April 18, 2014

Health Care Cost Goals: Washington's New Optimism -- Post Three of Three

This is post three of a three-part series on the developing consensus for the next steps on health care reform. Part One is here. Part Two is here.

Ultimately, for any health care reform plan to be credible and passable through Congress, it must have a meaningful and enforced target for long-term cost growth. In this final post of my three-part series (Part 1, Part 2), I look at the recent health care plans from the Bipartisan Policy Center, Simpson and Bowles, the Engleberg Center at Brookings, and the National Coalition on Health Care, as well as the recently produced budgets by the President, House Republicans and Senate Democrats, and evaluate their efforts on this crucial test.

In an interesting turn of events for Washington, the plans, including the policymakers’ budgets, are universally optimistic and one might even say remarkably ambitious in their cost-control goals.

The Affordable Care Act (ACA) only three years ago set a long-term target for per-capita Medicare cost inflation at the growth rate in the economy (GDP) plus 1 percent.

Consistently attaining that target, given the historical rate of around GDP plus 2 percent, was, at the time, considered a reach -- but possible. The latest plans set even more stringent targets for Medicare cost inflation, ranging from GDP plus 0.5 percent -- shared by the President’s budget, the House Republican budget and a Bipartisan Policy Center plan -- to just GDP growth, which is shared by the Simpson-Bowles and the Engelberg Center plans. 

These tighter targets are in response to recent evidence that overall health care inflation is moderating, combined with the projections for Medicare provider payment reductions due to the ACA. While over the short term these targets look reachable, there is a question as to whether we should expect this 3-to-5-year slowdown to continue to the point where formerly pie-in-the-sky targets -- like holding health care inflation level with the growth in the economy -- are attainable.

There are two reasons why someone might critique these goals as overly ambitious. The first is the possibility of a growing gap between Medicare and private-sector payments. This could happen if health care inflation in the private sector reverts to the higher levels of the past even as Medicare costs are successfully limited through payment-formula changes and implementation of some of the provider-transformation ideas discussed in my first blog post. This could lead to an environment in which providers begin to restrict access for Medicare beneficiaries or suffer periods of intense profit losses. (A danger warned of by former Medicare chief actuary Rick Foster in conjunction with the recent Medicare Trustees reports.)

So enacting reforms that revolve primarily around strict budgets for government programs but are limited in their abilities to transform the private sector might be destined to fail. To their credit, each of the four plans recently put together by fiscal and health care policy experts aims to avoid this by identifying pathways through which government program reforms can spread to the private sector.

The second reason to think these goals are overly ambitious is referred to as “Baumol’s cost disease.” This is the idea that certain sectors of the economy with low productivity, like health care, will have higher inflation than sectors with high productivity, like automobile manufacturing. Reliance on human labor (such as doctors and nurses) as the fundamental unit of production, as opposed to machines that can become increasingly complex, is one of the defining differences between these sectors. This “disease” then limits the ability of the health care sector to keep cost growth at the same level as the economy as a whole. It bears mention that health care systems around the world, all of which have lower total costs than ours, still have difficulty holding per-capita costs at the same level as economic growth. (For a much more comprehensive discussion and critique of Baumol and health care see this series by Austin Frakt at The Incidental Economist)

On the other hand, because our levels of spending are so excessive relative to the rest of the world, and because many health care economists generally agree that about one-third of our health care spending is wasteful, unnecessary or at the very least inefficient, we have the room to cut spending by enough that the de facto rate of growth can be held to the rate of growth in the economy, despite the underlying Baumol-type pressures. Then the goal would be to have enough time to transform our health care system into one that no longer suffers from those cost pressures. This transformation could even involve increasing sector productivity through new technologies (bring on the robot doctors!) as opposed to the way adoption of new medical technology currently tends to increase costs.

Ambitious targets and budgets should be good things that will help encourage reticent players in the industry to accept change. If those targets prove overly ambitious, the concern is that instead of working hard to bring practices under the budget, attention instead would turn to lobbying Congress to ignore the targets -- as happened with Medicare physician payments under the Sustainable Growth Rate Formula (SGR).

That is why, regardless of the level at which the targets are set, the enforcement mechanism for the targets is a more important component for determining whether a health care reform plan might be effective. 

The current mechanism for enforcing the ACA’s GDP plus 1 percent goal is the Independent Payment Advisory Board (IPAB). If the cost-control measures and reduced payment formulas from the ACA do not do enough to lower the per-capita growth rate in Medicare, the IPAB (a group of 15 presidentially appointed and Senate-confirmed health care experts) is empowered to recommend cost-cutting measures to get Medicare’s growth rate down to that level. These recommendations are then fast-tracked through Congress. The secretary of the Department of Health and Human Services (HHS) is empowered to recommend the necessary measures if the IPAB is unable to act.

The IPAB is limited in the types of cost controls it is allowed to recommend -- a flaw that Simpson-Bowles, the Engleberg Center, and the President’s budget attempt to correct. Simpson-Bowles and NCHC go beyond only utilizing the IPAB process for enforcement and suggest a process called “value-based withholding,” which increases the carrots and sticks for providers to save money. The House budget repeals the IPAB while indirectly limiting the amount of Medicare premium-support subsidies in order to reach its health care inflation target. 

Yet for the most part, each plan recognizes the need to have some structure behind its health care spending goals. This is done not just to make those goals more likely to be met, but also to set up an environment in which the Congressional Budget Office (CBO) might be more likely to credit a reform plan with lowering long-term health care costs. In the absence of such targets, the CBO has found it difficult to estimate cost savings from delivery-system reform --  and has often not scored such changes as saving money over the long term.

This is a greater problem when attempting to achieve deficit reduction from health care savings within the 10-year budget window. Even though it is more important to the fiscal future to reduce costs beyond the budget window, the ability of these reform plans to become part of the immediate fiscal debate -- and part of a grand bargain, or a smaller replacement for a grand bargain -- hinges on the plans’ 10-year deficit-reduction scores.

Perhaps the most encouraging part of the reform exercises is that all of them, along with the policymakers’ proposed budgets, seek 10-year scorable savings and use many of the same policy changes to do so. Nearly all of the policy changes recommended in these plans with an eye for 10-year savings can be combined and scaled in a way to produce almost any deficit-reduction target required.

Given the similarities in the plans, it is fascinating that the scored savings ranges from $450 billion to $585 billion for the expert plans and from $50 billion to $378 billion for the policymakers’ budgets. Considering the overlap in proposed policies, achieving the “right” amount of 10-year savings could be easier than one might think.