STATE OF FLORIDA et al v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES et al

Filing 83

NOTICE Errata re Exhibits in support of 82 Defendants' Motion for Summary Judgment by TIMOTHY F GEITHNER, KATHLEEN SEBELIUS, HILDA L SOLIS, UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, UNITED STATES DEPARTMENT OF LABOR, UNITED STATES DEPARTMENT OF THE TREASURY (Attachments: # 1 Table of Exhibits, # 2 Exhibit 1, # 3 Exhibit 2, # 4 Exhibit 3, # 5 Exhibit 4, # 6 Exhibit 5, # 7 Exhibit 6, # 8 Exhibit 7, # 9 Exhibit 8, # 10 Exhibit 9, # 11 Exhibit 10, # 12 Exhibit 11, # 13 Exhibit 12, # 14 Exhibit 13, # 15 Exhibit 14, # 16 Exhibit 15, # 17 Exhibit 16, # 18 Exhibit 17, # 19 Exhibit 18, # 20 Exhibit 19, # 21 Exhibit 20, # 22 Exhibit 21, # 23 Exhibit 22, # 24 Exhibit 23, # 25 Exhibit 24, # 26 Exhibit 25, # 27 Exhibit 26, # 28 Exhibit 27, # 29 Exhibit 28, # 30 Exhibit 29, # 31 Exhibit 30, # 32 Exhibit 31, # 33 Exhibit 32, # 34 Exhibit 33, # 35 Exhibit 34, # 36 Exhibit 35, # 37 Exhibit 36, # 38 Exhibit 37, # 39 Exhibit 38, # 40 Exhibit 39, # 41 Exhibit 40, # 42 Exhibit 41, # 43 Exhibit 42, # 44 Exhibit 43) (BECKENHAUER, ERIC)

STATE OF FLORIDA et al v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES et al

Doc. 83 Att. 5

Exhibit 4

Dockets.Justia.com

EMBARGOED UNTIL TUESDAY, JUNE 2

EXECUTIVE OFFICE OF THE PRESIDENT COUNCIL OF ECONOMIC ADVISERS

THE ECONOMIC CASE FOR HEALTH CARE REFORM

JUNE 2009

7 D. Trends in Insurance Coverage In 2007, 45.7 million Americans did not have health insurance. 9 About one out of every six U.S. residents under the age of 65 is currently without health insurance. 10 Moreover, an even larger number of non-elderly individuals experience gaps in coverage over longer time periods. For example, one study found that 31.8 percent (82 million individuals) were uninsured for at least one month during the 2004 and 2005 calendar years. 11 As Figure 6 demonstrates, the fraction of Americans without insurance varies substantially across ages, with the highest rates among young adults and the lowest rates among the elderly, virtually all of whom are covered by Medicare.

Figure 6: Percent of Americans Unisured by Age
Percent uninsured 40% 35% 30% 25% 20% 15% 10% 5% 0% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

Source: U.S. Census Bureau. 2008 Annual Social and Economic (ASEC) Supplement.

One reason for the large number of uninsured in the United States is high and increasing health care costs. Individuals may become uninsured if out-of-pocket premium requirements are no longer affordable. They may also become uninsured if employers no longer offer health insurance as part of workers' total compensation. 12 Recent work suggests that rising health insurance costs (which are highly correlated with overall health care spending) can explain more than one-half of the declines in overall rates of health insurance coverage during the 1990s. 13

DeNavas-Walt et al. (2007). Based on CEA tabulations of the U.S. Census Bureau's March 2008 Current Population Survey. 11 Rhoades and Cohen (2007). See also Cutler and Gelber (2009). 12 See Chernew, Culter, and Keenan (2005). Cutler (2003) and Glied and Jack (2003) examine specifically declines in private coverage rates rather than overall coverage. 13 Chernew, Cutler, and Keenan (2005).
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8 Workers in small firms are especially vulnerable. In the United States, almost 96 percent of firms with 50 or more employees offer health insurance as compared with 43 percent of firms that have fewer than 50 workers. 14 Among small firms, the percentage offering health insurance peaked in 2001 and has been gradually declining since then. 15 On average, small firms face much higher premiums relative to large firms for a given level of coverage generosity. 16 This is primarily due to small firms facing higher administrative costs and insurers' concern about potential adverse selection risks.17 Assuming that real growth in employer-sponsored insurance premiums does not slow from current rates, CEA projects that less than 20 percent of small employers will offer coverage by 2040. 18 While the percentage of Americans with public insurance has been rising, it has not been sufficient to offset the decline in rates of private health insurance coverage. 19 Using historical changes in the percentage of non-elderly uninsured individuals to predict future trends, Figure 7 shows that 22 percent of the non-elderly population (roughly 72 million Americans) will be uninsured by 2040. 20 As the number of uninsured rises, there is a corresponding increase in uncompensated care costs, which include costs incurred by hospitals and physicians for the charity care they provide to the uninsured as well as bad debt (for example, unpaid bills). 21 Both the Federal government and state governments use tax revenues to pay health care providers for a portion of these costs through Disproportionate Share Hospital (DSH) payments, grants to Community Health Centers, and other mechanisms. 22 In 2008, total government spending to reimburse uncompensated care costs incurred by medical providers was approximately $42.9 billion. 23 In the absence of reform to slow the real growth rate of health spending and a subsequent rise in the uninsured, we project that the real annual tax burden of uncompensated care for an average family of four will rise from $627 in 2008 to $1,652 (in 2008 dollars) by 2030. 24
U.S. Department of Health and Human Services, Medical Expenditure Panel Survey-Insurance Component (2006). 15 Kaiser Family Foundation (2008). 16 Gabel, McDevitt, and Gandolfo (2006). 17 Lee (2002); Simon (2005). 18 Projection was generated using the average annual change in small firm offer rates over the 2001 to 2006 period. For additional discussion of small firms' demand for health insurance, see Hadley and Reschovsky (2002) and Gruber and Lettau (2004). 19 Cutler and Gelber (2009). 20 The projection was generated using the historical average annual change in the percentage of the non-elderly population that is uninsured from 1999 to 2007, as reported by DeNavas-Walt et al. (2007). Given the lags in data availability on national health insurance coverage, our estimates do not fully incorporate the effect of the economic downturn on employer-sponsored coverage and its impact on future coverage rates. Moreover, the projection does not take into account other factors that may influence coverage rates, such as changes in public insurance eligibility or local labor market conditions. 21 American Hospital Association (2005). 22 Hadley et al. (2008). 23 The precise amount of government spending used to finance uncompensated care is challenging to estimate since these resources may not be well targeted to providers who treat the uninsured. See Hadley et al. (2008) for more discussion. 24 Current year per capita estimates were based on the ratio of total estimated uncompensated care costs paid for by the government to the estimated number of full-year uninsured. We then assume that per capita spending would grow at 4 percent per year in real terms.
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Figure 7: Projected Percentage of the U.S. Population Under Age 65 without Health Insurance, 2000-2040
25% Percent Projected 20%

15%

10%

5%

0% 2000

2004

2008

2012

2016

2020

2024

2028

2032

2036

2040

Source: CEA projections using U.S. Census Bureau's Annual Social and Economic (ASEC) Supplement.

Taken together, these facts and projections paint a compelling picture of the serious challenges facing the American health care system. Rapidly rising costs threaten to lead to stagnating take-home wages and devastating budget deficits. And, they are likely to greatly increase the number of people without health insurance over the next three decades.

III. INEFFICIENCIES IN THE CURRENT SYSTEM
To understand what could be accomplished with health care reform, it is crucial to identify the inefficiencies present in the current system. This section details both the empirical evidence for such inefficiencies and the likely sources. It also describes the market failures leading to low rates of insurance coverage. The section then describes two key components of health care reform: genuine containment of the growth rate of health care costs and expansion of insurance coverage. Because genuine cost containment will be difficult, we describe some of the critical changes likely to be necessary to achieve success.

A. Quantifying the Amount of Inefficiency Using Comparisons It is well known that the American health care system has many virtues. Over the past half century, American hospitals, physicians, pharmaceutical companies, and academic researchers have developed techniques and prescription drugs that permit the treatment of a host of previously untreatable conditions. 25 Nevertheless, two sets of comparisons strongly suggest that there are large inefficiencies in the American health care system.
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Cutler and McClellan (2001).

10 International comparisons. The first set of comparisons is international. We devote a far larger share of our GDP to health care than other developed countries, but we do not achieve better health outcomes. 26 Figure 8 shows the fraction of GDP devoted to health care in a number of developed countries in 2006. According to the Organization for Economic Cooperation and Development (OECD), the United States spent 15.3 percent of its GDP on health care in 2006. The next highest country was Switzerland, with 11.3 percent. In most other high-income countries, the share was less than 10 percent.
Figure 8: International Comparison of Health Care Spending as a Share of GDP, 2006
United States Switzerland France Germany Belgium Portugal Austria Canada Netherlands Denmark Sweden Greece Iceland Italy Australia Norway UK Spain Hungary Finland Japan New Zealand Ireland Slovak Republic Luxembourg Czech Republic Mexic o Korea Poland Turkey
0 2 4 6 8 10 12 14 16 18

Source: Organization for Economic Cooperation and Development, OECD Health Data, 2008 (Paris: OECD, 2008). Note: For countries not reporting 2006 data, data from previous years is substituted.

Figures 9a and 9b show female and male life expectancy in the same group of countries. The data show that life expectancy in the United States is lower than in any other high-income country--and many middle-income countries. The same result holds if one looks at infant mortality: despite the high share of health care expenditures in the United States, our infant mortality rate is substantially above that of other developed countries. Of course, many factors other than health care expenditures may affect life expectancy and infant mortality rates, including demographics, lifestyle behaviors, income inequality, non-health disparities, and measurement differences across countries. 27 But, the fact that the United States lags behind lower spending countries is strongly suggestive of substantial inefficiency in our current system.

Anderson and Frogner (2008). Robert Wood Johnson Foundation (2009). For more information on how differences in measurement and norms affect cross-country comparisons, see Congressional Budget Office (1992).
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Figure 9a: Female Life Expectancy at Birth, 2006
Turkey Hungary Mexic o Slovak Republic Poland Czech Republic United States Denmark United Kingdom Netherlands Luxembourg Greece Ireland New Zealand Portugal Belgium Germany Korea Austria Canada Norway Sweden Iceland Finland Australia Italy Switzerland France Spain Japan 66 68 70 72 74 76 78 80 82 84 86

Source: Organization for Economic Cooperation and Development. OECD Health Data, 2008 (Paris: OECD, 2008). Note: For countries not reporting 2006 data, data from previous years is substituted.

Figure 9b: Male Life Expectancy at Birth, 2006
Hungary Turkey Slovak Republic Poland Mexic o Czech Republic United States Portugal Korea Finland Denmark Belgium Luxembourg United Kingdom Greece Austria Germany Ireland France Netherlands Spain Italy Canada New Zealand Norway Sweden Australia Japan Switzerland Iceland 66 68 70 72 74 76 78 80 82 84 86

Source: Organization for Economic Cooperation and Development, OECD Health Data, 2008 (Paris: OECD, 2008). Note: For countries not reporting 2006 data, data from previous years is substituted.

12 As a crude indicator, one can use the difference in health care's share of GDP between the United States and similar countries to gauge the magnitude of inefficiency. Looking at the average for Canada, Germany, Japan, Sweden, Britain, and France, it appears that the amount of resources devoted to health care in the United States that may be due to inefficiency is roughly 5 percent of GDP (15.3 percent in the United States in 2006, versus 9.6 percent, the average for the six comparison countries, all of which have better health outcomes). 28 Put another way, judging from the spending and outcomes in other countries, efficiency improvements in the U.S. health care system potentially could free up resources equal to 5 percent of U.S. GDP. This is, however, only a rough measure. It may well be that because of other differences between the various countries the true level is smaller. But, this estimate is a useful guidepost.29 Further evidence that the high level of spending in the United States reflects inefficiency comes from the behavior of spending over time. U.S. health care spending has risen dramatically in recent decades relative to spending in other countries, with no evident gains in relative outcomes. In 1970, we devoted only a moderately higher fraction of our GDP to health care than other high-income countries. As described above, today we spend dramatically more. Yet, during that period, life expectancy has actually risen less in the United States than in other countries. 30 Unless one believes that other influences on life expectancy have deteriorated dramatically in the United States relative to other countries, this suggests that much of the increased U.S. spending is inefficient. State comparisons. A second set of comparisons is within the United States. Because U.S. states are more similar on most dimensions than independent countries, this comparison is even more compelling. There is a large body of evidence, much of it assembled by researchers associated with the Dartmouth Atlas of Health Care, showing that utilization of specific procedures and per capita health care spending vary enormously by geographic region, and that in many cases these variations are not associated with any substantial differences in health outcomes. 31 Figure 10, for example, shows the wide variation in spending per Medicare enrollee across the United States. Large variation remains even after adjusting for differences in the age, sex, and race of enrollees across states. 32 Analyses suggest that areas with high rates of per capita spending have higher intensity of services in an inpatient setting, higher rates of minor procedures, and greater use of specialists and hospitals ("supply-sensitive services"). Factors such as differences in medical care prices, patient demographics, health status, and income levels cannot fully explain this variation. 33

OECD (2008). A recent report by McKinsey Global Institute (2008) concluded that the United States spends $630 billion more than expected on health care after adjusting for differences in wealth. This is over 4 percent of GDP in 2008. 30 Garber and Skinner (2008). 31 Wennberg, Fisher, and Skinner (2002). 32 Fisher, Bynum, and Skinner (2009). 33 Research suggests that there may be additional contributing factors, including workforce patterns and end-of-life care education. See Baicker and Chandra (2004) and Fisher et al. (2003) for additional discussion.
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These large differences in spending suggest that nearly 30 percent of Medicare's costs could be saved without adverse health consequences. 34 If these patterns are consistent with the experience of other populations, such as Medicaid enrollees and the privately insured, then it should be possible to cut total health expenditures by about 30 percent without worsening outcomes. Since we currently spend approximately 18 percent of our GDP on health care, a 30 percent reduction in expenditures would again suggest that savings on the order of 5 percent of GDP could be feasible.

B. Sources of Inefficiency in the Health Care Delivery System The inefficiencies behind the empirical estimates have been widely reported. Among the most frequently cited are: x x x x x x We spend a substantial amount on high cost, low-value treatments. Patients obtain too little of certain types of care that are effective and of high value. Patients frequently do not receive care in the most cost-effective setting. There is extensive variation in the quality of care provided to patients. There are many preventable medical errors that lead to worse outcomes and higher costs. Our system is complex and we have high administrative costs.

At a fundamental level, the inefficiencies stem from the fact that health care is very different from conventional goods and services. The markets for health insurance and medical
34

Wennberg, Fisher, and Skinner (2002).

14 care are classic examples of markets in which asymmetric information is important--that is, where one party to a transaction is likely to have more information than another. In health insurance markets, asymmetric information can lead to adverse selection, whereby individuals who know they are likely to have high health care costs are more likely to seek health insurance. Information asymmetries also lead to moral hazard, where insurance coverage may insulate patients from cost consciousness and promote unnecessary care. In considerable part because of these market failures, government programs and policies play a large role in health care. This means that in many cases incentives are not determined by market forces. These departures from the conditions that would lead to efficient outcomes manifest themselves in seven main drivers of inefficiency in the U.S. health care system. Provider incentives. Most provider payment systems are fee-for-service, which creates financial incentives for doctors and hospitals to focus on the volume of services that they deliver rather than the quality, cost, or efficiency of care delivery. In general, payment systems do not reward higher quality and value. In some cases, they reward poor quality of care by paying for the costs associated with additional medical care necessary to fix errors that could have been prevented. 35 Providers also have strong financial incentives to compete on the basis of technology adoption rather than price, leading to an excess supply of high technology equipment and services (for example, MRI machines and minimally invasive vascular diagnostic and procedure suites) and accelerated replacement of hospital beds in local markets. In turn, this can lead to higher rates of utilization and costs. 36 Also, current payment systems generally do not reward providers for effectively managing patients with chronic illnesses or educating patients about preventing disease through lifestyle changes such as exercise, improved nutrition, and smoking cessation. Finally, some academic research has suggested that some physicians practice "defensive medicine," that is, supply additional services that are of marginal or no medical value, including additional diagnostic tests and unnecessary referrals to specialists. 37 Limited financial incentives for consumers. While health insurance provides valuable financial protection against high costs associated with medical treatment, current benefit designs often blunt consumer sensitivity with respect to prices, quality, and choice of care setting. 38 There is well documented evidence that individuals respond to lower cost-sharing by using more care, as well as more expensive care, when they do not face the full price of their decisions at the point of utilization. 39 Additionally, most insurance benefit designs do not include direct
35

Preventable re-admissions are an example. According to Medicare Payment Advisory Commission (MEDPAC), about 18 percent of Medicare hospital admissions result in re-admissions within 30 days of discharge, which amounts to an extra $15 billion a year spent on re-admissions. About $12 billion of this amount is spent on potentially preventable re-admissions (Hackbarth, 2009). A second example is payment for drug-related injuries. In a recent Institute of Medicine study, researchers estimated that medication errors injure at least 1.5 million people each year and generate at least $3.5 billion in health care spending (Institute of Medicine, 2006). 36 U.S. General Accounting Office (2008). 37 Studdert et al. (2005). 38 This source of inefficiency is driven in part by the tax treatment of health insurance, which over time has led to very generous health insurance products (e.g., low deductibles and coinsurance) being offered in the market, particularly in employer settings. 39 The classic illustration of this relationship is from the RAND Health Insurance Experiment (Manning et al., 1987). Additional evidence can be found with respect to emergency room visits (Selby, Firemand, and Swain, 1996;

15 financial incentives to enrollees for choosing physicians, hospitals, and diagnostic testing facilities that are higher quality and lower cost. Pricing of medical treatment. There are relatively few forces in health care markets that lead to price reductions in the way that we observe price reductions in other sectors of the economy when new technologies are introduced and diffused. Many administered pricing systems, such as those used by Medicare and some private plans, are slow to adjust for productivity improvement or decreasing marginal costs of production that come as new medical procedures are routinized and providers acquire experience. One example of this is CT scan technology, whereby a procedure on an older 8- or 16-slice machine may be reimbursed at a similar rate as one on a newer 32- or 64-slice model. Even though the newer machine is faster, which can lead to greater throughput and a lower average cost per scan, prices are not adequately updated to reflect this, leading to potential overpayment. 40 Fragmentation. Within the United States, patients receive care from a variety of independent and often competing organizations. Poor information flows across provider organizations and misaligned incentives can lead to higher utilization and costs, as well as poorer health outcomes. 41 There is some evidence that vertically integrated provider systems (such as Kaiser Permanente, Geisinger, and Mayo Health System) can better manage costs and coordinate high-value treatment plans with patients, resulting in higher quality of care. 42 Fragmentation of the system also leads to higher administrative costs. Because there is a lack of standardization around billing systems, forms, and benefit designs, additional personnel are needed in hospitals and physicians offices to handle administrative functions for different payers. There is a wide range of estimates regarding just how much higher administrative costs are in the United States relative to other countries given our complex multiple-payer system. For example, a report by the McKinsey Global Institute estimates that the excess administrative costs associated with the U.S. multi-payer system are approximately $100 billion (in 2008 dollars) per year. 43 Lack of information for providers. Medical care has become increasingly specialized and complicated, and patients do not always receive care that fully complies with current clinical guidelines. 44 Often, it is exceedingly difficult for providers to keep up with the best available evidence regarding the clinical risks and potential health benefits of alternative treatments. In the United States, there are few coordinated efforts to objectively quantify the benefits of new devices, drugs, and procedures for diagnosing and treating diseases relative to their predecessors. This lack of information for providers is likely an important part of explaining the variation in treatment patterns, and may help to explain why the United States spends a great deal on procedures and treatments with little objective marginal value.
Wharam et al., 2007); and the effect of tiered cost-sharing for pharmaceuticals (see Gibson, Ozminkowski, and Goetzel, 2005, for a review). 40 Competitive bidding systems would address some of these weaknesses, but have only been adopted in limited capacities by public insurance programs. See Dowd, Feldman, and Christianson (1996) for additional discussion of competitive bidding and Cutler (2009) for discussion of productivity improvement in health care. 41 Cebul et al. (2008). 42 For example, see Feachem, Sekhri, and White (2002). 43 McKinsey Global Institute (2008). 44 A study by McGlynn et al. (2003) found that only 54 percent of acute care and 56 percent of chronic care provided by physicians conformed to clinical recommendations in the medical literature.

16 Lack of comprehensive performance measurement and feedback. Performance measurement provides a way for physicians to determine how well or poorly they are doing with respect to delivering recommended care, using resources, and patient outcomes. 45 There is some evidence that when physicians receive data on their clinical performance, they change behavior in ways that can improve outcomes. 46 Currently, a large proportion of physicians do not get timely feedback on the quality of care they provide and their resource use relative to that of their peer group, making it difficult for them to know how they compare in order to modify their practice behavior. 47 Lack of information for consumers. During the past several years, there have been important investments by government and private organizations to develop better information resources for consumers. 48 However, large gaps still exist with respect to the availability of information on the effectiveness of alternative treatment options, preventive care recommendations, physician quality, and transaction prices for specific medical services. Without this, consumers are not able to make informed decisions when they select providers and treatments--choices that may affect their out-of-pocket costs, the quality of care they receive, and their health outcomes. For example, when a patient lacks information on the number of times a provider has performed a particular procedure, he or she may choose to go to a lowvolume hospital for a complex procedure, even though there is very good evidence that this choice will put him or her at higher risk of complications and death. 49

C. Market Failures Leading to High Numbers of Uninsured The preceding discussion focuses on the sources of unnecessarily high costs related to the delivery of medical care. But, the large number of individuals and families without health insurance represents another major inefficiency of our health care system. In a well-functioning market, individual choices lead to the desirable quantities of goods and services being purchased, and the fact that many individuals choose not to purchase some goods is not usually a cause for concern. The market for health insurance, however, is not a well-functioning market. There are several market failures--that is, factors that cause the costs and benefits that households face to differ from the true costs and benefits. These market failures result in too few individuals and households having insurance. Asymmetric information and adverse selection. The most important market failure causing inefficiently low coverage is adverse selection. An insurance company will not price
Institute of Medicine Report Brief (2005). The New York State Cardiac Surgery Reporting System provides one such example. Chassin (2002) reports some evidence that measurement and public reporting on cardiac surgeons' performance led to improved patient outcomes. 47 A Commonwealth Fund study by Audet, Doty, Shamasdin, and Schoenbaum (2005a) found only one-third of physicians had any comparative performance data available to them, with health plans being the most common source. See also, Audet, Doty, Shamasdin, and Schoenbaum (2005b) 48 Two examples of government information resources include Hospital Compare and Nursing Home Compare, which are found on the U.S. Department of Health and Human Services, Center for Medicare and Medicaid Services website. Other resources include the Leapfrog Group and HealthGrades. 49 See for example, Birkmeyer et al. (2002), Gaynor, Seider, and Vogt (2005), and Huckman and Pisano (2006).
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17 individual health insurance at the average cost of covering the uninsured. If it did, the individuals who purchased the policy would be disproportionately those who knew they were likely to have high health care costs, and so the company would lose money. To address adverse selection risks, most insurers use medical underwriting and incorporate a risk premium into the actual price of coverage. As a result, the price of health insurance that a typical person would face in the individual market greatly exceeds the average cost of covering him or her. 50 Moreover, a significant proportion of individuals may be uninsured because they are denied coverage as a result of medical underwriting. For example, a 2007 survey by America's Health Insurance Plans found that in a sample of about 1.5 million individual applicants underwritten for coverage, among those between 50 and 64 years of age, approximately 22 percent of applicants were denied coverage based on medical underwriting. 51 Liquidity constraints and uncompensated care. Imperfections in credit markets reduce the ability of households, especially low-income households, to obtain goods and services with immediate costs but long-term benefits. Health insurance is a classic example of such a good. Similarly, the uninsured obtain some free medical care through emergency rooms, free clinics, and hospitals, which reduces their incentives to obtain health insurance. 52 Positive externalities. When an uninsured person obtains health insurance and thus better access to care, there are benefits to others. For example, in the case of infectious diseases such as influenza or tuberculosis, appropriate diagnosis and care may prevent the spread of illness. This is the classic definition of a positive externality--a benefit that accrues to someone other than the decision-maker. This is another force that works in the direction of causing too few individuals and households to have health insurance.

IV. KEY ELEMENTS OF SUCCESSFUL HEALTH CARE REFORM
As discussed above, the key goals of health care reform are reducing the growth rate of costs, while maintaining choice of doctors and health plans, and assuring quality, affordable health care for all Americans. At this point, the specifics of reform are far from settled. In the analysis that follows, we therefore discuss relatively stylized versions of what successful reform could accomplish.

A. Slowing Cost Growth On May 11, 2009, representatives from many facets of the health care system, including doctors, hospital administrators, health insurers, pharmaceutical firms, medical device manufacturers, and unions, met with the President and made clear their commitment to health care reform that lowers cost growth and covers all Americans. These representatives pledged to do their part to achieve the goal of reducing the annual growth rate of health care costs by 1.5
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Similar adverse selection problems exist for the self-employed and small employer groups. America's Health Insurance Plans (2007). 52 Herring (2005).

36 increasing at similar rates. 89 This suggests that the relationship between labor force participation and health insurance may not be a primary determinant of labor force participation of this segment of the population today. 90 Similarly, the expansion of coverage will likely include subsidizing premiums for newly insured, low-income individuals and families. If subsidy levels decline as household income rises, this will increase the effective marginal tax rate for these households. As a result, workers could respond by reducing their labor supply. To consider the likely magnitude of this effect on aggregate labor supply, it is instructive to consider a policy that affected individuals across a relatively wide range of the incomes for which subsidized premiums may be relevant. Academic research explored the effect on labor supply of the earned income tax credit (EITC), which introduced a 10 percent tax rate for EITC beneficiaries with incomes slightly above the poverty line because of the phase-out of EITC benefits with additional earnings. 91 The results suggest that this tax had very little impact on labor supply, and the study concludes that the findings are consistent with previous research indicating that taxes such as these typically have very little effect on hours of work. It therefore seems likely that the effects of subsidized health insurance premiums on aggregate labor supply would be modest. Overall effects. In light of the large number of individuals with disabilities and significant medical conditions, and the fact that the offsetting effects appear small, the net impact of health care reform would very likely be to increase effective labor supply. This would magnify the rise in GDP and improvement in the government's budgetary position discussed above. The magnitude of the effects would depend on the size of the effects on labor supply. For example, a one percent increase in overall labor supply would translate in the long run to a one percent increase in GDP beyond the effects described in Section V.

C. Health Care Reform would Improve the Functioning of the Labor Market The provision of health insurance through workers' employers has significant advantages. It is, and will remain, the source of health insurance for many Americans. At the same time, some of the specific features of our employer-based system cause the labor market to function less effectively. Properly designed health care reform could reduce those inefficiencies. Here we discuss two ways that health care reform would improve efficiency in the labor market. Reduce job lock. Because of limitations on coverage of pre-existing conditions, many workers who might change jobs do not do so out of fear of losing their access to insurance coverage or facing limitations on coverage offered by a new employer. 92 Health care reform would allow many of these workers to move to jobs where they would be more productive.
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U.S Department of Labor. Additionally, greater access to health care insurance may increase the utilization of treatments that facilitate work. For example, Garthwaite (2008) finds that the use of certain new pharmaceutical treatments substantially increased the labor supply of near-elderly individuals with chronic pain. The author argues that new treatments may be partially responsible for the increase in labor supply among near-elderly and elderly men during the past decade. 91 Eissa and Liebman (1996). 92 Gruber (2000).

37 Again, it is possible to get a sense of the size of the potential gains involved. Although there is not complete agreement on the issue, many studies find substantial effects of employersponsored insurance on job mobility. 93 In particular, one study examines the effect of employersponsored health insurance on job turnover, and estimates the corresponding effect on wages. 94 To do this, it focuses on the short-term (one-year effect) by multiplying the estimate of the number of workers between the ages of 25 and 54 who do not move in the current year (1.04 million in 1987) because of employer-sponsored insurance by the estimate of the average wage gain that the workers would have enjoyed in their new jobs ($3,560 per year). The selectivityadjusted wage gain of $3.7 billion represents 0.3 percent of wages for all workers between the ages of 25 to 54 and more than ten percent of wages for the affected workers. This estimate is a lower bound, however, as it focuses on the flow in each year rather than the stock over a longer time period. While there appear to be no corresponding estimates for long-term wage effects in the literature (that consider not just the flow but the stock), a simple back-of-the-envelope calculation can be useful. One study estimates that 16 percent of workers ages 25 to 54 change jobs each year. 95 This suggests that on average, a worker will change jobs five times between ages 25 and 54. It further estimates that both men and women are approximately 25 percent less likely to change jobs if they are likely to lose health insurance coverage. This implies that a worker with employer-sponsored insurance throughout his working years would change jobs approximately four times during the years from 25 to 54, whereas his counterpart with health insurance from another source would change jobs five times. Assuming that these job transitions are equally spaced during the 30-year interval and that the wage gain is the same for each worker at each transition, the average wage effect during this thirty-year period would be at least three times larger than the short-term estimate reported above would suggest. 96 This represents approximately 1.0 percent of wages for all workers between the ages of 25 and 54 in the typical year, and more than 0.2 percent of GDP. 97 This estimate is necessarily more speculative than the short-term one, however. Promote small firm creation and competitiveness. Firms compete for workers by offering compensation packages that include wages as well as non-wage benefits such as health insurance. In a large majority of states, current insurance market practices disadvantage small employers (including the self-employed) relative to larger firms with respect to purchasing coverage. High administrative costs and concerns among insurers about adverse selection contribute to higher premiums for small employers, which can reduce their willingness to offer health insurance as part of total compensation. This, in turn, can affect the ability of small
See, for example, Madrian (1994), Monheit and Cooper (1994), and Currie and Madrian (1999). For a review of related literature, see Gruber and Madrian (2001). 94 Monheit and Cooper (1994). 95 Monheit and Cooper (1994). 96 The short-term estimate essentially only considers the wage difference that is missed at the time of the extra transition. However, because the worker will spend more time in each job, there will be more than one year at the lower wage, with this becoming increasingly true over time. For example, while the worker without ESI would change to a third job around the age of 37, the worker with ESI would not transition to the third job until age 41. On average, the worker with ESI transitions to the next job almost four years later than the one without ESI, and this lag increases from just a year or two at the first transition to several years at the final transition. 97 The estimated long-term effect of at least $11 billion in 1987 represents 0.24 percent of GDP in that year.
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38 employers to attract and retain qualified workers. Moreover, if small employers choose not to offer health insurance, they are further disadvantaged given the preferential tax treatment associated with employer contributions toward health insurance. In addition to the direct effect of higher premiums on the ability of small firms and the self-employed to purchase affordable health insurance, there are broader economic costs introduced by this market failure. Both economic theory and empirical evidence suggest that there are substantial benefits to society of individual risk-taking of the kind that entrepreneurs bear when starting up their own businesses. 98 As discussed above, the creation of an exchange has the potential to improve access to affordable coverage for small employers and to help level the playing field with respect to their ability to compete for talented workers in the labor market.

VII. CONCLUSION
The American health care system is on an unsustainable path. Expenditures as a share of GDP are already substantially higher than in other developed countries, and are projected to grow rapidly in the next three decades. This growth threatens to have a devastating impact on the growth in workers' take-home pay and the government budget deficit. It is also likely to increase the number of Americans without health insurance from its already very high level and thus undermine the health of our population. Successful health care reform will slow the growth rate of health care costs, maintain choices of doctors and health plans, and expand coverage. Slowing the growth rate of costs by 1.5 percentage points per year would have a dramatic impact on the trajectory of health care expenditures as a share of GDP over time. Slowing the growth rate of costs by a smaller amount (0.5 or 1.0 percentage point per year) would have smaller, but still important effects. Our analysis shows that successful health care reform would have major benefits for the U.S. economy. Over time, the slowing of cost growth through increased efficiency would bring about substantial increases in Americans' standard of living. It will also prevent devastating increases in the budget deficit and raise capital formation. We estimate that slowing health care cost growth by 1.5 percentage points will increase real GDP in 2030 by nearly 8 percent relative to what would happen without reform. We also find that slowing cost growth is likely to lower the unemployment rate consistent with steady inflation by roughly one-quarter of a percentage point for an extended period. The net welfare effects of expanding coverage to the uninsured are also likely to be very large--probably in the range of $100 billion each year. Genuine reform will also likely increase labor supply, reduce job lock, and aid small businesses.

98

van Praag and Versloot (2007) and Holtz-Eakin and Kao (2003); see also Lerner (1999).

39 The kind of reform that will bring about these economic rewards will not be easy. It will require truly game-changing innovations in many areas. But, if we can bring about such changes, there will be substantial benefits to American households, businesses, and the economy as a whole.