The actuaries at the Centers for Medicare and Medicaid Services released a report this week estimating that health reform would marginally increase medical spending over the next decade. The estimated increase was less than 1 percent. Despite the small magnitude, the report was picked up by the usual suspects opposed to comprehensive health reform and used in the usual way—as false proof that the sky is falling. Even though health reform is now the law of the land, the health reform debate is far from over.
But these conservative Cassandras miss the real point. Thanks to the Patient Protection and Accountable Care Act we now have in our hands the ability to bend the health care cost curve—to demonstrate that quality health care can be made available to all Americans at lower costs. We no longer need to debate whether health reform will save money. We get to try and prove the skeptics wrong.
The Affordable Care Act contemplates two sources of cost savings. The first is reduction in the growth of traditional Medicare spending, including lower overhead payments to Medicare Advantage plans and reduced rates of price increases to hospitals. These savings are expected to reduce Medicare spending by 7 percent over the next decade.
Contrary to many claims, these savings are not that large. The Balanced Budget Act of 1997, for example, made larger cuts to Medicare—and in that case, the money was taken out of the health system entirely. The health reform law, in contrast, reinvests the money in new coverage. If the providers were not worried about these savings, it’s hard to see why anyone else should be.
But as the actuaries also note, traditional payment reductions are not a long-term source of financing. Prices can be reduced only so far before they become unreasonably low. What is essential is the second source of savings—reduced spending associated with modernizing the health care system and driving out inefficiencies. This includes more efficient production by eliminating layers of administrative cost, the prevention of acute episodes of care, and improved care management when people are sick.
The estimates of possible efficiency savings range up to 30 percent or more of medical spending. The Affordable Care Act is premised on the idea that Medicare reform can lead to savings in these areas. Payment reforms to improve the quality of care while lowering costs—including bundled payments, accountable care organizations, value-based purchasing, and care coordination—combined with better use of information technology are fundamental to the strategy laid out in the new law.
There are no controlled trials of large-scale payment innovations of the type envisioned in the health reform law. Thus, the CMS and CBO actuaries did not know how to evaluate the likely savings from them. In both cases, this translated into an assumption of essentially no savings.
Those of us who disagree—and there are a lot of us—now have the chance to prove the skeptics wrong. We get to show that we can create a higher quality, less expensive health care system. If we are right, then costs will fall more rapidly than expected. Since the coverage expansions are already paid for through traditional payment reductions and revenue increases, all of the incremental savings can be used for deficit reduction, with perhaps some for expansions in subsidy amounts.
If we are wrong, we still have the traditional savings from Medicare reform to balance costs in the first decade. But in any case, arguing over the likely effects of reform is now irrelevant. The country made its decision on health care a month ago. People believed that cost savings were feasible, and that the strategy for realizing them was the right one. It’s time to turn belief into reality.
David Cutler is a Senior Fellow at the Center for American Progress and the Otto Eckstein Professor of Applied Economics in the department of economics and Kennedy School of Government at Harvard University.
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