July 23, 2014

Looking Beyond the Reserve Fund: Cost Control Must Do More Than Pay For Expanded Health Insurance Coverage

By David Koitz

This is Issue #6 in The Concord Coalition Series on Health Care and Medicare. For the rest of the series, click here.

“I think it is extremely important from a credibility standpoint to show the American people that you’re making savings in the enormous sums now being spent on health care before you go out and ask them for billions of dollars more.  And I don’t think I’m the only senator who feels that way.”  

Statement attributed to Senator Ron Wyden, March, 12, 2009[1]

The Jumping Off Point

As promised during his campaign, President Obama has made reform of the nation’s health care system a major element of his domestic agenda. Although leaving the details to be worked out with Congress and stakeholder groups, the President’s budget proposed a $634 billion 10-year reserve fund dedicated to health care reform. The Administration considers the fund a beginning step toward reform, acknowledging that aggregate costs could top one trillion dollars over the coming decade.[2]

The President’s major aim is to move the nation toward a more universal health care system, with the primary emphasis on extending insurance coverage to as many of the uninsured as possible. In addition, he has set out certain principles he wishes to achieve through legislative reforms, including guaranteed choice, affordable coverage, protecting families' financial health, investing in prevention and wellness, portable coverage, improved patient safety and quality care, and long-term fiscal sustainability.

By itself, the proposed reserve fund would do none of these things. Indeed, the use of the term “reserve fund” itself is misleading because there are currently no funds to be “reserved.” The President’s budget projects a deficit of $1.8 trillion this year and $1.3 trillion next year. Over the coming 10 years, the budget projects deficits totaling $7.1 trillion with no annual deficit dipping below $500 billion. What is being “reserved” is the ability to spend more federal dollars on health care if sufficient offsets can be agreed upon. The reserve fund simply establishes a tentative top line for new spending ($634 billion cumulatively over the next 10 years) and insists that this amount be paid for with tax increases or spending cuts elsewhere in the budget.

This does not mean that the reserve fund is totally meaningless. At a minimum, it provides a budgetary framework to ensure that health care reform will not add to the deficit over the coming 10 years. This restriction is responsible for current efforts on Capitol Hill to offset the cost of various reform plans, and in some cases to rethink what is possible. It also provides the Administration with an opportunity to put forward its own recommendations for how health care reform should be paid for. To its credit, the Administration has not ducked this challenge.

An initial package of policy recommendations was included in the President’s budget plan announced in late February of this year. Under them, the “resources” the Administration proposed to be credit to the reserve fund were to be derived through a roughly 50-50 split of spending constraints and revenue measures -- $325 billion to be trimmed from Medicare and Medicaid and $309 billion coming from new revenue. The largest of the spending constraints would attempt to reduce Medicare’s payments to its private group-health contractors (providers under in the Medicare Advantage program) through a new competitive bidding process, resulting in estimated savings of $177 billion over the next 10 years. Other measures would hold down spending on drugs under Medicaid by increasing a legislatively-prescribed drug rebate for brand-name drugs (increasing it from 15.1 percent to 22.1 percent of the average manufacturers price), incentivize health care practices that lower hospital readmission rates, expand a Hospital Quality Improvement Program, improve Medicare and Medicaid payment accuracy, lower premium subsidies for upper income participants in Medicare’s Part D prescription drug program, and reduce drug prices by allowing more generic drugs on the market.

The revenue portion would come from raising income taxes on higher-income individuals and families, primarily by reducing the tax-saving value of itemized deductions for families with annual incomes over $250,000. The Administration anticipates that this would raise $267 billion over 10 years.

The President has since proposed an additional $313 billion of spending savings, bringing the total 10-year offsets to the potential cost of health care reform to $947 billion. In doing so, on June 13, 2009 he reiterated --

 real reform will mean reductions in our long term budget. And I have made a firm commitment that health care reform will not add to the federal deficit over the next decade.[3]

While this is a fiscally responsible pledge -- and a big improvement over the deficit financing of Medicare’s prescription drug expansion in 2003 -- it requires a major caveat. As explained by Congressional Budget Office (CBO) Director Douglas Elmendorf --

It … bears emphasizing that if a reform package achieved ‘deficit neutrality’ during its first 10 years, budgetary savings in the long run would not be guaranteed even if the package included initial steps towards transforming the delivery and financing of health care that would gain momentum over time.[4]

There are many reasons for this. One is timing. If expanded coverage were phased-in slowly, as would probably be the case, the first several years of the 10-year window would be low-cost years. As a result, the initial 10-year total would be artificially low relative to the true cost of the program when fully phased in.

The second reason is more subtle. CBO’s Elmendorf elaborates --

 savings generated by policy actions outside of the health care system would probably not grow as fast as health care spending. Such would be the case for revenues stemming from the Administration’s proposal to limit the tax rate applied to itemized deductions and from proposals to tax sugar-sweetened soda or alcohol, for example.[5]

Yet a third possibility is that Congress might engage in blatant budget gimmicks. Deficit-neutrality over 10 years could be achieved in a technical sense by enacting a “sunset” on coverage expansion before the 10th year while enacting savings that extend out over the entire decade. Hence the cost of the expansion would seemingly end while the savings measures would be assumed to continue. While this might seem too absurd for consideration, it would actually be consistent with actions taken by Congress to achieve favorable budgetary “scores” for recent tax cuts and entitlement expansions.[6]

An even bigger problem, however, is that which results from focusing too heavily on the objective of 10-year deficit-neutrality. Simply paying for new commitments during this immediate period overlooks the unsustainable path the nation’s health care spending is already on. As noted by Elmendorf --

[A]ny savings in existing federal programs that were used to finance a significant expansion of health insurance would not be available to reduce future budget deficits. In light of the unsustainable path of the federal budget under current law, using savings to finance new programs instead of reducing the deficit would necessitate even stronger policy actions in other areas of the budget.[7]

Expanding insurance coverage is a clearly stated goal for the Administration, but its strategy for reining in health care costs beyond the 10-year window is less defined, resting heavily on achieving consensus on still-to-be-determined measures to wean out waste and ineffective or unnecessary procedures. The President’s budget elaborates --

Across our Nation, health care costs vary substantially, yet the higher-cost areas do not generate better health outcomes than the lower-cost areas. Even among our Nation’s leading medical centers, costs vary significantly -- with costs at some centers twice as high as others -- but the higher-cost centers do not achieve higher quality than the lower-cost centers. Some researchers believe that health care costs could be reduced by a stunning 30 percent -- or about $700 billion a year -- without harming quality if we moved as a Nation toward the proven and successful practices adopted by the lower-cost areas and hospitals. Capturing this opportunity would help to boost family take-home pay and put the Nation on a sounder fiscal path. It will require many steps, including expanding the use of health information technology, more aggressively studying what works and what doesn’t, experimenting with different payment systems to health care providers, and promoting prevention and healthy living -- many of which are advanced dramatically through the recovery Act.[8]

Defining Reform

However it may be framed, real health care reform requires more than devoting new resources to expanded health care coverage and services.  We need specific policy changes to spend less, not just from the federal treasury, but from all sources that people have to pay for their health care. More importantly, we need to make sure that the savings actually materialize and grow beyond the next 10 years. And, the more that health care reform expands the federal government’s commitments the greater the magnitude of the savings needed to make the system sustainable.

Requiring increased income taxes on the high-income population won’t reduce health care costs. Lowering payments to private Medicare providers who only cover a quarter of Medicare’s enrollees won’t change the “test-more, serve-more” incentives of fee-for-service medicine that pervades the health care industry. Research on comparative effectiveness of various treatments, investments in health care technology and prevention programs may some day pay off, but not without specific mechanisms to tie the results of such initiatives to provider practices, purchasing decisions, and consumer behavior.

Covering the 46 million who now lack insurance is an important social goal. The Administration calls it a “moral imperative.” And it potentially can save money in various ways if tied to other reforms. But standing alone, expanded insurance coverage means expanding access to health care and that will likely increase health spending overall. The efforts in Massachusetts mandating that its citizens have health insurance show that simply expanding the availability of insurance does not contain costs. If anything the evidence from its brief existence suggests the opposite. Over the past year, the State has had to raise taxes and fees to keep the new program afloat, and government and industry officials believe the program will not survive over the next five to ten years if major actions are not taken to slow the State’s health care spending.[9]

Nationally, the need to rein in spiraling health care costs has become an economic imperative. The high cost of health care in the U.S. encumbers the economy’s potential to grow. Every year it rises, it acts like a new tax on all aspects of the economy. Today, one out of six dollars’ worth of goods and services we produce represents a health care cost. In just ten years, it will be one out of five. To quote the Administration’s budget --

One of the biggest drains on American pocketbooks is the high cost of health care. Many families are one illness or accident away from financial ruin. Health insurance costs reduce workers’ take-home pay to a degree that is both underappreciated and unnecessarily large. At the same time, health care costs are consuming a growing share of Federal and State government budgets. The United States spends over $2.2 trillion on health care each year -- almost $8,000 per person. That number represents approximately 16 percent of the total economy and is growing rapidly. By 2017, almost 20 percent of the economy -- more than $4 trillion -- will be spent on health care.[10]

Moreover, the unabated growth in health care spending is a fiscal yoke around the neck of future generations. Absent containment, it will cause the federal debt to rise, future taxes to go up, and pre-empt future government spending on things vital to fostering growth -- a modern infrastructure, better education, technological advancement, cheaper energy, and promotion of research.

 

Estimated Growth of National Health Expenditures, 2008-2018

 

Total National Expenditures

($s in trillions)

National Expenditures as Share of GDP

Per Capita expenditures

2008

2.379

16.6%

$7,804

2009

2.510

17.6%

$8,160

2010

2.624

17.7%

$8,459

2011

2.770

17.9%

$8,851

2012

2.931

18.0%

$9,282

2013

3.111

18.2%

$9,767

2014

3.313

18.5%

$10,312

2015

3.541

18.9%

$10,929

2016

3.790

19.3%

$11,598

2017

4.062

19.8%

$12,325

2018

4.353

20.3%

$13,100

Source:  Centers for Medicare and Medicaid Services, National Health Expenditures, projection series for 2008-2018.

It’s true that health care creates jobs and is a form of consumption that contributes to the wealth and advancement of the nation. But health care in the U.S. costs too much. We over-test, over-treat, and over-inflate our medical services. The health care profession has come to expect high compensation and the consumer expects Cadillac coverage from its insurers. We complain about our premiums and deductibles, but wonder why the simplest things aren’t covered. The concept of health insurance for that catastrophic financial event… that illness that would otherwise bankrupt us… has been replaced by a presumption that health insurance should cover nearly every ache or pain. We don’t feel that way about tuning our cars, repairing our washing machines, painting our houses, or getting a hair cut. But for health care we expect it all to be on our third-party dimes, whether they be our insurers, our employers, Medicare, Medicaid, the VA, or other payers other than ourselves. Yes, that’s an exaggeration -- certainly for those who have no or poor health insurance or lack other means to pay for medical care -- but our expectations of what health insurance means and how it influences the delivery of medical care today has changed the concept of what our health care system can provide at a reasonable cost.

The U.S. is not alone in experiencing health care spending that exceeds the growth of its economy and workers’ incomes, but other countries provide health care for their populations with much less of their resources. Moreover, by various indicators of well-being, the U.S. falls behind many countries that spend far less than we do.[11]

Conclusion

While the need to find ways to constrain our medical care spending is increasingly recognized by policymakers -- whether it means reducing tax preferences for the rich, taxing employer-provided health insurance, or shrinking private Medicare payments -- the political world sees it primarily as a “pay for,” i.e., as a means to pay for something new to be offered to constituents. Given the Congress’ past propensity to drop the burden of new programs on the government’s general fund with little or no regard as to where the money would come from, this new pay-as-you-go perspective is laudable. But it fails to recognize the need to address medical care spending for the sake of the economy, not for something new. Those new things might expand insurance coverage for the uninsured, provide better health care for children, close the Medicare “donut hole” for prescription drugs, cover pre-existing conditions, or increase the availability of preventive care. Who can be against those things? All are worthy, and some may have a savings element. But they represent an immediate quid pro quo for retrenchment based on the presupposition that something concrete has to be exchanged for the sacrifice the public is asked to make. The notion that health care spending needs containment for the broader good of the economy -- to bring down costs for consumers and businesses and making insurance premiums more affordable -- has too often been a siren lure for inaction, more the food for political rhetoric than legislative action. Filling the nation’s health care gaps needs to be part of a broader strategy to contain its health care costs, not the reverse.

Comparison of National Health Expenditures in the U.S. and Other Selected Countries in 2006

Country

National Expenditures as a Share of GDP

Percentage Point Increase in GDP Devoted to Health Expenditures from 1980 to 2006

Per Capita Health Expenditures (purchasing power parity in US $s)

Life Expectancy at Birth, 2006

(in years)

United States

15.8%

6.8

$6,933

78.1

Australia

8.7%

2.4

$3,137

81.1

Belgium

10.0%

3.7

$3,356

79.5

Canada

10.0%

3.0

$3,423

80.7

France

11.0%

4.0

$3,048

80.7

Italy

9.0%

n/a

$2,673

81.2

Japan

8.1%

1.6

$2,581

82.4

Luxembourg

7.3%

2.1

$4,162

79.4

Switzerland

10.8%

3.5

$4,165

81.7

United Kingdom

8.5%

2.9

$2,885

79.1*

*Note: for 2005.

Source: OECD Health Data 2009, June 09, 2009.

Little will happen to contain the nation’s health care costs that doesn’t address the ill-managed proliferation of new technology and the propensities of the fee-for-service insurance structure to promote more services. More importantly, little substantive will happen until there is an acceptance all around -- by the public, providers, insurers, and others in the health care industry -- that sacrifice must be shared. The vested interests who have a stake in the nation’s health care systems have historically acted independently to preserve their own domains. The initial favorable reaction to the Obama reform blueprint from pharmaceutical companies, insurance companies  and a number of others in the health care business shows that they recognize the potential of health care reform to redirect even larger amounts of the nation’s resources to them.[12] Moreover, there are so many vested interests that they swamp the political process when even the hint of change portends potential constraint. When all are asked to contribute, it becomes a tidal wave of resistance. Until the message is given and understood that all must yield something, it is hard to see how the parties will coalesce.

Time is not on the side of piecemeal attempts to wring excesses out of the system. In years past, it was mostly the excesses of the health care system itself that raised its costs.  Within a few short years, the emergence of retiring baby boomers and the medical needs they will have as aging seniors will compound those pressures. The CBO estimates that between now and 2035, demographic changes account for 44 percent of the projected growth in Medicare and Medicaid spending. Hence, the promise of eliminating wasteful medical practice may be quickly overwhelmed by demand-driven pressures on the entire medical delivery system.

What reform requires most of all, for the nation as a whole, is cost containment. Paying for expanded or universal health care requires more than balancing new expenditures with new revenues or other savings, whatever possible resources are identified and earmarked. It’s a commendable track relative to past efforts to expand health care benefits, which pushed much of the payment onto future generations. But it still avoids the larger question of how to manage the nation’s spiraling health care spending so that the whole system doesn’t implode some day. Policymakers cannot afford to lose track of that larger question even as they battle it out over the best way to pay for health care reform in the next 10 years.


[1]Lori Montgomery, “Workers’ Health Benefits Eyed for Taxation,” The Washington Post, March 12, 2009.

[2]Jake Tapper, “President Obama's Health Care Reserve Fund,” ABC News Blogs, February 25, 2009.

[3] President Obama, Weekly Address, June 13, 2009.

[4] CBO, Douglas Elmendorf letter to Senator Kent Conrad, June 14, 2009, p.4.

[5] Ibid.

[6] The 2001 and 2003 tax cuts and the 2009 expansion of the State Children’s’ Health Insurance Program (SCHIP) all included sunsets to limit their official cost.

[7] Ibid.

[8] “A New Era of Responsibility, The 2010 Budget,” Office of Management and Budget.

[9]Kevin Sack, “With Health Care for Nearly All, Massachusetts Now Faces New Costs,” New York Times, March 15, 2009.

[10] “A New Era of Responsibility,” loc. cit.

[11] An OECD study released this past February concluded “the overall health status of the US population, as reflected in variables such as life expectancy and potential years of life lost, appears to rank among the lower third of OECD countries, despite much higher health expenditure per capita than in any other country.”  See David Carey, Bradley Herring and Patrick Lenain, “Health Care Reform In The United States,” Economics Department Working Paper No. 665, OECD, February 6, 2009.

[12] See, for instance, press releases on February 26, 2009 from the Pharmaceutical Research and Manufacturers of America, (“PhRMA Statement on the President’s FY 2010 Budget Proposal”), and the American Health Insurance Plans, (“AHIP Statement on the President’s Budget.”)