Is an IOM v. CBO Smackdown Looming on Health-Reform Costs?

The U.S. can cut health-care spending by $250 billion a year within a decade, a
congressionally chartered panel will say this month in a bid to
show costs can be contained even if all Americans are insured.

A report from the Institute of Medicine, which advises the
federal government on health care, will counter “stingy”
estimates from the Congressional Budget Office, said Arnold
, planning chairman of the institute’s working group on
health costs. The panel’s annual figure is five times the amount
the budget office says the U.S. will save under a bill in the
House of Representatives, according to the budget office’s July
17 letter to House Ways and Means Committee chairman Charles

The preliminary findings from the institute, part of the
National Academies in Washington, will be issued amid a growing
debate over the health-care overhaul proposals that President
Barack Obama
is urging Congress to pass. The report will help
bolster the argument that covering the nation’s 46 million
uninsured won’t bust the budget, advocates of the bill say.

“The institute will make it very clear that we are
right,” said Senator Benjamin Cardin, a Maryland Democrat who
backs health legislation because he says it will save money.
“It gives us the lift we need and the encouragement to say,
‘We’re right to do this.’”

The report, which hasn’t been completed yet, was disclosed
in interviews with Milstein, institute senior scholar Michael
McGinnis, and David Walker, president of the Peter G. Peterson
Foundation, which is funding the organization’s research.

‘Big Differences’

The working group plans to release a preliminary version to
ensure its findings contribute to the debate in Congress,
Milstein said. That report is expected by about Sept. 20,
McGinnis said, with a more comprehensive paper to follow.

“I think the Institute of Medicine report will garner a
lot of attention,” said David Brailer, a peer reviewer on the
study who was former President George W. Bush’s top adviser on
health-care information technology. “There will be big
differences on the magnitude of real near-term savings.”

Budget office spokeswoman Melissa Merson didn’t return
calls seeking comment.

The working group’s recommendations will cover a broad
range of changes, Walker said. The panel asked dozens of experts
to prepare case studies about how leading hospitals and
insurance companies have saved money, said Walker, a former U.S.
comptroller general.

The report is likely to reflect those cost-saving ideas,
presented at three workshops in May, July and September, Walker
said. Proposed solutions include simplifying medical billing
forms, letting Medicare buy equipment at auction and rewarding
doctors based on the quality of care, he said.

Killer Costs

“The whole objective is to have comprehensive health-care
reform, but we have to control costs first because costs are
going to kill the country,” Walker said.

The working group is seeking ways to cut costs in the $2.5
trillion U.S. health-care industry by at least 10 percent by
2019, Milstein said. The savings target will rise higher than
$250 billion to keep up with inflation in the broader economy,
Milstein said. The budget office said July 17 that proposals to
extend insurance coverage may cost as much as $1.6 trillion over
10 years.

The nonprofit Institute of Medicine was chartered by
Congress in 1970 to provide scientific, evidence-based advice to
the government, according to its Web site. The National
Academies gather independent panels of volunteer experts to make
policy recommendations in their respective disciplines.

Differing Approaches

The institute took a more comprehensive approach to cost
containment than the Congressional Budget Office, said Paul
, president of the Center for Studying Health System
Change, a nonpartisan policy-research group in Washington.

The largest chunk of savings in the budget office’s
analysis of the health-insurance bill pending in the House of
Representatives came from Medicare and Medicaid beneficiaries
switching to other insurance, according to the letter to Rangel.

“The Institute of Medicine is looking at much bolder cost-
containment measures than have been given to the Congressional
Budget Office to analyze,” Ginsburg said.

About a third of the savings to be outlined in the
institute’s report will go to the federal government, Milstein
said. The cuts won’t hurt quality or innovation, he said.

The government pays for almost a third of U.S. health care,
providing Medicare coverage for the elderly, the federal share
of Medicaid coverage for poor families that is also partly paid
for by states, and a children’s health-insurance program
targeting families with incomes as high as $64,085 for a family
of three.

Other Beneficiaries

The rest of the savings would benefit private insurance
companies, health-care providers and consumers, McGinnis said.

Medicare can cut costs by buying equipment at auction, one
study proposes. The agency saved 26 percent in a pilot test of
auctions before Congress suspended the program, Mark Wynn,
senior adviser at the Centers for Medicare and Medicaid Services
in Baltimore, said in a May 22 presentation. Medicare spends
about $10 billion a year on such equipment, including hospital
beds and wheelchairs, Wynn said.

Insurers may save $109 billion over 10 years by
accelerating the use of electronic payments and related
technologies, David Wichmann, executive vice president at
Minnetonka, Minnesota-based UnitedHealth Group Inc., the largest
private U.S. health insurer, said in May.

Monthly Statements

An additional $14 billion could be cut if insurers
substituted monthly statements for “explanation of benefits”
forms on each claim, he said.

Other recommendations may focus on paying doctors and
hospitals based on the quality of care, instead of rewarding
doctors for performing more tests and procedures, according to
John Rother, executive vice president of policy at AARP,
formerly the American Association of Retired Persons.

“The focus is on changing incentives,” Rother said.

Those inducements may include Medicare bonuses for
hospitals’ daily rates if patients do well after being
discharged, or creating pools of money not tied to specific
tests to cover preventive care, Rother said in an interview.

The Institute of Medicine’s report may not convince
Congress that the budget office’s estimates are wrong, said Gail
, director of health-policy analysis at Consumers Union
and a member of the institute’s planning committee. Whether
Congress will pass health-care legislation with the budget
office’s estimated price tag “will come down to political
will,” she said.

Poor Record

Advocates of Obama’s health-care proposals have argued the
budget office’s track record is poor in predicting health costs.
The office overestimated the cost of Medicare prescription-drug
coverage by 35 percent when it was proposed in 2003, and missed
more than half of the effects of reimbursement cuts passed as
part of the Balanced Budget Act in 1997, Clinton administration
Medicare director Bruce Vladeck said in an interview.

“The Congressional Budget Office is always wrong,”
Vladeck said. “The CBO systematically underestimates savings,
so we cut twice as much in 1997 as we needed to balance the

The budget office has disappointed supporters of a health-
care overhaul by refusing to count savings from initiatives such
as subsidizing adoption of electronic medical records, Obama
said July 1 at a gathering at Northern Virginia Community
in Annandale.

Patient Records

“The CBO can’t identify how much money it will save, even
though everyone believes it will be a lot,” the president said.

The government has been trying since early this decade to
link computerized patient records into a nationwide network that
would let researchers identify the most cost-effective
treatments, eliminate duplication of tests and avoid medical
errors from adverse drug interactions, Brailer said.

The budget office estimated that wide adoption of
electronic medical records would save no more than $5.4 billion
a year, according to a Jan. 21 letter to Rangel. The Boston-
based Center for Information Technology Leadership, a nonprofit
arm of Harvard University-affiliated Partners HealthCare,
estimated $77.8 billion in annual savings.

Tim Mullaney is a business writer for Bloomberg News. Before
joining Bloomberg, Tim was with BusinessWeek magazine where he authored
a series of influential cover stories on healthcare themes, including the Digital Hospital, a piece co-written with Arlene Weintraub and Bush’s Healthcare Radical, a profile of Bush administration healthcare IT coordinator David Brailer.  This article first appeared on Bloomberg, and is reprinted here with permission.