We've had some spirited debate as to the shape of healthcare reform.  Should it be a single payer system, or a combination of the public option alongside private insurers subject to heavy regulation?  Some have even argued an unfettered free market as the solution to our soaring healthcare costs, although that idea has been considered all but defunct since economist, and Nobel Prize winner, Kenneth Arrow published his seminal work "Uncertainty and the Welfare Economics of Medical Care" some 40 odd years ago, coincidentally giving birth to the field of Health Economics.  His work looked at the effects of 'information asymmetry in the healthcare field.  This is the fact that in most healthcare transactions, one party, (usually the seller), has more information than the other, (usually the consumer).  The upshot of his work is that due to these information asymmetries, the healthcare market should be subject to third party regulation in order to ensure fair and even market distribution of the goods and services not realizable through reliance on a free market norm.  No one who has seriously considered his findings has been able to refute them, yet we have allowed a virtual free market to exist in our healthcare sector despite its' cost eroding our national wealth, impacting our competitiveness in world markets, and failure to offer affordable health insurance to all of the citizens of the wealthiest country on the face of the earth.  So something has to be done, and the question is what, exactly, is that to be?

I'm setting aside, (for the most part), my personal preference for a single payer system in this blog and am going to concentrate on how we get from where we are now to a more streamlined healthcare system that efficiently and economically delivers those needed services to all Americans.  This blog draws heavily from this study done by two highly respected economists for the think tank, Center for American Progress which attempts to set out guidelines for implementing the changes Americans seek in healthcare in a 'revenue neutral' manner.  In other words how do we make these changes pay for themselves, so as to not increase the economic load on the country and its' citizens?  In the author's own words,  "Increasing coverage and saving money requires a complex combination of short- and long-run policies".  Such reforms extend well beyond the so called healthcare reform currently under consideration, which really amounts to 'health insurance reform'.  The way we will get medical costs under control are manifold, and not just limited to the insurance industry.


Cost savings can be accomplished through two methods according to Cutler & Feder.

Health care reform can be responsibly financed through a combination of reduced spending in current public programs--Medicare, Medicaid and the State Children's Health Insurance Program--and new revenues. We consider the financing in three roughly equal ways. The first source is from traditional savings in public programs by reducing or eliminating spending generally recognized as excessive relative to costs. The second source is additional revenues from within or outside of the health system. Finally, there are savings that come from modernizing the delivery of health care--payment and other reforms to promote more efficient delivery of medical services.

The bulk of the projected savings here hinges on reducing the price paid through existing programs such as Medicaire and Medicaid.  It targets physicians and hospitals who over-prescribe care and would encourage them to seek better health outcomes through greater efficiencies resulting from "health information technology infrastructure reforms, comparative effective research, and payment innovations".  In other words we stop referring patients for testing and treatments that show no statistical advantage for improving the medical outcome for each particular diagnosis, (as well as a few other things which I'll get to shortly).  We can accomplish much of this by changing the reward system for healthcare providers from a 'fee for service' mode to a 'fee for outcome' mode, which in turn is attached to developing accurate statistical models for treatment from a new health IT infrastructure.  This will surely meet sharp resistance from the AMA and doctors who have fiduciary relationships with testing, and treatment facilities.  If we had a single payer system, these changes could be instituted easily across the board.  In a public/private paradigm, we depend on the efficiencies of the public option to create competitive pressure on the private companies, and with luck arrive at a similar across the board reduction in costs.  We should all expect the fight we're having with the insurance companies to be repeated with this other subgroup of the healthcare industry. 

The second area of change we need is a modernization of the health care infrastructure:

Long-term cost saving requires more than simply reducing payments for certain services.  It requires restructuring the health care system in far more fundamental ways. The idea underlying health care modernization is that the delivery of health care is inefficient, and this inefficiency drives up spending and lowers the quality of care. That's why it is possible to simultaneously lower the cost of medical care and improve its quality.

Here the authors introduce the concept of "shared savings".  They cite an example where costs could potentially be reduced by 15% at a hospital.  Now instead of reducing the payments to the hospital by 15%, the government only reduces its' payments by 11%, thereby increasing the hospitals profitability by 4%, which they note would effectively double most hospitals' profitability.  Thus the implementation of cost savings can be used as a carrot to help pull the system out of the losing formula of 'fee for service' which we currently labor under in the health marketplace.  The key to instituting these changes is putting in place an extensive Health Information Technology Infrastructure.  It is only through such infrastructure we will be able to arrive at statistically accurate models for treatment, and in turn diagnosing and correcting local and regional anomalies in the delivery of quality and efficient healthcare.  

At the consumer end, empowerment entails the provision of price and quality information, adjusting cost sharing to encourage use of valuable services, and using health information technology to engage patients in caring for their own health. Health professionals can be empowered by loosening restrictions on the scope of practice for nurses, physician assistants, and other providers, promoting efficiency by allowing the full range of providers to practice their full range of skills.

Here's another big point to be made.  Opening treatment to nurses, PAs, etc.  I would personally like to see the death grip on the distribution of many pharmaceuticals changed as well.  Requiring someone to see a doctor to get a script for a common ailment just increases our costs, and the workload on the physicians.  

The experience of other industries provides one guide. Information technology and the payment and organizational reforms that can accompany it led to enormous productivity improvements in most industries in the 1990s. Productivity growth rose from just over 1 percent annually in the 1970s and 1980s to 2.5 percent annually since 1995. Information technology and the other changes it enabled are the widely accepted source of this.

The first set of savings comes from administrative efficiencies associated with information technology and associated organizational and payment reforms. These savings build on estimates of the savings from information technology that come from Congressional Budget Office estimates. But they go beyond them to consider the impact of simplified documentation and reductions in wasteful interactions on professionals' time.

The second savings are lower administrative costs for small businesses that buy insurance as part of insurance exchanges. The lower premiums that result will increase revenue to the federal government because they lower tax-preferred spending on premiums.
 
The third, and largest, savings results from fewer and less expensive acute episodes of care. Increased use of preventive care, management of chronic illness, reduction in medical errors, and other improvements in care will result in fewer acute episodes, and payment and organizational changes will reduce the cost associated with each episode.

The report suggests other means of reducing expenses in home health care, nursing homes, and "as part of a comprehensive strategy to encourage more primary care relative to specialty care, Medicare could realign payment for graduate school medical education to better reflect costs and to enhance support for primary care training".

The key to all these cost savings actually being realized is to empower the public option in whatever form it emerges from congress to pay medicare rates.  These rates could be in turn be allowed for private insurance programs where:

the concentration of health care providers makes it difficult for insurers to limit rates. This authority would simply override the market power of health care providers to set prices for their services.

Paying Medicare rates would undoubtedly make the public plan the "lowest-cost plan" the plan to which subsidies will likely be tied. It therefore immediately lowers federal subsidy costs. In addition, it would make it both easier and necessary for private plans to lower their rates in order to compete. We estimate that subsidy costs could fall by 10 percent. This change would also lower the cost to individuals and small firms buying insurance through an exchange. 

Watch for the opponents of a strong public option to oppose a provision to allow it to negotiate payment rates through the medicare program.

The authors also suggest a failsafe mechanism in their analysis, that  guarantees adequate financing for new and existing federally financed health coverage as well as a specified negative growth rate in the nation's health care spending.  They stress that the trigger for such a system must remain flexible, but a "menu of policy measures can be specified in advance", and also suggest the implementation of a new Medicare Payment Advisory Commission within the executive branch to monitor the system and determine when or if to initiate the failsafe mechanism.

There is a tax component in the plan laid out by Cutler and Fedler as well, which the authors project to be about $400B and suggest several sources, among many which can be initiated to bring the total cost of a $1.2T projected budget into a revenue neutral state.   

The study concludes that by 2035, we should be realizing annual savings from instituting their proposed changes of $1.2 trillion, or 3 percent of GDP. If we can focus on the big, [long term], picture we might just accomplish meaningful healthcare reform this year, insure all our citizens, and save money in the long run to boot.

I know I said I was putting aside my preference for a single payer system in this blog, but I will mention again that if we had a single payer system, these changes could be instituted easily across the board,without poking and prodding the private sector to keep pace.  In a public/private paradigm, we depend on the efficiencies of the public option to create competitive pressure on the private companies, and with luck arrive at a similar across the board reduction in costs.  Our job is to see that the public option that comes out of congress is not emasculated to the point where it can do nothing to help lower our health care costs. 






I'm traveling now and for the next few days, but will try to check in as possible.