A recent Congressional Budget Office analysis of U.S. health-care costs is sobering even for those knowledgeable about the topic and nothing short of staggering for those who aren't.

Going back to 1975, it examines Medicare, Medicaid and all other health care spending. Like a thermonuclear blast, in which a smaller atom bomb detonates a larger hydrogen one, the study shows two distinct health-care spending explosions: overall costs and, within it, government's.

The cause of health spending's steep trajectory is government's flawed role in it — a flaw that has distorted the market but one that also can be rectified.

CBO examines health-care spending from 1975 (to capture Medicare and Medicaid after a decade's operation) to 2005. Total U.S. health-care spending roughly doubled to 14.9% of GDP and reached $1.9 trillion. Of this, 54.5% was privately financed (down from 59%) and Medicare and Medicaid's share was 45.5% (up from 41%).

The historical analysis shows two clear trends: One is the movement away from individual payments via increases in both government and insurer spending, and the other is total health care spending's rapid increase relative to economic growth.

CBO defines this latter "excess cost growth" as "the increase in health-care spending for an average individual relative to the growth of per capita GDP." Both Medicare (2.4%) and Medicaid (2.2%) had average annual excess cost growth above all other health spending (2% for both private-sector and other government spending).

As dramatic as these increases are, their magnitude seems relatively manageable when compared with future spending projections. Future cost projections are so staggering that CBO was forced to make assumptions regarding cost-control legislation — despite the fact that such an assumption runs counter to historical experience.

Yet without such assumptions and based on past growth, total national health spending would equal 99% of GDP in 2082 — virtually the entire economy.

As a result, CBO assumes historic growth projections would apply to 2018 and then average annual excess cost growth would decline to 1.7% for Medicare, 0.9% for Medicaid and 0.6% for all other health spending.

CBO cautions that even this relatively limited "slowdown in excess cost growth would not be painless" to achieve, and would still mean enormous future spending. Total national health spending, which doubled over the past 30 years, would do so again by 2035 — to 31% of GDP and 49% by 2082. Medicare and Medicaid would grow from 4% today to 19% of GDP in 2082.

To understand these figures, one must first understand that government has had an enormous distorting effect on the nation's health-care market — resulting not just from what it has done, but from what it has not done as a participant and the market's largest payer.

Markets work. They work because, and to the extent, participants are allowed to pursue their roles as economic maximizers. The push and pull of economic agents centers markets over the long term. Government has influenced the market to be sure — from granting a tax deduction for employer-provided insurance to mandating covered benefits. However, the focus on government's influence in health care has largely ignored its role as a market participant.

To understand government's role one must first understand that it is only indirectly influenced by economics because of its unique ability to tax, spend and borrow. What directly influences government is politics; economics only exerts itself indirectly through the political system. Economics is therefore muted — like an echo, lag and loss greatly affect the message.

Until now, government has not performed as a market participant, and both market and patient suffer for it. The government pays without seeking to change health care's delivery. By not seeking to do so, it has prevented change. Why would a provider change its practices for a comparatively minor purchaser when its largest purchaser with a 45% share does not demand change?

The result of the federal government's simultaneous influence on the market and lack of a role in the market has been a dual insulation of the individual from cost decisions. Favorable tax treatment for employer-provided health insurance and excessive health-care cost growth have driven the individual to hedge his liability through health insurance. Government's failure to act as a market participant undercuts the market's operation.

In both cases, the health-care recipient is rarely the direct primary payer for health care (CBO's 1975-2005 analysis shows out-of-pocket payments fell to 13%, down from 31%, and private insurer payments rose to 37%, up from 25%).

This combined insulation creates a perverse situation where neither consumer nor provider has an incentive to control costs. In fact, the opposite prevails; by using more health care, both get a greater return. And in the case of Medicare and Medicaid, not even the payer (unlike private insurers) is directly influenced by economics. Such a dynamic ensured health-care cost explosion.

Health care's rapid increase threatens not only the government's finances, but the nation's. As CBO shows, past cannot be prologue, regardless of who pays. If government is to be in the health-care market, then it must be a market participant.

Sen. John Kerry and former House Speaker Newt Gingrich wrote in the Wall Street Journal Nov. 16 about the value of e-prescribing in preventing medical errors and exhorted the government to demand providers use it as a condition for participating in government programs.

That is an excellent start, as have been the Bush administration's efforts to instill competition in the 2003 Medicare drug benefit program and their new quality initiatives. But these are just the beginning of what government should require of its participating providers.

The government should likewise require use of information technology throughout health care to reduce medical errors, improve efficiency, increase the diffusion of knowledge and reduce care variability. It should provide greater transparency of payment and medical outcomes for its providers. It should also begin to pay based on performance and comparative effectiveness of practices and medications used.

By instituting metrics and standardization, such steps would be quickly adopted throughout the entire health-care market. Regardless of how one perceives it, the federal government is the market leader in purchasing health care. It must therefore act accordingly by demanding best practices for its patients and its purchases.

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