By David M. Cutler
The Wall Street Journal
March 9, 2010
Many people are worried that the health-care reform proposed by President Obama and congressional Democrats will fail to bend the “cost curve.” A number of commentators are urging no votes because of this, and Republicans have asked the president to start health reform over, focusing squarely on the issue of cost reduction.
These calls overlook the actual legislation. Over the past year of debate, 10 broad ideas have been offered for bending the health-care cost curve. The Democrats’ proposed legislation incorporates virtually every one of them. Here they are:
• Form insurance exchanges. These would help curb underwriting and inefficient marketing practices that raise costs in the small-group and individual insurance markets. This is addressed in all the House and Senate bills, and the president’s proposal. Grade: Full credit.
• Reduce excessive prices, including those of supplemental plans enrolling Medicare beneficiaries. The president’s proposal reduces these Medicare Advantage overpayments and others to different providers, even in the face of Republican claims that reducing such overpayments is tantamount to rationing care for seniors. Grade: Full credit.
• Moving to value-based payment in Medicare. Both Democrats and Republicans have called for moving from a system where volume drives reimbursement to one where value drives reimbursement. The president’s proposal includes virtually every idea offered for doing this. Grade: Full credit.
• Tax generous insurance plans. Health-insurance benefits are excluded from income taxation, providing incentives for excessively generous insurance. Many economists have proposed capping the tax exclusion to reduce these incentives. The president’s proposal taxes some of the most generous policies, though it has deferred the date by which these taxes take effect. Grade: Partial credit.
• Empower an independent Medicare advisory board. Interest-group politics intrudes too deeply within the mechanics of Medicare policy, raising program costs and hindering efforts to improve care. Despite powerful opposition, the president proposes this independent board and a process for fast-tracking such recommendations through Congress. Grade: Full credit.
• Combat Medicare fraud and abuse. The administration has started an active task force to combat these problems. Other ideas to reduce fraud and abuse were presented at the recent health-care summit, and were incorporated in the president’s proposal. Grade: Full credit.
• Malpractice reform. Defensive medicine is a small but important driver of medical spending. The reform proposal makes some headway, encouraging states to experiment with alternative mechanisms to reduce malpractice burdens. More could be done—for example, specialized malpractice courts and a safe harbor for physicians practicing evidence-based medicine—but the president’s proposal makes a start. Grade: Partial credit.
• Invest in information technology. Many studies suggest savings in the tens of billions of dollars from IT investment. The stimulus bill passed a year ago contains funds to wire the medical system over the next few years, and the administration is supplementing this with significant funds to analyze the comparative effectiveness of different treatments—even in the face of “death panel” claims. Grade: Full credit.
• Prevention. The president’s proposal includes significant public-health investments, provides new incentives for physicians to focus on preventive and chronic care, and opens Medicare to finding new ways of supporting prevention. The only area of weakness is the lack of a junk food tax or tax on sugar sweetened beverages. Grade: Partial credit.
• Create a public option. A public insurance option would provide competition for insurers in areas that are nearly a monopoly and provide a path for reforms in Medicare to expand readily in the under-65 population. The public option was eliminated because of Republican opposition, however. Grade: No credit.
So reform gets full credit on six of the 10 ideas, partial credit on three others, and no credit on one. The area of no credit (a public option) is because Republicans opposed the idea. One area receives only partial credit because of Democratic opposition (malpractice reform) and two other areas reflect general hesitancy to increase taxes (taxing Cadillac plans and taxing drivers of obesity).
Why is reform viewed so negatively? In part, it may reflect the perfect being the enemy of the good. If the only passing grade is 10 out of 10, then reform clearly fails. But given where the Republican Party is on a public option, no reform will get a passing grade. If both parties were willing to raise taxes and Republicans negotiated malpractice reform for their overall support, we could probably get a nine out of 10.
Reform is also viewed negatively because official scorekeepers do not believe anything on this list other than reducing prices will save much money. The Congressional Budget Office has consistently estimated that policies built around changing incentives and thus encouraging more efficient care will not have any effect on cost trends. My own calculations, mirrored by other observers and a host of business and provider groups, suggest that the reforms will save nearly $600 billion over the next decade and even more in the subsequent one.
Of course, no one knows precisely how much medical spending increases will moderate. But one cannot doubt the commitment to try. What is on the table is the most significant action on medical spending ever proposed in the United States. Should we really walk away from that?
Mr. Cutler is a professor of economics at Harvard University. He was senior health-care adviser to the Obama presidential campaign.
http://online.wsj.com/article/SB10001424052748703936804575108080266520738.html
Comment:
By Don McCanne, MD
There is an important debate taking place as to whether or not the Obama proposal, based on the Senate bill, will control health care costs. President Obama and his supporters contend that every idea on controlling costs is in this bill. The private insurance industry contends that premiums will continue to increase at unsustainable levels because this measure does very little to control rising costs. Who is right?
Harvard economics professor David Cutler served as a health care adviser to the Obama presidential campaign and is well situated to present the arguments in support of the position that the Obama proposal will “bend the cost curve,” slowing the rise in health care costs. Let’s look at the arguments that he presents in this WSJ article.
* Form insurance exchanges.
Private insurance plans to be offered through the exchanges will have higher premiums than plans currently in the individual market because the increased costs of the required benefits will more than offset any administrative efficiencies of these plans. Since the actuarial value of the exchange plans will be lower than the average of today’s employer-sponsored group plans, patients will have to bear a significant portion of the costs. The exchanges themselves create additional administrative costs which will reduce the savings from administrative efficiencies.
Although the administrative waste in our current fragmented financing system is profound, reform that would recover much of this waste was rejected before the process began. If there is any net savings at all from the exchanges, it will not qualify as even a footnote in the annual report on our national health expenditures (NHE).
* Reduce excessive prices, including th
ose of supplemental plans enrolling Medicare beneficiaries.
Studies have shown that one of the largest and most important contributors to our health care spending is the very high health care prices in the United States, when compared to other nations. In other nations, the government plays a significant role in pricing, but our legislators rejected any type of administered pricing that was not already in force in our public programs, instead leaving it to market competition of private plans. The fact that we have the highest prices is proof that the private plans have not been capable of controlling prices.
The proposal reduces the overpayments to private plans, but leaves in place their administrative excesses. Spending in Medicare actually could be reduced by eliminating both the Medicare Advantage plans and the Medigap plans. Medigap provides the very worst value of private health plans. It would be far less expensive to roll the extra benefits that are of value in these plans into the traditional Medicare program. That would enable modest savings while providing Medicare beneficiaries with a better program.
* Moving to value-based payment in Medicare.
Cutler says that the president’s proposal “includes virtually every idea offered” for “moving from a system where volume drives reimbursement to one where value drives reimbursement.” Nice rhetoric, but the plethora of health policy literature provides almost nothing on how to do this. Current measurements of value in health care are very primitive and would have very little impact on our total health care delivery system.
Much of health care is not particularly productive even if provided in large volumes, but it is exceedingly difficult to slash the volume without slashing the truly beneficial services blended into that volume. We should certainly make greater strides in trying to sort out beneficial and non-beneficial services, but that is not dependent on the passage of this bill.
Many of the financing experiments in the proposal are limited to Medicare and wouldn’t even apply to the remaining 85 percent of our population. When we do find out how to obtain greater value in health care, we need to apply those principles to our entire population and not simply to Medicare beneficiaries. To do that would require an improved Medicare-like financing structure that includes everyone, because the fragmented market of private insurance plans could never pull their act together.
* Tax generous insurance plans.
Employer-sponsored plans formerly provided an actuarial value of about 89 percent, leaving 11 percent of the costs as the responsibility of the employee. In an attempt to control premium increases – not cost increases – more of the costs have been shifted to employees, reducing the average actuarial value to about 80 percent. The exchanges will be offering plans at a 70 percent actuarial value.
In one of the great deceptions of the reform process, plans that actually protect patients from financial hardship are now called “generous insurance plans” which allegedly need to be taxed. The intent of the tax is to ratchet down the actuarial value of employer-sponsored plans to control the premiums, while reducing spending by increasing financial barriers through greater patient cost sharing. We need policies to help get patients the care that they need, not hinder access.
* Empower an independent Medicare advisory board.
As discussed in a recent Quote of the Day, we do need a greater government role in improving our health care financing, which can help to transform health care delivery into a high performance system, whether that is through an Independent Medicare Advisory Board – an empowered MedPAC – or some other appropriate institution. Again, this should not be a role limited to 15 percent of our population. To be effective it should be applied to an improved Medicare that covers everyone. The Obama plan, since it perpetuates our fragmented system, would not enable such an institution to provide the impact that it should have.
* Combat Medicare fraud and abuse.
Since the beginning of Medicare everyone knows that fraud and abuse are problems because of all of the reports of the government cracking down on these criminal activities. This legislation is not essential to perpetuate the government oversight that we need to reduce these losses. What we need instead is an expansion of this oversight to our entire health system and not limited to the government programs. The federal government formerly partnered with the private insurers in fraud prosecution, but it doesn’t anymore since the private insurers contributed very little but merely wanted a cut of the recovery. Can you imagine the insurers ever risking offending their network panels by conducting fraud investigations against them?
* Malpractice reform.
Our malpractice tort system fails to provide most individuals who experience medical injury with any compensation. It isn’t working and needs to be reformed. If we do provide compensation for all victims of medical injury, costs will increase. Although that is appropriate, we can’t pretend that costs will decrease merely because of the enactment of this legislation.
* Invest in information technology.
Electronic medical records and integrated information technology systems are expensive. Most studies indicate that they increase costs. One study demonstrated that they have enabled upcoding, resulting in higher prices for the same services. Well designed systems may provide some benefit, but don’t look for cost savings, and certainly don’t think that this legislation provides the key to unlock the IT world.
* Prevention.
Prevention is very important, but overall it does not save money, and it is certainly not dependent on the enactment of this legislation.
* Create a public option.
There is no public option in the Obama plan. Even if there were, it would not reduce the waste in our dysfunctional health care system, just as Medicare has been largely unable to do. In our fragmented system Medicare is merely an additional player, adding to the complexities and costs of health care financing and health care delivery. As a single entity covering everyone, an improved Medicare would provide the efficiencies that would recover hundreds of billions of dollars that could be used to fully cover the uninsured and underinsured.
Conclusion
The confusion in costs and “bending the curve” has resulted from the fact that the discussion primarily has been limited to consultations with the Congressional Budget Office on the federal budget and not on our national health expenditures. The very modest bending of the curve has related to federal budget projections. Much of that was accomplished by placing a greater financial burden on the people, especially moderate and upper-moderate income individuals and families. We need to fix the problem of our escalating total costs, and then adjust the federal budget to match the solution.
Now do like David Cutler and go back and score these “ten broad ideas that have been offered for bending the health-care cost curve.” Negative scores are not only permitted but should be used when appropriate.
Your final score? (Ouch!)