Peter Orszag: Putting the Deficit on a Diet

Peter Orszag is playing a more prominent policy role than directors of the Office of Management & Budget have in the recent past. He helped design the Administration's $787 billion stimulus plan and the health-care-overhaul bill now before Congress. As the economy has stabilized, he's begun tackling the gargantuan deficits that threaten America's fiscal stability. This is an edited version of a conversation televised on Feb. 24.


You have always considered health-care reform as a tool in deficit reduction.


Yes. As you go out over the long term, there is nothing else we can do. I don't care what revenue proposal you have, what Social Security proposals you have, what proposals you have to reduce discretionary spending—none of that will matter unless we reduce the rate at which health-care costs grow.

Health-care costs are what percentage of GDP?
Currently, overall health care is about 16% of GDP. It is projected to rapidly increase. In 10 years, it will increase by a few percentage points as a share of GDP. But the issue is it continues thereafter. And the thing that's important about the bills under consideration—the single most important thing we can do—is to move the incentive system for providers, hospitals, and doctors away from paying for more stuff. The problem is that we currently do not know exactly how to design that system. Even if I appointed you dictator today, you would not have the knowledge to just snap your fingers and take 16% of the economy and transform it immediately to a fee-for-value system. So what we need to do is be aggressively testing out different approaches...and then have a way of moving rapidly as we learn which approaches are more promising.

One of the things Republicans always say is, why doesn't the White House want to make a deal about tort law? The President says he's open to every idea, so why is it a big thing to say "I'm open to medical malpractice reform"?
I guess I'd push back and say, if that's the deciding issue, then let's see a comprehensive plan that says, with this additional piece, we now sign on.

You're just putting the ball in the other guy's court. Rather than suggesting alternatives on which you might find common ground, all you're saying is, show me your idea and I'll react to it.
One thing I would note on medical malpractice is that the same people who criticize the existing bills for not reducing costs sufficiently, not reducing the deficit sufficiently, use the Congressional Budget Office as the basis for reaching those judgments. The CBO has said most of the medical malpractice reforms out there don't do much to reduce costs. Plus, what exactly does medical malpractice reform mean? Put it on the table.

Are you telling me that at this stage of the game there have not been those kinds of discussions? Health care has been one of the President's primary domestic goals since the Inauguration.
And the President has put forward a specific plan that expands coverage, reduces the deficit, and will put in place an infrastructure that will help contain costs. Let's not forget that if we don't get health reform done now, I don't know that anyone's going to be willing to try again for a very long time.

So what is the outcome the Administration wants?
A bill that reduces the deficit over time, that expands coverage so that fewer Americans face the health and financial risks associated with no insurance, and that puts in place the key infrastructure that will help move to a higher-quality system over time.

Why is American health care a larger percentage of GDP than in any other industrial economy?
One study suggests the higher costs are partially because we are more intense users of technology and partially because we pay more to doctors. Cross-country comparisons suggest that a very large share of health costs in the U.S., perhaps as much as 30%, don't actually improve health outcomes. But I would say that if you face a complicated medical condition, the reason you see foreigners often traveling to the U.S. is that our top medical facilities are the best in the world.

Can you learn anything from a Cleveland Clinic or a Mayo Clinic?
Absolutely. This is the stunning part. We have examples in the U.S. of world-class medicine being delivered at much lower costs than at other institutions. And if we can move toward the practice norms that exist at Cleveland and at Mayo, we would not only have higher quality, we'd have lower costs, too.

Will the deficit commission the President has created work?
I think it will. We have Alan Simpson and Erskine Bowles, a Republican and a Democrat, who know the issues and know Washington and are willing to work hard on a bipartisan basis. Is it 100% guaranteed that it will work? Absolutely not.

Most people look at the commission and say no Republican will buy into anything that talks about a tax increase. And anything that talks about serious spending cuts—certainly on safety-net programs—no Democrat will buy into.
That needs to change, because if it doesn't, we will ultimately wind up with a fiscal crisis. The Administration has been very clear. Everything has to remain on the table.

What do you think the commission might come up with?
Hopefully with a set of proposals that reduce the deficit to no more than 3% of the economy by 2015.

But can you do that without an austerity program and a tax program?
The issue is not writing down ways to get there. The issue is building a coalition that supports a particular approach. Maybe they'll come upon some new solutions. That would be great. But the problem is how do you bring people together around an approach, choosing from one of several that are out there?

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