A World Without an Individual Mandate: Careful What You Wish For GOP
Health economist Jon Gruber runs the numbers on a world in which the individual mandate is struck down and not replaced by anything:
-Repeal of the requirement to buy insurance would mean more people would wait until they get sick to buy insurance in the new nongroup exchanges, which would increase the average premium by 27 percent in 2019.
-Retaining the law’s insurance reforms, but repealing the subsidies as well as the requirement to purchase insurance, would further discourage people from buying insurance when they’re healthy. Premiums in 2019 would cost twice as much as projected under the law as a result.
-Retaining the law but repealing the mandate would newly cover fewer than 7 million people in 2019 rather than the 32 million projected to be newly covered by the law. Federal spending, however, would decline by only about a quarter under this scenario since the sickest and most costly uninsured are the ones most likely to gain coverage.
-Retaining only the insurance reforms in the law — repealing both the mandate and the subsidies — would not increase the number of people with insurance, leaving 55 million people uninsured in 2019.
By Ezra Klein | December 13, 2010;
Individual Mandate: Cutting Off Your Policies to Spite Your Opponents
To step outside the latest Supreme Court case, it’s worth remarking on the long-term damage conservatives are doing their cause by focusing their fire on the individual mandate.
The political case for their strategy is clear: The individual mandate, like most taxes, is unpopular. In fact, it’s one of the only unpopular elements of the whole bill. But it’s also one of very few ways to have a health-care system where everyone has coverage but private insurers dominate. In the long run, it may be the only way. That’s why Republicans originally thought up the idea, and why it’s mainly been associated with a Republican health-care bill. Mitt Romney, Chuck Grassley, Orrin Hatch, Bob Dole, Judd Gregg and Mike Crapo are just a few of the prominent Republicans who’ve cosponsored legislation with individual mandates.
More internationally, you may have heard of the conservative affection for Singapore’s health-care system. Here’s how the journal of the American Enterprise Institute describes Singapore’s structure in a gushing article: “In Singapore’s system, the primary role of government is to require people to save in order to meet medical expenses they don’t expect.” Another term for the government forcing you to put money into a vehicle that helps protect you from a health-care crisis is, well, an individual mandate.
Switzerland and the Netherlands also use individual mandates to sustain universal health-care systems that are less centralized than single-payer arrangements. It’s a pretty common device. But if Republicans get it ruled unconstitutional in America, they’d be wise to ask themselves what other options they have: After all, the constitutionality of Medicare is not in question, and that’s really the other model we could eventually trend toward. As Matt Miller put it in a column a few months back:
Conservatives, either from confusion, or for the sheer fun of taking a political bite out of Democrats, are fighting the one measure that’s essential if private insurance is to retain its central role in American health care … [But] be careful what you wish for. By fighting the mandate needed to make private insurance solutions work, and doing nothing to ease the health cost burden on everyday Americans, you’ll hasten the day when the public throws up its hands and says, “Just give us single-payer and price controls.” Don’t think the anti-government wave this fall won’t reverse itself on health care if the most private sector-oriented health care system on earth keeps delivering the world’s costliest, most inefficient care.
By Ezra Klein | December 13, 2010
Voters Are About to be Disillusioned With the GOP
The Puppet Master and his Minions
But going forward, now that they control the House and aspire to gain control of the Senate and the executive branch in the next election, Republicans will be forced to work for an actual agenda. And as Paul Waldman nicely explains in The American Prospect, this can produce a great pivot in the political climate of the country, very fast:
As a long history of public-opinion research has made clear — and as events continue to remind us — Americans are “symbolic conservatives” but “operational liberals.” In other words, they like the idea of limited government, but they also like just about everything government does. Good things happen to the party that can successfully pander to both impulses, which is why we saw so many ads from Republicans…condemning Democrats for passing a big-government health-care plan because it would … curtail the growth of Medicare.Perhaps they’re just being cautious as they get used to their new majority, but in the last week, Republicans have steadfastly refused to say what their professed desire to limit government would actually entail. Press them hard on what they want to cut, and they’ll answer “earmarks,” which would be fine were it not for the fact that a) earmarks do not appropriate new money; they merely direct money that has already been appropriated, and b) the value of all earmarks amounts to less than 1 percent of the federal budget….
If there’s one thing Republicans have been clear about, it’s their desire to repeal the Affordable Care Act. Even here, though, they don’t want to get too specific. As you’ve no doubt heard many times, a bare majority of the public opposes “health-care reform” (or “Obamacare”), while substantial majorities favor almost all the major provisions of the law. Once again, Republicans can win the vague, general argument but not the specific one. Faced with the impossibility of repealing the entire act (which Obama would veto), Republicans have said they’ll try to dismantle it piece by piece. Try that, however, and they’re suddenly attacking not “health-care reform” but those particular things people like.
That isn’t to say Republicans will inevitably be punished for attempting to repeal the ACA. Pushing repeal will only be dangerous for them if Democrats make it so. Republicans will suffer if they’re attacked aggressively for wanting to reopen the Medicare prescription-drug “doughnut hole,” for wanting to kick young people off their parents’ insurance, or for wanting to give the insurance companies the ability to deny coverage to children with pre-existing conditions. Those are all provisions of the ACA that have already gone into effect. The Democrats are hardly guaranteed to win the battle of ACA, but they have a shot if they make the right arguments.
Waldman goes on to note that House Republicans will have to write a budget resolution, and moreover, are virtually promising a budget showdown with the president, probably forcing a shutdown of the federal government. There’s no particular reason to assume that tactic will fare any better than it did when Newt Gingrich tried it back in the ’90s. But that scenario, too, will force Republicans–and attentive voters generally–to make some sheep-and-goat distinctions between government programs and services that are essential and those that are not. It’s when those two judgments begin to diverge, as they undoubtedly will, that the GOP will begin to pay a high price for consciously promising an austerity budget that somehow won’t upset their own voters. Campaigning on a Big Lie–Big Government is a terrible threat to your liberties and your pocketbook, but Big Government doesn’t involve anything that you care about, dear voter–can cause a real boomerang when the lies have to be turned into an agenda.
BY: Ed Kilgore, The New Republic, November 11, 2010
Still Making Things Worse: An Updated Critique of Conservative Health Policy Proposals
Repeal of health care would mean that approximately 15 million Americans would do without the help they need to pay for their health insurance premiums, and another 15 million would be denied Medicaid coverage.
Introduction
Less than six months after passage of the Affordable Care Act—landmark legislation that will expand coverage to 31 million Americans, reduce the growth of health care spending, and reduce the federal deficit over the coming decade— conservative think tanks, pundits, and politicians are urging Congress to repeal, or repeal and replace, the new law. But how would these pundits and policymakers address the problems of cost, coverage, and access that have festered in our health care system for decades? Would their proposals solve this puzzle?
A careful look makes clear they would not. Most of those who advocate repeal of the Affordable Care Act, or ACA, are really calling for a “do-nothing” approach. Their “solution” is for today’s myriad health care problems to continue to fester and grow, saddling future generations of Americans with unsustainable federal budget deficits and leaving the American people paying more each year for health insurance—if they are fortunate enough to have health insurance at all.
Even worse, though, are proposals offered by some conservatives. Whether small or large in scope, these approaches would exacerbate already existing problems in our health care system while failing to rein in ever-rising health care costs. These conservative “solutions” would hurt the average family budget and those left out of our health care system altogether. But let’s look at both of these conservative options—simply returning to the status quo of 2009, or doing even more harm—in more detail. Neither approach offers the health care prescription our nation needs.
Preserving the status quo
Prior to passage of the Affordable Care Act, the U.S. health care system was broken. Even after passage of the new law, much work will be necessary to effectively implement this legislation. In the year before passage of comprehensive health care reform, more than 46 million people in our country lacked health care coverage, while health care premiums were growing three times faster than wages and four times faster than inflation. Quality of care varied widely, and many Americans either received too little care or care inappropriate to their needs. And the nation’s public health insurance programs—primarily Medicare, Medicaid, and the Children’s Health Insurance Program, which provide coverage to more than 90 million people—could not, with their existing eligibility rules, serve as safety nets for millions of low-income, uninsured Americans. Until the new law is fully implemented, many of these dynamics remain.
This scenario, in short, was untenable. Escalating health care costs put health insurance out of reach for many Americans without health coverage. As Congress was considering the new law, four out of five people without health insurance lived in working families, but these families earn too little to purchase coverage on their own. Employers, who provide coverage to 163 million workers and their dependents, struggled to absorb rising health insurance premiums, which have grown 131 percent in the last decade. And individuals who purchased coverage on their own often experienced unpredictable jumps in their health insurance premiums. One high-profile example—Wellpoint’s Anthem Blue Cross company in California, which initially tried to increase premiums by up to 39 percent for individual policyholders—emerged during final consideration of the new law.
Nationwide, at the beginning of ACA implementation, we continue to spend more than 17 percent of gross domestic product on health care, and health care costs account for nearly 20 percent of household consumption. Among Americans with below-average incomes, more than half have unmet health care needs due to the high cost of care.
In addition, many individuals and families are unable to purchase health insurance because of insurance company practices. In most states, insurers can deny coverage to people with preexisting conditions or rescind insurance from policy holders who become sick. A recent survey reveals that over the course of three years, insurance companies denied coverage to 12.6 million Americans who sought health insurance in individual market. And for those who are able to get coverage on the individual market, policies can be very costly, particularly for people with health problems. In many instances, these policies do not cover certain services, and they commonly impose annual or lifetime limits on how much policyholders can spend on care.
The U.S. health care system also is riddled with inefficiency and poor quality care. The Institute of Medicine, part of the National Academies of Science, estimates that up to 98,000 people die each year due to medical errors—more than the number of people who die in motor vehicle accidents, or from breast cancer or AIDS. One in five Medicare beneficiaries have unplanned re-hospitalizations within 30 days of a discharge. Others receive more care than they need—a costly inefficiency the nation can ill afford.
Overutilization of health care services in our country is driven in part by a payment system that rewards the volume and complexity of services rendered rather than the suitability and quality of those services. At the same time, doctors and patients have little information on which treatment, drug, or medical device is best suited for a given condition. Taken together, the prevailing payment system and this dearth of comparative information fuel an inclination to provide the most expensive service or treatment, even if it’s no better than an older, cheaper one.
Finally, looming health workforce shortages in nursing and certain physician specialties, such as primary care and general surgery, also threaten future access to basic care. The Health Resources and Services Administration estimates that by 2020 there will be a shortfall of 49,000 physicians and more than 800,000 nurses. Those Americans who lack access to providers—especially primary care providers—often do not receive treatment for preventable conditions. Limited access to primary care providers, in addition to lack of insurance, is a leading cause of nonurgent emergency room utilization.
As bleak as the status quo looked in 2009, the picture only appeared darker when we looked to the future. Researchers estimated that by 2019, many employers would see their health premiums more than double, thus limiting their ability to provide coverage and add workers. Health care benefits would represent 17 percent of total worker compensation, up from roughly 10 percent, and families would face out-of-pocket costs that grow by 35 percent or more. And the ranks of Americans without health insurance would have swollen to more than 65 million.
The ACA took concrete steps to alter these trends and deliver the lower-cost growth, increased coverage, and improved quality necessary for transforming our nation’s health care system. In particular, the new law improves the availability of health coverage by transforming the national health insurance market. Health plans will no longer be allowed to deny coverage or charge higher premiums to people with health problems, or to rescind coverage when policyholders get sick.
At the same time, the new law establishes health insurance exchanges, a new marketplace that will enable individuals and families who do not have coverage through an employer, and who do not qualify for public insurance, to find high quality, comprehensive coverage. In this exchange, consumers will be able to comparison-shop across policies, making apples-to-apples comparisons of benefits, likely out-of-pocket costs, and other important variables.
The ACA also ensures that health coverage is affordable for all Americans. It strengthens and expands the Medicaid program, which previously provided a health care safety net for many, but not nearly all, low-income Americans. It also provides real help with premiums and co-payments for individuals and families who do not have employer coverage and can’t afford the full cost on their own.
The new law invests in our healthcare workforce to ensure our nation has enough primary care doctors and nurse-practitioners and the tools these providers need, such as research on which treatments work best and technology that can help them manage care. It also ensures that all Americans enjoy easy access to preventive care, and can develop the knowledge and skills they need to manage their own health.
Finally, provisions of the new law bring a new focus to cost containment, creating real financial incentives for health care providers to improve care for people with chronic conditions by improving the quality and efficiency of care. They combine the market muscle of the Medicare program with the innovation capacity of private payers to prompt greater changes than either sector could manage on its own, and ensure that successful payment reforms and delivery system strategies are duplicated across the country.
Through a Medicare innovation center, and a public-private commission dedicated to reducing growth in health care costs, the ACA ensures that payment innovation will take root and grow. The new law also takes steps to reduce the prevalence of high-end insurance plans and the overuse of services that they encourage through very generous coverage, further enhancing cost-control efforts.
But conservatives who would repeal the law—in particular, Reps. Steve King (R-IA) and Wally Herger (R-CA), as well as Minority Leader John Boehner (R-OH) and other members of the Republican leadership—would return our nation to this untenable status quo. Repealing the Affordable Care Act would enable insurance companies to continue discriminating against individuals with preexisting conditions. Repeal would mean that approximately 15 million Americans would do without the help they need to pay for their health insurance premiums, while another 15 million will be denied Medicaid coverage, simply because their family makeup or modest incomes disqualify them for public health insurance coverage. And repeal would mean that health care costs would continue to grow at an untenable rate, while patients would continue to experience chaotic, episodic, and poorly coordinated care.
In short, repeal means a return to the bad old days that we have only begun to leave behind.
Conservatives’ solutions
But what happens if the Affordable Care Act is repealed and conservative policymakers can pursue their own health reform agenda? The elected officials and health policy experts who have offered up policy solutions to this crisis are often criticized for proposing only “small ideas” in response to our nation’s serious health care crisis. These criticisms correctly identify a grab bag of ideas, common to virtually all conservatives engaged in health care reform, which are intended to make coverage more affordable for small segments of the population. These proposals do nothing to tackle the large, interconnected problems that plague our current health care system.
Consider conservatives’ most cherished reforms: Enabling health insurance companies to sell coverage outside of their licensing state, medical malpractice reform, and enabling small businesses to purchase coverage through business or professional associations. All three proposals are unlikely to make a significant difference in health care costs for the average American family with health insurance or make a meaningful dent in the numbers of Americans without health insurance. And they carry significant risks for patients, small businesses with older and sicker workers, and others.
But these small ideas are not the only ideas advanced by conservative policymakers. Conservative health policy proposals also include some clearly radical ideas, such as changing the tax treatment of health insurance and significantly altering the public health insurance programs that provide coverage today for nearly 90 million people. Taken together, conservative ideas fall into several big themes:
- Promoting the individual health insurance market, where Americans seek coverage on their own instead of benefiting from the buying power of employers and other large groups
- Eliminating the nation’s public health insurance programs so that millions of Americans lose guaranteed health care coverage
- Shifting responsibility for health care cost containment to individuals and families, which means paying more for less health care
Let’s unpack each of these radical ideas in turn.
Promoting the individual market
A major emphasis of conservative health reform proposals is to move Americans from group coverage—typically employer-sponsored health insurance but also public health insurance programs such as Medicaid—to the individual health insurance market. Conservatives argue that Americans would have greater ability to maintain coverage through changes in employment and work status if individuals and families purchased insurance on their own rather than through an employer.
Critics of this idea note that unpredictable costs, limited benefits, and the discriminatory practices characteristic of the individual insurance market would undermine any advantages related to insurance portability. Millions of Americans would face loss of health insurance coverage through preexisting condition exclusions or lose coverage after falling ill as conservative reform proposals shift Americans to individual coverage through a combination of discrete policy changes.
First of all, conservative policymakers propose to unravel employer-based coverage by either eliminating, or severely limiting, current tax treatment for employersponsored health insurance. Today, approximately 163 million workers and their dependents receive health insurance coverage as a tax-free benefit. Under conservative proposals, workers who receive coverage through their jobs would pay income and payroll taxes on some or all of the health insurance premiums paid by their employers. Yet significant research concludes that treating some or all of employer-covered premiums as taxable income would result in the erosion of employer-sponsored coverage because employers’ and employees’ incentives for participating in an employer-based system are reduced.
Undeterred, Rep. Paul Ryan (R-WI), Sens. Judd Gregg (R-NH), and Tom Coburn (R-OK) have all proposed some variation of this idea over the last year. Former Speaker of the House Newt Gingrich, conservative health policy analyst John Goodman, and Minnesota Governor Tim Pawlenty have all floated the idea in the national op-ed pages. In addition, Sen. John McCain (R-AZ) made a similar proposal during the 2008 presidential campaign.
A related concept—often offered in tandem with changing the tax treatment of employer-sponsored coverage—would create new tax breaks for individually purchased health insurance policies. This approach would enable individuals and families who purchase coverage on their own to either receive a refundable tax credit or claim an itemized deduction on their individual income taxes. The value of the credit typically ranges from approximately $2,300 for individuals to $5,700 for families, with some variation across plans, while Sen. Gregg’s proposal for a tax deduction would limit the deduction to the lower of the actual premium, or $11,500 per family and $5,000 per individual.
The actual value of the deduction when translated into reduced tax liability, however, would be significantly smaller. Higher-income families would reduce their taxes by $4,025 if they took the maximum possible deduction of $11,500, while families in lower tax brackets would receive a smaller benefit. Both the proposed tax credits and the Gregg deduction fall short when compared to the cost of comprehensive coverage through a group plan, which averaged $13,375 in 2009. So these proposed credits and deductions do not come close to covering the full cost of comprehensive coverage.
In addition, the buying power of these credits and deductions would diminish over time, as conservative policymakers typically propose using a growth index that falls well below average growth in health care costs. Sen. Coburn and Rep. Ryan, for example, propose growing their tax credits more than 2 percentage points more slowly than expected growth in health care costs.
Finally, a number of conservative policymakers—notably Sens. Gregg and Coburn and Rep. Ryan—propose to move low-income families from Medicaid coverage to the individual market. Under this approach, low-income families would, like other Americans, receive tax credits or other help with purchasing health coverage. This coverage is unlikely to be as comprehensive as the Medicaid benefit package and would entail significant out-of-pocket costs through deductibles, copayments, and uncovered services. These proposals include additional subsidies to these families to help with these costs, but even with this supplement low-income families will face higher health care costs.
Moving millions of people out of group coverage and into the individual market raises a number of thorny issues. First, coverage in the individual market is hard to obtain. Except for insurance companies that operate in the handful of states with comprehensive insurance reform, most insurers subject applicants to underwriting tests, examining their health histories in an effort to determine whether they have preexisting conditions and should therefore be denied coverage. In other cases, the insurance company may offer applicants with health problems coverage that excludes particular treatments or body parts, or the insurer may significantly increase the premium cost.
Between 2004 and 2007, nearly three-quarters of all individuals who sought coverage in this market did not end up purchasing a policy—many could not afford the coverage they were offered while others were denied coverage altogether due to a preexisting condition. Insurers in many states may also “rescind” coverage once they have sold a policy and collected premium payments. Insurers in the individual market also charge highly differentiated premiums based on age or gender.
These problems go largely unaddressed by conservative policymakers. And some of their other proposals, such as allowing insurers to sell policies in any state, would undermine strong insurance industry regulations and other consumer protection laws in the states that have made insurance market reforms.
Some conservative policymakers are divided on the extent to which they seek to reform insurance markets. Rep. Wally Herger (R-CA), for example, recently released a so-called repeal-and-replace bill, which would enact a proposal introduced by Rep. Dave Camp (R-MI). Minority leader John Boehner (R-OH) also offered this proposal—the “Common Sense Health Care Reform and Affordability Act”—as the Republican alternative during last year’s reform debate.
The Common Sense proposal would expand so-called high-risk pools rather than ban preexisting condition exclusions. High-risk pools are arrangements that make some degree of coverage available to individuals with preexisting conditions who cannot purchase coverage in the individual market. These pools currently cover 200,000 individuals, and often refuse to cover the health problem that makes the enrollee eligible for the high-risk pool in the first place. The Common Sense proposal also would prohibit annual or lifetime limits on health benefits and would limit insurers’ ability to rescind coverage once the policy is in force. Rep. Tom Price (R-GA) of the Republican Study Committee employs a similar strategy.
In contrast, Sen. Coburn and Rep. Ryan would enable health plans to continue using annual and lifetime limits, and continue policy rescissions, but would ban exclusions for preexisting conditions. Sen. Gregg would also end those exclusions and annual and lifetime benefit limits, but he does not address rescissions. None of the conservative proposals restrict rate-setting practices. This means insurers can charge people with chronic illnesses and other preexisting conditions exorbitant rates.
In sum, none of these proposals takes a comprehensive approach to reforming the individual insurance market, which means Americans who must turn to this market for health insurance will face some combination of limited access to coverage, inadequate coverage, and unaffordable premiums.
Finally, this move to the individual market would shift a significant portion of health care costs to individuals and families. Insurance policies in the individual market typically carry higher deductibles and co-payments, while covering fewer health care services compared to comprehensive employer-based coverage. Families covered by these skimpier policies must often pay out-of-pocket for uncovered services, and be prepared to lay down significant resources to meet their annual deductible and cost-sharing requirements.
Undermining the nation’s public health insurance programs
Consistent with (and part of) this push toward the individual market, conservative policymakers also propose dismantling critical public health insurance programs, including Medicaid, the Children’s Health Insurance Program, and Medicare. These programs provide publicly funded insurance to a range of individuals and families who cannot access affordable, market-based coverage, including senior citizens, people with disabilities, children living in low-income families, low-income pregnant women, and people with long-term care needs.
As noted earlier, legislation proposed by Rep. Ryan and Sen. Coburn would end Medicaid eligibility for low-income children and families, pregnant women, and low-income seniors, offering a tax credit for use in the individual insurance market in place of Medicaid coverage. In both proposals the standard tax credit would be supplemented by additional income-based subsidies for lower-income populations.
These two bills would also convert the remaining Medicaid program—essentially long-term care services and coverage for low-income people with disabilities—to a block grant program. Under this structure, the federal government would make fixed, formula-driven payments to states, which would then be responsible for providing services to individuals with disabilities and people with long-term care needs. But the states could not rely on federal payments that increase with enrollment or service costs. Individuals who currently rely on Medicaid to provide this coverage would no longer have a guaranteed source of payment for their health care needs.
In his “roadmap plan,” Rep. Ryan also envisions transforming Medicare coverage into a voucher payment, which people eligible for Medicare can use to purchase an individual health insurance policy. Individuals who become eligible for Medicare after January 1, 2021, would receive vouchers, including those who acquire Medicare eligibility by qualifying for Social Security disability benefits (currently 16 percent of individuals with Medicare coverage), individuals with end-stage renal disease, and those who reach the Medicare eligibility age.
These vouchers, according to the Congressional Budget Office, would have a value equivalent to $5,900 in 2009 dollars—far short of the cost of age-rated insurance policies in the individual market. And Rep. Ryan’s legislative language clearly indicates that the disability population would receive vouchers like everyone else, even though the CBO estimate (based on consultation with his staff) assumed otherwise.
These proposals raise a number of serious issues. Low-income individuals who rely on the Medicaid program for comprehensive health insurance coverage would be forced to move to private plans with more limited coverage and higher out-ofpocket costs. And while the Ryan budget roadmap, for example, would provide current Medicaid enrollees with a higher-than-average subsidy to cover premium costs, the total subsidy, $11,000 per year, still falls short of the average premium for comprehensive coverage purchased in the group market.
In some cases, these low-income families may not have the ability to make up the difference between the premium and cost-sharing obligations they would face in the individual market and the help offered to them under this proposal. In addition, the buying power of these subsidies will diminish over time because the subsidy amount typically grows more slowly than expected growth in health care costs.
In addition, without meaningful insurance market reforms, many people with Medicaid, CHIP, and Medicare coverage may experience real difficulty finding a health insurance policy. In 2006, for example, Medicare covered 6.9 million people with disabilities so severe that they cannot work. Unless insurance companies are required to sell a policy to all who seek coverage, and are prohibited from pricing policies based on health status, these individuals are unlikely to find affordable coverage in the individual market. And, as discussed earlier, conservatives typically do not propose such reforms of insurance industry practices.
Finally, proposals to protect the federal government from financial risk related to population growth, economic downturns, and growing health care costs would leave the states extremely vulnerable to unanticipated health care costs. Transforming Medicaid coverage for people with disabilities and Medicaid payment for long-term care costs into a block grant program would leave the states on their own and at financial risk. Medicaid enrollment, for example, grew by 3.3 million individuals from June 2008 to June 2009. The overall Medicaid population would look considerably different under these conservative proposals, but even with enrollment limited to low-income people with disabilities and people with long-term care needs, states could still expect enrollment to grow during economic downturns.
Shifting cost-cutting responsibilities to patients
Conservatives also promote strategies for shifting responsibility for controlling health care costs from insurance companies, public insurance administrators, and health care providers, the latter of whom drive the majority of health care spending through referrals, recommendations, and treatment plans, to patients themselves. In this way, conservatives believe, individual patients will be able to make sophisticated and complex decisions about the costs of their own health care by themselves while also lowering overall health care costs in the United States. They are wrong on both counts.
Consider first conservatives’ favorite idea for controlling costs—health savings accounts. For many years, conservatives have touted high-deductible health insurance plans in combination with health savings accounts as a strategy for reducing health care spending. These arrangements require patients to pay out of their own pocket, or out of their health savings account, until they reach their deductible and full coverage kicks in. This approach will, proponents argue, encourage patients to spend their health care dollars frugally and effectively.
Advocates for health savings accounts believe that paying a greater proportion of their health care spending will drive patients to seek higher-quality providers and shop for lower prices on a given procedure. Today, various conservative policymakers and health policy experts, among them Reps. Herger and Rep. Ryan, propose raising the contribution limits for the savings account component of these arrangements or making other changes to make health savings accounts more attractive to potential enrollees.
Yet to the degree that health savings accounts induce enrollees to reduce their health care spending, these incentives are focused on the health care people use before they meet their deductible. Because 80 percent of all health care spending is dedicated to only 20 percent of the population, this approach will have little impact on total health care spending. The patients who consume most of our nation’s health care dollars—people with catastrophic problems or chronic illnesses—use health care services at levels that far exceed a deductible, including the high deductibles featured in health savings account plans.
So instead of addressing the factors that drive the vast majority of health care spending in the United States, such as poor coordination and poor quality of care for people with chronic disease, this approach simply asks very sick people to pay for a larger proportion of their care themselves.
This emphasis on health savings accounts also assumes that patients can shop for health care just as consumers shop for other goods and services. To be savvy health care consumers, patients would need quality and cost information on providers, comparative research on competing treatment plans, and other information that simply does not exist today. This emphasis on “consumerism” to control health care costs also assumes that people are indifferent to any factor other than price—when in fact patients choose physicians based on long-standing relationships, trusted referrals, location and convenience, and intangible attributes such as personality and compassion.
In addition, nearly half of our national spending on health care services is dedicated to institutional payments to hospitals, nursing homes, and other facilities. In general, when individual consumers need these levels of care, they have very little ability to control the intensity or cost of the services they receive. Their needs are simply too acute or too complex.
Finally, Gingrich and Goodman propose allowing physicians to “repackage and reprice” the services they provide people with Medicare coverage, which would effectively unravel the fee schedule Medicare uses to pay doctors and other providers. This conservative approach is intended to provide some useful flexibility, such as payment for email and telephone consultations, and to create a more price-sensitive market for physician services. But again, this pushes costcontainment responsibility to the consumer.
A flawed approach to health reform
The true challenge of health care policy-making is to address the all-too-real problems of cost, coverage, and quality in our health care system. Improving the availability and affordability of coverage, reining in the growth of health care costs, and making the infrastructure investments necessary to modernize heath care delivery and address developing health care need must be top priorities. To be successful, reforms must offer pragmatic solutions that achieve these goals.
The conservative approach—which promotes the individual insurance market, undermines public health insurance programs, and requires individuals and families to take responsibility for controlling health care costs—fails to meet this standard.
Likely outcomes of conservative proposals
Given the very real problems in our nation’s health care system, how would these conservative proposals address our systemic problems, and what would the U.S. health care system look like if they were implemented? It is impossible to develop precise cost and coverage estimates when considering a range of proposals, but existing research points to some clear probabilities.
Providing tax credits or tax deductions in the place of employer-sponsored insurance and public health insurance coverage would result in millions of Americans moving into the individual insurance market—and millions more who will not be able to find affordable coverage in this market. Recent cost and coverage estimates of these approaches are elusive, but an analysis of Sen. McCain’s 2008 health reform proposal, which featured new tax credits for the purchase of health insurance, and the elimination of the tax exclusion for employer-provided health coverage, estimated that 20 million people would lose employer-sponsored coverage.
Because policies in the individual market are less likely to include comprehensive benefits, more families would face high out-of-pocket costs for cost sharing and uncovered services. At the extreme, families may be duped into buying junk insurance, which offers virtually no financial protection but nevertheless proliferates in some poorly regulated markets. Families facing high out-of-pocket costs, or carrying poor insurance, are more likely to face medical bankruptcy, even though they have health insurance.
These conservative proposals also are likely to result in larger numbers of uninsured Americans. Families who previously held coverage through an employer or through the Medicaid and CHIP programs would find that the new tax credits or deductions do not provide enough help for them to purchase coverage on their own. Some small business owners and their employees also are likely to find coverage less affordable because association health plans—which create group purchasing options for small businesses—enable businesses with younger, healthier employees to find advantageous employer-provided health insurance plans, leaving those with older, sicker workers in the current small group market where their premiums will spiral up once the good risks and healthy workers have been siphoned off to association health plans.
Finally, health care costs overall would continue growing at unsustainable rates, since individual patients will have little ability to induce doctors, hospitals, and other providers to improve efficiency, improve coordination for people with chronic illnesses, and upgrade the quality of care they deliver. Nor could individual patients, largely through the dollars they would spend on services they consume before they meet their deductible, create the kind of financial incentives that would induce providers to develop the new types of health care organizations most experts think are needed to truly improve health care delivery and control the growth of health care costs.
A specific example—repeal and replace
The consequences of the conservative approach can be best understood through a thorough examination of one specific proposal—the Common Sense plan. Rep. Camp introduced this plan on November 6, 2009, and Minority Leader Boehner offered the same language as the so-called House leadership alternative to the Democratic proposal in during floor debate in mid-November. Boehner has since signaled that he would like to replace the law with this plan. In short, the plan has all the main ingredients of the conservative approach to health care reform: it shifts the costs and risks of insurance onto individuals, and divides the already fragmented insurance market into low-cost plans for the healthy and high-cost insurance for the sick.
To insure sicker individuals who are currently uninsured and can’t find affordable coverage in the unregulated individual market, the bill requires states to establish high-risk pools with the aid of $15 billion in federal funding. But like most pools designed to insure very sick and costly beneficiaries, these programs would likely try to control costs by denying coverage for certain chronic conditions. The bill does abolish waiting lists and specifies that the pools must provide at least two coverage options (one of which must be a high deductible plan with a health savings account), but it does not require states to cover all preexisting conditions. Given the limited federal funding and the cap on premiums—they could be set no higher than 150 percent of the state average—this cannot be a permanent solution for providing coverage.
For Americans moving from group to individual coverage, the legislation eliminates the Health Insurance Portability and Accountability Act requirement of having creditable coverage in the past 18 months to receive individual insurance. Annual or lifetime spending caps are also eliminated and insurers will no longer be able to rescind coverage. But since insurers could still deny coverage for preexisting conditions and charge very different rates based on gender and age, these plans would only be open to healthier and younger Americans who can survive the tedious underwriting process.
Under this bill, insurers selling products in the individual health care market will no longer be confined by the consumer protections of a particular state. Instead, they will be able to choose their own rules and regulations by declaring a state as their “primary” state. From that locale, issuers can sell to customers in all other states and the District of Columbia. This is the plan’s signature proposal and it’s worth examining further.
Conservatives claim that they are empowering individuals by giving everyone a choice of plans across the United States. But in reality this provision is a thinly veiled attempted to free insurers from any rules or regulations. The plan not only undermines state sovereignty by stripping states of their power to set insurance rates and conditions, but also tilts the balance of power in the regulator-issuerbeneficiary relationship toward the issuer.
The Common Sense proposal also explicitly expands the definition of “state” to include not just D.C. and Puerto Rico, but also the Virgin Islands, Guam, American Samoa and the Northern Marianas. Companies can designate the Northern Marianas as the “primary state” for their plan—and then have that island’s nonexistent regulatory authority serve as the company’s sole regulator. This provision would not only empower the issuer, but it could also set off a race to the bottom among the states, many of which would undoubtedly lower their consumer protections standards to attract businesses and jobs.
In fact, the bill seems to recognize this reality and requires insurers to carry a “buyer beware” label, warning consumers that the plan is “not subject to all of the consumer protection laws or restrictions on rate changes of the state.”
The bill’s cost-control provisions are even less impressive than its coverage proposals. All in all, the Common Sense proposal would establish state innovation program grants to reward states for lowering the cost of their premiums, build a website to help consumers navigate through their coverage options, cap noneconomic damages in malpractice lawsuits at $250,000, and specify that all claims must be filed within three years.
These efforts would have a minimal impact on health spending and coverage expansion. The Congressional Budget Office found that under this $61 billion proposal, three million Americans would gain coverage, while the total number of uninsured Americans would actually increase to 52 million by 2019, and millions of Americans would continue to pay skyrocketing premiums. The proposal would, however, decrease the deficit by $68 billion over the 2010–2019 period. It would also reduce premiums for healthy Americans who can purchase coverage independently by 10 to 13 percent.
In fact, it’s unlikely that Rep. Boehner would be able to find affordable insurance under his own proposal should he choose to give up his government-sponsored plans for his own set of conservative reforms. He is 60 and by virtue of his age is more susceptible to cardiovascular disease, different cancers, high blood pressure, and host of other chronic diseases.
The Common Sense proposal would allow insurers to discriminate against these conditions and price the Republican leader out of the market. Specifically, Rep. Boehner:
Would not find coverage in the individual market
The Common Sense proposal aims to increase access to coverage in the individual market by giving individuals the opportunity to purchase insurance licensed in different states. But it’s unlikely that Boehner would be able to find an affordable coverage option, particularly since insurers will now have the option of selecting a deregulated U.S. territory in the Caribbean Sea or Pacific Ocean as their “primary state” and will likely compete on risk selection.
Would not find adequate coverage in high-risk pools
When Rep. Boehner is denied coverage in the individual market, he could apply for insurance in expanded state-based high-risk pools, which typically provide very expensive coverage for the so-called “uninsurables.” But his legislation does not adequately fund these pools and would compel states to limit services, deny coverage for preexisting conditions, and impose high cost sharing.
Would not find stable coverage in association health plans
If Rep. Boehner can’t purchase affordable coverage from state-run high-risk pools, he could join an association-sponsored plan. Unfortunately, under his own legislation, associations are not required to provide a standard package of benefits and have an incentive to craft skimpy policies that attract healthier applicants. See table for a general comparison of the Common Sense Plan and the Affordable Care Act. His alternative would not provide adequate or affordable coverage to Americans who need it most.
Conclusion
The Affordable Care Act made landmark improvements in the American health care system. By reforming the health insurance marketplace, creating new coverage opportunities through expanded Medicaid eligibility and new help with private health insurance for moderate income families, and creating a new platform for controlling health care costs by changing payment incentives and improving the delivery system, the new law takes on the fundamental flaws in American health care.
By Karen Davenport, Igor Volsky | August 5, 2010-Karen Davenport is the Director of Health Policy and Igor Volsky is a Health Care Researcher and Blogger at American Progress. Photo: AP/Jacquelyn Martin
The Impact of Health Reform on Health System Spending
The health reform legislation passed in March 2010 will introduce a range of payment and delivery system changes designed to achieve a significant slowing of health care cost growth. Most assessments of the new reform law have focused only on the federal budgetary impact. This updated analysis projects the effect of national reform on total national health expenditures and the insurance premiums that American families would likely pay. We estimate that, on net, the combination of provisions in the new law will reduce health care spending by $590 billion over 2010–2019 and lower premiums by nearly $2,000 per family. Moreover, the annual growth rate in national health expenditures could be slowed from 6.3 percent to 5.7 percent.
Overview
To judge the merit of the comprehensive health reform legislation recently signed into law by President Obama, it is essential to understand its impact on the affordability of insurance coverage and overall health care spending. Most assessments of the new law consider the federal budget only. For example, the Congressional Budget Office “scored” the federal budget impact of the Patient Protection and Affordable Care Act, as modified by the Reconciliation Act (Affordable Care Act), finding a modest deficit reduction in the first 10 years of implementation.
But the federal budget impact is not the same as the health system impact. A portion of the federal funds would be used to reduce costs for people who already have health insurance coverage but struggle to afford it, while very small businesses would receive help in paying insurance premiums. To estimate health spending accurately, we need to separate out the costs into new health care spending and transfers of existing spending from the private sector to the government. Furthermore, CBO assigned very little savings to system reform efforts, rendering its overall analysis incomplete.
The Office of the Actuary within the Centers for Medicare and Medicaid Services, meanwhile, estimated the health system impacts of the Affordable Care Act and determined there would be a small increase in medical spending as a result of the reform. But, again, this analysis is limited, since it gives almost no weight to proposals for improving the information available to providers and modifying the financial incentives in the current system.
This study considers the new law, as enacted in March 2010, to project the impact of major health reform on national health expenditures and the insurance premiums that families will likely pay, accounting for the full range of impacts the legislation is likely to induce. As part of our analysis, we provide estimates of the effect of key provisions on health spending by government, employers, and households. We build on our earlier analysis of the draft legislation, taking account of the provisions in the final law.
Impact of reform on national health expenditures
Health care reform will affect national health expenditures through five major channels.
Impact of new coverage
Extending health insurance coverage to essentially all Americans will increase medical spending, at least in the short run. (Some argue that increased coverage will lower spending over time by making it possible to pursue more-aggressive cost-containment policies without risking access to care for the uninsured, but in this analysis we do not consider such effects.) From previous studies, data are available to estimate the magnitude of the increase in spending. Hadley and colleagues, for example, estimated that each uninsured individual who gains coverage will incur annually an additional $1,600 of medical care expenses—an increase of 70 percent. The Congressional Budget Office estimated that spending for uninsured individuals, if they become insured, will increase by 25 percent to 60 percent. The actual increase will depend in part on the rates that are paid to health care providers for treating currently uninsured patients.
For our estimates, we increase the $1,600 figure over time with expected increases in medical costs. We then multiply the revised amounts by the number of newly insured resulting from health reform to produce a total estimate. Fully phased in, incremental coverage costs about $75 billion per year to cover 60 percent of the uninsured, or 2 percent of total health care spending. This is comparable to Davis and Schoen’s projection that covering all of the uninsured would add 3 percent to medical spending, and Schoen, Davis, and Collins’s finding that covering all of the uninsured would add 2 percent to medical spending. This methodology suggests that the new law will lead to a 10-year cumulative medical spending increase of $415 billion over the period 2010–2019. This estimate is shown in the first row of Exhibit 1.
Savings in public programs
The new health reform law contains a number of changes to Medicare and Medicaid payments. Many of these are traditional payment changes—for example, reductions in the amount paid to Medicare Advantage managed care plans to a level comparable with the cost of covering beneficiaries under traditional Medicare, or smaller increases in Medicare inpatient payments to account for a likely increase in productivity and to reduce bad debts. Our estimates of the medical spending impact of these changes come from CBO. While this is a good place to begin, it should be noted that CBO has often misestimated, or failed to estimate, the behavioral consequences of such changes in the past.
We consider all such changes, with a few exceptions: 1) we exempt the net savings associated with health care modernization (Section 1104 and Title III, subtitle A, of the reform bill), which is treated separately; 2) we omit the sections associated with coverage expansions, which are accounted for above; and 3) we omit savings from the Community Living Assistance Services and Supports (CLASS) Act, which are a collection of premiums in anticipation of future spending. CBO estimates that the net impact of the remaining proposals in the reform law is to reduce Medicare and Medicaid spending by $416 billion over the 2010–2019 period. This estimate is depicted in the second row of Exhibit 1.
The reduction in Medicare and Medicaid spending is approximately on par with the increase in medical costs associated with covering the uninsured. The net impact of covering the uninsured and reducing traditional program payments (and other taxes from outside the health care system) is a decrease in spending of $1 billion over 2010–2019. This roughly parallels the analysis from the Office of the Actuary, which estimated that national medical expenditures under the new law will increase by $311 billion over 2010–2019. The difference of about $30 billion per year is very small on the scale of health expenditures (less than 1 percent per year), and it indicates that our analysis matches that of the actuary when no other cost changes are considered.
Our analysis assumes that a reduction in Medicare and Medicaid payments will not be offset by higher prices to private payers and, equivalently, that fewer uninsured patients will not yield savings to existing payers because of the reduced need of payers to shift costs onto covered patients. This assumption is common to other estimators and is consistent with empirical research.
Insurance exchanges
Currently, nearly 13 percent of insurance premiums are accounted for by administrative costs. These costs range from about 5 percent in large firms and firms that are self-insured to 30 percent for individuals. Higher costs for marketing, underwriting, churning, benefit complexity, and brokers’ fees explain the bulk of the difference.
The new reform law establishes insurance exchanges that will group individuals and small firms into larger entities and thus drive down those administrative costs. The exchanges also will minimize marketing costs through more transparent posting of premiums, facilitated enrollment (assistance with the application process and screening for eligibility), and stronger oversight of industry practices.
If all individuals and small firms were to receive the same premiums as large firms or self-insured firms do, the costs of insurance administration would decline to less than 10 percent. In analyzing the experience of other countries, The Commonwealth Fund estimated that administrative costs could fall to 8 percent or lower under a robust exchange system. We assume more modest savings, such that administrative costs fall to 10 percent of total premiums—a rate also assumed to remain constant over time, even though this implies administrative costs increase along with national health spending. We assume such savings begin in 2014, the year the exchanges will become operational, and are phased in over three years. The reduction in health spending associated with reduced insurer administration is $211 billion over 2010–2019.
CBO estimates $27 billion in administrative savings owing to insurance exchanges over 10 years. CBO assumes premium reductions of between 1 percent and 4 percent for small groups in the exchanges, and no savings for large groups, for an average of about 0.4 percent. We assume additional savings above this amount, totaling $184 billion over 2010–2019 (see third line of Exhibit 1).
Health system modernization
The reform law includes numerous provisions intended to improve the information available to patients and providers and the incentives facing medical care providers, and thus make medical care more efficient. The Commonwealth Fund has summarized these provisions. Within the Medicare and Medicaid programs, these include:
- Payment innovations, including higher reimbursement for preventive care services and patient-centered primary care, bundled payment for hospital, physician, and other services provided for a single episode of care, shared savings or capitation payments for accountable provider groups that assume responsibility for the continuum of a patient’s care, and pay-for-performance incentives for Medicare providers
- An Independent Payment Advisory Board, with the authority to make recommendations that reduce cost growth and improve quality in both the Medicare program and the health system as a whole
- A new Innovation Center within the Center for Medicare and Medicaid Services, charged with streamlining the testing of demonstration and pilot projects in Medicare and rapidly expanding successful models across the program
- Profiling medical care providers on the basis of cost and quality, making that data available to consumers and insurance plans, and providing relatively low-quality, high-cost providers with financial incentives to improve their care
- Increased funding for comparative effectiveness research
- Increased emphasis on wellness and prevention.
The exact amount that will be saved from these provisions collectively is uncertain. Partly as a result of this uncertainty, CBO and the Office of the Actuary assume only minor savings. For example, CBO estimated that the major parts of the law including these provisions will cost $10 billion over the 2010–2019 period, while the Office of the Actuary determined savings of only $2 billion.
Other estimates, however, suggest that an aggressive approach to health care modernization could result in significantly greater cost reductions. Beeuwkes-Buntin and Cutler estimated a 1.5-percentage-point reduction in cost increases annually from significant health care reform, or more than $700 billion in the 10-year window. These savings would come from two primary sources. First, administrative expenses incurred by provider groups would decline as electronic medical records, and incentives to use them appropriately, are widely disseminated. The potential for administrative savings has been stressed by both provider groups and insurers, and they are distinct from the reduction in insurance administration noted above. Second, reform would lead to fewer and less-costly acute care episodes. Potentially substantial savings could be had by preventing certain illnesses from recurring through better coordination of care and by rationalizing what is done when a person becomes sick by bundling payments, paying more for quality care, and sharing savings with accountable provider organizations.
Similarly, Hussey, Eibner, Ridgely et al. estimate that savings of more than 10 percent are possible, largely from payment reforms like bundled-payment systems. Realizing these savings over a decade implies cost reductions of nearly 1.5 percentage points annually. A more conservative mid-range set of assumptions suggests that such reforms could reduce growth in national health expenditures by about one percentage point per year.
The combination of provisions in the new law will achieve substantial savings in total health spending. A Commonwealth Fund report indicates that similar provisions will slow annual growth in national health expenditures from 6.5 percent to 5.6 percent over the period 2010–2020. Thus, cost reductions on the order of 1.0 percentage points are realistic. We assume such savings are first realized in 2014, to allow time for payment changes to be designed and implemented and exchanges to become operational.
The public and private savings from health system modernization are $406 billion over the 10 years (see fourth line of Exhibit 1). These savings are smaller in the early years but increase over time.
Taking account of these different factors, on net the new law will reduce health care spending by $590 billion over 2010–2019. Exhibit 2 shows the changes by year, highlighting significant savings potential as payment and system reforms are fully phased in.
We find that the annual rate of growth in national health expenditures falls from 6.1 percent before reform to 5.7 percent after reform. When the current projection is corrected to reflect underutilization of services by the uninsured, the reform package lowers the annual rate of growth from 6.3 percent to 5.7 percent, a reduction of 0.6 percentage points per year (Exhibit 3).
The savings we estimate are comparable to the reports by CBO and the Office of the Actuary, with the exception that we also include reasonable impacts of system modernization incentives and efforts to streamline sales of insurance.
Impact on the federal budget
The Congressional Budget Office estimates that the reform law will reduce the federal deficit by $143 billion over the 10 years, 2010–2019. Our estimates of the federal deficit impact differ from CBO’s in two ways. First, we include savings to Medicare and Medicaid resulting from health system modernization. In addition, reductions in employer spending for health insurance lead to increases in wage and salary payments, which are taxed by the federal government. While CBO accounted for some of this effect in recent estimates, further reductions in employer spending for health insurance can be expected from modernization and lower administrative costs. We assume that 90 percent of private health insurance savings are passed on to employees through increased wages, which are taxed at an average marginal rate of 28 percent.
The net effect is a federal deficit reduction of $400 billion over 2010–2019 (Exhibit 4). This reduction results from several factors. As estimated by CBO, the federal cost of insurance coverage expansion is $788 billion. Savings from payment and system reform provisions are projected to generate $682 billion—more than is estimated by CBO, owing to the reasonable estimates of health system modernization provisions. Our federal tax revenue projection mirrors that of CBO’s, though we also add in the additional revenue from employer savings and increased wages from modernization and lower administrative costs—projected to raise $86 billion over the 10-year, 2010–2019 period.
Impact on Medicare
Prior to reform, Medicare expenditures were projected to grow by 6.8 percent annually from 2010 to 2019 (Exhibit 5). The payment and system reform savings estimated by CBO total $397 billion when CLASS and non-Medicare provisions are removed. Applying these net Medicare savings bends the Medicare spending curve and reduces the projected annual growth rate to 5.5 percent. When additional savings from health system modernization are accounted for, the annual growth rate is reduced to 4.9 percent and total 10-year savings reach $524 billion.
Impact on premiums for private coverage
Reducing insurer administration and modernizing the delivery of health care services will each result in reductions in private insurance premiums. Private premiums might be affected by other provisions as well. For example, an excise tax on high-premium health insurance plans, set to take effect in 2018, will introduce a strong financial incentive for insurers to trim benefits and reduce costs below a tax-free threshold of $10,200 for individual coverage and $27,500 for family coverage. Indexing this cap to the overall rate of inflation in the economy plus one percentage point will encourage insurers to seek out value and efficiency continually, thus placing downward pressure on premiums over time.
Health reform might also alter the generosity of the average insurance benefits offered, which may raise premiums for certain groups. In the current market, many people have coverage that is extremely limited, with deductibles totaling many thousands of dollars and entire classes of services that are excluded. Such people will face premium increases under reform, although the quality of the coverage will be significantly improved and out-of-pocket expenses reduced.
The Congressional Budget Office estimates that such changes will increase nongroup premiums. For purposes of this analysis, we exclude changes in premiums associated with better coverage, since one would need to consider the impacts of the enhanced coverage and correspondingly lower out-of-pocket spending to be able to gauge the impact of the changes accurately.
In addition, health reform might change the risk pool and thus affect the average cost of enrollees. Limiting age-based underwriting without providing offsetting subsidies to young adults would drive many within this population out of the insurance market. Close-to-universal coverage, in contrast, might bring more young people into the market, thus lowering premiums. Because of the issues associated with changes in out-of-pocket spending when people move in and out of coverage, this effect is, again, omitted.
We estimate the impact of insurance exchanges and system reform on average premiums using a method analogous to the one proposed above. In particular, we consider how reductions in administrative loads and more-efficient care delivery will affect average market premiums. The basis for the premium estimates is the average employer premium in 2006, as determined by the Medical Expenditure Panel Survey. This premium is then trended forward using the projected growth of premiums under the different scenarios.
Exhibit 6 shows the premium estimates. Without reform, premiums are expected to increase from $13,305 in 2010 to $21,458 in 2019. Relative to this increase, premiums under reform increase only three-quarters as much. By 2019, family premiums are nearly $2,000 lower. Adding reductions in out-of-pocket costs and lower taxes for Medicare and Medicaid will result in estimated savings for the typical family of over $2,500 that year. Again, these are conservative estimates: a recent analysis by the Business Roundtable prepared by Hewitt, for example, found that such legislative reforms could potentially reduce the trend line in employment-based health care spending by about $3,000 per employee by 2019.22
Explaining the difference with other estimates
The estimated health system savings we present are larger than those forecast by the Congressional Budget Office and the Centers for Medicare and Medicaid Services Office of the Actuary, which are similar to each other. The common assessments of CBO and the CMS actuary are not surprising, since most of the evidence upon which they are based comprises peer-reviewed studies that utilize carefully controlled comparison groups (either randomized trials or the natural equivalent). Within that genre, the dominant published themes are the inexorable nature of technology-led medical care cost increases, and the resulting need for unalterable demand- or supply-side constraints to confront that trend.
Although there is significant evidence in the literature that medical care providers are responsive to financial incentives, there is not much evidence in the published literature on policy reforms short of severe constraints that save large amounts of money. And for every study that shows savings from baseline, there is another study that does not. Thus, the common assessment is that there is little efficacious that can be done.
There is, however, a less formal, but no less important, literature that sees the world very differently. Business scholars, including Michael Porter and Elizabeth Teisberg, and Clay Christenson, Jerome Grossman, and Jason Hwang, all note the enormous inefficiency in health care relative to other industries: excessive administrative spending, wasted time and money, and resources spent not reducing costs but simply passing them along to others. These scholars highlight the enormous potential for productivity improvement that reform can drive if it makes health care operate more like other industries.
Through their experiences, health care practitioners reach a similar conclusion. Physicians on the frontlines of medicine, including Guy Clifton, Arthur Garson, Atul Gawande, and Arnold Relman, see the waste that exists and hold a common view on why it exists—principally, misaligned incentives. They show how health care would be better and cheaper were it not for a health care system that discourages such improvements. Echoing the story of misaligned incentives are journalistic accounts showing how the health system fails patients, physicians, and society as a payer. Each case cries out for reforms that would change the underlying perverse incentives.
A number of case studies lend support for the potential of reform. The experiences of Geisinger Health System, HealthPartners, Denver Health, and other health care delivery organizations demonstrate that health can be improved and costs lowered. They also point to the components that are most critical for system improvement. While these studies are often published in the professional literature, their authors do not employ the careful comparison groups that would make the results compelling to the most skeptical reviewers. Thus, case study findings are not given as much emphasis as they otherwise might.
While views differ as to appropriate evidence standards, the situation we analyze is one where there are essentially no clinical trials and where effects of multiple large policy changes may differ substantially from the effects of small trials of single interventions. In such a situation, it is imperative to cast a wider net than traditional evidence standards do. Our decision to be more inclusive in the use of evidence is the primary reason why our results diverge from those of CBO and the CMS Office of the Actuary.
Conclusion
The new health reform law introduces a range of payment and delivery system changes likely to result in a significant slowing of health care cost growth. First, the law calls for the creation of health insurance exchanges that offer a choice of plans and the ability, for the first time, to truly compare plan premiums. The exchanges will have authority to reject plans with excessive premium increases and to set caps on insurance profits and overhead of no more than 15 percent of premiums for large firms and 20 percent of the premiums for small firms and individuals, producing savings to employers and workers that might reach 15 percent to 20 percent by 2019.
The law also begins to change how providers are paid and care is delivered, so that they are rewarded not for the volume of services they provide but for the value they offer. It accelerates the testing, adoption, and spread of innovative payment methods to control growth in volume of services. The law also includes extensive provisions to report data on quality and cost and to enhance choice. Finally, the law directs investments in primary and preventive care, among other changes, that have the potential to yield substantial savings.
In addition to significant payment and delivery system reform, the Affordable Care Act will extend coverage to an estimated 32 million previously uninsured Americans by 2019. Improving access to care should return substantial improvement in overall population health, increase workforce productivity, and reduce the significant financial risk uninsured and underinsured individuals and families now face in the unreformed market.
Even with these improvements in coverage, we estimate that the combination of provisions in the new law will save $590 billion or more in national health spending over 2010–2019 and lower premiums by nearly $2,000 per family. The annual growth rate in national health expenditures will be slowed from 6.3 percent to 5.7 percent.
Congress and the President have enacted a historic health care reform law that will help ensure that all families are able to get the care they need, as well as financial security and relief from rising premiums. The legislation is a significant first step toward bending the health care cost curve for the federal government and families, and it will yield real economic benefits.
By David M. Cutler, Karen Davis, Kristof Stremikis | May 21, 2010-Center for American Progress
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