When President Obama announced Peter Orszag as his choice for director of the Office of Management and Budget, many in the health care community ran for Google. Orszag, an intense and studious 40-year-old economist, who headed the Congressional Budget Office during 2007 and 2008, has emerged as a forceful advocate of controlling entitlement spending and improving the effectiveness of the health system.

Orszag’s new job will put him in the center of the Obama administration’s health policy circle. From the health care industry’s standpoint, he will be a formidable addition to the team. Orszag is an unrepentant deficit hawk, who has committed the president, despite little discussion of “entitlement reform” during Obama’s campaign, to restructuring both Medicare and Social Security to accommodate the flood of 78 million baby boomers who began entering the program last year.

Orszag is new to health care. Like Paul Krugman, Orszag began his career focusing on international economics. Orszag did his undergraduate work at Princeton, eventually receiving his doctorate from the London School of Economics in 1997. Rather than pursuing an academic career, however, Orszag quickly found his way into the political process as a staffer to President Clinton’s Council of Economic Advisors and then to his National Economic Council.

Orszag was a special assistant to the president during the Asian currency meltdown and the Russian debt crisis, the most serious economic problem of the Clinton presidency, where he worked closely with former Treasury Secretary Robert Rubin. Appropriately, his doctoral thesis was entitled Dynamic Analysis of Regime Shifts under Uncertainty: Applications to Hyperinflation and Privatization. After Clinton, Orszag spent several years in economic consulting before moving to the Brookings Institution in 2001.

CBO Documents Provide Clues To Orszag’s Priorities At OMB

Orszag arrives at OMB with the most thorough analytic preparation on health care issues of any OMB director since the inception of the agency. He walks in the door with a 218-page published blueprint for containing federal health spending (published by CBO in December as Budget Options, Volume I: Health Care. Orszag spent most of his two years at CBO directing the most intense analytic effort ever undertaken at CBO (or in Washington for that matter) to frame options for containing the growth in health spending. At its peak, he had 48 CBO staff engaged in health care analytics, more than 20% of his workforce.

The selection of issues in this analysis and their budgetary scoring provide important clues about the direction Obama may take both in health reform and restraining health spending growth. Orszag and CBO were not entirely silent during the 2008 presidential campaign. CBO made news during May of 2008 by favorably analyzing the Healthy Americans Act offered by Senators Ron Wyden (D-OR) and Robert Bennett (R-UT). Wyden-Bennett, S. 334, is a more radical reform proposal than the Obama campaign plan, replacing employer-based coverage with a federally regulated and subsidized individual insurance benefit.

CBO found that Wyden-Bennett would be “revenue neutral” in a snapshot year of full implementation (2014), and generate a budgetary surplus in future years. This was a remarkable finding given that it would add more than forty million people to insurance rolls. CBO also issued a report in July questioning the validity of the $80 billion in claimed savings from universal implementation of electronic health records, a major priority of the Obama campaign.

Orszag’s December CBO health cost analysis dispatched several other Obama campaign ideas. You probably won’t be hearing a lot more about the campaign idea about federal reinsurance for catastrophic health claims. CBO estimated it would cost $68 billion over ten years and simply substitute public for private reinsurance.

CBO also refused to score savings associated with direct federal negotiation with drug companies, suggesting that the federal government would be unable to do better than private pharmacy benefit managers (PBMs) in negotiating discounts. (CBO did, however, score at $110 billion savings over ten years a mandatory 15% “rebate” by pharmaceutical manufacturers for branded drugs distributed to Medicare patients.) CBO declined to analyze the potential impact of a new Medicare-like public health plan for those under age 65, perhaps because too many of the details on benefits and how it would pay providers are speculative and ill-defined.

CBO Cost Containment Options Targeted Teaching Hospitals, Other Health Industry Sectors

The CBO’s cost containment options should send shivers through a health care industry already shaken by the recession. They include the old standbys: “simply” reducing or eliminating updates for various pieces of the current Medicare payment system for key provider groups (hospitals, nursing homes, home care providers, and some physicians). These produce ten-year savings of over $500 billion. Because they are so simple to administer, these ideas might find their way into the early Obama budgets.

Teaching hospitals are squarely in the crosshairs. CBO identified options for converting the huge teaching hospital subsidies into block grants (and capping their growth): Medicare disproportionate share (DSH) payments to the states and direct (GME) and indirecft (IME) payments for medical education to the federal government. These two proposals save over $170 billion over ten years. There is also an option for converting acute care Medicaid payment to bloc grants to the states and indexing the growth to inflation, which would save $700 billion over ten years (a possible tradeoff for a short term Medicaid “bailout” in the stimulus bill).

The messiest cost-saving issues revolve around the controversial “sustainable growth rate” (SGR) formula for Medicare Part B physician payment, a major political nuisance for Congress that has yet to yield meaningful savings. Just the cost of a politically unsalable ten-year rate freeze for physicians under SGR is estimated at $218 billion, an indication of the depth of the crater Congress has created by resetting physician payment rates every year. Completely eliminating SGR fee reductions and reverting to a full inflation adjustment for ten years would cost the budget $439 billion, and suspending the mandatory beneficiary premium increases under SGR, an additional $124 billion. 

These estimates do not include the impact of the looming reduction in per capita GDP that the recession will produce, which will deepen the crater into a full-blown canyon. The apparent fallback option is to split the Part B SGR formula to spare evaluation and management services (e.g. primary care) and hammer down imaging and minor surgery. SGR’s thus far illusory savings have become the fiscal equivalent of a huge bad mortgage on Medicare’s balance sheet.

Orszag: A Believer In Cost-Savings From Health IT … But Only If Accompanied By The Right Reforms

Despite concerns expressed in a CBO report released in the summer of 2008, Orszag believes in health IT. And if Congress allocates $20 billion in incentives or grants for electronic health records (EHRs), the Orszag quid pro quo could be to make EHR use a condition of participation in Medicare. CBO estimated that this would save $33.9 billion in Medicare outlays, but also enable the program to recoup the presumed operating cost savings for hospitals and physicians by reducing their annual updates, saving another $40 billion over ten years.

If the IT tools don’t get a lot better than they are today, however, there will be operating cost increases, not savings, and the reductions in updates will come right out of hospital operating margins. Right now, it takes remarkable imagination to find actual provider-level operating savings from installation of clinical IT.

The main concern in the May 2008 CBO report about the claimed savings from implementing EHRs was that they depended upon changing fee-for-service incentives to discourage overuse of services. There are lots of scored options here. They include paying primary care physicians either under partial capitation (25% of total payments on a population basis) or under a modified medical home.

There are also proposals to bundle post-acute care provided within thirty days of a hospitalization into Part A Diagnostic-Related Group (DRG) payments, saving around $18 billion over ten years. These could be multiplied many fold, however, by restricting or eliminating payment for readmissions within 30 days (18% of Medicare admissions result in such readmissions). Interestingly, proposals to bundle Part B fees with the DRG for “selected surgical services” such as open heart surgery and joint replacement saved a comparatively negligible $4 50 million over ten years, but no other options for broader Part B bundling were analyzed.

CBO struggled with what to do about the huge variation in per capital Medicare spending, a major Orszag policy focus. None of the options discussed–cutting fees in high-using “minimarkets” (basically John Wennberg and Elliot Fisher’s hospital service areas), withholds for hospitals with higher than justifiable readmissions rates, or simply reducing the updates in high utilization areas–seem to get the job done without a lot of collateral damage. Bundling Part B inpatient consults into the DRGs and a significant further tightening of the Stark self-referral laws are better options for solving the so-called Miami problem.

Providers, however, do not bear all the pain under the CBO options. Medicare beneficiaries could be given some relief from the open-ended catastrophic liability they currently face under Medicare’s bizarre cost-sharing provisions. But they could pay for it by having Medigap plans forbidden to cover the first dollar. The combination of these two save an estimated $70 billion over ten years. In a New England Journal of Medicine  article published on November 8, 2007, Orszag also advocated higher copays for services of questionable benefit under an evidence-based coverage design. The CBO analysis also explored much lower copays for beneficiaries who opt for surgical “centers of excellence.”

The CBO document included some intriguing but less-discussed ideas. Lifting restrictions on family planning services for Medicaid patients generated an estimated $160 million in ten-year savings from reduced pregnancies. Mandating that all state Medicaid programs institute premium assistance so Medicaid-eligible individuals could accept and pay for private insurance offered by employers could save $2 billion over ten years and cover 200,000 uninsured people. And an excise tax on Medigap policies could generate another $12 billion, and perhaps induce some individuals to accept more-cost-sensitive plans.

It is impossible to convey in a brief analysis the sweeping scope of CBO’s search for budget options in federal health programs. The document bears reading. But Orszag’s other work–his Director’s blog, his articles and speeches–convey a subtlety and thoughtfulness that distinguish him from a Democratic version of David Stockman.

For example, Orszag has cited the successful risk-reduction initiative of the nation’s anesthesia community in the 1980s, which led to a twenty-fold reduction in anesthesia deaths, and mused about how to multiply such efforts. He has observed the role of patients’ expectations in repeated examples of the placebo effect, and urged his colleagues in health economics better to understand the role of expectations and social norms both in consumer and professional behavior. He has addressed the complex social equity questions raised by the growing gap in survival rates between higher educated and wealthier elders and their less fortunate peers.

Orszag’s peers have noticed. They voted him into the prestigious Institute of Medicine of the National Academy of Sciences at the age of 39. A self-described “avid runner,” Orszag is not unacquainted with pain and its management. How much of the proceeds of health care’s fiscal pain end up getting reallocated to expanding health coverage, and how much to reducing the yawning federal deficit, will be an early test of the Obama administration’s capacity to make tough choices.