditions, they did 

not find that tort reforms lowered spending.63 In a 

2006 review of the evidence, CBO analysts found 

that tort reforms are sometimes associated with 

higher spending, sometimes lower spending, and 

sometimes with no effect on spending at all.64

While the empirical evidence regarding the 

implications of medical malpractice premiums on 

total health care costs is mixed, large segments 

of the provider community and many providers 

of health insurance are convinced that it is a significant problem. They are not convinced that the 

empirical studies are capturing the actual extent 

to which malpractice cases are driving medical 

practice in directions that increase costs over time. 

Disparate interpretations of economic evidence 

sometime lead to these sorts of diverse conclusions 

about the effects of factors affecting behavior. For 

example, a 2007 study using Medicare data found 

that a 10  percent increase in malpractice premiums per physician was associated with a 1 percent 

increase in Medicare payments for physician services and found specifically an increased use of 

imaging services.65 A 2008 study by Sloan and 

Chepke, found that between 1970 and 2000 malpractice premiums increased from 5.5  percent to 

7.5 percent of total physician practice expenses.66

One interpretation of the results here is that 

medical malpractice has had little effect on the 

practice of medicine driving up total physician 

expenses from 5.5 to 7.5 percent of total expenses 

62 Kessler, Daniel and Mark McClellan, “Do doctors practice defensive medicine?” The Quarterly Journal of Economics, May 1996, 

vol. 111, no. 2, pp. 353-390. See also Kessler, Daniel and Mark 

McClellan “Malpractice Law and Health care Reform: Optimal 

Liability Policy in an Era of Managed Care,” Journal of Public 

Economics, vol. 84, no. 2 (May 2002). Another widely cited study 

based on a survey of physicians is D. Studdert, et al. “Defensive 

Medicine among High Risk Specialist Physicians in a Volatile 

Malpractice Environment,” Journal of the American Medical 

Association, vol. 293, no. 21, 2005. 63 U.S. Congressional Budget Office, Limiting Tort Liability for 

Medical Malpractice, January 8, 2004. Available at: http://www.

cbo.gov/ftpdocs/49xx/doc4968/01-08-MedicalMalpractice.pdf.

64 U.S. Congressional Budget Office, Medical Malpractice Tort 

Limits and Health Care Spending, Background Paper, April 2006, 

p. 3. Available at: http://www.cbo.gov/ftpdocs/71xx/doc7174/04-

28-MedicalMalpractice.pdf.

65 Baicker, Katherine, Elliott F. Fisher, and Amitabh Chandra, 

“Malpractice Liability Costs and The Practice of Medicine in the 

Medicare Program,” Health Affairs, 2007; 26(3): pp. 841-852. 66 Sloan, F. and L.Chepke, “From Medical Malpractice 

to Quality Assurance.” Issues in Science and Technology, 

Spring 2008.

in the last 30 years of the twentieth century. It is 

possible, however, to construe these results somewhat differently. According to the National Health 

Expenditure Accounts, spending on physician 

and clinical services in 1970 was $13.98  billion 

or $49.31  billion in 2000  dollars using the GDP 

deflator. In 2000, spending was $288.62 billion in 

current dollars according to the National Health 

Expenditure Accounts. The cost of malpractice 

premiums over the period would have gone from 

$2.71 billion (.055 x 13.98) in 1970 to $21.65 billion (.075 x 288.62) according to these results. 

That is an increase of 698 percent. If a 10 percent 

increase in malpractice premiums leads to a 1 percent increase in service costs, this would have 

translated into a 70  percent increase in physician and clinical costs according to the Sloan and 

Chepke results.

In most circumstances, any factor that 

accounted for 70  percent growth in costs over a 

30 year period would be considered significant by 

most observers. In this case, total physician and 

clinical costs increased by 485  percent over the 

total period and even if medical malpractice did 

drive base costs up by 70 percent, it would only represent about 14 percent of total cost increases over 

the period. Sorting out how important malpractice 

insurance costs are in view of other strong factors 

has proven very difficult. The question of whether 

changes in malpractice liability change health care 

costs and under what circumstances remains open 

to more conclusive and consistent empirical study.
The Unsustainable Cost of Health Care 15

The need to restrain the unsustainable growth in 

health care costs is often overlooked as discussions 

of health care reform focus on expanding access to 

health insurance. As we have shown, health care 

costs place a large and growing burden on today’s 

retirees, workers, and employers, and they are projected to continue to grow faster than incomes.

Experts have been arguing for some time that 

in order to achieve effective health care reform and 

restrain the growth in costs, attention must be 

focused on restructuring the payment processes. 

The Board has heard many suggestions on ways to 

reform the system while at the same time reducing 

the growth of health care costs, without reducing quality. In this section of our report, we will 

describe a number of suggestions. Inclusion in this 

report does not necessarily imply recommendation 

by the Advisory Board.

Although there is some overlap, most suggestions fall into one of two categories: directly 

improving the efficiency of health care delivery 

or aligning financial incentives to reward more 

effective and efficient care. The two approaches are 

complementary. Incentives are needed to change 

behavior, but improvements in processes and 

organization, as well as cultural changes, are also 

required. We will also point out some organizations 

that can be used as models for the needed changes. 

Some providers are already using alternative strategies that reduce costs and improve efficiency. In 

the following sections, we will discuss some of 

those strategies and suggest how public policy can 

be used to encourage successful change.

Improving the Efficiency of theHealth Care 

Delivery System

Process Improvement

As the knowledge base underlying medical 

practice continues to grow, the traditional craft 

of medicine practiced by individual physicians 

becomes more and more untenable. A new model 

of medicine is emerging, based on evidence rather 

than personal experience and on teamwork rather 

than individuals. Through examining data to 

develop shared baselines, clinicians are able to 

reduce complexity and to adapt baselines to individual cases. Some providers have applied to health 

services the process improvement techniques that 

have been used successfully in manufacturing 

and other industries. (See the text box, “Quality 

Improvement: From Manufacturing to Medicine.”) 

The end result is improved patient outcomes and 

higher quality care at reduced costs.

As part of our examination of health care 

costs, the Advisory Board visited Intermountain 

Healthcare in Salt Lake City.67 Dr.  Brent James, 

Intermountain’s Chief Quality Officer, described 

a number of examples of how Intermountain 

had improved quality while reducing costs. One 

example—pregnancy, labor, and delivery—is 

Intermountain’s largest single routine care process. While data showed a wide range of gestational 

ages at which labor was induced, guidelines published by the American College of Obstetrics and 

Gynecology (ACOG) outlined conditions in which 

67 Intermountain Healthcare is an integrated system of nonprofit 

hospitals, clinics, and related services. Its more than 30,000 

employees provide care in 6 million patient visits a year at 

21 hospitals and more than 130 clinics. It also owns or supports 19 community clinics serving uninsured and low-income 

patients. SelectHealth, a nonprofit insurance company owned by 

Intermountain, provides benefits to nearly 500,000 people. 

What Can Be Done About Health Care Costs
16 The Unsustainable Cost of Health Care

elective induction of labor is safe for the mother 

and the baby, the main one being a gestationalage of at least 39  weeks. Intermountain blended 

the ACOG criteria into its workflow for labor and 

delivery and saw elective induction at less than 

39 weeks drop from 28 percent to 5 percent in the 

space of a year. The number of unplanned c-sections and the number of newborns in neo-natal 

intensive care also fell. The bottom line was better

care for mothers and their babies and a savings of 

more than $10 million per year.68

Another early example is a quality improvement program designed to enhance the prescribing 

of medications for cardiovascular patients when 

68 For more examples of process improvements at 

Intermountain, see Brent James’ testimony to the U.S. House 

of Representatives’ Committee on Ways and Means on April 1, 

2009, and Baker, G.R., A. MacIntosh-Murray, C. Porcellato, 

L. Dionne, K. Stalmacovich, and K. Born, Intermountain 

Healthcare, High Performing Healthcare Systems: Delivering Quality 

by Design, pp. 151-178.

Quality Improvement: From Manufacturing to Medicine

Dr. Brent James had been studying variations in patient care, when a colleague introduced him 

in 1987 to Dr. W. Edwards Deming, who had introduced quality methods into post-WWII Japan. 

After talking to Deming, Dr. James realized that he could apply the same techniques to health 

services research that Deming had been applying to industry. In Dr. James’ own words:1

“Frankly, in many ways quality improvement makes far better sense from a medical foundation than it does from a manufacturing foundation...In honest truth, there is nothing new here for 

medicine. It was our best, core values, systemically applied.”

“It was pretty easy to sell to my physician colleagues if I kept it in the traditional research 

mode, focused on understanding how we best care for patients. I could show you the graph that got 

administration on board. I spent some time with Deming, and Dr. Deming had this crazy idea – at 

least, it was absolutely crazy at the time. He claimed that if you improve your quality, your costs 

should drop. In these days people understand that that is true, but back in 1986 and 87 that idea 

was massively counterintuitive.”

“Deming taught that quality and cost are two sides of the same coin, and that you really can’t 

change one without changing the other. They always come as a set. Then he went on to define tight 

linkages, causal mechanisms, by which quality and cost interact together. As you understand the 

mechanisms, you can get a win-win going. You can win on both sides of the line. Better clinical 

outcomes can drive lower costs of operations, in a predictable way, a way that you can manage.”

“Now, there is a trick to this. This one blindsided us bad, and we didn’t figure it out until 1995. 

We were going along pursuing clinical improvement projects. We had a series of trials, where we 

could prove that as our medical outcomes improved that our costs were dropping. I thought we had 

solved the problem, but my administrators were whining. They kept saying, ‘Yeah, but our budgets 

are not getting better.’ . . . Eventually, I went back to track the savings through their budgets. That’s 

when the big surprise came: Our costs were dropping, but our reimbursements were dropping as 

much or more. There were perversities in the payment system, so that when you delivered more 

efficient care, the savings were all going back to the payers, the insurance companies or the Federal 

Government, as windfall savings.”

“We think the only way to protect our hospitals and protect our physician partners is to get our 

cost structure under control. The plan to do that is by improving our care for our patients. It is possible; we know how to do it. We think the ability to control cost structure, then administratively 

turn that into a positive bottom line, is key to survival. We need to be paid for our work.”

1 Excerpts from “Dr. Brent James: Moving from ‘Craft-Based’ Medicine to Evidence-Directed Teams,” DocTalk, May 2008, 

pp. 40-56.
The Unsustainable Cost of Health Care 17

they were discharged from the hospital. For each 

diagnostic category, Intermountain developed 

guidelines for prescriptions based on the recommendations of the American College of Cardiology 

and American Heart Association. Implementing 

the guidelines required the commitment of physicians, nurses, and staff, and an extensive education 

campaign was conducted to gain that support. A 

reference card was printed to aid physicians and 

clinical staff. The appropriate medications were 

printed on patients’ discharge forms, so physicians 

only had to check the correct box or note a reason 

for not following the guideline. Within a year, the 

program resulted in increases in the percentage of 

patients receiving prescriptions for five classes of 

recommended drugs. The increases ranged from 16 

to 82 percentage points. The mortality rate at one 

year for chronic heart failure went from 22.7 percent to 17.8 percent and for ischemic heart disease 

from 4.5  percent to 3.5  percent, a reduction of 

455 deaths. The rate of re-hospitalizations within 

one year went from 46.5  percent to 38.5  percent 

for chronic heart failure and from 20.4 percent to 

17.7 percent for ischemic heart disease, a reduction 

of 887  readmissions. The program showed that a 

relatively simple quality improvement project could 

have substantial long-term lifesaving benefits.69

Some criticize the use of guidelines as “cookbook medicine.” However, Dr. James stressed that 

is not their intention, and that guidelines should 

not be applied mindlessly. The goal of such guidelines is to reduce complexity so that individual 

clinicians can focus on what is most helpful to 

individual patients, adapting the guidelines to the 

patient’s individual needs. 

Quality improvement is an ongoing way of 

doing business. Intermountain has identified 

1,400 clinical processes to analyze for quality 

improvement. As a result of its quality improvement efforts, Intermountain is often cited as an 

example of cost-effective delivery of quality health 

care. For example, a 2008 Dartmouth study said:

Given the strong national reputations enjoyed 

by such organized practices as the Mayo Clinic and 

Intermountain Healthcare, and the objective evidence 

that they deliver more efficient, higher quality care, it 

seems reasonable to use these systems as benchmarks 

69 Jason M. Lappe, et al., “Improvements in 1-Year 

Cardiovascular Clinical Outcomes Associated with a Hospitalbased Discharge Medication Program,” Annals of Internal 

Medicine, 2004; pp. 141:446-453.

for the rest of the country. Were all providers in the 

country to achieve the same level of efficiency for inpatient spending on supply-sensitive care, we estimate 

a 28  percent reduction in hospital spending under a 

Mayo benchmark and a 43 percent reduction under an 

Intermountain benchmark.

Intermountain is not alone in the way it 

does business. There are many other organizations of excellence around the country: the 

Mayo Clinic in Minnesota, Geisinger Health 

System in Pennsylvania, and Group Health in 

Seattle, to name a few. We expect the data-driven 

approach to quality improvement to continue to 

spread. Intermountain has been conducting its 

Advanced Training Program in Clinical Practice 

Improvement since 1991, and there are now about 

30 similar training programs. The Mayo Medical 

School has integrated quality improvement into 

years 1 through 4 of its existing curriculum.70 The 

spread of quality improvement in medicine should 

be encouraged. We will have more to say about this 

when we discuss incentives.

Organized Systems of Care

Intermountain Healthcare is an excellent 

example of a large organized system of care that 

is able to leverage and incorporate new medical 

knowledge into practice regimens when appropriate. In Intermountain’s experience, integrated 

delivery systems with common baselines of practice have improved quality while lowering costs. 

It presents its integrated medical groups, with 

greater use of health information technology 

(HIT) and quality improvement programs, as an 

example of providing better clinical performance 

than less integrated independent practice associations, at a reduced cost. 

The model of a cost-effective integrated delivery system could be applied to physicians who 

already practice within local referral networks 

around one or more hospitals, which could form 

the nucleus of local integrated delivery systems. 

Community Care of North Carolina provides integrating services to physicians in solo or small 

group practices and has demonstrated improved 

70 Varkey, Prathibha, “Educating to Improve Patient Care: 

Integrating Quality Improvement into a Medical School 

Curriculum,” American Journal of Medical Quality, 22 (2), MarchApril 2007, pp. 112-16.
18 The Unsustainable Cost of Health Care

quality as well as significant cost savings.71 The 

CEO of Kaiser Permanente suggests that “infrastructure vendors” could bridge the gap to a more 

integrated system.72

Fostering the growth of integrated delivery 

systems requires a culture shift. To facilitate that 

shift, policymakers could remove legal obstacles 

to collaboration and provide encouragement.73

For example, providers could share in the savings from reduced utilization. The Commonwealth 

Fund Commission suggests that adopting “enterprise liability” as an approach to malpractice 

liability reform would stimulate collaboration. 

Under enterprise liability, physicians are licensed 

in association with a hospital or large organization 

affiliation. Liability then becomes the responsibility of the enterprise, rather than the individual 

physician. While giving the individual physician 

greater protection, enterprise liability gives the 

enterprise an incentive to ensure that its physicians are competent and that the organization 

works together to enhance quality of care.74

Coordination of Care

Patients with multiple chronic conditions 

account for a disproportionate share of spending, 

both in a given year and from year-to-year. In the 

Medicare population, chronic conditions account 

for much of the skewing of health care spending. 

Medicare beneficiaries with five or more chronic 

conditions see an average of 14 doctors per year.75

Coordination of care is especially important 

for patients with multiple chronic conditions, 

because it is not uncommon for them to receive 

duplicate testing, conflicting treatment advice, 

and prescriptions that are contraindicated. In a 

2000  survey, 14  percent of people with chronic 

conditions reported receiving different diagno71 Fisher, E.F., et al., p. 852; The Commonwealth Fund 

Commission on a High Performance United States Health 

System, The Path to a High Performance United States Health 

System: A 2020 Vision and the Policies to Pave the Way, 

February 2009, pp. 43-45.

72 Halvorson, George, Health Care Reform Now, pp. 173-218. 73 The American Hospital Association issued Guidance for Clinical 

Integration in 2007 to discuss specific regulatory issues. 74 The Commonwealth Fund Commission on a High Performance 

Health System, The Path to a High Performance United States 

Health System: A 2020 Vision and the Policies to Pave the Way, 

February 2009.

75 U.S. Social Security Advisory Board briefing by Thomas Reilly, 

U.S. Centers for Medicare and Medicaid Services, Office of 

Research, September 12, 2008.

ses from different providers; 17  percent reported 

receiving conflicting information from providers; 

and 18 percent reported having duplicate tests or 

procedures. Some combination of these factors 

may play a role in the fact that there is a correlation between the number of chronic conditions 

and the number of inappropriate hospitalizations 

of Medicare patients.76

Changes to insurance coverage and provider 

payments could help with management of chronic 

conditions. Health insurance often provides better 

coverage for acute episodes than it does for preventive or ongoing care. Payment systems are also 

oriented toward acute episodes and do not pay providers to coordinate with one another. Gundersen 

Lutheran Health System in Wisconsin provides an 

example of how coordination of care can improve 

patient outcomes while reducing costs. Gundersen 

reports an average per patient savings of $15,087 

over 24 months through its care coordination program. It assigns registered nurses or social workers 

to the 1  percent to 2  percent of its patients who 

use the most health services, to help them get the 

appropriate care at the right time. This service, 

which is provided without charge to the patient, 

results in fewer preventable readmissions and 

improved compliance with treatment plans.77

Many forms of organization have been proposed in order to provide coordinated care, and 

each form allows for variations. One specific type 

of coordination is a concept known as the medical 

home. A medical home is a primary care practice 

that serves as the focal point for coordinating a 

patient’s care. Each patient has an ongoing relationship with a personal physician, who is responsible 

for providing for all the patient’s health care needs 

or taking responsibility for appropriately arranging care with other qualified professionals. Patients 

have enhanced access to care through expanded 

hours and a variety of means of communication. In 

addition to being paid for specific services, medical 

homes would be paid per  beneficiary to promote 

ongoing comprehensive management of a patient’s 

76 Partnership for Solutions, Chronic Conditions: Making the 

Case for Ongoing Care, September 2004 (update). Inappropriate 

hospitalizations are defined as hospitalizations for ambulatory care sensitive conditions, “conditions for which timely and 

effective outpatient primary care may help to reduce the risk of 

hospitalization.”

77 Statement for the Record to the U.S. House of Representatives’ 

Committee on Ways and Means, April 1, 2009. http://waysandmeans.house.gov/hearings.asp?formmode=view&id=7765.
The Unsustainable Cost of Health Care 19

care.78 One specific model, the Patient-Centered 

Medical Home, incorporates four principles: primary care, patient-centered care where care is 

tailored to the patient’s needs and preferences, a 

“new-practice model” that is based on continuous 

improvement concepts, and payment reform.79

Payment reforms can foster the use of medical homes. Making the use of a medical home less 

expensive for consumers would make them more 

attractive. A system in which insurers paid for 

patient care by a medical home over a period of 

time, with rewards for quality of outcomes rather 

than for quantity of services, would give patients 

access to coordinated care and a way to manage 

chronic conditions. Savings realized by the use of 

medical homes could be shared between patients, 

in the form of reduced premiums, and practices, in 

the form of year-end bonus payments. Combined 

with health information technology, a medical 

home could provide e-mail consultations, access to 

personal records, guidance on managing chronic 

conditions, and the potential for electronic monitoring of chronic conditions.

A variation on the medical home is the Guided 

Care model developed by Professor Chad Boult at 

The Johns Hopkins University.80 In the Guided 

Care model, nurses collaborate with primary care 

physicians to coordinate care for older adults 

with chronic conditions over extended periods to 

provide transitional care, help patients develop 

self-management skills, and assist them in connecting with community resources. The Guided 

Care model has the advantage of enabling small 

medical practices to provide coordinated care for 

chronic conditions even though they do not take 

on the full range of health care. Guided Care has 

shown improved quality of care at reduced costs.

A more highly structured approach to 

coordination of care is the accountable care organization (ACO). The Medicare Payment Advisory 

Commission (MedPAC) has recommended that 

Medicare test ACOs as a means to restrain the 

78 American Academy of Family Physicians, Joint Principles of the 

Patient-Centered Medical Home, March 2007. 79 Rittenhouse, Diane R., Stephen M. Shortell, “The PatientCentered Medical Home Will It Stand the Test of Health Reform?” 

Journal of the American Medical Association, May 20, 2009. The 

Medicare Payment Advisory Commission provides an extensive 

discussion of medical homes in its June 2008 report to Congress.

80 Whelan, Ellen-Marie and Judy Feder, Payment Reform to 

Improve Health Care: Ways to Move Forward, Center for American 

Progress, June 2009, p. 12.

growth in health care costs.81 In the MedPAC 

model, an ACO would consist of primary care physicians, specialists, and at least one hospital, that 

together take on the responsibility of caring for 

the health care of a population. To create an incentive to restrain costs while improving quality, the 

model would give a bonus if the ACO meets both 

quality and cost targets. ACOs would thus have a 

financial incentive to change practice patterns and 

hold down their costs.

Diagnostic and Treatment Tools

The marketplace is exploding with new medical devices, second and third generations of 

well-established drugs and treatment protocols, 

and new research findings continue to inform 

the practice of medicine. These new tools have 

played a significant role in increasing longevity, 

improving the quality of life and reducing disability. New drugs, new imaging equipment, and 

redesigned diagnostic tools have an allure that 

is undeniable. These services and procedures are 

often quite expensive and often there is a dearth 

of objective evidence that can assist a physician 

or patient make an informed decision about the 

relative value of various options; decisions to use 

particular treatments and services often are based 

on a physician’s past experience. Moreover, current payment structures often encourage the use 

(or in some cases, unnecessary use) of these new 

protocols by paying for the number of procedures 

regardless of the value.

For many types of illness, there is no definitive evidence regarding which type of treatment 

is most effective. For example, patients with the 

most common form of prostate cancer, slow-growing early-stage prostate cancer, can choose from 

a range of treatments. The simplest is known as 

watchful waiting, monitoring the cancer to see if 

it worsens. More aggressive treatments are radiation and removing the prostate gland. The newest 

treatment, proton radiation therapy, requires the 

use of a large proton accelerator. None of these 

treatments has been proven superior, and most 

men with this type of cancer die of something else 

before the cancer becomes life-threatening. The 

costs, however, range from a few thousand dollars 

81 Medicare Payment Advisory Commission, Report to the 

Congress: Improving Incentives in the Medicare Program, June 2009, 

chapter 2.
20 The Unsustainable Cost of Health Care

of doctor visits and tests for watchful waiting to 

$100,000 or more for proton radiation therapy.82

Knowing what works is essential to controlling 

health care costs. Earlier in this report we noted 

that preference-sensitive care has been estimated 

to account for 25  percent of Medicare spending. 

There are several approaches that may help reduce 

unwarranted variation in preference-sensitive 

care. The first is to improve the state of clinical 

science, by increasing the number of treatment 

options that have been tested for efficacy. Better 

information on the risks and benefits of alternative treatments will give physicians and patients a 

better basis for informed decision making. 

Because this type of knowledge is considered 

a public good, federally funded research would 

be appropriate for this purpose. There are federal agencies doing this type of work now, but a 

larger-scale, coordinated effort is required.83

Many experts are calling for an autonomous 

organization dedicated to assessing both new 

technologies and clinical science. To preserve its 

objectivity, this organization must be independent 

of the political process. Professor Victor Fuchs of 

Stanford University has argued that the assessment organization should have its own dedicated 

source of funding to enable it to make decisions 

that may be politically unpopular. Professor Fuchs 

recommends a value-added tax to fund health care 

reform, a portion of which would go to technology 

and clinical assessment. Another approach is promoted by the Commonwealth Fund Commission 

on a High-Performance Health System, which 

recommends that a center for medical effectiveness be operated as a quasi-governmental entity 

that could receive funding from both public and 

private sources. Operating funds would come in 

equal parts from the Medicare Hospital Insurance 

Trust Fund, from general revenue funding for the 

Medicaid program, and from an assessment on 

private insurance premiums.84

82 Leonhardt, David, “In Health Reform, a Cancer Offers an Acid 

Test,” The New York Times, July 8, 2009. 83 Funding for this purpose was increased by the American 

Recovery and Reinvestment Act of 2009, which provides $1.1 billion 

for comparative effectiveness research.

84 The Commonwealth Fund Commission on a High Performance 

Health System, The Path to a High Performance United States 

Health System: A 2020 Vision and the Policies to Pave the Way, 

February 2009.

Such a national technology assessment organization would conduct comparative effectiveness 

studies as well as examine questions of cost-effectiveness. Part of the organization’s mission would 

be to reduce the unwarranted variation in supply-sensitive care described in an earlier section. 

This goes beyond what is currently understood by 

comparative effectiveness research and focuses 

on rationalizing care processes and coordinating 

roles and responsibilities of health professionals. 

The goal is to redesign care processes, coordinate 

care, and incorporate accountability measures of 

performance and outcomes.85

There is a gap in health care between knowledge and practice. It is estimated that it takes 

17  years for proven medical advances to make 

their way into common practice, except for new 

devices and pharmaceuticals.86 Given the explosion of biomedical knowledge, it is not surprising 

that it is becoming nearly impossible to retain 

and apply new information. As Brent James of 

Intermountain Healthcare explains, “That information overload can lead to clinical uncertainty, 

widespread practice variations, the opportunity 

for inappropriate care, and an inability to deliver 

even simple, proven therapies consistently to all 

who might benefit.”87

To help close this gap, knowledge would be disseminated timely to both providers and patients in 

user-friendly formats. In addition, health information technology systems could take the guidelines 

that are developed by the technology assessment 

organization and build them into their decision support systems to help manage quality and cost. (The 

Mayo Clinic has an Enterprise Learning System to 

support clinicians by alerting them to problems, 

suggesting actions, and providing information. 

Dr. Farrell Lloyd of Mayo describes the system as 

a “cognitive prosthetic.”)88 Finally, the knowledge 

that comes from the technology-assessment organizations that have been proposed could be linked 

to coverage and payment, so that those systems are 

aligned with evidence-based standards.

85 Wennberg et al., p. 7. 86 Liang, Louise, “The Gap between Evidence and Practice,” 

Health Affairs, 26(2), pp. w119-w121, published online 

January 26, 2007.

87 James, Brent, M.D., “No Clinician Is an Island,” Trustee, 

February 2006, p. 28.

88 “Building and Sharing Medical Knowledge,” Mayo Magazine, 

Spring 2009, pp. 23-27, http://www.mayoclinic.org/mcitems/

mc2300-mc2399/mc2386-sp09.pdf.
The Unsustainable Cost of Health Care 21

Informed Patient Choice and Shared Decision 

Making

There are some medical situations in which 

there is no clear right or wrong answer. For example, for women with early-stage breast cancer, 

both mastectomy and lumpectomy followed by 

radiation have similar mortality rates. The choice 

depends largely on the preferences of the patient. 

Frequently, however, patients leave that decision 

to their physician.89 Several studies have shown 

that some patients who meet the guidelines to 

qualify them for surgery do not want it once they 

have been fully informed of all treatment options. 

Data suggest that implementing shared informed 

decision making could reduce health care expenditures by reducing utilization. Standards already 

exist for the development and evaluation of decision aids to be used in shared decision making.

In order to make informed patient choice 

the standard of practice, State legislatures would 

need to enact informed consent laws, to promote 

the use of informed patient choice, as the State of 

Washington has done. About half the States now 

follow a physician-based standard that requires 

physicians to inform patients as a “reasonably 

informed practitioner” would. The other States 

follow a patient-based standard that requires 

physicians to provide all information that a “reasonable patient” would want to know. Informed 

consent could explicitly be established as the standard of practice in order to give physicians who 

use patient decision aids enhanced immunity from 

malpractice suits. 

Emphasis on Wellness

Employers have been paying greater attention to wellness programs, citing lower health 

care benefit costs as a major reason. A 2006–2007 

Business Roundtable survey of member companies 

found that 20 percent of respondents had created 

wellness programs within the past two years, and 

several other companies responded that they plan 

to implement new programs. 

89 The following discussion is based on Wennberg, John E., 

Annette M. O’Connor, E. Dale Collins, and James N. Weinstein, 

“Extending the P4P Agenda, Part 1: How Medicare Can Improve 

Patient Decision Making and Reduce Unnecessary Care,” Health 

Affairs 26(6), pp. 1564-74. It also draws upon a presentation 

by Dr. Wennberg to the U.S. Social Security Advisory Board on 

October 24, 2008.

Wellness programs often blend into health 

insurance programs including health benefits provided to retirees. Health risk assessments that are 

part of wellness programs identify employees and/

or retirees who need preventive care or chronic disease management under the insurance program. 

Programs to reduce health risks, such as tobacco 

cessation and weight management, are common and 

sometimes use financial rewards and consequences 

to motivate employees. There is a business case for 

such programs, and Business Roundtable member 

companies track costs and return on investment.90

Wellness programs are only part of the picture, 

however. It is also important for consumers to take 

responsibility for their own health and to comply 

with the instructions of their providers.

Health Information Technology

Health information technology (HIT) will not 

of itself improve the efficiency of health care delivery, but it will support and enable practices that 

will improve efficiency. HIT began with administrative software for billing and functions such 

as computerized order entry for medications and 

was supplemented with electronic patient health 

records, but it has the potential to do much more.

HIT can also stimulate broader systemic 

improvements. A national health database could 

be developed, with data from all payers, providers, 

and other owners of health care data. Information 

from this database on treatments, outcomes, and 

costs, without personal identifiers, could be made 

available to researchers. Because an electronic 

system of health records can identify outcomes and 

side effects and aggregate the information quickly, 

it has the potential to go beyond what can now be 

done with clinical trials and can measure evidence 

across subpopulations. It could also accelerate the 

adoption of improved medical knowledge into 

practice, by delivering information in the form of 

decision-support tools. And it could enable patients 

with chronic diseases to become active participants in their own care. HIT can provide them 

with information and enable them to send results 

of home monitoring to their electronic records.91

90 Business Roundtable, Doing Well through Wellness: 2006–07 

Survey of Wellness Programs at Business Roundtable Member 

Companies, 2007. 91 Liang, Louise, “The Gap between Evidence and Practice,” 

Health Affairs 26(2), pp. w119-w121.
22 The Unsustainable Cost of Health Care

This is clearly a critical time for the future of 

HIT. The recently enacted American Recovery and 

Reinvestment Act of 2009 included $19  billion to 

promote the adoption and use of HIT. The law 

provides financial incentives for hospitals and doctors to adopt and use electronic health records, 

and financial penalties for physicians and hospitals who do not use them meaningfully by 2015. 

The law also strengthens protection of health care 

information, to assuage concerns about privacy and 

security.92 An article in the New England Journal of 

Medicine points out the need for flexibility in implementing HIT.93 As one of its authors said, “If the 

government’s money goes to cement the current 

technology in place, we will have a very hard time 

innovating in health care reform.”94 Rather, flexibility is essential to allow HIT to adapt continually to 

new policies, new health care delivery mechanisms, 

and new information technologies. To meet this 

challenge, system components should be not just 

interoperable but substitutable. The article cites the 

example of the iPhone, an open-software platform 

that allows outside developers to create applications. The platform should also reduce obstacles to 

the flow of data, in a standard form, among systems.

Aligning Financial Iincentives to Reward

More Effective and Efficient Care

The Current System: Volume Rather Than Value

Elliott Fisher and Mark McClellan have noted 

that the current payment system has two effects: 

fostering commercial behavior and presenting 

barriers to aligning care with values.95 Current payment systems generally pay doctors, hospitals, and 

other providers for services. This system provides an 

incentive to provide more services and procedures 

and thereby increase costs. Research has shown, 

however, that more services do not necessarily lead 

to better health. In fact, they may lead to worse out92 Blumenthal, David, “Stimulating the Adoption of Health 

Information Technology,” New England Journal of Medicine, 

360;15, March 25, 2009. The Certification Commission for Health 

Information Technology certifies systems that meet established 

standards.

93 Mandl, Kenneth D. and Isaac S. Kohane, No Small Change for 

the Health Information Economy, 360;13, March 26, 2009. 94 Mandl, Kenneth, quoted in Steve Lohr, “Doctors Raise Doubt 

on Digital Health Data,” The New York Times, March 26, 2009. 95 Fisher, McClellan et al., Fostering Accountable Health Care: 

Health Affairs 28 (2), 2009: pp. w219-w231.

comes for patients.96 George Halvorson, chairman 

and CEO of Kaiser Permanente has written: “[W]e 

have over 9,000 billing codes for individual health 

care procedures, services, and separate units of 

care. There is not one single billing code for patient 

improvement. There is also not one single billing 

code for a cure. Providers have a huge economic 

incentive to do a lot of procedures. They have no 

economic incentive to actually make us better. The 

economic incentive score is 9,000 to zero – process 

versus results.”97

The current system also sometimes perversely 

penalizes efficient health care providers. We earlier described the experience of Intermountain 

Healthcare improving its performance at prescribing appropriate medications for heart patients when 

they were released from the hospital. While this 

resulted in reducing readmissions and saving lives, 

it also cost the hospital more than $3.5 million in 

revenues it would have received from those hospital 

admissions.98 Intermountain’s chief quality officer 

says that “about three-fourths of the time, improved 

care that produced cost savings resulted in substantial financial penalties to the care provider. In 

those situations all of the savings flowed back to 

payers as windfall benefits.”99 Providers such as 

Intermountain that have achieved demonstrated 

savings by improved care have been able to negotiate payments with commercial insurers, to reduce 

such perverse incentives. However, it is not possible 

under current law to negotiate Medicare payment 

rates with CMS. Last year, the Mayo Clinic lost 

$840  million on $1.7  billion in Medicare services. 

Mayo’s CEO said, “The system pays more money for 

worse care. If it doesn’t start paying for value instead 

of volume, it will destroy the culture of the organizations with the best care. We might have to start 

doing more procedures just to stay in business.”100

96 Wennberg, John E., Elliott S. Fisher, Jonathan S. Skinner, 

and Kristen K. Bronner, “Extending the P4P Agenda, Part 2: 

How Medicare Can Reduce Waste and Improve the Care of the 

Chronically Ill,” Health Affairs, 26 (6), 2007, pp. 1575-85. 97 Health Care Reform Now: A Prescription for Change, 2007, p. 16. 98 James, Brent C., M.D., Testimony before the U.S. House of 

Representatives’ Committee on Ways and Means, April 1, 2009. 

99 Ibid. Some financial penalties are the result of differences in 

operating margins. The operating margin for some services is 

much higher than that for others. Other financial penalties result 

from services not being performed, as in the case of reduced 

hospital admissions.

100 Grunwald, Michael, “How to Cut Health-Care Costs: Less Care, 

More Data,” Time, June 23, 2009. See also Abelson, R., “Hospitals 

Say They’re Penalized by Medicare for Improving Care,” The

New York Times, December 5, 2003.
The Unsustainable Cost of Health Care 23

Improvements in the delivery of care or reduction of costs will continue to be very difficult if 

financial incentives are aligned for more spending, regardless of quality. In the following pages, 

we will briefly describe some ways to improve the 

alignment of incentives.

Managed Competition

As part of his discussion with the Board, Victor 

Fuchs described the power of managed competition to restrain costs.101 He advocated, within a 

framework of universal coverage, a defined budget 

for government-funded health care programs. 

This, he said, would give insurers an incentive 

to provide quality care more efficiently. His proposal would require insurers to provide a standard 

benefit package with guaranteed issue and no 

exclusions for pre-existing conditions. They would 

receive risk-adjusted premiums and have their outcomes monitored. This will provide an incentive for 

insurers to pressure providers to be more efficient, 

so that the insurers can lower their premiums and 

gain more business in a competitive market.

Professor Fuchs proposes giving consumers 

vouchers so that they can choose among competing health plans. Consumers would therefore have 

a strong incentive to choose the most efficient plan 

providing the highest quality care. To give health 

care consumers an incentive to restrain costs, 

they would pay with their own after-tax dollars 

for care that goes beyond what is covered in the 

standard benefit package. For example, for a wider 

selection of doctors or hospitals, they would pay 

a supplemental fee. Another way of incentivizing 

cost restraint is a value-based approach that would 

charge higher copayments covering the added 

marginal cost for a more expensive service when a 

less expensive one is just as effective.

Pay for Outcomes

Value-based purchasing is a term for making 

providers accountable for both the cost and 

the quality of the services they provide.102 Eric 

Stanchfield, the former director of the Wisconsin 

101 The entire proposal is published as “Health Reform: Getting 

the Essentials Right,” Health Affairs 28, no. 2 (2009), pp. w180-

w183, published online January 16, 2009.

102 Silow-Carroll, Sharon and Tanya Alteras, Value-Driven 

Health Care Purchasing: Four States That Are Ahead of the Curve, 

Commonwealth Fund Publication 1052, August 2007.

Department of Employee Trust Funds, described 

for the Board Wisconsin’s implementation of value 

purchasing. That State’s program covers 227,000 

active and retired workers in Wisconsin State and 

local governments. In 2003 the program began to 

implement value purchasing, which rewards health 

plans that deliver exceptionally high quality care 

and creates incentives to encourage members to 

select efficient, high-quality plans. It conducts an 

annual negotiation process in which insurance 

plans submit detailed cost and utilization data. 

Actuaries compare the cost-effectiveness of each 

plan using a risk-adjustment system. Plans are 

credited if they have had high quality results. The 

State also makes available a public plan in areas 

where there is inadequate competition. In the 

four years before the current Wisconsin program 

was implemented, the annual average premium 

increase was 13.3 percent. In the four years after 

implementation, it was 7.1 percent.

Incentives for Consumers of Health Care

The Board heard from Joe Antos, Wilson H. 

Taylor Scholar in Health Care and Retirement 

Policy at the American Enterprise Institute, about 

the incentives he saw for consumers in today’s 

health care system. He explained that workers do not recognize that employers offer health 

insurance as part of a compensation package, 

and therefore that higher insurance costs mean 

lower wages. Higher health care costs lead to more 

expensive health insurance plans and lower wages. 

Antos said that open-ended insurance payments 

that pay nearly all the cost of health services lead 

consumers to purchase more services than they 

would if they were aware of the cost. When people 

are spending their own money, they are likely to be 

more careful about how it is spent.103

Increasing the share of costs paid by consumers has been shown to reduce spending on medical 

care. The only long-term experimental study of 

cost sharing and its effects is the RAND Health 

Insurance Experiment, completed in 1982. In that 

experiment, participants who paid for a share of 

their health care used fewer services than a com103 U.S. Social Security Advisory Board briefing, February 13, 

2009; “Consumer Choice: Can It Cure the Nation’s Health-Care 

Ills?” The Wall Street Journal, December 13, 2005; Joseph R. 

Antos, “Symptomatic Relief, but No Cure – The Obama Health 

Care Reform,” New England Journal of Medicine, October 16, 2008, 

pp. 1648-1650.
24 The Unsustainable Cost of Health Care

parison group without cost sharing. Cost sharing 

reduced the use of both highly effective and less 

effective services in roughly equal proportions. 

Cost sharing did not significantly affect the quality of care. For the most part, cost sharing had 

no adverse effects on participant health. The 

exception was that, among the poorest and sickest participants, the absence of cost sharing led 

to improvements in hypertension, dental health, 

vision, and several serious symptoms.104

More recent observational studies have also 

examined cost sharing. Increasing the share of 

costs paid by consumers has been shown to reduce 

spending on medical care. Studies have shown 

that increasing out-of-pocket costs to consumers 

by 10  percent reduces total spending per  patient 

by 2 percent, and adding a high ($1,000 or more) 

deductible reduced total spending by 4 to 15 percent. Research has also identified drawbacks to 

consumer cost sharing. Patients with high levels 

of cost sharing seem just as likely to cut back on 

essential services as on services with little or no 

value.105 Payments could be structured in a way to 

lead patients to make decisions that are in the best 

interest of their health.

Consumer-directed Health Care

As the most recent approach to restraining 

health costs through employer-provided insurance, consumer-directed health care (CDHC) is 

another way to give consumers greater control. 

CDHC is designed to give consumers incentive to 

use care wisely and to shop for services that provide the best value. CDHC insurance plans have 

high deductibles that give consumers an incentive 

to be cost-conscious by requiring a higher level 

of out-of-pocket spending before insurance payments are made.

The most recent form of CDHC is health savings 

accounts (HSAs). HSAs were established in 2003 

by the Medicare Prescription Drug, Improvement, 

and Modernization Act. HSAs can be used only with 

high-deductible insurance plans with a minimum 

deductible and a maximum amount for out-of104 The results of the experiment are summarized in the RAND 

research brief, The Health Insurance Experiment, http://www.rand.

org/pubs/research_briefs/2006/RAND_RB9174.pdf. 105 Rosenthal, Meredith B., “What Works in Market-Oriented 

Health Policy?” New England Journal of Medicine, May 21, 2009.

pocket spending.106 Funds deposited into the 

accounts are tax-deductible, and earnings in the 

accounts accrue tax-free, so that they accumulate 

over a period of time to provide a larger buffer 

against medical expenses.107

The Board heard from Duane Olson, Manager 

for Health and Welfare Plans at Deere and Company, 

about how HSAs can reduce health care costs. At 

Deere and Company, the total expenditure on 

employee health care costs (including premiums, 

out-of-pocket costs, and employer HSA contributions) was lower than it was before the company 

offered HSAs. Consumers in HSAs must be active in 

getting all the information they need to make wise 

decisions about health care spending. To help consumers make healthy decisions, some CDHC plans 

include incentives to participate in wellness initiatives and disease management programs or waive 

or reduce the deductible for preventive care. In 

the case of Deere, Olson reported that, for 8 of 11 

chronic conditions, employees had improved prescription compliance, and two-thirds of employees 

with an identified high or moderate health risk 

were actively engaged with a health coach.108

Incentives for Providers of Health Care

Providers, as well as consumers, respond to 

incentives. For example, when Medicare introduced 

its Prospective Payment System, which provides a 

predetermined fixed amount for diagnosis-related 

groups for inpatient hospital services, it resulted 

in a substantial decline in lengths of stays in hos106 The levels for contributions, deductibles, and out-of-pocket 

maximums are indexed for inflation. For 2009, the maximum 

contribution is $3,000 for an individual ($5,950 for a family); 

the minimum deductible is $1,150 for an individual ($2,300 for a 

family); and the out-of-pocket maximum is $5,800 ($11,600 for 

a family).

107 For more discussion of HSAs, see: RAND, “ConsumerDirected” Health Plans: Implications for Health Care Quality and 

Cost, California Health Care Foundation, June 2005; GAO08-474R, Health Savings Accounts; Blumberg, Linda J. and Lisa 

Clemans-Cope, Health Savings Accounts and High-Deductible 

Health Insurance Plans: Implications for Those with High Medical 

Costs, Low Incomes, and the Uninsured, the Robert Wood Johnson 

Foundation and Urban Institute, January 2009. There are many 

unanswered questions about the effects these plans might have 

on consumer behavior. Watson Wyatt is partnering with the 

RAND Corporation to investigate the effects of these new plans 

on health care costs and quality. Specifically, they are studying 

the medical care use and expenditure patterns as reported in the 

medical claims files for nearly 33 large treatment employers and 

25 large control employers over the 2003–2007 period.

108 U.S. Social Security Advisory Board briefing by Duane Olson, 

February 13, 2009.
The Unsustainable Cost of Health Care 25

pitals. The expansion of the use of prospective 

payment for diagnosis-related groups to physicians 

should be considered. The current payment system 

pays physicians for services, giving an incentive to 

provide more services. A payment system that provided payment per patient or for treating a given 

diagnosis would reduce the incentive to provide 

more services and procedures. As with incentives 

for consumers, changes to incentives for providers should be approached carefully, with an eye to 

avoiding potential unintended consequences, such 

as physicians leaving the Medicare system.

Hospital readmissions are costly, and the 

data suggest that they happen far too frequently. 

While there are many reasons for readmissions, 

a lack of coordination between providers and the 

patient for follow-up care is one factor. A recent 

study of Medicare patients illustrates the scope of 

the problem of readmissions. It found high overall 

readmission rates, with nearly 20 percent readmitted within 30 days, 34 percent within 90 days, and 

56 percent within a year. Readmission rates varied 

widely by State; readmission rates in the highest 

five States were 45 percent higher than in the lowest 

five.109 Variations in costs suggest that improvements are possible. The top quartile of hospitals 

spends almost four times as much on readmissions 

as the bottom quartile.110 Changes in the payment 

structure may encourage better quality of care and 

outcomes, resulting in reduced readmissions.

Paying providers per episode of care and bundling payments have been suggested as ways to 

redirect incentives toward increased coordination 

of care that can reduce readmissions and result in 

improved cost management. Episode payments 

would pay a single provider an amount to cover the 

costs of care for an entire hospitalization episode, 

to include a specified amount of time (30 days, for 

example) after discharge. Using a single fee for 

an entire episode may encourage coordination of 

services and provide an incentive to reduce complications and readmissions. This concept is similar 

109 Jencks, S.F., M.V. Williams, and E.A. Coleman, 

“Rehospitalizations among Patients in the Medicare Fee-forService Program,” New England Journal of Medicine, April 2, 2009 

360(14): pp. 1418-28.

110 Statement of Glenn M. Hackbarth before the U.S. Senate 

Committee on Finance Roundtable on Reforming America’s 

Health Care Delivery System, April 21, 2009. Hackbarth points 

out that in the early 1990s, Medicare conducted a successful 

demonstration of combined physician-hospital payment for a 

specific type of admission, showing that costs could be lowered 

without reducing quality.

to the diagnosis related group payment system 

used by Medicare to pay hospitals for episodes of 

care. Bundling of payments usually means paying 

two or more providers jointly for the services they 

provided during an episode of care. This differs 

from the more common practice of paying each 

provider separately for every action taken.111

In 2006, Geisinger Health Systems in 

Pennsylvania began changing its approach to episodic care. It analyzed its procedures for coronary 

artery bypass grafts to identify best practices 

and prompt physicians to follow them. It then 

established a package price that included everything from the first physician visit when it was 

decided that the surgery would be done through 

the surgery and 90 days after surgery. It calls its 

program ProvenCare and takes financial responsibility for any associated complications and their 

treatment. After implementing this “warranty” 

program, patient care improved. Complications 

fell by 21  percent and readmissions dropped by 

44 percent. The average length of hospital stay fell 

by half a day, and costs of treatment were reduced. 

Geisinger has since expanded its “warranty” program to include hip replacement, cataract surgery, 

obesity surgery, prenatal care for babies and mothers, and heart catheterization.112

Geisinger reports reducing costs and improving 

quality through the bundling of payments for some 

procedures. Geisinger’s chief medical officer has said, 

“A great paradox in U.S. health care is that we get 

paid for making more mistakes. For example (with 

few exceptions), if a patient develops a post-operative complication that might have been avoided by 

proper care, we often receive more reimbursement 

for that case than for a comparable case without a 

complication. This does not happen in other industries. Why are health care services an exception?”

Dealing with Unwarranted Variations

To deal with the variations among Hospital 

Referral Regions described earlier in the discussion of causes of high health care costs, payment 

reforms should address geographic differences 

111 Whelan, Ellen-Marie and Judy Feder, Payment Reform to 

Improve Health Care, Center for American Progress, June 2009, 

pp. 16

112 Testimony of Glenn D. Steele, Jr. before the U.S. House 

of Representatives’ Committee on Ways and Means, 

April 1, 2009. http://waysandmeans.house.gov/hearings.

asp?formmode=view&id=7651
26 The Unsustainable Cost of Health Care

caused by supply-sensitive care. Currently, more 

efficient Hospital Referral Regions in effect subsidize less efficient regions. This could be corrected 

by adjusting the dollar amount of premiums to 

reflect the cost of delivering care within a regional 

health care market. These premiums could be 

adjusted to local prices and incidence of illness, 

as Dartmouth Atlas data are. Doing so would add 

the advantage of highlighting regional differences to consumers and to local decision makers. 

The problems of disorganized delivery of care and 

the resulting misuse or overuse of resources could 

then develop as local issues, and differences in premiums would provide an incentive for those issues 

to be dealt with.113

113 Wennberg, John E., Shannon Brownlee, Elliott S. Fisher, 

Jonathan S. Skinner, and James N. Weinstein, Improving Quality 

and Curbing Health Care Spending: Opportunities for the Congress 

and the Obama Administration. A Dartmouth Atlas White Paper, 

December 2008, pp. 13-14.
The Unsustainable Cost of Health Care 27

It is essential that the United  States take 

action to restrain the growth of future health care 

costs. The cost of health care is high and continues 

to grow rapidly, while its quality is not always commensurate with cost. The potential expansion of 

health insurance to millions more Americans will 

only increase the growth of costs. There is no simple 

way to restrain the growth of costs while improving and ensuring quality. We need to improve the 

efficiency of the health care delivery system while 

aligning financial incentives to reward more efficient and effective care.

There is no single right way to do this, but we 

note that many providers around the country are 

already providing high quality care at costs that 

are well below average. We are not dealing with 

abstract theory but rather with practices that have 

a proven track record. 

Some of our suggestions will require a change 

in the culture of medicine, moving it away from a 

craft to an evidence-based system of care. A short 

anecdote about the use of a checklist illustrates 

this. Using a five-step checklist before putting 

large intravenous lines into intensive-care patients 

in Michigan hospitals reduced the infection rate 

by two-thirds over a three-month period. Over 

18  months it saved more than 1,500  lives and 

$200 million. The results were published in 2006, 

but the use of the checklist approach is spreading slowly.114 Dr.  Peter Pronovost, who developed 

the checklist, says that American medicine does 

not look at health care delivery as a science, but 

114 Peter Pronovost, et al., “An Intervention to Decrease CatheterRelated Bloodstream Infections in the ICU,” New England Journal 

of Medicine, 335: 2725-32, December 28, 2006. Twenty-eight 

State hospital associations have undertaken to disseminate this 

technique to reduce infections. Health Research & Educational 

Trust, “HRET, Hospital Associations Announce Participants 

in National Efforts to Reduce Bloodstream Infections,” news 

release, March 19, 2009.

Conclusions

rather as an art.115 As MedPAC has pointed out, 

“Understanding why the rate of dissemination for 

beneficial delivery changes is so slow is essential; 

increasing that rate could have substantial payoffs 

for the health care system.”116 Our rapidly growing 

scientific knowledge needs to be brought to patients 

through more integrated and coordinated care.

Moving from our current volume-driven 

system to a more value-driven system will take 

thoughtful and deliberate action. Looking at 

delivery of care, quality improvement processes 

take time and attention, as in the example of the 

checklist described above. Organized systems of 

care seem to offer improved care at lower cost, but 

many details will need to be worked through and 

we will learn much from the experience of working through them. Looking at financial incentives, 

changes may have unintended consequences, and 

periodic course corrections will be needed.

We do not underestimate the difficulty of what 

needs to be done. Nor do we underestimate the 

need to do it. The need is urgent. It is time to begin.

115 Gawande, Atul, “Annals of Medicine: The Checklist,” The 

New Yorker, December 10, 2007. 116 Report to the Congress: Reforming the Delivery System, 

June 2008, p. 10.
28 The Unsustainable Cost of Health Care
The Unsustainable Cost of Health Care 29

Appendices
30 The Unsustainable Cost of Health Care
The Unsustainable Cost of Health Care 31

Long-Term Care

Appendix A

At the time this report was being written, 

nearly all of the public discussions on health care 

reform have omitted consideration of long-term 

care, even though the cost of long-term care is a significant part of the overall growth of costs. About 

10 million Americans, or one in twenty adults, need 

long-term care. Most of them are 65 or older, a population group that will continue to grow. Another 

42 percent are people under 65 with disabilities or 

chronic illnesses.117 We note that the topic of longterm care is one that may demand both discussion 

and reform efforts all its own. However, the nation’s 

shifting demographics makes long-term care a subject of large and growing importance that should 

be factored in as the work of reforming our nation’s 

health care continues. 

Long-term care can be provided in a variety 

of settings: in the home, in group homes, in adult 

day-care and other community-based settings, in a 

hospice, and in institutional settings such as nursing homes. Much long-term care takes the form of 

unpaid help from family and friends. Consumers’ 

preference for receiving care in their homes and 

communities, and the Supreme Court’s 1999 

117 Testimony of Diane Rowland before the U.S. Senate Special 

Committee on Aging, June 3, 2009.

Olmstead decision highlight the need to think 

broadly about how long-term care is delivered.118

The rising cost of long-term care affects retirement security in a number of ways. For today’s 

retirees who have limited income and resources, 

it may mean that all their monthly income is consumed by a nursing facility or that they bear the 

costs of home care out of pocket. For those with 

more means, their income and resources may 

be consumed by the large expenses of providing 

long-term care. Because much long-term care is 

provided by unpaid family and friends, the retirement security of those caregivers is affected as 

well, as they frequently reduce their work hours or 

leave the workforce to provide that care.

Home and Community-Based Services under 

Medicaid

Medicare provides very little in the way of 

long-term care. Even the 100  days that Medicare 

may pay in whole or in part are not considered 

long-term care. Those payments cover post-acute 

care and limited rehabilitation/convalescent time. 

Therefore, the largest public source of payment for 

long-term care is Medicaid.

118 The Olmstead case was brought by two women residing in a State 

mental institution who had sought placement in community care 

and had been found appropriate for that care by their treatment 

professionals. The Supreme Court found that the Americans with 

Disabilities Act required States to place persons with mental disabilities in community settings rather than in institutions when the 

State’s treatment professionals have determined that community 

placement is appropriate, the transfer from institutional care to 

a less restrictive setting is not opposed by the affected individual, 

and the placement can be reasonably accommodated, taking 

into account the resources available to the State and the needs 

of others with mental disabilities. Olmstead v. L.C., No. 98-536. 

For a discussion of preferences for community placement and the 

implementation of Olmstead, see National Council on Disability, 

The State of 21st Century Long-Term Services and Supports: Financing 

and Systems Reform for Americans with Disabilities, 2005.
32 The Unsustainable Cost of Health Care

In 2006 Medicaid spent $109  billion for 

long-term care, up from $32  billion in 1990. Of 

the amount spent in 2006, 59  percent went to 

institutional care and 41  percent to home- and 

community-based care. Although it spends more 

on people in institutions, the majority of people 

Medicaid serves with long-term care are in the 

community, not in nursing homes. Medicaid longterm care expenditures have been growing rapidly, 

and they are expected to continue growing.119

Some recent research on long-term care may 

help point out future directions and potential 

cost savings for delivering long-term care. States 

are required to pay for institutional care under 

Medicaid, but home- and community-based long 

term care services (HCBS) are provided at State 

option. Most Medicaid HCBS are provided through 

programs that waive federal rules. CMS can approve 

the waivers only if the State demonstrates that 

providing HCBS will not cost more than the State 

would have spent on institutional care. The average 

total public expenditure per person receiving HCBS 

waiver services is, in fact, well below that of a person 

receiving institutional services. A study in 2006 

measured the difference for one year at $44,000.120

States have been increasing their spending on 

HCBS over the last 20  years. Currently 2.8  million people are receiving Medicaid HCBS, but more 

than 300,000 people are on waiting lists. There 

are wide variations among States. State spending ranges from less than 5 percent to more than 

50 percent of State Medicaid long-term care funds 

for older people and adults with disabilities going

119 Testimony of Diane Rowland before the U.S. Senate Special 

Committee on Aging, June 3, 2009; Kaiser Commission on 

Medicaid and the Uninsured, Growth in Medicaid Long-Term Care 

Expenditures, 1990-2006; “The Cost and Financing of Long-Term 

Care Services,” Statement of Douglas Holtz-Eakin, Director of 

the U.S. Congressional Budget Office, before the U.S. House of 

Representatives’ Subcommittee on Health and Committee on 

Energy and Commerce, April 27, 2005.

120 Testimony of Diane Rowland before the U.S. Senate Special 

Committee on Aging, June 3, 2009; Kaye, H. Stephen, Mitchell P. 

LaPlante, and Charlene Harrington, “Do Noninstitutional LongTerm Care Services Reduce Medicaid Spending?” Health Affairs

28(1), January/February 2009; AARP Public Policy Institute, 

Taking the Long View: Investing in Medicaid Home and CommunityBased Services Is Cost-Effective, March 2009; Kitchener, 

Martin, Terence Ng, Nancy Miller, and Charlene Harrington, 

“Institutional and Community-Based Long-Term Care: A 

Comparative Estimate of Public Costs,” Journal of Health & Social 

Policy, 22(2), 2006.

 for HCBS. Only four States spend more than half 

their Medicaid long-term care funding on HCBS.121

Despite the fact that HCBS costs less per individual than institutional care, the expansion of 

HCBS is constrained by a concern that increased 

use of HCBS will lead to higher aggregate costs. 

The fear is that making HCBS more available would 

attract more people to seek it, that people who are 

eligible but would not apply for Medicaid to enter 

an institution would apply for Medicaid if HCBS 

were available.

Demonstration projects have been inconclusive on the question of whether aggregate costs 

would increase. A recent study, however, analyzed 

State spending from 1995 to 2005 and showed 

that an expansion of HCBS seems to lead to a 

short-term increase in spending, but that is followed by a reduction in institutional spending and 

long-term cost savings. These long-term savings 

are not automatic, but may result from parallel 

policy initiatives discouraging the use of institutional care.122

CMS has been conducting a demonstration 

project known as Money Follows the Person, in 

which it is trying to help States expand their 

options for people to receive care in their communities. In view of the recent research cited above, 

the variations in State implementation of HCBS, 

and the requirements of Olmstead, CMS should 

also study the implementation of HCBS in States 

that have been more cost-effective and develop 

incentives for other States to follow their example.

The Larger Picture of Long-term Care

The availability of HCBS is vitally important 

to Medicaid beneficiaries and may save money 

in the long run, but it is only one aspect of longterm care that needs attention from policymakers. 

Other aspects of the larger picture include the role 

of long-term care insurance, the respective roles 

of public payments and private insurance, and the 

alignment of financial incentives to encourage the 

cost-effective provision of long-term care to meet 

our future needs. We encourage the Congress and 

the Administration to devote increased attention 

to these issues.

121 Rowland; Kassner, Enid, Susan Reinhard, Wendy Fox-Grage, 

Ari Houser, and Jean Accius, A Balancing Act: State Long-Term Care 

Reform, AARP Public Policy Institute, July 2008. 122 Kaye, LaPlante, and Harrington, Health Affairs 2009.
The Unsustainable Cost of Health Care 33

International Comparisons

Appendix B

Levels of Health Care Spending

The United  States devotes a much larger 

share of it national income to health care than 

any other country in the world. In 2007, the last 

year for which internationally comparable data 

were available, total expenditures on health care 

in the United States comprised 16.0 percent of the 

Gross Domestic Product (GDP), while the average of the developed countries that are part of 

the Organization for Economic Cooperation and 

Development (OECD) was only 8.9 percent of GDP 

(see Figure B-1, left axis).

The United States spends more than twice as 

much per  person on health care compared to the 

average of the OECD countries (see Figure  B-1, 

right axis). In 2007, the United  States spent the 

equivalent of $7,290 per  person on health care, 

compared to only around $3,900 in Canada, 

$3,600 in France, Germany and the Netherlands, 

and $2,600 in Japan. Switzerland, long the country with the second highest health care costs, 

spends only two-thirds as much per person as does 

the United States.

Figure B-1: Total health care expenditures as a percent of GDP and per capita, OECD countries, 20071

Source: OECD Health Data, June 2009.

*2006 data; 2007 figures unavailable for Australia, Japan, Luxembourg, and Portugal

1 Data for Belgium, Denmark and Netherlands are current expenditures excluding investment. Data are expressed in U.S. dollars adjusted for purchasing power parities (PPPs), which provide a means of comparing spending between countries on a common base. PPPs are 

the rates of currency conversion that equalize the cost of a given ‘basket’ of goods and services in different countries.

0%

2%

4%

6%

8%

10%

12%

14%

16%

United States

France

Switzerland

Belgium

Germany

Austria

Canada

*Portugal

Netherlands

Denmark

Iceland

Greece

New Zealand

Sweden

OECD Average

Norway

Italy

*Australia

Spain

United Kingdom

*Japan

Finland

Slovak Republic

Ireland

Hungary

*Luxembourg

Korea

Czech Republic

Mexico

Poland

Health expenditures as percent of GDP (left axis) Health expenditures per capita (right axis)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

5.9 

6.4 6.8 6.8 7.4 7.6 7.7 8.1 8.2 8.4 8.5 8.7 8.7 8.9 9.1 9.2 9.3 9.6 9.8 9.8 9.9 10.1 10.1 10.2 10.4 10.8 11.0 

16.0 

7.3 

8.9 

82310351626

1688

416213883424155525812840

29922671313726864763296433232510331927273512383721503763389535953588441736017290
34 The Unsustainable Cost of Health Care

Growth in Health Care Spending

From 1960 to 2006 total health care spending 

in the United States has grown on average at a rate 

of 2.5 percent annually, faster than the growth of 

the national income. Rapid growth is not unique 

to the United States, as shown in Figure B-2. But 

over the past 40 years, U.S. spending growth has 

exceeded that in other countries with comparable 

standards of living.

Health Status of the Population

The United States lags behind several other industrialized countries in basic measures of health status, 

including life expectancy and also experiences higher 

prevalence rates of some diseases and conditions such 

as diabetes and obesity. Figure B-3 shows how the 

United  States ranks compared similarly developed 

countries in rates of mortality “amenable to health 

care.”123 In other measures, the U.S appears to do a 

123 Nolte, Ellen and C. Martin McKee, “Measuring The Health 

Of Nations: Updating An Earlier Analysis,” Health Affairs, 27, 

no. 1 (2008): pp. 58-71. The authors compared trends in deaths 

considered amenable to health carebefore age 75 between 1997-98 

and 2002-03in the United States and in 18 other industrialized 

countries.Such deaths account, on average, for 23 percent of total 

mortalityunder age 75 among males and 32 percent among females.

better job: prevalence rates of some high costs diseases such as chronic obstructive pulmonary disease 

and hypertension are fact lower in the United States, 

as are survival rates from some cancers.124

Relationship of Per Capita Income to Health Spending

Some researchers contend that the Unites States’ 

high spending on health care is reasonably commensurate with its wealth.125 Figure B-4 shows 

that the relationship between national income 

(GDP) per capita and health care spending is indeed 

positive – the red line shows on average the richer a 

country is, the more of their national income they 

spend on health care. But the figure also clearly 

shows that the United  States spends a disproportionately high share. The expected level of spending 

for a nation of our prosperity in 2007 should have 

been about $4,600 per capita, higher than in other 

less well-off countries, but about 35  percent less 

than the $7,300 per person we did spend.

124 McKinsey Global Institute, “Accounting for the Cost of U.S 

Health Care: A New Look at Why Americans Spend More,” 

December 2008, p 24; Preston, Samuel and Jessica Ho, “Low Life 

Expectancy in the United States: Is the Health Care System at 

Fault?” NBER Working Paper No. 15213, August 2009.

125 Hall, Robert E. and Charles I. Jones, 2007. “The Value of 

Life and the Rise in Health Spending,” The Quarterly Journal of 

Economics, MIT Press, vol. 122(1), pp. 39-72, 02. 

Figure B-2: Cumulative growth rate of total health care spending as a percent of GDP since 1980, selected 

countries (relative to level in 1980)

Source: OECD

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

United States

United Kingdom

Switzerland

Japan

Germany

Canada

198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006

76%

55%

50%

43%

25%

26%
The Unsustainable Cost of Health Care 35

Figure B-3: Mortality amenable to health care, selected countries 1997 to 2003

Source: Nolte and McKee, 2008

Figure B-4: Relationship between national income per capita and health care spending, 

OECD Countries, 2007

Source: OECD Health Data 2009

0 30 60 90 120 150

2002/03

1997/98

United States

Portugal

Ireland

United Kingdom

Denmark

New Zealand

Finland

Germany

Austria

Greece

Sweden

Netherlands

Norway

Canada

Italy

Spain

Australia

Japan

France

Deaths per 100,000

76

81

88

84

89

89

99

97

88

97

109

106

116

115

113

130

134

128

115

65

71

71

74

74

77

80

82

82

84

84

90

93

96

101

103

103

104

110

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Mexico

Poland

Hungary

Slovak Republic

Czech Republic

Korea

New Zealand Spain

Greece Italy

Finland

United Kingdom

United States

U.S. “expected value” Norway

Ireland

Switzerland

Sweden

Netherlands

Canada

France

Health Care Spending per Capita

GDP per Capita
36 The Unsustainable Cost of Health Care
The Unsustainable Cost of Health Care 37

Organizations and People Consulted

Appendix C

Joseph Antos, Ph.D.

Wilson H. Taylor Scholar in Health 

Care and Retirement Policy

American Enterprise Institute

Steven B. Cohen, Ph.D.

Director, Center for Financing, 

Access, and Cost Trends

Agency for Healthcare Research 

and Quality

Helen Darling

President

National Business Group on Health

Karen Davis, Ph.D.

President 

The Commonwealth Fund

Richard Foster

Chief Actuary

Centers for Medicare and Medicaid 

Services

Victor Fuchs, Ph.D.

Professor of Economics and Health 

Research Policy

Stanford University

Marge Ginsburg

Executive Director

Center for Healthcare Decisions

John Hsu, M.D., MBA, MSCE

Director, Kaiser Permanente Center 

for Health Policy Studies

Kaiser Permanente Northern 

California

Brent James, M.D.

Executive Director, Institute for 

Healthcare Delivery Research

Vice President, Medical Research and 

Continuing Medical Education

Intermountain Healthcare

Mark McClellan. M.D., Ph.D.

Director, Engelberg Center for Health 

Care Reform

Brookings Institution

Mark Miller, Ph.D.

Executive Director

Medicare Payment Advisory 

Commission

David Nexon

Senior Executive, Vice President 

AdvaMed

Advanced Medical Technology 

Association

Duane Olson

Manager for Health and 

Welfare Plans

Deere and Company

Marc Probst

Chief Information Officer

Intermountain Healthcare

Thomas Reilly, Ph.D.

Deputy Director

Office of Research, Development, 

and Information

Centers for Medicare and 

Medicaid Services

David Schwartz

Health Policy Analyst

Senate Finance Committee

Samuel Spagnolo, M.D.

Professor of Medicine and Attending 

Physician

George Washington University

Senior Attending Physician

VA Medical Center, Washington, D.C.

Eric Stanchfield

Executive Director

District of Columbia Retirement 

Board

Donald Steinwachs, Ph.D.

Professor and Director of the Health 

Services Research and Development 

Center

The Johns Hopkins Bloomberg School 

of Public Health

John Wennberg, M.D.

Peggy Y. Thompson Professor (Chair) 

for the Evaluative Clinical Sciences

Dartmouth Medical School
38 The Unsustainable Cost of Health Care
The Unsustainable Cost of Health Care 39

Establishment Of The Social Security Advisory Board

In 1994, when Congress passed Public Law 103-

296 establishing the Social Security Administration 

as an independent agency, it also created an independent, bipartisan Advisory Board to advise the 

President, the Congress, and the Commissioner 

of Social Security on matters related to the Social 

Security and Supplemental Security Income programs. Under this legislation, appointments to the 

Board are made by the President, the Speaker of 

the House of Representatives, and the President 

pro tempore of the Senate.

Advisory Board members are appointed to 

staggered six year terms, made up as follows: 

three appointed by the President (no more than 

two from the same political party); and two each 

(no more than one from the same political party) 

by the Speaker of the House (in consultation with 

the Chairman and the Ranking Minority Member 

of the Committee on Ways and Means) and by the 

President pro tempore of the Senate (in consultation with the Chairman and Ranking Minority 

Member of the Committee on Finance). Presidential 

appointments are subject to Senate confirmation. 

The President designates one member of the Board 

to serve as Chairman for a four year term, coincident with the term of the President, or until the 

designation of a successor.

Members of the Social Security Advisory Board

Sylvester J. Schieber, Chairman

Sylvester J. Schieber is a private consultant on 

retirement and health issues based in New Market, 

Maryland. He retired from Watson Wyatt Worldwide 

in September 2006 where he had served as Vice 

President/U.S. Director of Benefit Consulting and 

Director of Research and Information. From 1981-

1983, Dr. Schieber was the Director of Research at 

the Employee Benefit Research Institute. Earlier, he 

worked for the U.S. Social Security Administration 

as an economic analyst and as Deputy Director of 

the Office of Policy Analysis. Dr.  Schieber is the 

author of numerous journal articles, policy analysis papers, and several books including: Retirement 

Income Opportunities in an Aging America: Coverage 

and Benefit Entitlement; Social Security: Perspectives 

on Preserving the System; and The Real Deal: the 

History and Future of Social Security. He served on 

the 1994-1996 Advisory Council on Social Security. 

Dr. Schieber received his Ph.D. from the University 

of Notre Dame. First term of office: January 1998 

to September 2003. Current term of office: October 

2003 to September 2009. He was appointed by the 

President in September 2006 to serve as Chairman 

of the Advisory Board from October 2006 to 

January 2009.

Dana K. Bilyeu

Dana K. Bilyeu is the Executive Officer of the 

Public Employees’ Retirement System of Nevada. 

As the Executive Officer of the $21  billion pension trust she is responsible for all aspects of fund 

management including analysis of plan funding, 

investment oversight, operational and strategic 

planning, and fiduciary and governance issues. 

Mrs. Bilyeu is principally responsible for the relationship with the System’s independent actuary 

and oversees the data reconciliation process for 

actuarial valuations of the System. In her capacity 

as the Executive Officer, Mrs. Bilyeu provides information and analysis to the Nevada Legislature in 

consideration of pension policy issues affecting 

state and local government. Prior to her appointment as the Executive Officer, Mrs. Bilyeu served 

for eight years as the System’s Operations Officer, 

overseeing all aspects of benefit administration, 

including survivor, disability, and retirement benefit programs. Mrs. Bilyeu also was responsible for 
40 The Unsustainable Cost of Health Care

cost effectiveness measurement for all activities 

of the System. She was accountable for technology oversight as well as policy issues related to the 

public safety sector of public employment. Prior to 

her employment at the System, Mrs. Bilyeu was the 

System’s legal counsel, representing the System in 

a variety of aspects from benefits litigation, contracts analysis, to Board governance. Mrs.  Bilyeu 

is a member of the National Association of State 

Retirement Administrators, the National Council 

on Teacher Retirement, the National Conference 

of Public Employee Retirement Systems, and the 

National Association of Public Pension Attorneys. 

She also serves on the Public Employee Advisory 

Board for the International Foundation of 

Employee Benefit Plans. She received her juris 

doctor from California Western School of Law and 

her B.A. from the University of Arizona. Term of 

office: December 2006 to September 2010.

Dorcas R. Hardy

Dorcas  R. Hardy is President of DRHardy & 

Associates, a government relations and public 

policy firm serving a diverse portfolio of clients. 

After her appointment by President Ronald Reagan 

as Assistant Secretary of Human Development 

Services, Ms. Hardy was appointed Commissioner 

of Social Security (1986 to 1989) and was 

appointed by President George  W. Bush to chair 

the Policy Committee for the 2005 White House 

Conference on Aging. Ms. Hardy has launched and 

hosted her own primetime, weekly television program, “Financing Your Future,” on Financial News 

Network and UPI Broadcasting, and “The Senior 

American,” an NET political program for older 

Americans. She speaks and writes widely about 

domestic and international retirement financing 

issues and entitlement program reforms and is the 

co-author of Social Insecurity: the Crisis in America’s 

Social Security System and How to Plan Now for Your 

Own Financial Survival, Random House, 1992. A 

former CEO of a rehabilitation technology firm, 

Ms. Hardy promotes redesign and modernization 

of the Social Security, Medicare, and disability 

insurance systems. Additionally, she has chaired a 

Task Force to rebuild vocational rehabilitation services for disabled veterans for the U.S. Department 

of Veterans Affairs. She received her B.A. from 

Connecticut College, her M.B.A. from Pepperdine 

University, and completed the Executive Program 

in Health Policy and Financial Management at 

Harvard University. Ms. Hardy is a Certified Senior 

Advisor and serves on the Board of Directors of 

Wright Investors Service Managed Funds, and 

First Coast Service Options of Florida. First term 

of office: April 2002 to September 2004. Current 

term of office: October 2004 to September 2010.

Marsha Rose Katz

Marsha Rose Katz is a Project Director at the 

University of Montana Rural Institute in Missoula, 

where her work has concentrated on assisting persons with disabilities to utilize Social Security 

work incentives to start their own businesses or 

engage in wage employment. Since coming to the 

Rural Institute in 1999, Ms.  Katz has focused on 

providing training and technical assistance on 

both employment and SSI/SSDI to rural, frontier and tribal communities across the country. 

Previously, she worked for nearly 20 years in a disability rights community based organization, the 

Association for Community Advocacy (ACA), a local 

Arc in Ann  Arbor, Michigan. She served as both 

Vice President of ACA, and Director of its Family 

Resource Center. It was at ACA that Ms. Katz began 

her nearly 30 years of individual and systems advocacy regarding programs administered by the U.S. 

Social Security Administration, especially the 

Supplemental Security Income and Social Security 

Disability Insurance programs. Ms. Katz has written numerous articles and created many widely 

distributed user-friendly general handouts on SSI 

and SSDI, the majority of which focus on the impact 

of work on benefits, and utilizing work incentives. 

She is the author of Don’t Look for Logic; An Advocate’s 

Manual for Negotiating the SSI and SSDI Programs, 

published by the Rural Institute. Her Bachelor’s 

and Master’s Degrees are from the University of 

Michigan. Ms.  Katz’s many years of experience as 

a trainer, technical advisor, and advocate have been 

guided and informed by her partnership with people 

with disabilities, from her husband, Bob Liston, to 

the people she assisted in her work with ACA and 

the Arc Michigan, her current work at the Rural 

Institute, and her longstanding participation in 

ADAPT, the nation’s largest cross-disability, grassroots disability rights organization. Term of office: 

November 2006 to September 2012.

Barbara B. Kennelly

Barbara  B. Kennelly became President and 

Chief Executive Officer of the National Committee 
The Unsustainable Cost of Health Care 41

to Preserve Social Security and Medicare in April 

2002 after a distinguished 23 year career in elected 

public office. Mrs. Kennelly served 17 years in the 

United States House of Representatives representing the First District of Connecticut. During her 

Congressional career, Mrs. Kennelly was the first 

woman elected to serve as the Vice Chair of the 

House Democratic Caucus. Mrs. Kennelly was also 

the first woman to serve on the House Committee on 

Intelligence and to chair one of its subcommittees. 

She was the first woman to serve as Chief Majority 

Whip, and the third woman in history to serve 

on the 200 year-old Ways and Means Committee. 

During the 105th  Congress, she was the ranking 

member of the Subcommittee on Social Security. 

Prior to her election to Congress, Mrs.  Kennelly 

was Secretary of State of Connecticut. After serving in Congress, Mrs.  Kennelly was appointed to 

the position of Counselor to the Commissioner 

at the U.S. Social Security Administration (SSA). 

As Counselor, Mrs.  Kennelly worked closely with 

the former Commissioner of Social Security, 

Kenneth  S. Apfel, and members of Congress to 

inform and educate the American people on the 

choices they face to ensure the future solvency of 

Social Security. She served on the Policy Committee 

for the 2005 White House Conference on Aging. 

Mrs. Kennelly received a B.A. in Economics from 

Trinity College, Washington, D.C. She earned a 

certificate from the Harvard Business School on 

completion of the Harvard-Radcliffe Program in 

Business Administration and a Master’s Degree in 

Government from Trinity College, Hartford. Term 

of office: January 2006 to September 2011.

Mark J. Warshawsky

Mark J. Warshawsky is Director of Retirement 

Research at Watson Wyatt Worldwide, a global 

human capital consulting firm. He conducts and 

oversees research on employer-sponsored retirement programs and policies. A frequent speaker to 

business and professional groups, Dr.  Warshawsky 

is a recognized thought leader on pensions, Social 

Security, insurance and health care financing. He 

has written numerous articles published in leading 

professional journals, books and working papers, 

and has testified before Congress on pensions, annuities and other economic issues. A member of the 

Social Security Advisory Board for a term through 

2012, he is also on the Advisory Board of the Pension 

Research Council of the Wharton School.

From 2004 to 2006, Dr.  Warshawsky served 

as assistant secretary for economic policy at the 

U.S. Treasury Department. During his tenure, 

he played a key role in the development of the 

Administration’s pension reform proposals, particularly pertaining to single-employer defined 

benefit plans, which were ultimately included 

in the Pension Protection Act (“PPA”) of 2006. He 

was also involved extensively in the formulation 

of Social Security reform proposals, and oversaw the Department’s comprehensive 2005 study 

of the terror risk insurance program. In addition, Dr.  Warshawsky led the efforts to update 

and enhance substantially the measures and 

disclosures in the Social Security and Medicare 

Trustees’ Reports, as well as the setting of the 

macroeconomic forecasts which underlie the 

administration’s budget submissions to Congress.

Dr. Warshawsky’s research has been influential 

in the 2001-2002 regulatory reform of minimum 

distribution requirements for qualified retirement 

plans, the increasing realization of the importance 

of financial protection against outliving one’s 

financial resources in retirement, and a product 

innovation to integrate the immediate life annuity and long-term care insurance. For the latter 

research, he won a prize from the British Institute 

of Actuaries in 2001 for a professional article he 

co-authored. Favorable tax treatment for this 

integrated product was also included in PPA due 

to Dr.  Warshawsky’s advocacy. Dr.  Warshawsky 

has also held senior-level economic research positions at the Internal Revenue Service, the Federal 

Reserve Board in Washington, D.C. and TIAACREF, where he established the Paul A. Samuelson 

Prize and organized several research conferences. A 

native of Chicago, he received a Ph.D. in Economics 

from Harvard University and a B.A. with Highest 

Distinction from Northwestern University. Term 

of office: December 2006 to September 2012.

Members of the Staff

Katherine Thornton, Staff Director

Deborah Sullivan, Deputy Staff Director

Joel Feinleib

George Schuette

Beverly Sheingorn

Jean Von Ancken

David Warner
42 The Unsustainable Cost of Health Care
Social Security Advisory Board

400 Virginia Avenue, S. W.

Suite 625

Washington, D.C. 20024

TEL: (202) 475-7700

FAX: (202) 475-7715

E-mail: info@ssab.gov

www.ssab.gov