Ben S Bernanke: Challenges for health-care reform
Speech by Mr Ben S Bernanke, Chairman of the Board of Governors of the US Federal
Reserve System, at the Senate Finance Committee Health Reform Summit, Washington DC,
16 June 2008.
The original speech, which contains various links to the documents mentioned, can be found on the US Federal Reserve
System's website.
* * *
Improving the performance of our health-care system is without a doubt one of the most
important challenges that our nation faces. In recent decades, improvements in medical
knowledge and standards of care have allowed people to live healthier, longer, and more
productive lives. New medical technologies and treatments promise more and better to
come. From a social point of view, we hope as many people as possible benefit from these
advances. But health care is not only a scientific and social issue; it is an economic issue as
well. The decisions we make about health-care reform will affect many aspects of our
economy, including the pace of economic growth, wages and living standards, and
government budgets, to name a few.
By any measure, the health-care sector represents a major segment of our economy.
Spending on health-care services currently exceeds 15 percent of the gross domestic
product (GDP). Indeed, health-care spending is the single largest component of personal
consumption - larger than spending on either housing or food. Importantly, health care also
has long been, and continues to be, one of the fastest-growing sectors in the economy: Over
the past four decades, this sector has grown, on average, at a rate of about 2-1/2 percentage
points faster than the GDP. Should this rate of growth continue, health spending would
exceed 22 percent of GDP by 2020 and reach almost 30 percent of GDP by 2030.1
Health-related spending is also a large and growing share of government budgets. Last year,
health care accounted for about one-quarter of total federal spending. The Congressional
Budget Office (CBO) projects that, under current policies, health spending will account for
almost one-half of all federal non-interest outlays by 2050.2
As the public interest in these issues testifies, the stakes associated with health-care reform,
both economic and social, are very high. But we must keep in mind that, for all its problems,
the U.S. health-care system also has many strengths. We must take care that we do not lose
what is good about our system as we try to address the significant concerns that certainly
exist.
In the remainder of my remarks, I will discuss three key challenges for health-care reform.
These challenges are, in short, the issues of access, quality, and cost.
Challenges for health-care reform
Access
Access to health care is the first major challenge that health-care reform must address. In
2006, a total of 47 million Americans, or almost 16 percent of the population, lacked health
insurance. Although the federal and state governments spent more than $35 billion to finance
uncompensated care in 2004, the evidence nonetheless indicates that uninsured persons
receive less health care than those who are insured and that their health suffers as a
consequence. Per capita expenditures on health care for uninsured individuals are, on
average, roughly half those for fully insured individuals.3 People who are uninsured are less
likely to receive preventive and screening services, less likely to receive appropriate care to
manage chronic illnesses, and more likely to die prematurely from cancer - largely because
they tend to be diagnosed when the disease is more advanced.4 One recent study found that
uninsured victims of automobile accidents receive 20 percent less treatment in hospitals and
are 37 percent more likely to die of their injuries than those who are insured.5
Quality
The second key challenge is improving the quality of health care. The quality of medical
research, training, and technology in the United States is generally very high. However, the
quality of health care is determined not only by, say, technological advances in preventing
and treating disease but also by our ability to deliver the benefits of those advances to
patients. For maximum impact, advances in medical knowledge must be widely disseminated
and consistently and efficiently implemented. But evidence suggests a disturbing gap
between the quality of health services that can be provided in principle and the quality of
health services that actually are provided in practice. For example, in 2000, the Institute of
Medicine issued a landmark report that concluded that up to 98,000 Americans died each
year in hospitals as a result of medical errors.6 Many of the errors identified by the report -
for example, errors caused by adverse drug events, improper transfusions, wrong-site
surgery, and mistaken patient identity - could have been prevented if hospitals had adopted
appropriate safety systems. Although hospitals have implemented a number of new safety
practices since the time of that report, the scope for improving patient safety remains large.7
Inconsistent use of best practices by doctors and hospitals is also surprisingly widespread.
For example, numerous studies have pointed to the lack of adherence to evidence-based
guidelines for the treatment of heart attacks. In particular, it has long been well established
that restoring blood flow to the heart and using aspirin, beta blockers, and ACE inhibitors at
the appropriate times significantly reduce deaths resulting from heart attacks.8 Yet studies
show that the dissemination of these treatments occurred only slowly.9 More widespread
application of evidence-based medicine could help health-care workers make better use of
the medical knowledge they already have to improve patients' outcomes.
Although some patients do not receive the care they need, others receive more (and more
expensive) care than necessary. Research on geographic variation in health-care practices
and costs confirms this point. For example, Medicare expenditures per eligible recipient vary
widely across regions, yet areas with the highest expenditures do not appear to have better
health outcomes than those with the lowest expenditures; indeed, the reverse seems to be
true.10
Cost
This observation brings me to a third important challenge for health-care reform: controlling
costs. The problem here is not only the current level of health-care spending (U.S. spending
exceeds that of most other industrial countries) but, to an even greater degree, the continued
rapid growth of that spending. Per capita health-care spending in the United States has
increased at a faster rate than per capita income for a number of decades. Should that trend
continue, as many economists predict it will, the share of income devoted to paying for health
care will rise relentlessly. A piece of wisdom attributed to the economist Herbert Stein holds
that if something cannot go on forever, it will stop. At some point, health-care spending as a
share of GDP will stop rising, but it is difficult to guess when that will be, and there is little
sign of it yet.
Although the high cost of health care is a frequently heard complaint, it is important to note
that a substantial portion of the cost increases that we have seen in recent decades reflects
improvements in both the quality and quantity of care delivered rather than higher costs of
delivering a given level of care. Notably, new technologies, despite greatly adding to cost in
many cases, have also yielded significant benefits in the form of better health. People put
great value on their health, and it is not surprising that, as our society becomes wealthier, we
would choose to spend more on health-care services. Indeed, although quantifying the
economic value of improved health and greater expected longevity is difficult, most
researchers who have undertaken an exercise of this type find that, on average, the health
benefits of new technologies and other advances have significantly exceed the economic
costs.11
That said, the evidence also suggests that the cost of health care in the United States is
greater than necessary to allow us to achieve the levels of health and longevity we now
enjoy. I have already mentioned research that finds large regional differences in the cost of
treating a given condition, with high-cost areas showing no better results. The slow diffusion
of the use of aspirin and beta blockers for treating heart-attack patients shows that cheap,
effective treatments are not always used, potentially leading to higher costs and worse
outcomes. Moreover, because insurance companies and the government play such
prominent roles in financing health care, patients and doctors have far less incentive to
consider the extra costs of optional tests or treatments. But, as we all know, although testing
and treatment decisions may be undertaken on the presumption that "someone else will
pay," the public eventually pays for all these costs, either through higher insurance premiums
or higher taxes.
The effects of high health-care costs on government budgets deserve special note. In the
United States, a large and growing portion of both federal and state expenditures is for
subsidized health insurance. In 1975, federal spending on Medicare and Medicaid was about
6 percent of total non-interest federal spending. Today, that share is about 23 percent.
Because of rising costs of health care and the aging of the population, the CBO projects that,
without reform, Medicare and Medicaid will be about 35 percent of non-interest federal
spending in 2025.12 This trend implies increasingly difficult tradeoffs for legislators and
taxpayers, as higher government spending on health-care spending will, of necessity, require
reductions in other government programs, higher taxes, or larger budget deficits.
Rapid increases in health spending also portend increasingly difficult access to health
services for people with lower incomes.13 As health spending continues to outpace income,
health insurance and out-of-pocket payments will become increasingly unaffordable.14 One
way that society has addressed this problem in the past has been to expand government
subsidies for health spending. The Medicare Part D program, which assists seniors with the
costs of prescription drugs, is an example. However, to continue limiting the effects of rising
medical costs on household budgets, the government may have to absorb an increasing
proportion of the nation's total bill for health care, putting even greater pressure on
government budgets than official projections suggest.
Taking on these challenges will be daunting. Because our health-care system is so complex,
the challenges so diverse, and our knowledge so incomplete, we should not expect a single
set of reforms to address all concerns. Rather, an eclectic approach will probably be needed.
In particular, we may need to first address the problems that seem more easily managed
rather than waiting for a solution that will address all problems at once.
Thinking about solutions
In health-care reform, it is certainly easier to pose questions than to provide answers.
Moreover, even putting aside the scope and technical complexities of the problems we face,
the types of reforms we choose will depend importantly on value judgments and the tradeoffs
made among social objectives. Such choices are appropriately left to the public and their
elected representatives. Consequently, I will have little to say here regarding specific
proposals. However, I will suggest a few questions and considerations that those seeking
reform might wish to keep in mind.
Regarding access, one important consideration is that people who are uninsured are not all
alike. They include people who have low incomes, people who may not be poor but have
costly pre-existing health conditions, those whose employers do not offer group health
insurance and who cannot afford to buy insurance in the more-expensive nongroup market,
and people who are eligible for Medicaid or other programs but for some reason have not
enrolled. Some people who can afford health insurance do not purchase it, presumably
because they do not anticipate having significant medical expenses. Broadening access to
health care may thus require us to consider a mix of policies. The following are some of the
questions with which we will have to wrestle.
First, should enrollment in a health insurance program be mandated, or at least strongly
encouraged, for example, through tax incentives? Supporters argue that mandates lead to
better risk pooling and prevent those who could afford insurance but choose not to buy it
from "free-riding" on the public safety net. Opponents argue that mandates infringe on what
should be an individual choice and may require a substantial government budgetary
commitment to help those who cannot afford insurance on their own to meet the mandate.
Second, should we continue to rely on employer-provided health insurance as the key
element of our system? The employees of large companies in particular typically constitute a
good risk-sharing pool, allowing insurance to be provided at a lower overall cost. But the
dominance of the insurance market by employer-provided plans means that the market for
individual and small-group policies is underdeveloped and that the cost of such coverage is
very high. Employer-based systems also reduce the portability of health insurance between
jobs, which reduces labor mobility and the efficiency of the labor market as well as creating a
burden for those changing jobs.
Third, to help people with costly pre-existing conditions, should we impose requirements on
insurance companies to accept all applicants and mandate the conditions that must be
covered? Doing so would help some people obtain coverage, but the resulting increases in
insurance premiums might exclude others. An alternative approach would be to promote
bare-bones, high-deductible policies that are affordable and attractive to healthy people while
offering government help to those who need coverage for costly conditions.
Finally, to what extent are we willing to use public funds to reduce the number of those who
are uninsured, for example, by providing subsidies to low-income people not covered by
Medicaid or to people, such as the self-employed, who find it difficult to obtain affordable
coverage in the non-group market? How would we finance additional spending? For
instance, would we consider limiting the employers' tax exemption for the cost of employee
health insurance?
The issue of access to health care, though difficult politically, is in some sense the technically
least complex of the three challenges I have identified; it is mostly about financing, and
possibly regulation, rather than about medicine. Of course, access to health care is closely
entwined with the other issues, notably the issue of cost. In particular, restraining the growth
of health-care costs would increase the number of people who can afford insurance
coverage.
On the second challenge, improving the quality of health care, a number of private and public
initiatives have been undertaken in recent years. These include programs to monitor
hospitals' performance in ensuring patient safety and adherence to best practices; greater
efforts to identify and disseminate best practices, as determined from clinical trials; and
public and private initiatives to increase the use of information technology in health care.
Researchers are also examining how the structure of health-care delivery systems affects
the quality of care. For example, some evidence suggests that vertically integrated systems
like that of the Veterans Administration are quicker to adopt health information technology
and have been more successful in applying it. Some instances of initiatives that aim to
encourage quality through financial incentives or disincentives - so-called
pay-forperformance - have begun to emerge. Examples include accreditation practices that require
hospitals to comply with established standards and best practices, and the recent decision
that Medicare will not cover costs caused by certain medical errors.
Efforts to improve the quality of health care are a vital component of comprehensive reform
and are likely to yield high social returns. Additional research and experimentation can help
us address difficult questions such as how best to measure quality and cost-effectiveness in
health-care delivery and how to give doctors and hospitals incentives to adopt best practices
and improved information technologies.
The solutions we choose for access and quality will interact in important ways with the third
critical issue - the issue of cost. Greater access to health care will improve health outcomes,
but it almost certainly will raise financial costs. Increasing the quality of health care, although
highly desirable, could also result in higher total health-care spending. For example,
increased patient screening may avoid more serious problems and thus be cost-saving, but it
could also identify problems that might otherwise have gone untreated - a good outcome,
certainly, but one that increases overall spending. These are certainly not arguments against
increasing access or improving quality. My point is only that improving access and quality
may increase rather than reduce total costs.
From the economist's perspective, the question of whether we are spending too much on
health care cannot ultimately be answered by looking at total expenditures relative to GDP or
the federal budget. Rather, the question, whatever we spend, is whether we are getting our
money's worth. In general, good information and appropriate incentives are necessary to
allocate resources efficiently. In health care, the necessary information should include not
only the clinical effectiveness of certain tests or courses of treatment but also their
costeffectiveness. As the regional comparison of health-care costs illustrates, cost-effective
approaches may be at least as useful as more costly approaches in delivering good health
outcomes.
Knowledge of the costs of alternative approaches is likely to be insufficient by itself. Patients,
doctors, and hospitals must also be given incentives for choosing cost-effective approaches.
However, the questions of how to structure incentives and monitor performance are hotly
debated. For example, advocates of "consumer-driven" health care argue that, given
appropriate information and incentives, patients - or in some cases, private insurers acting
on their behalf - can effectively impose at least some degree of market discipline on
healthcare providers. Others see an inevitable role for government in setting standards of care and
in measuring performance. Professional associations, hospitals, medical researchers, and
other stakeholders may also have a role to play. At the heart of the debate are the
fundamental social questions of how we determine when various medical services are worth
their cost and how we measure and reward good performance by providers.
Rising health spending increases stress on both private and public budgets, and thus
stakeholders in both spheres are aiming to reduce costs. Cost-saving reforms in the private
sector will inevitably reverberate in the public sector and vice versa. For example, the shift
toward managed care in the private sector also resulted in more managed care in the public
sector. Similarly, innovations in public insurance programs, such as the introduction of
reimbursement by diagnosis-related groups in Medicare, changed the way private insurance
payments were structured.15 Our health-care system is, de facto, a private-public
partnership; as a result, governments should not view health-care costs narrowly as a
budgetary issue. Rather, they should consider how the totality of government intervention in
the health-care market - including tax policies, insurance regulation, and the structure of
Medicare and Medicaid - affect the sector as a whole. The best way to reduce the fiscal
burdens of health care is to deliver cost-effective health care throughout the entire system.
Conclusion
Let me conclude by restating a point I made at the beginning: As we focus on the problems
of our health system, it is easy to forget that much is good about it. Our health system has
produced innovations in basic science, in the understanding and diagnosing of disease, and
in pharmacology and medical technology. These advances have resulted in more-effective
treatments and significant reductions in mortality across a wide spectrum of diseases. In
devising policies to reform our health-care system, we must take care to maintain the vitality
and spirit of innovation that has been its hallmark.
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