Naive policy makers need not apply

Picture_1The Congressional Budget Office (CBO) has released two comprehensive papers detailing the policy and
financial options for health care reform: Key Issues in Analyzing Major Health Insurance Proposals and Budget Options, Volume I: Health Care.I can’t overestimate the importance of these documents to health care reform. I recently did a post as sort of an open letter to the CBO: To the Congressional Budget Office: Please Keep Playing it Straight!After reading these two reports, totaling more than 400 pages of some of the most valuable health policy analysis I have ever seen, I now know that I had no reason to worry that the CBO would just tell the politicians what they wanted to hear.Any Congressional health care reform proposal will need to be “scored” by the CBO and, by preempting the coming proposals with this report, the career CBO health care experts
have now made it very clear they will not be an easy touch. Reformers
are going to have to play the game on the up and up—show real savings
or find the money elsewhere. CBO Director and incoming Obama Budget Director, Peter Orszag, also deserves a lot of credit for supporting his staff and issuing this report.It is also clear that, whoever the Congressional Democratic leadership appoints to succeed Orszag, a marker is down. The CBO is
on the record about what the likely reform options will cost before
anyone had a chance to bring political pressure to bear. And, that just
might have been intentional.The work contains an inventory of about all of the health care reform options being discussed complete with a thorough cost/benefit analysis detailing their impact on federal
spending. There would certainly be impact on private spending from many
of these options but this at least gives us a relative cost index to
compare the many health care reform ideas. This is also a financial report and did not attempt to measure quality improvements.

Taken together these two documents make a number of critical points:

  1. There are no one, two, or even ten silver bullets.
    There are literally dozens of steps that will likely have to be taken
    in order to achieve the savings necessary to make our system more cost
    and quality effective.
  2. The politically easy stuff won’t get it done. Democrats and
    Republicans have said that things like prevention,>wellness, and
    wider use of health information technology
    can free-up the savings we need to make our system affordable even
    while we dramatically expand the number of citizens covered. But the
    CBO confirms that these less politically problematic “ cost containment
    lite” proposals won’t be enough: “…approaches—such as the wider
    adoption of health information technology or greater use of preventive
    medical care—could improve people’s health but would probably generate
    either modest reductions in the overall costs of health care or
    increases in such spending within a 10-year budgetary window.”
  3. Really controlling costs will be very hard and will require some
    courageous and politically problematic actions: “ Those problems cannot
    be solved without making major changes in the financing or provision of
    health insurance and health care. In considering such changes,
    policymakers face difficult trade-offs between the objectives of
    expanding insurance coverage and >controlling both federal spending
    and total costs for health care.”
  4. Changing what we pay will have far more potential to change the system’s costs than changing how we pay.

The >CBO’s work provides a detailed shopping list of policy
options complete with assumptions and an analysis of what the various
steps could cost or save the federal budget.

you read through the reports it becomes clear that there are things we
can do that will help but really be a drop in the huge health care
bucket. There are other things that we can do that would have a really
dramatic impact on federal health care spending—and they tend to be the
most politically problematic.

For example, The Baucus Health Plan makes a big deal about saving
money from waste, fraud, and abuse.” But such efforts are estimated by
the CBO to save a relatively inconsequential $500 million over ten
years. Using pay-for-performance systems, the health care fix de jour,
yields only single digit gains while reducing Medicare physician
payments in line with productivity gains would save a whopping $201
billion over ten years.

Rebasing the Medicare physician payments using the Medicare
Economic Index (MEI) would cost a budget busting $556 billion over the
next ten years and "equalizing" the private Medicare Advantage
payments—the favored method to pay for a fix—would only save $157
billion over the same period.

Many of these proposals save a great deal of federal spending
because they shift costs to the private sector—for example a “pay or
play” large employer mandate would save the government $48 billion but
would certainly cost the private employer community a great deal more.

is a partial list to give you a sense for the trade-offs. Note in
particular the items, or categories, that make a big or small
difference compared to others. The estimates apply to federal spending
and the cumulative impact the particular proposal would have on the
deficit over ten years–between 2010 and 2019.

The reports also detail the many advantages and disadvantages to do these things not directly reflected by the budget estimates.

I offer this partial
list from the 115 options presented as a quick opportunity to compare
many of the most mentioned policy options and other options the CBO
has found will have the biggest impact. You really need to read the
document and the assumptions that go with these estimates to fully
appreciate the analysis.

Change the Health Insurance System

  • Foster the Formation of Association Health Plans – Adds $220 million to the deficit by 2019.
  • Allow Individuals to Purchase Non-Group Health Insurance Coverage in Any State – Reduces the deficit by $7.4 billion by 2019.
  • Impose a “Pay-or-Play” Requirement on Only Large Employers – Reduces the deficit by $48 billion by 2019.
  • Establish
    a National High-Risk-Pool Program – Fully subsidizing all state’s to
    enable them to cap high risk pool premiums at 150% of the market would
    add $16 billion to the deficit by 2019.
  • Establish a National
    Reinsurance Program to Provide Subsidies to Insurers and Firms for
    Privately Insured Individuals – Enacting a program to absorb 75% of the
    cost of high cost claims would add $752 billion to the deficit by 2019.
  • Create
    a Voucher Program to Expand Health Insurance Coverage – Providing
    vouchers for the uninsured with incomes below 250% of poverty with a
    cap of $1,500 for individuals and $3,000 for families would add $65
    billion to the deficit by 2019.
  • Require States to Use Community Rating for Small-Group Health Insurance Premiums – Reduces the deficit by $5 billion by 2019.

Medical Malpractice Reform

  • Limit Awards from Medical Malpractice Torts – Reduces the deficit by $5.6 billion by 2019.

Change the Tax System

  • Reduce
    the Tax Exclusion for Employment-Based Health Insurance and the Health
    Insurance Deduction for Self-Employed Individuals – Capping family
    health insurance deductions at $1,442 per month adds $452 billion in
    new revenues by 2019.
  • Replace the Income Tax Exclusion for
    Employment-Based Health Insurance with a Phased-Out Deduction –
    Beginning to phase-out the exclusion for employer health insurance at
    $160,000 in family income adds $552 billion in new revenues by 2019.
  • Disallow New Contributions to Health Savings Accounts – Adds $10.5 billion in new revenue by 2019.
  • Replace
    the Existing Income and Payroll Tax Exclusion on Employer Provided
    Health Insurance with a Refundable Credit – A more limited credit equal
    to 25% of health insurance premiums that would be phased out for high
    earners would increase federal revenues by a whopping $606 billion by

Expand Access to Public Programs

  • Raise the Age of Eligibility for Medicare to 67 – Reduces Medicare spending by $85.6 billion by 2019.
  • Create
    a Medicare Buy-In Program for Individuals Ages 62 to 64 – Adds $1.2
    billion to the deficit by 2019. CBO estimates the average single
    premium would be $7,600 a year in 2011.
  • Expand Medicaid
    Eligibility to Include Young Adults with Income Below the Federal
    Poverty Level – Adds $22 billion to mandatory spending by 2019.
  • Create
    a Medicaid Buy-In Program – Allowing the uninsured below 300% of
    poverty to buy-in to Medicaid would add $7.8 billion to the deficit by
  • Expand Medicaid Eligibility to Include Parents with
    Income Below the Federal Poverty Level – Adds $37 billion to the
    deficit by 2019.

Quality Initiatives and Pay-for-Performance

  • Reduce Medicare Payments to Hospitals with High Readmission Rates Above the 50th Percentile – Saves $9.7 billion by 2019.
  • Expand the Hospital Quality Incentive Demonstration to All Hospitals – Saves $2.9 billion by 2019.
  • Deny Payment Under Medicaid for Certain Hospital-Acquired Conditions – Reduces mandatory spending by $45 million by 2019.
  • Allow
    Physicians to Form Bonus-Eligible Organizations and Receive
    Performance-Based Payments – Reduces spending by $5.3 billion by 2019.
  • Pay
    Primary Care Physicians in Medicare Using a Partial-Capitation System,
    with Bonuses and Penalties – A net reduction of $5.2 billion in
    spending by 2019.
  • Pay for a Medical “Home” for Chronically Ill
    Beneficiaries in Fee-for-Service Medicare – An increase in mandatory
    spending of $5.6 billion by 2019.
  • Fund Research Comparing the
    Effectiveness of Treatment Options – The net effect on the deficit
    between 2010 and 2019 would be an increase of $860 million and “reduce
    total spending on health care in the United States by an estimated $8
    billion over the 2010–2019 period (or by less than one-tenth of 1
    percent).” CBO seems to be saying that more such information will be of
    small value unless underlying incentives that promote inefficient
    practice patterns are not changed.

Health Information Technology

  • Create
    Incentives in Medicare for the Adoption of Health Information
    Technology Including Bonuses and Penalties for all Physicians – A
    reduction in the deficit of $4.4 billion by 2019.
  • Require the
    Use of Health Information Technology as a Condition of Participation in
    Medicare – A savings of $11 billion on physician payments and a savings
    of $23 billion for hospitals by 2019.

Change Provider Payments

  • Reduce
    Medicare’s Fees for Physicians in Areas with Unusually High Spending –
    A reduction of $5.3 billion in federal spending by 2019.
  • Reduce Medicare’s Payment Rates Across the Board in High-Spending Areas – A savings of $51 billion by 2019.
  • Reduce
    Annual Updates in Medicare Fee-for-Service Payments to Reflect Expected
    Productivity Gains – $201 billion in savings by 2019.
  • Reduce
    the Update Factor for Hospitals’ Inpatient Operating Payments Under
    Medicare by 1 Percentage Point – A savings of $93 billion by 2019.
  • Reduce
    the Update Factor for Payments to Providers of Post-Acute Care Under
    Medicare by 1 Percentage Point – A savings of $54 billion by 2019.
  • Eliminate
    Inflation-Related Updates to Medicare’s Payment Rates for Home Health
    Care for Five Years – A savings of $50 billion by 2019.
  • Modify
    the Sustainable Growth Rate Formula for Updating Medicare’s Physician
    Payment Rates With Annual Updates Based Upon the Medicare Economic
    Index (MEI) and Include a Part D Hold-Harmless– Eliminating the
    Sustainable Growth rate Formula and rebasing on the MEI would increase
    spending by $556 billion over ten years. Freezing payments at 2009
    levels would cost $318 billion over ten years.
  • Set the
    Benchmark for Private Plans in Medicare Equal to Local Per Capita
    Fee-for-Service Spending – Reduces spending by $157 billion by 2019.
  • Require
    Manufacturers to Pay a Minimum Rebate on Drugs Covered Under Medicare
    Part D – Using the Medicaid rebate policy as a model saves $110 billion
    by 2019.


  • Eliminate
    Allotment Caps for the State Children’s Health Insurance Program and
    Permit States to Expand Coverage up to 400 Percent of the Federal
    Poverty Level – Adds $80 billion to the deficit by 2019.

Premium and Cost Sharing in Federal Programs

  • Require a Copayment for Home Health Episodes Covered by Medicare – A 10% Copay saves $47 billion by 2019.
  • Impose Cost Sharing for the First 20 Days of a Stay in a Skilled Nursing Facility Under Medicare – Saves $27 billion by 2019.
  • Impose a Deductible and Coinsurance for Clinical Laboratory Services Covered by Medicare – Saves $24 billion by 2019.
  • Institute
    a Premium for Higher-Income Enrollees Under Medicare’s Drug Benefit
    Similar to That Used in Part B – Saves $10 billion by 2019 without
    adjusting for inflation.
  • Increase Funding for the Health Care
    Fraud and Abuse Control Program in Medicare and Medicaid by $1 billion
    – Savings of $1.5 billion by 2019 for a net savings of $500 million.
  • Increase
    the Payroll Tax Rate for Medicare Hospital Insurance by One Percentage
    Point – Increasing the Medicare tax by one percentage point on all
    earnings would increase federal revenue by $592 billion by 2019—doing
    it only on earnings above $150,000 would increase federal revenues by
    $77 billion by 2019.

The inescapable conclusion is that what we pay has the potential to matter more than more than how we pay for it.

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5 replies »

  1. What’s also interesting in this overall discussion is the role that increasing healthcare challenges have in the larger economic crisis, specifically related to the role of policymakers in the forming of the situation. I wrote about this recently at my blog (shameless plug) at http://www.reiboldt.com, but I think this goes to show you how we’re facing a much larger crisis than the one we’re currently in, and healthcare will be the driving component. Personally, I think the impending healthcare crisis, outlined by some of the points in this post related to policymakers’ role in forming healthcare policy, will dwarf the current housing and Wall Street crisis.

  2. Medical procedures that benefited from productivity gains were time consuming and technically difficult when they were first introduced but can now be done much faster and more easily. CMS historically did a poor job of reflecting this in its payment policy which is why they are so overpaid now. Perhaps it could do a better job if it spent a little more on administrative costs to monitor productivity and reflect it in (reduced) payments faster.
    As for electronic records, while there are modest, in the scheme of things, savings to be realized by reducing duplicate testing and adverse drug interactions, especially in hospitals, the real potential value, I think, is in large population data analysis to better determine what works and what doesn’t. That, in turn, should make it easier to develop, update, and sustain national best practices standards.
    Regarding the big ticket item of the tax preference currently afforded to employer provided health insurance, we could eliminate it entirely if we moved to a taxpayer funded voucher approach financed with a highly transparent payroll tax which would probably have to be in the 15% range, especially if there is a reasonably high wage cap to which it applies. That is about the same size as the current FICA tax of 15.3% (12.4% on the first $106,800 for 2009 to pay for Social Security and 2.9% of all wages to cover Medicare Part A). If we opted for a payroll tax, however, we would also need to integrate the income and payroll tax so wage earners are not hugely overtaxed relative to those who earn their income from interest, dividends, capital gains, rent and other non-wage sources. There might also need to be a modest (5% or so) VAT to cover the cost of insuring the unemployed and pre-Medicare eligible retirees. A VAT, at least, would capture some revenue from the underground economy which goes largely untaxed now.

  3. We have been saying for a long time that the solution has to cover the entire scope of healthcare for it to sustain. EHR is needed but its benefits are overblown. The start of the blog Healthcare Transformation ( blogs.biproinc.com ) was with the intent to create a discussion around that total solution.
    As for as policy makers are concerned, I am not sure what new they are bringing to the table. Their past solutions have not helped.
    We need competent and independent medium to come to Healthcare solution that is sustianable, humane and useful.

  4. This is the best post I’ve ever seen on this blog. I’ve gotta read this report. Thanks for the summary!
    Initial thoughts: those tax code reform estimates are astounding. What a great idea (despite the political infeasibility). Why on earth do we allow wealthy individuals to shield massive amounts of income in health care consumption? Talk about the current tax policy distorting consumption patterns…this should all sound very familiar to anyone who’s taken Econ 101.
    Scanning the list, it looks like the next-largest cost-savers involve appropriate reductions in payment for services with high productivity gains. Hallelujah! For anybody who doesn’t see it, this is a direct assault on those procedures and radiology services that are ridiculously overpaid. Better get to those cataracts now, boys and girls; cancel the holidays and run that MRI 24/7! If we can get this done (“modify _what_ we pay”), the expensive SGR modifications might not need to be all that expensive…it’s only cognitive service access that will truly be threatened by across-the-board FFS cuts. Changing relative payments may alleviate this problem to a large extent.