Debating Cost-Control

Dec 03, 2009

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In recent days, a growing chorus of voices has expressed alarm that the health care legislation emerging in Congress does not come close to “bending the cost-curve” as President Obama has promised it would. David Broder and Robert Samuelson in the Washington Post, David Leonhardt in the New York Times and Harvard Medical School Dean Jeffrey Flier on the editorial page of the Wall Street Journal have all, to varying degrees, said the health care plans being developed by Congressional Democrats would vastly expand governmental health care commitments without fundamentally altering the arrangements that today push costs rapidly upward every year.

Now, top officials in the Obama administration are pushing back hard with their own “narrative” on the cost-containment potential of the health care bills in Congress. Specifically, White House Budget Director Peter Orszag and Director of the Office for Health Reform Nancy-Ann DeParle contend in a series of recent interviews that the health care plan introduced by Senate Majority Leader Harry Reid is more than sufficient to meet the “bend the curve” test. Their views have been echoed by MIT Economist Jonathan Gruber, who has been arguing that the Reid bill contains every conceivable idea to slow the pace of rising costs. And Ronald Brownstein of The Atlantic has hailed Senator Reid’s legislation as a “milestone” in the health reform journey because of its superior cost-control provisions.

To get a sense of who’s right here, some perspective is necessary. Both the House-passed bill and Senator Reid’s proposal would put in place the most costly entitlement expansion in more than four decades. They would add millions of households to the Medicaid program and promise all Americans between about 100 and 400 percent of the federal poverty line – some 127 million people under the age of 65 in 2008 -- that their health insurance premiums will not exceed a certain percentage of their incomes. They would also extend subsidies to small businesses offering insurance coverage. The Congressional Budget Office expects the combined federal cost of these new commitments to reach about $200 billion by 2019 and to increase eight percent annually every year thereafter.

So the bar for what constitutes credible “bending of the curve” potential should be set very high indeed. As currently written, the additional spending for coverage expansion provided in the House and Senate plans is absolutely certain to occur, putting tremendous additional pressure on the federal budget at a time when the federal government is already adding to the nation’s debt burden at an unprecedented pace. Are the provisions aimed at slowing the pace of rising costs similarly certain and robust?

Most analysts agree that what’s needed to address the cost challenge is real change in the way hospitals and doctors are organized and deliver care to patients. There’s abundant evidence that health care is needlessly expensive in many settings and regions. But getting at the inefficiency is much easier said than done. Indeed, the crucial question in the entire reform debate has always been this: what process has the best chance of bringing about continual improvement in the efficiency and quality of patient care?

The Obama administration believes a governmental process is the answer. There are a series of provisions in the Reid legislation which try to use the leverage of Medicare payment policy to force doctors and hospitals to change their practices. For instance, there are penalties for hospitals that have too many of their patients readmitted for care, and for physicians who are outliers in terms of how many services they render for certain diagnoses.

Other reforms are introduced as pilot programs that might be expanded later. In addition, the Reid bill picks up on the idea pushed by the administration to set up an independent Medicare commission which would make ongoing recommendations for cost-cutting in the program through provider payment reforms. Congress could not reject the commission’s proposals without substituting ideas that achieve similar levels of savings, but the commission couldn’t make any recommendations that alter any aspect of the program other than payment policies for providers of services.

Some of these reforms might work and marginally improve matters from the status quo. But would they fundamentally change Medicare, much less the rest of American health care? No, they wouldn’t.

CBO assigns relatively small savings to the Medicare commission, and even smaller amounts to the other payment ideas that are called “delivery system reform.” In 10 years time, even if all of ideas are fully implemented, the Medicare program would look and operate largely as it does today, which is to say as a fee-for-service insurance model that rewards volume and fragmentation, not integration. Indeed, under the Reid bill, fee-for-service Medicare would be even more dominant than it is now, as millions of seniors now in Medicare Advantage plans would migrate back into the traditional program.

The Reid bill would achieve significant Medicare savings in the coming years, but not with innovative payment policies or more efficient health care delivery. The savings would come from across-the-board payment rate cuts, applied without regard to any metric of quality, which is instructive.

Whenever Congress is in a budget crunch, the preferred route to savings is indiscriminate provider payment reductions. Politicians don’t want to be forced to pick winners and losers among their hospitals and physician groups. It is much easier to pass equal cuts for all licensed providers, no matter how well or badly they treat their patients. That’s been the history of Medicare and Medicaid for forty years, and there’s no reason to expect cost-control driven by the federal government will ever be any different.

The alternative, of course, is a decentralized process, where cost-conscious consumers choose from insurers and delivery systems that are competing on price and quality. The government can and should play an important oversight role in such a reformed system, much as it does in Medicare’s prescription drug benefit.

But the difficult organizational changes and innovations necessary to provide better care at less cost would come from those delivering the services, not Congress, or the Department of Health and Human Services, or even a commission. The Reid bill nods in a market-based direction with a new tax on high-cost insurance plans. But it would change incentives for a relatively small segment of the market, and certainly would not be enough to counter the pressures for rising costs built into today’s health entitlement programs and tax policies.

Of course, it shouldn’t be all that surprising that Congress is more interested in entitlement expansion than difficult and lasting reform. That’s why we are in our current budgetary predicament. And, despite protests to the contrary, the bills under development are more of the same. They are likely to make our health care cost problems much worse.

James C. Capretta is a Fellow at the Ethics and Public Policy Center. He served as an associate director at the White House Office of Management and Budget from 2001 to 2004.