Updated, Nov. 11, 1 p.m. | Regina E. Herzlinger of Harvard Business School joins the discussion. Scroll down to read her suggestion.
With the House’s passage of a health care bill and the Senate legislation possibly moving to the floor for debate next week, many analysts are saying that neither bill goes far enough to slow rising health care costs — an issue that President Obama has made central to his reform agenda.
We asked some experts what are one or two provisions not in the bills that could help contain health care costs going forward?
- Jacob S. Hacker, political science professor
- Len M.Nichols, New American Foundation
- Gail Wilensky, Project Hope
- Joseph Antos, American Enterprise Institute
- Daniel Callahan, co-founder of the Hastings Center
- Leslie Greenwald, RTI International
- Arnold Kling, EconLog
- Regina E. Herzlinger, Harvard Business School
All-Payer Rate-Setting
Jacob S. Hacker is a professor of political science at Yale and the author of “The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream.”
Many critics of the Democratic reform bills are concerned that the bills don’t do enough to slow the rise of health spending. Oddly, many of these critics are also against one of the most important immediate steps needed to create real spending restraint: a strong public insurance plan with the authority to bargain for lower prices for medical goods and services, including prescription drugs.
Health policy experts have shown — and some revealing new evidence drives home — that American insurers pay much more, on average, for goods and services than do insurers in other rich nations. There is also a huge disparity in the prices and the administration of payments that insurers pay.
To bring real cost restraint to American health care, not only should the public plan be strengthened to have greater bargaining authority, but private insurers should also be allowed to piggyback on it in setting their own rates.
Most observers of health care know that the insurance market has become increasingly consolidated, with one or a small handful of insurers enrolling most of the privately insured. Less well known is that providers, too, have grown increasingly consolidated. Many insurers admit they cannot negotiate fair rates in local markets because of provider oligopolies.
Forcing the public plan to negotiate rates, as the House public plan does, means giving dominant providers the power to set rates higher than efficiency would require. It may also mean allowing dominant insurers to cut “most favored nation” deals with providers to prevent them from participating in the public plan. This will drive up the public plan’s premiums and mean that private insurers will face more limited competition to bring down their own provider rates, resulting in higher private premiums as well.
A better alternative to a public plan without pricing authority, as Joseph White of Case Western Reserve has argued, is to allow private plans that pay providers on a more or less fee-for-service basis to piggyback on the public plan in setting their own prices. As Mr. White puts it: “If the main problem, from the private insurers’ perspective, is the superior market power of the public plan, that should be addressed by sharing the market power among all payers, through all-payer rate-setting.”
In practice, all-payer rate setting of this sort would mean that private fee-for-service plans within the exchange would use the same fee schedule that the public plan did. This would not stop private plans from offering alternatives to fee-for-service coverage, like integrated H.M.O.’s, they would simply use their own payment methods. Nor would it stop the public plan from improving its own payment methods; it would only require that those innovations be shared with other plans that used similar pricing methods.
All-payer rate setting would broaden price bargaining so that providers and insurers (including the public plan) could shape the whole pie rather than their own small slices of it. It would, therefore, require that providers and insurers (including the public plan) engage in regularized negotiation over provider rates, rather than the one-on-one turf wars that usually occur today. By putting the public plan and insurers “on the same side,” so to speak, it would also reassure private plans that they would have the ability to compete with the public plan, allowing them to focus on driving efficiencies through innovations in care management, quality assurance and customer service.
A less obvious but equally important effect of all-payer rate setting would be substantially reduced administrative costs. Although it is well recognized that administrative costs are much higher in the United States than other nations, few appreciate that a major portion of this difference arises because of the diverse and conflicting billing and reimbursement practices of providers and private insurers. A path-breaking study of administrative costs in California by Jim Kahn and his colleagues found, for instance, that 20 percent to 22 percent of spending on physician and hospital services in California that are paid for through privately insured arrangements is used for billing and insurance-related functions. Standardized billing and payments for a large part of the provider market would not only reduce administrative expenses, it would also facilitate the monitoring of care and doctor practice patterns — both of which are now shrouded in the fog of competing billing and reimbursement methods.
To be sure, all-payer rate setting cannot take the place of a new public plan. The new public plan would be needed to spearhead the development of payment schedules and improved payment methods for the non-elderly, to invest in public information and the development of strategies to improve the quality of care that could be disseminated systemwide, and to serve as a crucial continuing check on private insurers, as well as a backstop plan for those patients most in need of care. But allowing private plans that use fee-for-service payment to piggyback on the public plan’s rate would enhance cost control, encourage administrative simplification, facilitate delivery system reforms and promote care improvement.
Be More Like Medicare
Len M. Nichols is director of the Health Policy Program at the New America Foundation.
The Medicare payment reforms in both the House and the Senate bills will help to slow the growth of costs by rewarding value over volume, as will the proposed Medicare commission and the tax on insurers who offer high-cost health plans, which are in the Senate Finance Committee bill. And both House and Senate legislation also include “innovation centers” which will allow us to test different payment models and health care processes.
Even with these steps, the reform bills could be strengthened. Specifically:
1) The Medicare commission in the Senate finance committee legislation should be allowed to recommend changes that will reduce system-wide cost growth, not just in Medicare. The scope of the commission should be broadened to include both the private and public sectors.
2) Administrative costs are the fastest growing expense for most providers. Administrative simplification provisions should require private insurers to use common claims forms and adjudication approaches or adopt Medicare’s processes.
3) The current duplicative regulation system costs providers time and money. Evidence-based medicine should be rewarded with a regulation structure that streamlines existing oversight to form three regulatory bodies focused on quality, financial integrity, and workforce.
4) The current legal environment presents barriers to high-quality coordinated care. A task force chaired by the Health and Human Services Secretary and the Attorney General should lower these barriers by addressing current antitrust, self-referral, profit-sharing and medical malpractice laws.
Make ‘Cadillac’ Plans Less Attractive
Gail Wilensky is a senior fellow at Project Hope, an international health education foundation. She was the administrator of Health Care Financing Administration (now the Center for Medicare and Medicaid Services) from 1990 to 1992 and the chairwoman of the Medicare Payment Advisory Commission from 1997 to 2001.
As many have already noted, the legislation passed by the House is “cost-containment lite” at best. The legislation voted on by the Senate Finance Committee has at least one important cost containment addition but it’s too early to know whether — or in what format — the so-called Cadillac tax on expensive plans, will emerge from the full Senate.
The current tax treatment of employer-sponsored health insurance, which doesn’t count employer contributions as part of the employee’s taxable income, needs to change. It’s unfair because it helps higher income workers the most and encourages the purchase of expensive insurance, which exacerbates our spending problems.
The better solution is to limit the amount of an employer’s contribution that can be regarded as tax free or to provide a tax credit instead of an exclusion, which has the same value irrespective of income.
The Senate’s version imposes an excise tax on insurers who provide plans that exceed a certain amount, with various adjustments for family status, age and high-risk professions. Since the amounts are indexed to inflation rather than health care spending, which grows much faster, the limits will affect more people over time.
There is little doubt that the excise tax will be passed back to the employee and thus like the tax cap, will encourage the purchase of lower cost plans that stay under the limit. A tax-cap with a fig leaf is better than none at all, which is the case for the House bill.
Both bills recognize that as much as we need to change how doctors and institutions are reimbursed, we don’t know how to reform the payment system. As a result, they rely on pilot projects to test payment strategies. Unfortunately neither bill has a mechanism that would allow the secretary of Health and Human Services to implement a successful pilot project that improves quality, slows spending or does both Medicare-wide.
Past experience has shown that even successful projects rarely make it into law. The secretary needs to be able to fast-track projects, make mid-course corrections and, most important, implement successful ones into Medicare without requiring new legislation.
While this authority could be considered consistent with that being granted to the new independent Medicare Commission in the Senate Finance Committee’s proposal, giving the authority to the secretary is far preferable because unlike the members of the Medicare Commission, the secretary continues to be accountable for his or her actions.
Increase Consumer Choice
Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute.
The House bill will accelerate health spending, not slow it down. It relies on higher taxes (featuring the “millionaire’s tax” that has no impact on health spending) and Medicare cuts that do little to change fee-for-service incentives — but that are unlikely to be taken when future Congresses come eye to eye with elderly constituents and their health care providers.
The Senate can do better. The key is promoting smarter purchasing and smarter medical practice, not easy-to-score budget cuts that keep intact payment and delivery methods that have produced unaffordable health care.
Here are some suggestions:
• Reform the tax break for health insurance. Best option: cap the exclusion and extend it to everyone, not just those who buy coverage through their employers. The Finance Committee’s tax on so-called Cadillac coverage is a second-best policy that penalizes rich and poor equally.
• Give consumers better insurance choices. Open up state insurance markets to competition. Support value-based insurance design. Provide risk-adjusted subsidies for insurance.
• Create price and value transparency. Patients need to know the cost and likely effectiveness of their treatment options — and so do their physicians. Collect real-time information about treatments and outcomes to inform clinical decisions.
• Let competition work in Medicare. Require real competitive bidding among private Medicare Advantage plans and traditional Medicare. Move to bundled and performance-based payments to promote efficiency.
Price Controls on Premiums
Daniel Callahan is the co-founder of the Hastings Center, a nonpartisan research institution dedicated to bioethics and public policy. He is author of “Taming the Beloved Beast: How Medical Technology Costs Are Destroying our Health Care System.”
There are two important elements missing in the bills: permitting Medicare to consider costs in making its benefit coverage decisions, and a provision setting a “trigger point” to control insurance premiums if competition does not work to hold down cost increases.
The Medicare program has been forbidden since its inception in 1965 from allowing costs to be considered in its benefit coverage decisions. That ban makes no sense for a program facing insolvency in the next eight years or so, particularly since it now covers drugs and treatments that are far more costly than their health value. That limitation should be eliminated.
The other great omission is not providing some way to control how much private insurers can raise premiums. Even with a public choice plan, there is no good evidence that competition among private insurers, improved or not, has the capacity to control costs in any significant degree.
For example, the Federal Employee Health Benefit Program, which offers federal employees a wide range of private insurers, has not been able to hold down its annual cost escalation.
Such a large bet on competition should have its own trigger point. If, after three to five years, competition has not kept cost increases lower than the annual rate of inflation, price controls on premiums should be imposed.
Provisions for Evidence-Based Incentives
Leslie Greenwald is a principal scientist and division vice president at RTI International, a nonprofit research institute. She worked at the Health Care Financing Administration (now the Center for Medicare and Medicaid Services) on health care, among other issues, under Republican and Democratic administrations.
Identifying an effective method for controlling and reducing health care costs is the most difficult element of health care reform. Unfortunately, so far, the health care reform bills under consideration largely avoid the core problem of runaway health care spending: Americans consume too much expensive health care, driving up costs with little or no marginal improvement in their health status or longevity.
The current health care reform bills include some provisions that may have an impact on lowering health care prices. Inclusion of a public option is one way to lower health insurance pricing. Government sponsored health insurance options, like the Federal Medicare program, have a number of structural differences that make them inherently less expensive than private insurance.
These differences suggest that private health insurance competition with a public plan would create strong incentives for private plans to lower their costs and premium pricing to compete. The bills also include provisions to reduce prices for some Medicare services. These are positive steps.
But reduced pricing is only one element of lowering costs. Costs are a function of both the prices we pay for health care and the amount we consume. Lowering prices, but still consuming too much, will not lead to lasting change.
The bills must also contain provisions that would provide strong incentives for health care providers and patients to use evidence-based approaches for choosing care that provides a proven health benefit. Innovative methods to reward physicians and other providers who practice these methods — and penalize those who provide marginal care — should be a core element of reform. These are not easy models to develop and implement, as many Medicare demonstration programs have shown.
These types of performance-based approaches are also politically difficult as they require many constituencies — including health care providers and American consumers — to change their behavior. Still, we won’t have true health care reform until Americans learn that more health care isn’t always better health care.
Give Out Vouchers
Arnold Kling is the author of “Crisis of Abundance: Rethinking How We Pay for Health Care.” He writes for Econlog.
The key to containing health care costs is to reduce spending on medical procedures that have high costs and low benefits. In order to do that, you have to increase the share of spending that is paid for by patients and reduce the share that is paid for by third parties, so that consumers will think twice about high-cost, low-value procedures.
For example, if you hurt your back and your doctor recommends an MRI, today the only question you ask is whether your insurance will pay for it. If you were responsible for half of the cost or more, you would ask whether the MRI is likely to turn up anything that will affect the treatment plan.
In the Senate bill, there is one provision that might indirectly promote this form of cost-sharing. That is the tax on high-cost employer-provided insurance plans, which might cause employers to shift toward plans with higher deductibles and higher co-payments. However, this is only a small nudge in the right direction, and it is not in the House bill and is strongly opposed by organized labor.
For government programs, that means using vouchers rather than fee-for-service reimbursements. Vouchers would work like food stamps, except that they can be used to pay for medical procedures or to buy health insurance. Using vouchers instead of reimbursement would make government’s health care costs controllable rather than open-ended.
Government subsidies to individuals should be in the form of vouchers that are based on need. Need should reflect income and pre-existing conditions. Poor families would receive thousands of dollars in vouchers. People with expensive conditions also would receive thousands of dollars in vouchers. Healthy, affluent people would get much less.
Give Employees Cash to Buy Care
Regina E. Herzlinger is a professor of business administration at the Harvard Business School. She is the author of “Who Killed Health Care?”
Two unavoidable facts stand in the way as Democrats continue to rework their health-care reform bills. First, these bills deliver only half a loaf — they expand health insurance coverage, but do virtually nothing to control the health care costs. Second, expanding health insurance coverage requires nearly a trillion dollars in new funding sources.
There is a way to raise revenues and also control costs: Congress could simply extend the present tax exclusion of employer-sponsored health insurance to a cash-out of those costs as additional salary that employees could use to buy their own health insurance. This approach would motivate insured employees to treat their health insurance as if they paid for it directly and appeal to taxpayers.
Eventually, such a tax exemption could be extended to all individual purchasers of health insurance, regardless of employment status. Over time, a cash-out of employer-sponsored health insurance, adjusted for health-insurance price increases, would lift wages and encourage consumer shopping for affordable, appropriate insurance.
In Switzerland, consumer-based competition holds the general and administrative expenses of insurers to 5 percent of revenues, as compared to 12 to 18 percent for ours. As a result, Switzerland spends 11.4 percent of gross domestic product on health care (40 percent less than we do), and achieves universal coverage, excellent health care, and the greatest equality in health across income classes.
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