 Good afternoon. The United States is in the midst of a massive social experiment that will determine whether a democratic nation can control the inescapable tendency of widespread insurance to cause excessive health care spending. Dr. Henry J. Aaron wrote that in 2002, after nearly a decade of discussion about how to confront the rising costs and inequalities in the American health care system, a discussion that continues today with more questions than answers, and will continue well into the foreseeable future. Dr. Aaron has had a lot to say about the U.S. health care system in recent years, and we will look forward to hearing his thoughts in a few moments. Henry J. Aaron is the Bruce and Virginia McClurry Senior Fellow in the Economic Studies Program at the Brookings Institution in Washington, D.C., with which he has been affiliated almost continuously since 1968. He has also served as an Assistant Secretary in the Department of Health, Education and Welfare. He has chaired a National Advisory Council on Social Security. He's currently the Chair of the Board of Directors of the National Academy of Social Insurance. He served on the faculties of the University of Maryland and has been a visiting professor at Harvard. And in 1993, he was elected to the American Academy of Arts and Sciences. In the work of Henry Aaron, one theme stands out most clearly. Dr. Aaron's approach to the national policy debates on health care mirror his analysis of other central issues this nation has confronted in recent times. The future of Social Security, U.S. tax policy, federal budgeting, just to name a few. In its approach that students of all ages can appreciate, Henry Aaron, you see, does his homework and he does it exceedingly well. He brings facts to bear on the discussion of contentious issues. He uses evidence to support his conclusions. He seeks to educate as well as to advocate. Searching through the public record, one finds references that try to place Dr. Aaron in a convenient ideological box. How fashionable is that today? But the more one reviews his research and publications, the more one comes to realize that slapping a label on Aaron's ideas is a foolish and inadequate response. Considered in light of today's in-your-face, shout-down-your-opponents-polarized political climate, Henry Aaron's approach to significant public policy issues could almost be labeled quaint, or even old-fashioned, were it not so refreshing, so necessary, and all too rare. Henry Aaron is the author of numerous publications worthy of your attention. Most recently, last year, he and two colleagues co-authored the book Can We Say No? The Challenge of Rationing Healthcare. And he will speak today on the topic, Healthcare in America, Three Paradoxes. Please join me in welcoming Dr. Henry Aaron. Let me start by thanking Professor Gilbert for a very kind and, blessedly, relatively brief introduction. Unlike Dame Julia, I was aware that there were going to be a large number of people here. I had spoken with one of the participants in the event from two years ago, and he said, it's going to be like nothing you have ever experienced, but it's one thing to be told, and it is quite something else, to experience it. So to all of those, or any of those who were part of getting me invited here, I want to say thank you very much. The overarching theme for this convocation is prescription for tomorrow, but my reaction when I take a look at what is going on in healthcare is that the name could have well been, tomorrow's healthcare, wow. The reason is that the promise of modern medicine is genuinely vast. Dame Julia's talk, I think, made that crystal clear. We're on the edge of an era in which diagnosis and therapy will be tailored to each person's unique genetic makeup, and the way that that genetic makeup has been influenced by their experience over a lifetime. We're on the even of an era in which microscopic devices will monitor our physical state and dispense finely calibrated dosages of medications that prior tests have shown to be effective for our particular biology. And within the lifetimes of people in this room, it's likely that medical science will have found ways to forestall many of the aspects of aging and to prevent or cure many of the illnesses that kill us. The head of one of New York's largest teaching hospitals who went on to head one of the nation's largest insurance company, Jack Rowe, commented in a meeting that I attended just recently, and he said, and it was striking to me at the time, he said, I don't know of a scientist who doesn't believe that we will have a cure, not a treatment, but a cure for Alzheimer's disease within 10 years. Now that statement violated a law that I had heard some time ago from a Scottish economist who said, in forecasting, give a number or date, never both. Well, for a century or more, life expectancy has gone up in the United States by an average of about three months a year. Recently, that rate of improvement has slowed down a bit, and we've been looking at improvements of about one month a year. But whether we're talking about increases in life expectancy over the 21st century of 100 months or 300 months, we're either talking about something big or something huge. Yes, of course, it's science fiction to talk about immortality, and that's not my theme, but it is sober description of scientific research that's now going on to foresee interventions that delay mental and physical aging and that eliminate, slow, or drastically reduce major killer diseases. Now I just have to learn how to work this slide. There we go. But tomorrow's prescription, tomorrow's promise will be a technological tease and an unreachable utopia if we can't pay for it. Even worse, if we can pay for it, but pursue policies that put us in a position where we think we can't pay for it. And that possibility exists. According to some, it is inevitable. You have, I think most of you probably heard at one time or another, about the looming entitlement crisis. Well entitlements are government payments or services to which one earns a right irrespective of current congressional appropriations. That means that some years ago, Congress passed a law, set up rules for benefits, and if you have the right characteristics, you get a benefit. Congress, of course, could change the law. These are not constitutionally guaranteed. But if they don't change the law, then you get the benefit if you have the particular characteristics. Or rather, you get the benefit if the nation can afford to deliver on the promises. The biggest entitlements are social security, Medicare, and Medicaid. At the risk of boring you with what you already know, social security provides an earnings-related pension to workers and to their dependents if they've worked in covered employment for a required period of time. Medicare pays for the health care of social security-eligible retirees who are over the age of 65 and for the disabled. Beneficiaries have to pay some premiums and they also have to pay some co-payments at the time they receive services. But overall, Medicare picks up the rest of the cost. Medicaid, most of Medicaid anyway, doesn't go to mothers with dependent children, as many people suppose, but instead goes to the elderly and disabled poor, mostly for long-term care. Mothers and poor mothers and their children do get some of the benefits about 30%. Other entitlements include food stamps, those help feed low-income families with or without children, and the Earned Income Tax Credit, which is a supplement provided to the earnings of people who receive relatively low total compensation. Well, starting very soon, social security, Medicare, and Medicaid costs are projected to go up very, very fast. There are two reasons. The most widely discussed is the impending retirement of the baby boom generation. But really much more important than that is the fact that health care spending is expected to continue growing faster than income, something it's done for the past half century. It's not something new. It's just a continuation of past trends. Well, if all we had to deal with were the growing number of retiring baby boomers, the problem would actually be quite easy to handle. We could shoulder it without any difficulty at all. But that bigger challenge is the added and sustained rapid growth of per capita health care spending. Why? You heard a good explanation of the factors or some of the factors going into that increase this very morning. If current laws remain as they are, it looks like large and growing federal budget deficits are in our future. If revenues, taxes, remain about the same share of income as they have been over the past few decades, it looks as if they won't come close to paying for all the benefits promised by current law. Now, there's a big gap there. And I will try to explain, give you some numbers on just how large that gap is in a little bit. But before I get to that, I want to go back to EC1 and explain why it is we really do have to care about that gap. Let's suppose that we stick with current laws governing taxes and total spending. What will happen? Well, the obvious. Spendings bigger than taxes, deficits will emerge, and they will grow larger over time. The first thing they're going to do is they're going to stop up private savings that could otherwise finance investment and economic growth. In the near term, that just means that our incomes don't grow as fast as they could have. My colleague at Brookings, the former chairman of the Council of Economic Advisers, Charles Schultz, described that problem as not the wolf at the door, but termites in the woodwork. But over time, deficits can grow very wolf-like. Large and growing deficits generate explosively increasing public debt. Those deficits inevitably are associated with borrowing abroad, just as we are doing right now. Much of the US government's current budget deficit is being purchased by the Chinese, which helps them manage their trade surplus as well. If that continues, interest payments ultimately become so large that we can't pay them. And at that point, people here and abroad will just stop lending money to the US government. Something that currently seems unthinkable were the best credit risk in the world, but at one time Argentina was among the richest countries in the world at the end of the 19th century, so things can change. And if our ability to borrow abroad suddenly stops, then we will face abrupt and savage austerity. So for all of those reasons, doing nothing in the long run is just not an option. Long before debt explodes, we would need to raise taxes a lot or cut spending a lot. Now, I would like to give you some perspectives on this problem. The first by syndicated columnist Robert Samuelson, who wrote in a recent Newsweek article, some of you may have seen, it had the headline, the monster at our door. Uncontrolled health spending poses ugly choices, raise taxes, gut other programs, or run ever larger and dangerous deficits. Not exactly the tercest headline you've ever heard, but still it gets your attention. This is what Mr. Samuelson wrote. He wrote that maybe monster sounds like rhetorical overkill, then he said he put stress on what the baby boom does to government, which, as I tried to suggest before, is misdirecting attention right at the beginning. Federal spending on the elderly is plausibly projected to double in three decades by 2030 as a share of national income. Most of that spending will be for Medicare and Medicaid. And the rise in health care spending exceeds all of today's so-called discretionary spending. That's the spending Congress has to reappropriate each year. On schools, the FBI, the environment, and much more. Well, the general number story is absolutely right. It comes from projections of the Congressional Budget Office. Well, that's a journalist. We know journalists are trained to write very vividly. So let's turn now to the director of perhaps the most soberly named of all government agencies, the Government Accountability Office. It's enough almost to make you yawn just hearing the name. In any event, David Walker, who is that person, writes, simply put, our nation's fiscal policy is on an unsustainable course. Budget simulations show over the long term we face a large and growing structural deficit, primarily due to demographic trends and rising health care costs. Nothing less than a fundamental re-examination of all major existing spending and tax policies is needed. Well, that prose is a bit more bureaucratic, but it's still pretty strong stuff. But let me show you that Walker's prose is one and sleepy, compared to that of Boston University economist Lawrence Kotlikoff and his collaborator, Scott Burns. They write that if current policies persist, here is what we can look forward to in the United States by 2030. A country with impoverished elderly citizens languishing in understaffed, overcrowded, substandard nursing homes, a government in desperate trouble, taxes sky high, you can read the rest. We end up with tax evasion, inflation, an underground economy, a depreciating currency, and people fleeing the country. Well, there you have, in three different quotations, essentially one way of viewing the future. On the one hand, medical science is on the cusp of advances that promise to change the very meaning of what it is to live a normal life. Prevention or cure of major illnesses and other interventions is near. Measures to slow fiscal and mental decline await us. But so, it seems, do financial calamity and economic ruin. We're told we have to renege on previous commitments to the elderly, the disabled, and the poor, because if we don't, there will be economic cataclysm. We're told, in effect, that much of the promise of medical advance will indeed be a technological taunt. We risk becoming impoverished mendicants looking through the scientific window at goodies we just can't afford. But is that the right way to view the situation? I don't think so. To start seeing why, let's be precise about the nature of the economic challenge that these three commentators and many, many others all describe. First of all, they describe a purely public problem, not a private one. The problem, they say, is government. Government has promised more than we can afford. The solutions to that problem do not require, as far as these descriptions go, any change in private arrangements. These writers do not suggest that private and public health care spending are in any way linked. Oh, yes, private health care has its shortcomings, but they aren't mentioned as being in any way involved in what we are led to believe is an oncoming fiscal train wreck. I believe this formulation is misleading in two fundamental senses. First, it misstates the actual problem that we confront. Public commitments through the programs that I mentioned, in fact, are rather modest. Medicare covers only about three-fifths of the cost of health care for the elderly. Beneficiaries may be exposed to very large out-of-pocket expenses. Whole classes of benefits are uncovered. Social security replaces less of earnings than do the pension systems of nearly every other developed nation. On the average, only about 38% of earnings after beneficiaries have had their Medicare premiums deducted. And that share under current law will fall over time to about 33% by 2030. All at Medicaid is generous in some states, but in others, it is really quite stingy. So all in all, the US safety net is really rather thin and quite porous. The view that fiscal difficulties can be solved inside government is also misleading because it diverts us from confronting the problem that we really do face. And that is that the health care system as a whole is seriously flawed. It's flawed for those who are insured because it pays for absolutely anything that doctors do, whether the intervention is beneficial or not. The Institute of Medicine has documented that as many as 90,000 people die annually from avoidable medical error. It is flawed because nearly 47 million people are uninsured. And it is flawed because we spend nearly twice as much per capita on health care as do the 10 other richest nations in the world, but we still have shorter life expectancies and higher infant mortality rates than they do. Fixing those problems is formatively difficult, but it is doable. So now I would like to state the conclusion I'm going to reach as a prelude for the rest of my remarks. It takes the form of three paradoxes. The first one is that, in fact, health care is worth more in total than we spend on it, but we may waste a huge amount of money on the margin. Second, health care insurance for everybody in the nation would actually not cost very much in the near term. And it would make possible reforms that would save money in the long run. Why don't we do it? The reason we don't is because every one of the methods that would achieve universal coverage has the effect of massively redistributing who pays how much in what forms for the health care that they receive. And everybody, I suspect everybody in this room, would be afraid that once the reform got done, he or she might end up losing and maybe losing a lot. The third paradox is, yes, there are upcoming government deficits, but the only way to close them is if both private and public health care are jointly and simultaneously reformed. Well, let me turn to the first of these points that health care spending is worth far more than the approximately $1.6 trillion that we're going to spend for direct personal care this year. That's the conclusion of at least four separate and completely independent studies by some of the most competent and highly regarded economists in the nation. In particular, and this, I think, is a really quite striking fact, the value of the improvements in longevity and reduced morbidity in the three decades from 1970 to 2000, the value of those improvements equals the dollar value of all of the economic growth that occurred over that period of time. Put in another form, if you factored in the improvements in the value of the improvements in longevity and morbidity, we could try twice as fast as official statistics lead us to believe. Well, not all of that growth or improvement in longevity and reductions in morbidity is attributable to health care. That was something that Daniel Callahan stressed yesterday, and I completely agree with. But if improved health care accounted for even one fourth of that improvement, health care more than paid for itself, and there's good reason to think that health care accounted for much more than a fourth of the reduction in mortality rates, and complete certainty that health care provides other benefits besides reductions in mortality. About 90% of the extension of life expectancy over the last four decades has come from keeping infants and victims of heart attacks alive in situations where previously they would have died. And if that number is accepted, then the average cost of adding a year to human life was less than $20,000. On this calculation, all the reductions in pain that health care provides, all the lessened damage from illness, all of the reassurance that health care gives to sick people and their families are free bonuses. So in my view, there really can be little doubt that health care is, in total, worth what it costs. But that's on the average, and in total, we waste a lot, too. For example, we do four times more coronary artery procedures, operations, and angioplasties than the British do. Some of that extra care provides very real benefits. It reduces pain. It increases what people can do after a heart attack. But heart disease death rates have fallen as much in the United Kingdom as they have here. And that extra surgery here in the United States comes at a price tag of about $35 billion a year. We spend far more than the British do on neonatal intensive care, but the British have lower infant mortality than we do. Maybe there are any number of reasons that might explain that, ranging from genetic inheritance to personal habits of pregnant women to ready accessibility to primary care during a pregnancy. And we don't know which of those factors accounts for the difference, but we do know that despite vastly higher expenditures here, our infant mortality rates are higher than theirs. Overall, the British spend about 40% as much as we do on all health care, and they live a little longer than we do, as, to repeat myself, do the residents of the 10 richest nations other than the United States. Repeated studies from the RAND Corporation and elsewhere have shown that massive amounts of care are provided in cases where it should not have been provided, perhaps as much as a third of some procedures. Thus, the first paradox. Health care is worth what it costs overall, but we could do vastly better. We could get more benefits for the huge amounts we spend, or alternatively, we could save a whole lot of money by shaving off no benefit and low benefit care that sops up hundreds of billions of dollars each year and by improving the efficiency of medical practice. Well, let's turn to the issue of coverage. That coverage issue goes back seven decades. Elected officials for that long have been trying to fashion a politically acceptable way to extend health insurance coverage to all or to nearly all Americans. President Roosevelt, that's Franklin, not Theodore. President Franklin Roosevelt deleted from the Social Security Act of 1935 a proposal regarding health insurance because he feared the whole bill would have failed if he had included it. With utterly appalling bipartisan parody, President Truman, Nixon, Ford, George Herbert Walker Bush, and Clinton all failed to secure passage of ambitious plans to extend health insurance coverage. Well, the political law, Jim, might be easy to understand if the objective, that is universal coverage, cost a lot. But it doesn't now, and it never has. Let's do the math. About 16% of the US population is uninsured. The uninsured have been estimated by a number of different observers to consume, on the average, about half as much health care as they would if they were insured. They don't go in as often, but if they're really seriously ill, they go to the, they will be admitted to a hospital. Some physicians will see them and so on. So that takes us down to maybe 8% of health care spending, half of 16. But the uninsured are, on the average, younger than the insured, and therefore they cost less. So even if insured, the currently uninsured would spend less than that amount. How much? Well, nobody knows for exactly sure how much precisely. But the best guess is something in the vicinity of 5% to 6% of current health care spending added to current health care spending would enable us to provide health care at the standards we all receive to those who are currently uninsured. How big is that? Well, in a typical year, US health care spending goes up about 5% or 6%. So simply put, we could ensure everyone at an annual cost of an additional one year's growth of US health care spending. Why don't we do it? Well, part of the answer is ideology. We disagree about the role of government and we disagree about what role markets should play. We disagree about how much and what kinds of individual choice should exist in the resulting system. Those divisions aren't new. They run right through American history from Jefferson and Hamilton to Delay and Pelosi. But the more fundamental reason is that to cover everyone, someone would have to pick up the approximately $80 billion price tag for the currently uninsured. Even more problematic than that, though, is that we would have to dramatically reorganize who pays for the roughly $1.6 trillion now spent on hospitals, doctors, drugs, and medical devices. And inevitably, let's be honest, inevitably, there will be gainers and losers. Some people will come out ahead. Some people end up paying more taxes or suffering some reduction in access to care. And given the tenor of the times, I ask you how well some candidate would be likely to get if their motto was, trust me, I'm from Congress and I'm here to help them, which is a shame, not just for the uninsured, but also for the rest of us too. We well-insured would be a lot better off if we didn't waste so much money on useless or low-benefit health care. But none of us has much incentive to cut back. We well-insured pay little of what our health care costs when we use it. Insurance, that is somebody else, picks up most of the tab. But insurance does something else too. It pays hospitals and doctors enough more than our care costs so that they can provide free care to the uninsured. If our insurers tried, if they really, really tried to hold down spending, who do you think hospitals would turn away? Not us. We'd still be paying customers. Providers would wake up and they would find that they could no longer render free care to the uninsured. Rather than consuming perhaps half the health care that the insured use, the uninsured would be bereft of care. That outcome, I think, is too terrible for anyone to permit or seriously to contemplate. And that is why effective measures to squeeze out no benefit and low-benefit care, measures that would help all of us, you and me, everyone here, by saving hundreds of billions of dollars a year just cannot be taken until everybody is insured. Well, the moment you've all been waiting for has come. I promised you numbers. And now is the time you've been waiting for. It's here. The expenditure numbers that I'm going to show you don't include some of what government spends. And that is payment of interest on the national debt. So the numbers I'm going to show you are smaller than the ones you might see in your daily newspaper. Let's assume that the law governing expenditures is unchanged. Doesn't change. Social security, Medicare, tax law stays pretty much the same. In tax law, there's one difference. Taxes historically have been adjusted from year to year so that over time, the average take of the total US tax system has been just about what I show here, which is 18.3 to 18.4% of gross domestic product. So I'm assuming the law keeps that percentage unchanged. But if expenditures stay the same as there would be, if current law is unchanged, what this collection of numbers says is that we face either very large tax increases up almost by half by 2030, and we need to double them by 2050, or very big deficits. That's evidence because the projected deficit in 2030, 7.3% of GDP, is nearly half of the revenues that are there. So you'd have to raise taxes to the total tax collections to the mid-20s, plus a bit more for interest on the national debt. And by 2050, you'd have to essentially double tax collections. Well, why is all of this happening? Is it as the quotations I read at the start suggested because of entitlements, because of baby boomers retiring? Well, in a way, yes, and in a way, no. Health care spending in excess of earmarked revenues, that is, in excess of the revenues that are directed to health care today, account for all of the projected increase in government deficits. Those red bars are simply, in bar form, the same deficit numbers that I showed on the previous chart. These little, tiny green bars here that actually go above the line, and that means that there's a budget surplus, show what the deficit would be if one excluded those revenues directed to Medicare and Medicaid and all Medicare and Medicaid expenditures. Exclude Medicare and Medicaid, and there is no long-term projected budget deficit. These are not my numbers, let me stress. These are numbers from the congressional budget offices, so-called high-spending projection, which assumes that health care, per capita health care spending, continues to grow faster than income almost as much as it has over the past 40 years, but not quite as much. I want you to note that what remains, even in the numbers underlying those green columns that show no long-term budget problem, what remains in the budget covered by taxes includes some pretty hefty entitlements. What remains includes all of currently legislated social security benefits, food stamps, and the earned income tax credit. These and other entitlements, this fiscal year, account for more than $850 billion in government spending, and of course, they're going to account for far more in the future. But here's the central fact. The central fact is that current taxes, other than those earmarked to pay for health care, are sufficient to pay for everything the government is expected to do, including all social security benefits promised under current law. Well, there's some other good news. Even if we do not take away any Medicare or Social Security or Medicaid benefits, that is to say, if we pay enough taxes to cover the whole shebang, our incomes will continue to rise. If economic growth occurs at even relatively modest rates, our income will continue to grow, and we can pay the taxes, and we will still be able to afford more of other kinds of consumption. But we're not out of the woods yet. Let me explain this chart. I think it's important, and it's different probably from anything you've seen. That top line shows the growth of per capita income that is assumed by the Congressional Budget Office in their long-term budget projections. Fundamentally, what's going on here is that worker productivity goes up somewhere in the vicinity of 1.5% to 2% a year. That's about what the historical average has been. It was lower for about 20 years before the turn of the century. It was much higher in the years immediately after World War II. We had a period of relatively more rapid growth in the past few years, but we've had a slowdown quite recently. So this assumed growth of per capita income, again, reflects historical averages. The second line here shows what is left over from that growing per capita income if we pay all of the extra taxes that I previously indicated would be necessary if we didn't change Medicare or Medicaid or anything that they were all paid for as under current law through the budget line. This includes increasing taxes by half by 2030 and doubling them by 2050. But the reason I say we're not out of the woods is that increases in health care spending are not going to be confined to Medicare and Medicaid. Doctors do not practice medicine typically one way when they see privately insured patients and another way when they serve Medicare and Medicaid patients. Nurses don't check to see whether a patient is insured privately or publicly when they decide whether or how to put in an IV drip. When health care spending goes up, it goes up for everyone. And that means as public health care spending increases, working-age Americans will also be forking over ever more of their income for their own health care. How much more? Well, the answer shown in the bottom curve is enough more so that the amount of income left over for spending on everything but taxes and health care, it would grow only a tiny bit, would reach a peak in the year 2025. And if those trends continue, it would decline by about 30% over the succeeding 25 years. Turning points in about 20 years and then all other consumption, all other spending, other than for taxes and health care, would drop. Well, I don't know if I can be plainer than this. We don't have an entitlement crisis. We don't have a social security crisis. We have a general health care financing problem that affects us all. Yes, Medicare and Medicaid are part of the problem, but they're only part of the problem. If we treat this challenge as just a government fiscal predicament as an entitlement problem or even more narrowly and misleadingly as a baby boomer problem, we're not going to be able to deal with the real problem confronting us. Why? Because I don't believe that we will or that we should accept a social pact that says, well, you enjoyed one standard of living before you were elderly or disabled or poor now. Tough luck, bucko. That is the implication of slashing the so-called entitlement spending and regarding the rest of the health care system as somehow detached and distinct. The other moral of the story is that it's necessary to make sure that everyone is insured so that we can tackle the problem of squeezing out care that provides no benefits at all or that provides small benefits that are worth less than what they cost. I want to emphasize universal coverage can be achieved in very different ways. We could mandate that individuals buy insurance in the private insurance market and provide subsidies to those with low incomes so that they could afford it. That's the conservative approach. We could institute a single national system that provided health care to all paid for largely by taxes and that's the liberal approach. We might even authorize states to try different approaches to see what works best or even whether different approaches might work well in different parts of the nation. I don't want to argue today which of those approaches is best. My point is we have to tackle the health system whole. Whichever approach we take will, yes, require more taxes. The conservative approach will require taxes to pay subsidies to the poor. The liberal approach will require taxes to pay for publicly funded health care and the state-by-state approach will require taxes to help states bear the costs of covering the uninsured whichever way they choose. But whichever way we approach this problem, we need to recognize that the health care system as a whole is precisely that, a unity. And not believe that we can solve this problem simply by drastically reducing the access to care, the generosity of benefits, for those in our society who are most vulnerable, the aging, the disabled, and the poor. Thank you very much.