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Cost Containment Is Key

Health Care Reform Will Bring Costs Under Control

SOURCE: AP/Susan Walsh

A copy of the America Affordable Health Choices Act of 2009, H.R. 3200, sits on the desk of Rep. Henry Waxman (D-CA) after the markup on the health care bill was postponed on Capitol Hill. Health reform's potential to produce savings is one more reason to challenge the argument that we cannot afford to enact health reform.

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Health reform’s three major goals—insurance reform, affordable coverage, and slower cost growth—are all critical. But effective cost containment is key to achieving the other two. Health insurance that offers meaningful protection and is affordable hinges on getting ever-rising health costs under control.

Opponents of health reform and cost containment enthusiasts continually criticize evolving health reform legislation as insufficiently aggressive in achieving the cost slowdown everyone knows is critical. Opponents are often downright misleading, claiming that the legislation is unaffordable, while ignoring official Congressional Budget Office documentation that the bill more than pays for itself—and actually reduces the deficit. Similarly, cost containment advocates place such particular emphasis on one aspect of the bill—the new tax on the most costly health insurance plans—that they’ve given short shrift to the legislation’s underlying emphasis on improving efficiency in the health care system.

Improving efficiency, of course, is not a magic bullet. Effective implementation will require extraordinary public leadership and a commitment by the public and private sectors that surpasses anything we’ve previously seen. But if we’re really committed to cost containment, then it’s time to look at the legislation with a clear eye, enact the reforms, and provide the analytical and political support that will be sorely needed to make the law’s tools and authorities effective in the shortest possible time frame.

No one disputes that the key to reform is to shift our health payment system from fee for service, which rewards the volume of medical services without regard to health outcomes or efficient, effective care. The first steps toward this goal are improving the current system’s fee structure. If current fees are set too high, as some are, then health care providers will continue to generate more income from highly compensated, inefficient care than from efficient and appropriate care. Any new incentives will have little impact.

That’s why the health reform legislation now before Congress grants the Department of Health and Human Services the secretarial authority to review and alter “misvalued” fees without first requiring congressional action. Accompanied by specific deterrents to clearly undesirable behavior—such as hospital-acquired infections, inappropriate hospital readmissions, and, even more egregious, outright fraud—this new HHS authority mitigates the rewards for too much of the wrong kind of service that propel health care costs ever higher.

Alongside this “stick” to change the behavior of health care providers is a set of essential “carrots,” or payment rewards for more effective and efficient care. At the most basic level, these rewards are extra payments to providers for doing “good” things—say, meeting a set of efficiency standards. But more importantly, these rewards reside in alternative payment mechanisms to replace fee-for-service payment with quality-driven payments such as “bundling” separate fees into a single payment for services associated with a specific condition, or providing extra payments for primary care and chronic care management in newly created “medical homes.”

The health reform legislation also encourages “shared savings” incentives. This last approach would give so-called accountable care organizations—collaborations between inpatient and outpatient health care providers who deliver quality care at lower-than-projected costs—a portion of the difference between actual and projected expenditures for their patients.

The health reform legislation sets a clear timetable for implementing some of these measures and, to promote others, establishes a new Center for Medicare and Medicaid Payment Innovation to initiate, evaluate, and broadly extend the application of these methods as part of rapid cycle change in the two government-run health insurance programs.

These efficiencies and the savings they can produce are unlikely to be realized, however, if changes in health care provider payment are limited to the public sector. Medicare is a large payer whose payment practices the private sector historically follows. But that outcome is neither automatic nor immediate. And inconsistent payment mechanisms among public- and private-sector payers discourage health care providers from changing behavior, impede efficiency improvements, and create opportunities for offsetting one payer’s spending reductions with increases for others.

Fortunately, the health reform legislation now before Congress goes beyond making Medicare the engine of payment reform to actively promote a partnership with the private sector. The legislation favors new health care provider organizations (such as the ones discussed above) accompanied by new payment arrangements with Medicare and with private health insurance payers. What’s more, the bill offers access to Medicare’s data on provider quality and efficiency to guide private-sector payment reform efforts, and requires private health insurance plans to regularly report on those efforts.

Perhaps most importantly, it creates an Independent Medicare Advisory Board that not only holds Medicare spending to predetermined savings targets, but also reports on and makes recommendations for similar action in the private sector. The new board’s authority is generally regarded as the strongest of the health reform legislation’s cost containment tools—strengthened by its extension, even in a nonbinding way, to address concerns across the health care system. After all, Medicare and private health insurance companies all pay for medical care in the same health care system.

It’s important to remember that the private sector is, if anything, even less effective than Medicare in promoting efficiency. An effort that delivers effective, quality-driven cost containment measures in Medicare and Medicaid but not in private-sector health care plans risks limiting access for beneficiaries or shifting costs from public to private payers. Therefore, the broader the Independent Medicare Advisory Board’s authority to influence public and private spending the more effective it will be.

A focus on policy tools alone, however, obscures the most important element of the new board’s potential impact. Payment improvements in the past were stymied by legislators responding to health care providers’ resistance to change. Witness the previous failed efforts to introduce competitive bidding for managed care plans, oxygen providers, or medical devices. The Independent Medicare Advisory Board’s authority to make Medicare payment recommendations that become law unless explicitly overridden by legislative action gives a major boost to policy over politics in containing health care costs.

That said, with the exception of recognition for the new board’s potential impact of containing health care costs, the Congressional Budget Office and a number of health policy experts are skeptical of the reform legislation’s ability to contain health care costs. Indeed, CBO estimates that these and other efficiency incentives in pending health reform legislation would achieve minimal if any savings. The bill delivers on deficit reduction through cuts in payments to health care providers and new revenues rather than from payment “modernization.”

From a fiscal perspective, that is perhaps good news. It means that health reform is paid for—and reduces the federal budget deficit—even without a transformation of payment and delivery. But when health care payment reforms that encourage quality care over fee-for-service care kick in, all these savings will redound to deficit reduction and a stronger economy.

Drawing on experience with efficient health care delivery systems around the country, previous research by the Center for American Progress estimates potential savings from payment and other modernization as high as $500 billion to the federal government and $2 trillion to the whole health care system over 10 years. And lest that sound implausible, these savings simply means that the health care industry would achieve the same level of productivity growth improvements that every other U.S. industry has accomplished in recent years.

Health reform’s potential to actually produce these savings—of critical importance to the nation’s long-run economic health as well the individual financial health of all Americans —is just one more reason to challenge the argument that we cannot afford to enact health reform. The fact is, we simply cannot afford not to.

Judy Feder is a Senior Fellow at the Center for American Progress. To read more about the Center’s health care policy proposals and analysis, go to the Health Care page on our website.

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