Commentary | Health

Seeing the big picture on health reform and cost containment

Share this page:

Last week, two hugely influential players in health care reform addressed the crucial issue of a reform’s impact on cost savings. One of these players saw the big picture; the other did not.

During a July 22 press conference, President Barack Obama made a strong case that the benefits of reform in containing costs would be felt throughout the entire American health system, not just by government. At one point he argued that “If we do not reform health care, your premiums and out-of-pocket costs will continue to skyrocket.” President Obama further noted that the existing American system is vastly more expensive than those of our industrial peers, yet doesn’t generate better health outcomes. He urged health reformers to figure out what parts of our peer-country health systems should be emulated.

On July 16th, CBO director Doug Elmendorf took a much narrower view of the cost-savings issue during testimony before the Senate. When asked a question about reducing, or “bending the curve” of overall (not just federal) cost growth over time, Elmendorf answered the question entirely from the perspective of federal spending. He noted that aspects of the plans currently under debate in the Senate and House bills would add to federal spending in the form of subsidies to help people afford insurance coverage and other costs. When talking about potential health savings, Elmendorf noted that “the money is out there, but it is not going to walk in the government’s (emphasis added) door by itself….”

This assumption by Elmendorf — that health reform’s primary goal must be to reduce the growth of federal health spending — is tailor-made to block reform. It should be rejected.

Progressive health reformers may bear some of the blame for fostering the assumption that federal costs are the prime battleground of health reform. These reformers have correctly noted that the long-run budget problems of the federal government are driven entirely by rising health costs. As a result, they have identified comprehensive health reform that slows the rate of federal health care cost growth as the single most important component of sound budget policy. Along the way, however, the salutary effects of health reform on projected budget deficits somehow became the defining feature of this reform.

All of that has obscured an equally vital point: fundamental health reform is worth doing even if it does not pay off in big federal budget savings. The reason is simple: health care is an area where the more costs are loaded up on the federal government, the more efficiently care tends to be delivered overall. Three examples buttress this point.

First, the following graph provides a quick look at the U.S. and its 20 closest international peers and shows two clear aspects in which the US is an outlier: it spends by far the most on health care per capita, and, its share of total spending accounted for by government is by far the smallest. Following the president’s advice of looking to peers that have more efficient health systems, it seems clear that adding to the federal bill for health costs may well be a step towards lowering overall costs in the long-run.

Health expenditures for industrial peers

 Second, a detailed, apples-to-apples comparison of spending in the federal Medicare program with comparable services delivered by private insurers shows clearly that Medicare has done a better job of reining in costs over time, as shown in this chart:

Pre-enrollee cost growth

Imagine a past where, in 1970, these private sector health costs had been taken fully onto the federal government’s budget with a dedicated revenue source that made them budget-neutral. If these costs had been managed as effectively as Medicare, family health insurance policies today would cost Americans roughly $7,000, most likely in higher taxes, instead of the $12,400 they actually pay today in insurance premiums. Note that in this scenario there are no benefits at all to the federal budget relative to today’s status quo: the costs of Medicare (and Medicaid) would still be poised to drive huge budget deficits in the future, because no savings to Medicare’s cost growth have been assumed. Yet, even with no benefits to the federal budget, this scenario leaves American families much better off, paying 45% less for health coverage than they do today.

This applies to future reform efforts as well: it is possible to increase federal costs while still economizing overall. That is not what the goal should be — there are in theory plenty of ways to make reform serve the goal of slowing federal cost growth — but the long game of health reform must focus on system-side, and not just federal, costs.

Third, in most simulation-based evaluations of reform options, the bigger the federal role in financing health care the bigger the system-wide savings. For example, the Lewin group, a private consulting firm that is one of a small handful of health-care plan scorekeepers whose analysis is generally respected across partisan lines, has evaluated a range of health reform options that have been introduced by Congressional sponsors. The following chart shows their estimates of the reforms’ impact on federal and total health spending respectively.

Lewin Group scoring of 3 health reform proposals

The first reform proposal, Americare, which was introduced by Rep. Pete Stark (D- Ca.), is essentially a single-payer option plan in which the federal government would finance all health care currently financed through the employer-based system. The result is a large increase in federal spending, which would require new revenue sources to fund it, but large decreases in total health spending. Americans would see higher taxes, but would also see large reductions in spending on health, through lower premiums and co-pays and out-of-pocket spending. The bottom-line result would be higher take-home income.

Another plan, Rep. Mike Enzi’s (R-Wyo.) Ten Steps for America, would essentially change the tax treatment of insurance premiums. Under the Enzi plan, the federal government would forego large amounts of revenue (the Enzi plan is essentially large tax cut in its first years of implementation) but would not finance care directly. The only direct increase in federal financing of care would come from a slightly expanded Medicaid population. In stark contrast to the Americare plan, Rep. Enzi’s plan would, according to Lewin, increase total health spending in its first year of implementation.

In between the Stark and Enzi plans is a hybrid plan that builds on existing employer-sponsored insurance and creates a new national insurance exchange and public insurance option. The specific hybrid plan scored by Lewin in this case is the Commonwealth Fund’s Building Blocks plan, but this plan is very similar both to the Health Care for America plan from the Economic Policy Institute and Jacob Hacker as well as the current House bill.

The Building Blocks plan sees federal health spending rise as the new public insurance option enrolls people and as federal subsidies are provided for workers purchasing insurance through the new exchange. These increases in federal spending, however, are accompanied by large reductions in spending by households and businesses. Net total health spending would rise by less than $18 billion, an amount that is more than explained by the rise in spending needed to cover the 47 million Americans previously uninsured.

This abundance of evidence on the benefits to overall costs of having a larger role for public financing makes it all the more puzzling that, when asked what policies could be
true “game-changers” in reducing health care cost growth, the CBO director did not note the very large system-wide savings through a large federal role in financing coverage. President Obama rightly touted the large benefits of a public plan in providing a competitive check on cost-growth.

Reducing the growth rate of health care costs, (“bending the curve” of health costs, in the jargon) will require a number of very specific policy interventions. There is no silver bullet, only silver buckshot. However, nearly all of these policies will have more promise to work in a less fragmented health system. As we approach reform to reduce costs, it seems obvious that the low-hanging fruit should be plucked first. In the U.S., plucking this low-hanging fruit consists simply of realizing that sometimes you have to spend money to save money. Evidence from our international peers, our own domestic experience with publicly-financed versus private insurance, and simulations about the likely effects of future reform all back up this point. President Obama gets this. One imagines that he will be at least as influential on the final outcome of the debate as the CBO director.


See related work on Health

See more work by Josh Bivens