How Health Care Can Save or Sink America
Peter R. Orszag
The Case for Reform and Fiscal Sustainability
Foreign Affairs, July/
Rising health-care costs are at the core of
The problem is not limited to the federal government. Over the past 25 years, cost increases in the national
Another dimension of the problem involves the variation of health-care costs across
Even before it passed, the health act became mired in political controversy, and its future remains at risk. Opponents have filed legal challenges to the law, the
STRATEGIES FOR SAVING
Health-care costs rise for a variety of reasons, and there are essentially four conceptual approaches to constraining them. The first approach is to simply reduce payments to providers -- hospitals, doctors, and pharmaceutical companies. This blunt strategy can work, often quite well, in the short run. It is inherently limited over the medium and long term, however, unless accompanied by other measures to reduce the underlying quantity of services provided. If only
The second approach is direct rationing, whereby the government decides which services will be offered and which will not. This approach is not remotely politically viable in
The third approach -- consumer-directed health care -- could be a useful component of a cost-reduction strategy, but its benefits are often exaggerated. This approach emphasizes giving consumers more information and control over their health care and stronger financial incentives to reduce their own spending. The goal is to ensure that patients have a greater stake in keeping costs down through increased copayments and other forms of cost sharing.
If most health-care spending were driven by discretionary decisions among relatively healthy people, this approach could cut costs dramatically. But health-care costs are instead heavily concentrated among a small number of relatively sick patients. The top five percent of
Consumer-directed measures would have a substantial impact only if they lowered the cost of the care delivered in the most expensive cases. Yet some research suggests that consumer-directed health approaches could make high-cost cases even more expensive, because chronically ill patients facing copayments for their medicines would skip some doses, requiring even more expensive treatment later on. (Ironically, those who advocate consumer-directed reforms often oppose advance directives that spell out individuals' care instructions for late in life -- tools that might be more effective than any other consumer-directed change.) Since the share of total costs most affected by consumer-directed health-care incentives is relatively modest, no one should expect this approach to dramatically reduce overall health-care spending.
Nonetheless, the consumer-directed approach is at the heart of a reform of
The fourth approach, the provider-value approach, is more promising. Instead of reducing costs indirectly by having patients put pressure on doctors, the provider-value approach focuses on giving doctors more information and making changes so that payment is based on the quality of the services they provide -- not the quantity. The goal is to boost the use of evidence-based medicine and narrow the variation in treatment methods across
The potential for a better combination of cost and quality is not theoretical.
The health-care legislation aimed to address various gaps in insurance coverage, especially for those who were uninsured. And it aimed to do so without increasing (and, ideally, along with reducing) the budget deficit under conventional accounting methods -- while putting in place the infrastructure to reduce long-term growth in health-care costs through the provider-value approach. The legislation includes three basic categories of measures aimed at containing costs. The first category involves blunt reductions in
The second category of cost-containment measures involves private insurance. For example, the legislation made changes aimed at reducing unnecessary paperwork and moving toward uniform electronic standards to be used by all insurers (so that coding and other tasks are easier), which should yield an estimated savings of tens of billions of dollars a year. More important, the health bill includes an excise tax on "Cadillac" insurance plans -- plans that will cost more than
The legislation's third and arguably most important category of cost containment involves a variety of structural measures to prod
The legislation was an impressive, perhaps even improbable, achievement, passed in an era of intense political polarization. It lays the basis for future structural cost containment while expanding coverage to tens of millions of Americans. But it is not perfect. The act's shortcomings fall into two categories: those that have to do with appearance and those that have to do with substance.
The first mistake of messaging was made during the summer of 2009. At the time, the only bill in the public domain was the House legislation, which, although it expanded coverage substantially, did very little to contain structural costs. (It had plenty of reductions in reimbursements to providers, but again, that approach is ultimately not sustainable.) The administration nonetheless applauded the bill. The final legislation improved on the House bill's efforts to contain structural costs, but by the time the act was passed the next year, it was too late. The damage had been done, and it proved difficult to shift the prevailing public and elite opinion that the measure failed to reduce spending.
The second such mistake involved the CBO, which is the official body charged with assessing the budgetary and economic impact of legislation. Given the complexity of reducing health costs, the CBO has been understandably reluctant to conclude that any individual measure would be hugely effective in doing so. As a result, there is essentially no policy that the CBO will score as exerting powerful downward pressure on aggregate health-care costs. (It is willing to score some policies as reducing federal health spending substantially, but mostly because they shift costs to other parts of the health-care system.)
The biggest substantive shortcoming of the legislation involves tort reform. The academic literature generally concludes that medical liability laws do little to raise costs, although some recent studies suggest modestly larger effects. The literature also suggests that variation in the medical malpractice laws across
The traditional approach to tort reform involves imposing some limit on damages. The problem with such an approach, however, is that it does nothing about the customary-practice problem. A far better strategy would be to provide a safe harbor for doctors who follow evidence-based guidelines. Under this approach, a doctor would not be held liable if he or she followed the recommended course for treating a specific illness or condition under guidelines put forward by professional associations such as the
CRITICISMS AND CONCERNS
Much of the criticism that the health legislation has attracted, however, has been misplaced. For example, one prominent critic, former CBO Director
Another concern is that employers will drop coverage for certain employees and force them into the health insurance exchanges created by the act, thereby raising costs for the government, since coverage subsidies are available in the exchanges but not through employer-sponsored plans. The CBO has predicted that this will rarely happen: it estimated that by 2019, the legislation will reduce the number of people with employer-provided coverage by only three million. But critics have charged that the penalty the law imposes on firms that do not offer coverage (
Two factors suggest that this concern may be exaggerated: first, most firms consider coverage to be an important part of their compensation packages, meant to attract good workers, and second, the simple analysis ignores the effect of the tax subsidy for employer-sponsored insurance. In effect, if firms drop their coverage, they lose the tax preference on that component of their compensation packages, and that is often large enough to overcome the other incentives to drop coverage. Indeed,
Although employers may not eliminate health-care plans en masse, they could start dropping high-risk workers by designing health plans that encourage these employees to purchase insurance on the exchanges. This is a legitimate concern. If employers altered their plans, this could create a spiral effect, in which those employees buying insurance on the exchanges would be disproportionately high-risk patients, raising premiums and defeating the purpose of risk sharing. The cost to the federal government of subsidizing coverage in the exchanges, in turn, could become unsustainable.
Another substantial concern involves the effect of the legislation on local hospital markets. Over the past two decades, these markets have become increasingly concentrated, raising prices as competition among providers has been reduced. The health legislation, if anything, will exacerbate this trend by inducing a new round of mergers among clinics, hospitals, and practices. According to
A final concern involves the CLASS Act, a voluntary national long-term-care insurance program created by the bill. There is a serious risk that healthy people may be reluctant to join the program, whereas those who most need long-term care will be eager to do so, jeopardizing the idea of a broad and stable risk pool. The only solutions may be to make the purchase of such insurance mandatory or to require employers to provide it by default unless employees opt out -- a strategy that has worked well in boosting participation rates in 401(k) plans.
MOVING TO QUALITY
The health-care system of the future must be much more quality-oriented than today's is. As the economist
The data produced by that technology could also expand medical knowledge about which treatments do and do not work. A new marketplace of data should develop. Promising steps toward this future have already been taken, including efforts such as the Health Data Initiative, a partnership between the
If the true potential of these data is to be realized, appropriate privacy protections must be put in place and the research itself must be funded. To lead the effort, the legislation created the
The second way to move the health-care system forward involves infrastructural reform. The most pressing need is to encourage providers to increase the coordination of care, and the leading idea for driving such coordination is ACOs. ACOs are designed to tie doctors and hospitals together financially and give them incentives to deliver better care to their patients on a coordinated basis. Many questions remain about how exactly ACOs will work, but the draft regulations governing ACOs issued by the administration in the spring of 2011 have begun to provide some of the answers. The Premier QUEST initiative, a voluntary project among hospitals focusing on evidence-driven improvements in their performance, has highlighted the promise of information and incentives. By emphasizing evidence-based medicine and coordination across providers, the project has succeeded in narrowing the variation in practice norms, improving quality, and reducing costs.
The final prong involves incentives. The health-care system today is dominated by fee-for-service payment; the health-care system of the future needs to be dominated by fee-for-value payment. The difference is crucial: one payment system drives up quantity; the other, quality. The health bill takes some steps, albeit modest ones, toward creating a system based on paying for quality. For example, it creates penalties for hospitals with high rates of hospital-acquired infections and other avoidable conditions by reducing
All these measures will never be enough to substantially constrain the growth of health-care costs on their own. It would be shocking if they were, since the provider-value approach necessarily involves an ongoing, evolutionary process of continuous adjustment. That process is even more challenging in
One of those institutions is the
The new institution with the most potential by far, however, is the
These three new institutions -- the
A FISCALLY RESPONSIBLE FUTURE
Despite popular impressions to the contrary, the new health legislation would significantly bend the curve of
And what about the budget deficit, including both spending and revenue? The bill includes a variety of measures that increase revenue, such as the excise tax on high-cost insurance plans. Altogether, if fully implemented, the legislation is projected to reduce the long-term fiscal gap facing
In other words, if the legislation is implemented effectively -- and especially if IPAB and the excise tax on high-cost insurance plans live up to their promise -- it could significantly reduce the nation's long-term fiscal imbalance. A big gap would remain, but the gap would be even larger without the health bill.
Major challenges remain for the health bill.
The only prominent alternative that has been proposed is the consumer-directed one, and there is no doubt that this approach could supplement the provider-value one. Many opponents of the health legislation, however, are either implicitly or explicitly banking on a consumer-directed approach's ability to fix health care by itself. That is not a plausible path forward, since such an approach would likely do little to address high-cost cases and therefore do little to contain overall costs.
In the end, there is no credible path to reducing the long-term fiscal imbalance in
Peter R. Orszag is Vice Chair of Global Banking at Citigroup, an Adjunct Senior Fellow at the Council on Foreign Relations, and a columnist for Bloomberg. He was Director of the White House's Office of Management and Budget in 2009-10 and Director of the Congressional Budget Office in 2007-8
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