A Systemic Approach to Containing Health Care Spending

By Ezekiel Emanuel, M.D., Ph.D., Neera Tanden, J.D., Stuart Altman, Ph.D., Scott Armstrong, M.B.A., Donald Berwick, M.D., M.P.P., François de Brantes, M.B.A., Maura Calsyn, J.D., Michael Chernew, Ph.D., John Colmers, M.P.H., David Cutler, Ph.D., Tom Daschle, B.A., Paul Egerman, B.S., Bob Kocher, M.D., Arnold Milstein, M.D., M.P.H., Emily Oshima Lee, M.A., John D. Podesta, J.D., Uwe Reinhardt, Ph.D., Meredith Rosenthal, Ph.D., Joshua Sharfstein, M.D., Stephen Shortell, Ph.D., M.P.H., M.B.A., Andrew Stern, B.A., Peter R. Orszag, Ph.D., and Topher Spiro, J.D.
The New England Journal of Medicine, August 1, 2012

Although the Affordable Care Act (ACA) will significantly reduce Medicare spending over the next decade, health costs remain a major challenge. To effectively contain costs, solutions must target the drivers of both the level of costs and the growth in costs — and both medical prices and the quantity of services play important roles. Solutions will need to reduce costs not only for public payers but also for private payers. Finally, solutions will need to root out administrative costs that do not improve health status and outcomes.

The Center for American Progress convened leading health-policy experts with diverse perspectives to develop bold and innovative solutions that meet these criteria. Although these solutions are not intended to be exhaustive, they have the greatest probability of both being implemented and successfully controlling health costs. The following solutions could be implemented separately or, more effectively, integrated as a package.













These are the types of large-scale solutions that are necessary to contain health costs. Although many in the health industry perceive that it is not in their interest to contain national health spending, it is a fact that what cannot continue will not continue.

Americans therefore face a choice. Payers could simply shift costs to individuals. As those costs become more and more unaffordable, people would severely restrict their consumption of health care and might forgo necessary care. Alternatively, governments could impose deep cuts in provider payments unrelated to value or the quality of care. Without an alternative innovative strategy, these options will become the default. They are not in the long-term interests of patients, employers, states, insurers, or providers.

We present alternative strategies to contain national health spending that allow Americans to access necessary care. Our approach addresses the system as a whole, not just Medicare and Medicaid. It is the path to rising wages, a sustainable federal budget, and the health system that all Americans deserve.



Bending the Cost Curve through Market-Based Incentives

By Joseph R. Antos, Ph.D., Mark V. Pauly, Ph.D., and Gail R. Wilensky, Ph.D.
The New England Journal of Medicine, August 1, 2012

In a market-based approach, open-ended subsidies to beneficiaries and price-controlled reimbursements to providers should be replaced with fixed dollar subsidies — effectively shifting Medicare from a defined-benefit to a defined-contribution approach. The business model would shift from one that is driven by the volume and intensity of services to one that rewards cost-effective and efficient care.

Under this approach, Medicare would adopt a premium-support model, which provides a fixed subsidy for each beneficiary’s purchase of insurance. Health plans, including traditional Medicare, would compete with each other on equal terms. Beneficiaries could purchase more expensive coverage if they felt the extra cost was worth it to them.

Similarly, the principle of defined contribution should be applied to the currently unlimited tax subsidy for employer-sponsored insurance. Employer contributions to health insurance are not counted as part of the employees’ taxable income. That subsidy encourages the purchase of health insurance, but it also provides an incentive to increase the amount of coverage, which helps fuel the growth of private health spending. Converting the current exclusion to a predetermined refundable credit would be a reform similar to premium support for Medicare. A less dramatic compromise would set a dollar limit on the tax exclusion that is indexed to grow more slowly than the trend in medical spending.

Well-functioning competitive markets are required for these types of decentralized approaches to work effectively. Objective, understandable information needs to be available so that consumers can make informed decisions about their choice of health plans. The plans need to be able to adjust their benefit offerings to respond to changes in consumer demand. This could be facilitated by public and private health insurance exchanges without limiting what plans can offer and what consumers may buy.

A defined-contribution approach to subsidies would help resolve the federal budget problem without limiting the way in which consumers are able to spend their own funds. Reliance on competitive markets rather than on regulatory controls provides strong incentives for more efficient delivery of the health care services that consumers truly value.


Policies that attempt to reengineer the health system without changing the underlying financial incentives that drive health spending will ultimately fail. The adoption of a defined-benefit approach to federal health subsidies can improve the understanding of both consumers and providers that resources are limited and choices must be made, but those decisions should not be dictated from Washington through regulatory controls. A market-based approach that relies on competition and financial incentives can promote efficient health care delivery, reduce the unit cost of care, and thus help resolve the federal budget problem without placing limits on how individuals choose to spend their own money. Consumers will decide for themselves whether more costly coverage buys them access to better care and more effective medical technology, and those decisions will ultimately determine the pace of health spending growth. Budget-driven fiscal targets that are inconsistent with public wishes and the capacity of the health system to deliver are not sustainable.


With some fanfare today the recommendations on containing health care spending, advanced by a group of experts convened by the Center for American Progress (CAP), are being presented at a forum for the media at CAP headquarters in Washington, D.C. The recommendations of these experts are being released in a NEJM article, along with another article representing a different approach to cost containment by authors known for their support of market solutions to health care cost escalation.

The two supposedly contrasting views are being reported as representing the conservative Republican position on the one hand, and the progressive Democratic views on the other. This is not quite true since the Center for American Progress is a centrist organization and does not represent progressive/liberal views, even though it is more aligned with the Democratic Party. The point here is that the policy packages should be evaluated based on their soundness, and not on their alleged political leaning.

The proposal of Joseph Antos and colleagues can be summarized as a conversion of our health care financing to a defined-contribution approach, both for Medicare and for private health plans. It is based on the terribly simplistic concept that patients should select their insurance products and their health care based on what they have to pay out of their own funds. Supposedly this drives quality up and prices down. In reality, this erects greater financial barriers to health care, compounding physical suffering and financial hardship. It is astounding that these ideas have not yet been dumped on the trash heap of health policy failures.

The proposals by Ezekiel Emanuel and his colleagues are more of a laundry list of ideas intended to slow the increase in health care costs. Each one needs to be addressed separately, which we can’t do adequately in this message. Some of the ideas have been around for awhile and show little promise of having much impact on spending. Some are similar to a few of the measures in the Affordable Care Act which also provide little promise of containing costs without significantly restricting access because of issues of affordability or failure to adequately finance the health care infrastructure. Some are terrible ideas such as tiering of insurance products, or depending on patient-consumer price shopping. Protecting against malpractice claims by use of safe harbors depends on the fantasy that such harbors can be precisely defined when the variables in real-life clinical situations are too great. Competitive bidding can be disruptive to those that lose out in the bidding process, impairing access as losers leave the market.

Some of the better ideas such as reduction of administrative waste and global budgeting are commendable except for the fact that they are not recommending the fundamental repair of our health care financing infrastructure that would be required for these concepts to have any significant impact on future health care spending. Our fragmented, dysfunctional system is incapable of adapting such concepts in a broad manner.

CAP was part of the process that excluded single payer (improved Medicare for all) advocates during the reform process. Viewing the list of the CAP authors (above), it is clear that single payer advocates are still excluded. Many of the authors are fully aware of the superiority of the single payer model, but have bought into the concept that it is not politically feasible, whereas supporting our private insurance industry is. Some of the authors also seem to have neoliberal, pro-market views.

In sum, this effort to provoke a renewed interest in seriously addressing our American exceptionalism in our misdirected and wasteful spending in health care is a major disappointment. Other nations have been far more effective in achieving greater value in health care spending, and we know how they do it. It is a terrible shame that we are once again allowing committee-think to lead us down the wrong path.