Putting the Cost of the Democrats’ Plans for Reform in Context

Include the tab for expanding Medicaid, and the proposal for health care reform that the Senate Health, Education, Labor, and Pensions (HELP) Committee approved last week will probably cost $1.6 trillion, report the Urban Institute’s Linda J. Blumberg and John J. Holahan in a brief titled: “Beyond the $1.6 trillion sticker shock.”

This “is clearly a considerable sum,” acknowledge the researchers, who were funded by the Robert Wood Johnson Foundation. They note that when the Congressional Budget Office (CBO) announced that it guessed the Senate Committee’s health plan could cost that much, “the estimate caused the committee to stop its deliberations,” and set a new goal: “a plan that would cost closer to $1.0 trillion.”

But perhaps Finance Committee Chairman Senator Max Baucus didn’t need to panic. As Blumberg and Holahan point out: “The $1.6 trillion is a 10-year number,” measuring how much reform is expected to cost the nation between 2010 and 2019. Meanwhile, over that same span the Congressional Budget Office (CBO) projects that total GDP will “equal $187 trillion.” 

Thus, they observe, “the estimated gross costs of health reform are less than 1 percent of the GDP over ten years.”

Naysayers Ignore the Savings Built Into Health-Care Reform

Moreover, the $1.6 trillion is a total or gross estimate which does not take into account how the planned reforms would automatically reduce other government spending. Nor does it factor in how much individuals will save if they no longer have to purchase insurance in the non-group market where policies are exorbitantly expensive. The price tag also does not reflect the savings that would flow from structural changes in the health care system—changes that are spelled out in the House Democrats’ plan. Finally, while $1.6 trillion is a nice chunk of change, that number should be compared to what it will cost the nation if we don’t have health care reform.

Begin with government savings. “Multiple threads of federal and state spending currently devoted to financing uncompensated care could be cut substantially, if not eliminated,” Blumberg and Holahan observe. “Such offsets will likely reduce the net new spending attributable to comprehensive reform to about $1.2 trillion,” they add, referring to the numbers in “Covering the Uninsured in 2008: Current Costs, Sources of Payment and Incremental Costs,” an article published in Health Affairs last year.

Skeptics' estimates of cost also ignore how much employers and individuals would save under reform. Policies in the non-group market are so pricey in part because the administrative costs of selling insurance to customers “one enrollee at a time” are so high. Self-employed workers and others who are currently buying individual coverage will be able to find significantly less expensive policies in the Insurance Exchange that is part of the Democrat’s plan. Many smaller employers also will benefit from the broad-based risk-pooling in the Exchange.

We also should compare the cost of reform to what would happen if we don’t re-structure the health care system. If the nation’s health care bill continues to grow at the current rate, “from 2010 to 2019 total health care expenditures, public and private, will total $33.0 trillion,” the Urban Institute’s researchers report.

“The $1.2 trillion that we estimate in net new spending will therefore increase expected health costs by only 3.5 percent. The problem that the nation faces is not the small increment necessary to expand coverage to the uninsured, but the high and growing baseline costs of the system.”  

As I have explained in past posts, health-care inflation, driven in large part by over-use of advanced medical technologies, is the real threat to the economy. On this point, I’m in good company:  Dartmouth researchers Drs. Jack Wennberg, Elliott Fisher and Jim Weinstein, White House Budget director Peter Orszag, the Institute for Healthcare Improvement’s Dr. Don Berwick, and surgeon/writer Dr. Atul Gawande all  agree: tests and treatments that provide little or no benefit to the patient—while exposing him or her to needless risks—are making healthcare unaffordable.

Blumberg and Holahan argue that the only way to address soaring health care inflation is “through payment and delivery system reforms.”  Reform must change how health care is delivered, how we pay for it, and what we are paying for.

The good news is that these are precisely the cost-saving provisions embedded in the bill that three House committees approved last week. Here I must disagree with CBO Director Doug Elmendorf’s assertion that the health care reform plans put forward by Democrats in the Senate and the House do not provide “the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount.”

I am frankly baffled by Elmendorf’s comments. He seems to ignore much of the detail in the 1018 page House plan. Here are just a few examples of how the bill would cut spending:

    It calls for a demonstration program to evaluate the benefits of “shared decision-making” by letting Medicare pay for the time doctors and decision-making coaches spend consulting with their patients about various treatment options. 

Research shows that when patients are given the opportunity to weigh potential risks and benefits, roughly 20 percent decide against elective surgery, treatments and tests.  The goal of “shared decision-making” is not to save dollars —the aim is to let the patient make an “informed choice” rather than passively giving “informed consent”—and later regretting the decision. 

But the savings are certainly welcome. And it’s worth noting that  patients who engage in shared-decision-making are much less likely to experience regrets, and much less likely to sue. This, too, will help trim the nation’s healthcare bill—particularly if other states follow the state of Washington’s example and provide legal safe harbor for doctors who follow the shared decision-making protocol.

    It encourages primary care—which is almost always less expensive than specialists’ care.  The proposal would raise Medicare payments to primary care physicians by at least 5 percent, hiking reimbursements by 10 percent in areas where there is a serious shortage of primary care doctors. In addition, the plan offers bonuses for doctors who create medical homes and manage chronic diseases as well as loan-forgiveness for medical students who choose primary care. The public plan would follow Medicare’s example. Over ten years, this could lead to a significant increase in the supply of primary care physicians.

 One reason that European medicine is more affordable than U.S. care is that patients receive far more primary care, and see many fewer specialists. But in the U.S., thanks in large part to low reimbursements, we have too few family practitioners, and so patients wind up seeing a specialist—or land in an ER—because they cannot secure an appointment with a primary care doctor.

In addition, under the House bill, private insurers will no longer be allowed to charge co-pays for preventive care. Research shows that even small co-pays can cause low-income patients to put off needed care. Over the very long term, this is likely to mean that poorer Americans will live longer, and yes, that will increase total health care costs. But we can hardly object to changes that reduce premature deaths. And over the intermediate term, encouraging patients to go for preventive care means that they will be healthier, and less likely to need hospital care, which should help trim the nation’s healthcare bill..

    It recommends that all manufacturers of drugs and devices be required to report their financial relationships with physicians, pharmacies, hospitals, and other organizations. The Medicare Payment Advisory Commission (MedPac) has concluded that such relationships create conflicts, which lead to increased spending and suboptimal patient care. (In one notorious case, device-makers were paying kick-backs to surgeons to use their most expensive products—whether or not those devices were best-suited for that particular patient.)

    It changes how we pay for care by rewarding physicians who join “accountable care organizations” where they collaborate with hospitals and work as a team to provide more efficient higher quality care at a lower cost over a sustained period of time. As Dr. Atual Gawande points out in his June 1 New Yorker piece, experience demonstrates that ACO’s consistently offer better value for our healthcare dollars.

    It requires that all private insurers pay out a certain (as yet unspecified) percentage of their premiums in reimbursements. Those who do not meet the target will have to give rebates to enrollees. This implicitly puts a cap on insurers’ profits, and encourage
s greater administrative efficiency.
    It gives both Medicare and the public sector plan the power to reset reimbursements based on how much the treatment benefits the patient. On this point, perhaps CBO director Elmendorf should re-read the  CBO’s December 2008 report,  Key Issues in Analyzing Major Health Proposals :

“Rather than denying coverage,” for less effective treatments, Medicare could “tie its payments  to providers” to effectiveness the CBO suggests,  lowering fees for those treatments that provide less benefit. Meanwhile, patients could be required to pay for at least a portion of the additional costs of clinically less effective treatments. Ultimately, “the potential impact on Medicare spending could be substantial,”  the report adds, “If Medicare “link[ed] both new and existing evidence to payment rules or cost-sharing requirements.”

Orszag Responds to Elmendorf

When White House Budget direct Peter Orszag responded to Elmendorf’s comments Friday, he elaborated on how White House reformers plan to “bend the health care cost growth curve down in years to come” by “empowering an independent, non-partisan body of doctors and other health experts to make  recommendation about Medicare payment rates and other reforms.” 

In a letter to Congressional leaders, Orzag outlined the administration’s support for “an Independent Medicare Advisory Commission (as well as Senator Rockefeller’s similar proposal to accomplish this [goal] through the existing MedPAC).”

Orszag explained that the “Independent Medicare Advisory Council (IMAC) would be an independent, non-partisan body of doctors and other health experts, appointed by the President, confirmed by the Senate, and serving for five-year terms. The IMAC would issue recommendations as long as their implementation would not result in any increase in the aggregate level of net expenditures under the Medicare program; and either would improve the quality of medical care received by the program’s beneficiaries or improve Medicare’s efficiency.”

Political meddling would be kept to a minimum: “As with the military base-closing commissions, this proposed legislation would require the President to approve or disapprove each set of the IMAC’s recommendations as a package. If the President accepts the IMAC’s recommendations, Congress would then have 30 days to intervene with a joint resolution before the Secretary of Health and Human Services is authorized to implement them.

“This approach would free Congress from the burdens of dealing with highly technical issues such as Medicare reimbursement rates while rightly giving them . . .  a say in the matter."                                   

Stepping Back, and Understanding Reform As a Process

Ultimately, both the Senate bill and the House bill are works-in-progress that, in the end, will have to be reconciled. But the idea of creating an independent panel of medical experts who could implement changes in how Medicare pays for care, steering physicians and patients toward the most effective treatments dovetails nicely with recommendations in the House bill.  Over ten years, structural reforms will began to pay for the $1.6 trillion cost of healthcare reform—and they will keep on paying in the years that follow.

In the end, it is important to understand that health care reform will be a process, not an event that takes place this year or next.

7 thoughts on “Putting the Cost of the Democrats’ Plans for Reform in Context

  1. The fact that much or all of the $1.6 trillion, especially if MedPAC or a similar rate-paying commission is involved, is a transfer of payors rather than just an increase in how much is being paid seems to have been lost in most discussions of reform. Thanks for resurecting it.

  2. Thanks for reporting this. It’s very helpful.
    I watched ABC Evening News tonight. George and Charlie reported Obama’s approval ratings. They are not doing anything to educate the public about this proposed legislation. PBS News Hour wasn’t much better.

  3. The more I read about the proposals coming out of Congress and the Obama administration, the more I wonder if Americans have lost all vestiges of fiscal responsibility and common sense. We are talking about spending 1.6 trillion over the next ten years, but Blumberg and Holahan tell us not to worry because, during that 10-yr period, “the Congressional Budget Office (CBO) projects that total GDP will equal $187 trillion” so “the estimated gross costs of health reform are less than 1 percent of the GDP over ten years.”
    Should I applaud?
    Single payer would SAVE us 400 billion per year (Lewin goup), that’s 4 trillion over the decade.
    Maggie, you chastise Mr. Elmendorf of the CBO because he won’t score proposed reforms that are, at this point unmeasurable. Medical IT will be a cost, not a savings for a considerable period. How does one measure “shared decision-making,” or effective (as opposed to ineffective) medical treatments–other than by calculating mortality rates? Did the stent fail because a physician made an error, or because the patient brought with him/her weakened blood vessels, or a frail constitution? Did the patient’s recuperation go well because there was help and support at home, and he could afford the follow-up meds? Or did it go badly because of a lack of same?
    I’m a bit fed up with those eager to blame Medicare and physicians for our skyrocketing costs.
    Of course the use of Medicare resources needs to be monitored, and the overuse of treatments curtailed. Data collecting and transparency can reveal abuses–as we learned from Dr. Gawande and the Dartmouth researchers (not from HHS).
    You seem to buy the argument that individuals will save “if they no longer have to purchase insurance in the non-group market where policies are exorbitantly expensive.” I assume you are referring to the public option. If that group plan is designed to compete on a level playing field with private plans, it will still be unaffordable for low- and moderate-income folks.
    Add more low-income people to Medicaid? Gimme a break! Our state governments are crumbling under Medicaid. Benefits are being cut especially for mental health and the enrollment process is humiliating and demeaning.
    The best suggestion coming out of DC is the medPAC, an apolitical board that reminds me of Canada’s regional boards that set provider fees and reimbursement levels. They are subject to budget constraints when there is a change of provincial government, but they are free from political machinations between elections.
    Let’s get back to the key problem that needs fixing. In order to attack “the high and growing baseline costs of the system” I suggest we remove the biggest non-essential cost factor in our health care system–the private insurance industry!

  4. Harriette:
    I agree with your assessment of the extra costs for health care, compared to the GDP.
    Many economists will not do the same comparison with the accumulated national debt, which is around $11 trillion.
    Instead of saying how the accumulated debt is higher than the current GDP, they typically compare only the current year’s deficit to the current year’s GDP.
    It’s almost as if the deficits accumulated before the current year are irrelevant.
    I am confused how you seem to support Medicare in regard to skyrocketing costs, but seem to be very concerned about the governments crumbling under the costs of Medicaid.
    Are you suggesting that although both Medicare and Medicaid are single payer type programs, that Medicare is a more effective program than Medicaid?
    The single payer savings you referred to of the Lewin Group, is this supposed to be modeled after Medicare as opposed to Medicaid?
    If so, why?
    Don Levit

  5. Dan & John
    Thaks so much for understanding the issue.
    I feel that I’m not explaining it well enough- you’re certainly right people don’t seem to get it. (If you have any ideas about how to explain it, please e-mail me at mahar@tcf.org)
    John–Thank you very much for the kind words.
    I’m also frustrated when I watch these shows–which I do watch because I need to understand what the public does and doesn’t know.
    I’m also frustrated by much of the mainstream print media. There are reporters out there doing a great job, but they are the exception. (No doubt other reporters are trying to explain reform, but their editors/ publishers
    feel that their stories won’t sell newspapers–so they cut them, bury them, etc.

  6. Responding to Don Levit:
    Maybe we are all having difficulty explaining ourselves on health reform these days–including the President.
    Re the GNP, I was being sarcastic, quoting the economists Blumberg and Holahan who seemed to be telling us that the deficit caused by the proposed health care reforms was nothing to worry about–budget dust, so to speak–since the accrued coats would be “less than 1 percent of the GDP over ten years.”
    Of course, I think we could avoid a health care deficit entirely by switching to single payer which would be more than budget neutral–saving 4 T over the decade.
    As to my comments on Medicare, I agree that it needs some reform, and I note that the new emphasis seems to be on changing the way providers are paid and the mode of delivery. I approve of the IMAC (MedPAC). But Medicare serves its clients pretty darn well and holds administrative costs to about 3 percent.
    As I keep repeating–the biggest non-essential expense in our system is the insurers. We contribute to their shareholder profits and executive salaries and get no value in return. I assume you’ve seen UnitedHealth’s latest shareholder report.
    The Congressional committees are suggesting moving more people into Medicaid which is struggling as it is. The entire pool is made up of the least advantaged. The state and feds duke it out over funding and benefits are constantly being cut. You may want to call Medicaid a one-payer government-run system, but it does not operate like a true nationwide single payer pool in which the healthy and non-healthy are enrolled, and all taxpayers and voters have an interest.
    When the smart economists in France, Canada, Taiwan, etc were setting up their health care systems, no one said, “Hey, I’ve got it! Let’s put all the poor people in one pool!”
    But that’s exactly what some of our bright lights are recommending.

  7. Harriette-
    First the President of teh United States has told you that he will not sign a health reform bill that will lead to deficit apending.
    Yet you assert that reform will lead to deficit spending.
    This raises 3 possibilities:
    You believe that the president is lying.
    2) You believe that you are much smarter than Barack Obama, Peter Orszag etc–and better able to analyze the economic effects of health care reform.
    3) You know you are lying, but in your zeal to push for a now-dead idea (single-payer) you are happy to lie.
    I’m sorry if I sound harsh, but there is so much misinformaiton flying around out there in the media, I deeply object when someone tries to use this blog to spread more misinformation.
    Finally, it doesn’t matter how low Medicare’s administrative costs are.
    Its spending has been growing by 5% to 6% a year in recent years–and that is only because it has reaised co-pays and deductibles to a level that many seniors cannot afford.
    That’s a form of rationing by ability to pay. Many seniors don’t use their Medicare because they can’t afford the co-pay for outpatient surgery.
    The insurance that I get from my employer is better than Medicare–more comprehensive, lower co-pays, no lifetime cap.
    Before Medicare did this, Medicare spending was rising by 8% to 9% a year.
    Even with spendign rising 5% to 6% a year, that means that Medicare begins running out of money to pay hospital bills in about 7 or 8 years.
    Single-payer wouldn’t even begin to solve that problem.