The New York Times
July 21, 2012
Only the First Step in Containing Health Costs
By CHRISTINA D. ROMER
HERE'S a frightening thought: Despite the recent Supreme Court decision
upholding the Affordable Care Act, serious work on more health care
legislation is still needed.
Don't get me wrong: the new law is a great step forward. It is expected
to expand health insurance coverage to more than 30 million uninsured
Americans without increasing the deficit, and it makes an important
start on reining in the rapid growth of health care costs.
But it's only a start. Even with the law, health care spending is still
projected to rise rapidly over coming decades, so more steps to contain
costs will have to be taken.
Supporters of President Obama's plan usually talk about the expansion
in coverage and the new consumer protections: the large decline in the
number of uninsured people, more preventive care and the prohibition on
denying coverage for pre-existing conditions. These huge accomplishments
deserve to be shouted from the rooftops.
But there's a side that's often forgotten: the so-called pay-fors and
the cost-containment measures. These components -- provisions to finance
the new expenditures and tax credits, as well as to slow the rapid rise
of health care costs -- help explain why the act was so hard to pass,
and why it remains the subject of so much debate. Unfortunately, they
are also the parts that need to be expanded and built upon.
Despite Republican claims that the law is a budget buster, the
Congressional Budget Office, the nonpartisan, official scorekeeper on
budget matters, estimated it would actually reduce the deficit over
the next 10 years. Such fiscal responsibility is in stark contrast to
the last major health care legislation, the Medicare prescription drug
benefit passed in 2003, which was projected to add nearly $400 billion
to the 10-year deficit.
The new law includes some taxes on industries that are expected to
increase sales and profits because of the expanded coverage, such as
medical device makers and pharmaceutical companies. And it raises the
Medicare tax rate for families earning more than $250,000 a year.
It also trims some Medicare spending. For example, it cuts reimbursement
rates for the Medicare Advantage program, which allows Medicare
beneficiaries to choose a private health maintenance organization plan,
in place of traditional fee-for-service coverage. Medicare Advantage
has been much more costly than anticipated, largely because insurers
have been very clever in attracting the people from whom they earn the
most profits. Such cuts of even wasteful spending aren't popular, but
they are good policy.
EVEN more important than these pay-fors are measures that slow cost
growth. Health care spending has been rising as a share of national
income for decades, and is projected to keep rising -- from 10 percent
in 1985 to 17 percent in 2010 to nearly 25 percent in 2037. This rise
squeezes families' consumption of other goods and reduces business
investment. And because the government pays for much of the nation's
health care, rising spending devastates the federal budget. So finding
ways to slow spending growth is vital.
Surprisingly, one of the law's most useful cost-containment measures
may be a tax pay-for: the excise tax on high-priced insurance plans.
Since the 1950s, health insurance benefits provided by employers haven't
been taxed. Employers thus have strong incentives to pay workers with
more generous insurance policies. Such policies, which typically have
lower deductibles and co-payments, may lead families to be less vigilant
consumers of health care.
Starting in 2018, the law taxes very generous policies -- those costing
more than $27,500 a year for a family -- a move that should encourage
benefits managers to shop for more cost-effective plans. Those plans are
likely to include incentives for consumers to push for cost savings, too.
The hope is that this pressure will encourage efficiency improvements
throughout the health care industry. And because the cutoff for what
counts as a high-priced policy will grow with overall inflation, and not
with the higher rate of health care inflation, the tax's effectiveness
should increase over time.
The law also promotes efficiency by generating information about cost
effectiveness. A two-decade research project at Dartmouth College has
shown that different parts of the country have vastly different costs
for treating the same illness, without corresponding differences in
outcomes. The holy grail of health economics is to figure out which
treatments or ways of organizing care lead to lower costs and better
results. The act sets up an institute to evaluate the effectiveness of
different treatments, and includes funding for demonstration projects
to tackle this question.
For example, Medicare has a pilot program organizing primary-care
physicians into teams that coordinate care and anticipate health
problems. The goal is to see if this leads to better patient results
than the traditional approach of individual doctors reacting to problems
after the fact.
A third measure is the new Independent Payment Advisory Board, charged
with proposing near-term cost savings whenever Medicare spending is
projected to grow faster than a target rate. Though it's precluded from
suggesting many things -- notably additional revenue measures or benefit
limitations -- it can suggest restructuring or cuts in payments to health
care providers. Congress must either accept these recommendations or
find alternatives that achieve the same savings. In this way, the board
may be able to bring about politically difficult changes.
Just how much the law will slow spending growth is highly uncertain.
The Congressional Budget Office, whose views on this issue fall squarely
between the optimists' and the pessimists', estimates that it's likely
to reduce the budget deficit by about $1 trillion in its second decade --
when the cost-containment measures have had time to pay dividends.
Big as those savings are, they will still leave a huge share of national
output dedicated to health care and the federal budget far in the
red. What more might be done?
A natural approach is to strengthen measures already enacted. Once the
payment advisory board has a track record, for example, perhaps it could
be empowered to suggest changes in benefits or in how Medicare services
are provided -- say, along the lines of successful demonstration projects.
Likewise, the Bowles-Simpson bipartisan fiscal commission recommended,
as part of overall tax reform, limiting the amount of health insurance
benefits excluded from taxation. Like the excise tax on high-priced plans,
this change would probably increase pressure to keep costs down.
Even larger departures from the current system may be needed. The law
creates health insurance exchanges where individuals and small businesses
can buy coverage. Including a reasonably priced public plan as an option
could exert downward pressure on the price of private health insurance
policies by increasing competition.
SADLY, serious debate over further cost-savings measures may be a long
way off. Some Republicans seem more interested in just limiting the
government's share of health care expenditures than in slowing overall
spending. And some Democrats seem more interested in just preserving
existing government programs than in making the entire health care system
For the sake of the nation's fiscal health, and the health and economic
security of American families, it's time to embrace cost containment in
health care as the next great legislative challenge.
Christina D. Romer is an economics professor at the University of
California, Berkeley, and was the chairwoman of President Obama's Council
of Economic Advisers.