CONGRESSIONAL BUDGET OFFICE
Douglas W. Elmendorf, Director
U.S. Congress
Washington, DC 20515
June 16, 2009
Honorable Kent Conrad
Chairman
Committee on the Budget
United States Senate
Washington, DC 20510
Dear Mr. Chairman:
In the absence of significant changes in policy, rising costs for
health care will cause federal spending to grow much faster than the
economy, putting the federal budget on an unsustainable path. This
letter responds to your request for information about the features of
reform proposals that would affect federal spending on health care over
the long term.
As you noted, many experts believe that a substantial share of
spending on health care contributes little if anything to the overall
health of the nation. Therefore, changes in government policy have the
potential to yield large reductions in both national health
expenditures and federal health care spending without harming health.
Moreover, many experts agree on some general directions in which the
government's health policies should move--typically involving changes in
the information and incentives that doctors and patients have when
making decisions about health care.
However, large reductions in spending will not actually be achieved
without fundamental changes in the financing and delivery of health
care. The government can spur those changes by transforming payment
policies in federal health care programs and by significantly limiting
the current tax subsidy for health insurance. Those approaches could
directly lower federal spending on health care and indirectly lower
private spending on it as well. Yet, many of the specific changes that
might ultimately prove most important cannot be foreseen today and
could be developed only over time through experimentation and learning.
Modest versions of such efforts--which would have the desirable effect
of allowing policymakers to gauge their impact--would probably yield
only modest results in the short term.
Therefore, one broad long-range approach for reform that has drawn
interest recently would combine specific policy actions--to generate
near-term savings and provide experience that would lay the groundwork
for future savings--with a mechanism or framework to impose ongoing
pressure for achieving efficiencies in the delivery of health care. The
effectiveness of that path would depend ultimately on the willingness
of federal policy to maintain significant and systematic pressure over
time and would require tough choices to be made. Without meaningful
reforms, the substantial costs of many current proposals to expand
federal subsidies for health insurance would be much more likely to
worsen the long-run budget outlook than to improve it.
CBO does not provide formal cost estimates beyond the 10-year budget
window because the uncertainties are simply too great. However, in
evaluating proposals to reform health care, the agency will endeavor to
offer a qualitative indication of whether they would be more likely to
increase or decrease the budget deficit over the long term.
The attached analysis elaborates on these points. Please contact me at (202) XXX-XXXX if you have any questions.
Sincerely,
Douglas W. Elmendorf
Director
Attachment
Identical letter sent to the Honorable Judd Gregg.
Health Care Reform and the Federal Budget
June 16, 2009
Because the Congress is now considering major legislation affecting
health care and health insurance, the possible effects on the federal
budget have received significant attention. To elucidate those effects,
this analysis examines the budget outlook under current law; the likely
budgetary effect of efforts to expand the scope of insurance coverage;
the potential for reducing health care spending; the likely impact of
specific changes in the health system; and mechanisms for engendering
efficiency gains in health care over time.
The Federal Budget Outlook
The federal
budget is on an unsustainable path, primarily because of rapidly rising
spending on health care. Federal outlays for Medicare and Medicaid have
increased from 1 percent of gross domestic product (GDP) in 1970 to
more than 5 percent in 2009; and the Congressional Budget Office (CBO)
projects that under current policy, they will exceed 6 percent of GDP
in 2019 and about 8 percent in 2029. Most of that increase will result
from rising costs per capita, rather than from the aging of the
population. As a result, the country faces difficult and fundamental
trade-offs between limiting the growth of Medicare and Medicaid
relative to GDP, accepting a continuing increase in taxes relative to
GDP, and reducing other spending relative to GDP, possibly to levels
not experienced in this country in more than 40 years.1
Moreover, serious fiscal imbalances are not a far-off problem. Under
current law, CBO projects, Medicare's Part A trust fund--which pays for
inpatient services, post-acute care, and hospice services and receives
revenues principally from the payroll tax--will have insufficient funds
to pay for all covered services starting in 2017. More broadly, federal
debt held by the public is set to jump from 41 percent of GDP at the
end of 2008 to more than 60 percent by the end of 2010, the highest
level since the mid-1950s. Under CBO's March baseline projection, the
debt would fall back below 60 percent of GDP in the second half of the
decade, but the baseline assumes that currently scheduled increases in
tax rates will be allowed to occur, even though policymakers seem
intent on extending at least some of the 2001 and 2003 tax cuts. If
those and all other expiring provisions were extended and the
alternative minimum tax was indexed for inflation, the debt would
continue to rise relative to GDP throughout the next decade, reaching
86 percent by 2019. Debt held by the public has not been that high
since the years immediately following World War II.
For many observers and policymakers, that grim outlook for the
federal budget during the next decade and beyond is an important
motivation for crafting health care reform and making other policy
choices in a manner that significantly reduces future deficits.
The Potential Impact of Expanding Health Insurance Coverage on the Budget Outlook
The
federal government's financing of health care will total more than $1
trillion in 2009, all told. Federal outlays for Medicare and Medicaid
are about $700 billion; tax preferences for health care (especially the
exclusion of premiums for employment-based health insurance from income
and payroll taxes) amount to more than $250 billion; and the federal
government also pays for veterans' health care, public health
initiatives, and other health programs. Already, those direct and
indirect payments for health care account for nearly 60 percent of
total health expenditures for the nation.
Many proposals to significantly expand insurance coverage would add
to federal costs by providing large subsidies to help lower-income
individuals and families purchase insurance. Those proposals would take
several years to implement, but it is useful to consider the budgetary
implications if they were up and running now so as to compare those
costs to existing obligations. Depending on the specific policies
selected, the added cost could be on the order of $100 billion. In the
absence of specific constraints on growth, the new spending (or revenue
losses, if tax credits were used to provide subsidies) would probably
increase over time roughly with the underlying costs of health care
and, thus, would grow about as fast as spending on other federal health
care programs.2
From that perspective, a large-scale expansion of insurance coverage
would represent a permanent increase of roughly 10 percent in the
federal budgetary commitment to health care. Improving the budget
outlook therefore would require that other aspects of an initiative on
health care reduce the federal resources devoted to it by more than
that amount (or that other federal spending or revenues be adjusted to
accomplish the same end).
By themselves, insurance expansions would also cause national
spending on health care to increase, in part because insured people
generally receive somewhat more medical care than do uninsured
people--notwithstanding the fact that some newly insured people would
avoid expensive treatments by getting care sooner, before their illness
progressed.3
However, the rise in national spending on health care would be less
than the increase for the federal government because some costs that
are now paid by others would be shifted to the government (via the
subsidies provided by the proposal).
Expanding insurance coverage would make it modestly easier to
achieve some other reductions in national and federal spending on
health care, but it would not alter the fundamental nature of these
challenges. Several issues are relevant:
- Broader insurance coverage might lead to less cost shifting
in the health care system, but that effect would probably be relatively
small and would not directly produce net savings in national or federal
spending on health care.
If more people had insurance, then the
amount of uncompensated care would decline. Some government payments
designed to pay for part of that care (such as "disproportionate share"
payments to hospitals that treat many poor patients) could be trimmed
accordingly. And, to the extent that costs of uncompensated care are
currently shifted to private payers, some offsetting savings could
arise. However, undoing any current shifts of spending among different
payers would not change the growth rate of federal spending beyond the
first few years.
Moreover, uncompensated care is less significant than many people
assume. According to one study, hospitals provided about $35 billion in
uncompensated care nationwide in 2008--less than 2 percent of national
health expenditures--and the estimates are much smaller for other
providers.4
The extent to which such costs are shifted to other payers is also
uncertain; well-structured studies have found modest effects.5
Further, some proposed expansions of insurance coverage would broaden
eligibility for Medicaid, which might lead to additional cost shifting
given Medicaid's low payments to providers.
- In terms of the trajectory of spending, policymakers might
be more willing to slow the growth in payments to health care
providers--and providers might be more willing to accept slower
growth--if they were not worried about the possible impact of slower
payment growth on access to medical care for uninsured or underinsured
people. (That effect could arise if cutbacks in payment rates for
insured patients led doctors or hospitals to limit their provision of
such care.) But budgetary savings from reducing payments to providers
would not occur automatically with broader insurance coverage; they
would arise only to the extent that legislation explicitly trimmed
payment rates relative to levels under current law.
- Health care providers currently use resources looking for
ways to receive payments for treating uninsured people. In addition,
insurers currently use resources trying to determine the health of
prospective customers and to avoid paying for treatments that address
preexisting conditions. Expanded insurance coverage, together with the
requirement that insurers provide coverage to all applicants and the
elimination of restrictions on preexisting conditions (two features of
many current insurance-market reform proposals), would save such
resources.
- Currently, a significant share of the population moves in
and out of insurance coverage during a year, which complicates efforts
to provide effective prevention and wellness services. As discussed
later, though, those services are less broadly effective at reducing
health care spending than might be expected, and in any event,
expansion proposals would not eliminate all of the churning that makes
it harder to maintain continuity of care.
- Most expansions of insurance coverage that are under
consideration would leave a moderate number of people uninsured, in
part because some people would be ineligible for subsidies or would
choose not to buy insurance even with large subsidies. Therefore, any
current problems arising from the lack of insurance could be reduced
but not eliminated.
It also bears emphasizing that if a reform package achieved "budget
neutrality" during its first 10 years, budgetary savings in the long
run would not be guaranteed--even if the package included initial steps
toward transforming the delivery and financing of health care that
would gain momentum over time. Different reform plans would have
different effects, of course, but two general phenomena could make the
long-run budgetary impact less favorable than the short-run impact:
- First, an expansion of insurance coverage would be phased
in over time to allow for the creation of new administrative structures
such as insurance exchanges. As a result, the cost of an expansion
during the 2010-2019 period could be a poor indicator of its ultimate
cost.
- Second, 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.
Some policy options under consideration would yield savings that
grew in tandem with health care spending--reducing the level of federal
spending on health care but not affecting the measured rate of spending
growth after the first few years. For example, the largest savings
proposed in the President's budget would arise from a decrease in
payments to private health insurance plans operating under the Medicare
Advantage program. If enacted, that change would permanently lower the
level of Medicare spending, but it would probably not offset a
noticeably larger share of the cost of an expansion of insurance
coverage in the second 10 years than in the first.
Moreover, any 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.
Potential Savings in Health Care
Given
those challenges, a health care reform package would need to
incorporate very significant and fundamental changes in health care to
truly improve the long-run budget outlook. Of course, projecting the
effect of health policy changes into the distant future is very
difficult, partly because predicting how the practice of medicine would
evolve in the absence of those changes is difficult. Therefore, experts
generally focus on ways to reduce the growth of health care spending
over the next decade or two rather than over the very long run.
Policy changes that reaped significant savings quickly would lessen
the medium-term impact on the deficit that a large-scale expansion of
insurance coverage would have and could lay the groundwork for greater
savings later. For example, if the growth rate of federal health care
spending was trimmed by 1 percent per year during the next 20 years,
the savings would roughly match the cost of an expansion of insurance
coverage by the end of the decade and would exceed that cost in the
next decade.
Significant savings seem possible because the available evidence
implies that a substantial share of spending on health care contributes
little if anything to the overall health of the nation. Therefore,
experts generally agree that changes in government policy have the potential
to produce substantial savings in both national and federal spending on
health care without harming health. However, turning that potential
into reality in a sector that accounts for one-sixth of the U.S. economy is likely to be a prolonged and difficult process.
Perhaps the most compelling evidence about the extent of
inefficiency in the health sector is that Medicare spending varies
widely across different regions of the country, but the variation is
not correlated with available measures of the quality of care or health
outcomes. Researchers affiliated with the Dartmouth Atlas of Health Care
have compared the Medicare spending for enrollees across the nation,
controlling for demographic characteristics such as age, sex, and race.
According to those researchers' calculations, Medicare spending could
be reduced by almost 30 percent if outlays in medium- and high-spending
regions were reduced to the average level in the lowest-spending decile.6
Comparisons of that sort are sensitive to the method of calculation.
Some studies have expressed skepticism about the Dartmouth researchers'
estimate.7
CBO's own informal comparison of per capita Medicare spending in
metropolitan areas, controlling for both the health status of
individuals and the prices of health care inputs, implies that the
savings from turning medium- and high-spending areas into low-spending
areas might be roughly half of the estimate by the Dartmouth
researchers. In addition, much less is known about regional comparisons
of spending for and the health of patients outside the Medicare
program. Still, most experts conclude that both formal analysis and
extensive anecdotal evidence of regional differences in medical care
and costs imply that a significant portion of spending on health care
is not serving its intended purpose. Moreover, the delivery of health
care in low-cost regions is not completely efficient now, so further
savings might be achievable even in those areas.
Many experts think that transformational changes in health care
financing and delivery could reduce the federal budgetary commitment to
health by more than the 10 percent increase that would result from a
large-scale expansion of insurance coverage. Achieving substantial and
lasting savings, however, would require fundamental changes in the
organization and delivery of health care. Examples of efficient care
certainly exist today, with many individual health care providers and
groups of providers offering both high quality and relatively low cost.
Yet applying the methods of those efficient providers throughout the
health care system cannot be accomplished through fiat or good
intentions. Instead, the government controls two powerful policy levers
for encouraging changes in medical practice:
- Changes in Medicare could directly affect the efficiency of
health care delivered to older and disabled Americans. Changes in
payment rules could induce providers to offer higher-quality and
lower-cost care (while ensuring that efficiency gains were shared by
the government), and changes in the structure of benefits could give
program beneficiaries stronger incentives to choose less costly care.
Improved efficiency within Medicare is likely to have spillover effects
on the efficiency of health care outside of the program.
- Changes in the tax exclusion for employer-sponsored health
insurance can affect the efficiency of health care financed by the
private sector, by giving workers stronger incentives to seek
lower-cost health insurance plans. Those steps could well have
spillover effects on Medicare.
Considerable consensus exists among experts about some types of
changes that are likely to make the health sector more efficient: move
away from a fee-for-service system toward paying providers for value,
perhaps through fixed payments per patient, bonuses based on
performance, or penalties for substandard care; provide stronger
incentives for both providers and patients to control costs, through
higher cost-sharing requirements or tighter management of benefits; and
facilitate good decisionmaking by providers and patients by equipping
them with more information about the effectiveness of different
treatments and the quality of care delivered by different providers.
Those changes in the flow of money and information would spur and
facilitate other changes in the organization and delivery of health
care.
Unfortunately, little reliable evidence exists about exactly how to
implement those types of changes--especially at the level of specificity
required for legislation. A recent letter to the President from a group
of stakeholders in the health care industry reveals both the promise
and the difficulty of achieving substantial savings through health care
reform: Those stakeholders see increased efficiency as a critical goal
of their organizations, and they agree that significant savings can be
obtained. At the same time, many of the group's proposals offer little
detail about the specific changes necessary to achieve those objectives
or the obstacles to their making the changes.8
Policy Options That Could Produce Budgetary Savings in the Long Run
A
number of specific reforms show great promise for reducing federal
spending on health care over time without harming people's health.
However, at this point, experts do not know exactly how best to
structure those reforms to achieve that goal. They will need to learn
through experimentation. In the meantime, any particular approach to
implementing such ideas might well yield less savings than hoped for or
might raise concerns about the impact on the quality of care and on
patients and providers.
CBO has analyzed a number of reform options in its recent
publications, including creating so-called accountable care
organizations, bundling payments to hospitals and other providers,
providing additional information about effective medical treatments,
expanding the use of preventive and wellness services and primary care,
increasing cost sharing by patients, and modifying the tax treatment of
employment-based health insurance.9
When CBO evaluates policies, the agency aims to reflect the middle of
the range of expert opinion about likely outcomes. For any particular
policy option, CBO carefully reviews the relevant empirical evidence
and examines the incentives that would be created to control costs and
the factors that might limit the success of those incentives--as
illustrated in the following discussion.10
One general point worth emphasizing is that reform options may have
different effects on health and on the federal budget. Some policies,
such as the increased use of preventive services and the coordination
of care, would have clearer positive effects on health than on the
federal budget balance. Other policies, such as certain changes in
Medicare's payment methods, would have a direct impact on federal
spending, but their effect on health outcomes would be less clear. In
part, that uncertainty reflects the difficulty of measuring the quality
of health care--a situation that is likely to improve but which will
take time to do so.
Create Accountable Care Organizations
In
Medicare's traditional fee-for-service program, providers have little
or no financial incentive to coordinate the care their patients receive
across different treatment settings or to be accountable for the costs
and quality of that care. One prominent example of a structure that may
function better would be accountable care organizations formed by
physicians and other health care providers. Under this model, providers
would receive bonuses if they held down the total cost of the services
their patients received during a year while also meeting requirements
for the quality of the care; some versions would also impose penalties
on doctors who did not meet those targets.
Proponents contend that such groups would coordinate care more
effectively, which would improve patients' health. In addition, the
financial incentives would reduce the unnecessary use of specialists
and expensive tests and procedures. Other initiatives, such as
establishing "medical homes" for patients and implementing care
coordination or disease management, could also be pursued more easily
in this environment. Models of efficient health care today--including
the Mayo Clinic, Kaiser Permanente, and Geisinger--are integrated
delivery systems, and accountable care organizations have some of the
same features.
A current demonstration project in Medicare (known as the Physician
Group Practice demonstration) is testing similar approaches for
providing care, using some of the integrated health systems noted
above. However, the evidence for cost savings is mixed. Moreover,
expanding this approach to physicians who are not already in an
integrated system and may be reluctant to join one raises further
issues. For example, challenges arise when trying to design programs
that are voluntary for both enrollees and physicians, because both
parties would generally need to expect some gain in order to
participate--often at the government's expense. Making such mechanisms
mandatory, though, raises understandable concerns.
Given the novelty of these organizations, a number of questions
remain unanswered about the structure and environment of them: How
tightly would the groups need to be integrated in order to achieve cost
savings? How should bonuses and penalties be set? Should payments to
providers in the regular fee-for-service system be restrained in order
to encourage them to join accountable care organizations? Although many
experts agree that this approach should be vigorously pursued, several
rounds of successive and significant changes and refinements in
Medicare's rules would probably be necessary to yield substantial
budgetary savings.
Bundle Payments to Hospitals and Other Providers
A
number of experts have proposed bundling Medicare's payments for
hospitals and related services. (Payments are referred to as bundled
when they cover multiple individual services.) These proposals
illustrate a common issue in evaluating the budgetary effects of health
care reform: Options that sound alike may have quite different cost
consequences if they employ different degrees of aggressiveness in
pursuing cost-saving goals.
CBO's Budget Options volume included an option that would
have hospitals receive a single bundled payment from Medicare for both
the hospital services they provide and the care that their patients
receive in a post-acute setting in the 30 days following their
discharge. Hospitals already receive a fixed payment per admission, but
this arrangement would provide hospitals with a new incentive to
coordinate the care their patients receive after they are discharged
and to economize in the use of post-acute care. The payment amount
would be adjusted over time to capture part of the anticipated
reduction in costs. CBO estimated that this option would save about $19
billion over the 2010-2019 period.
The Commonwealth Fund also recently analyzed an option for bundling,
one considerably more aggressive in reducing spending and altering
incentives for providers.11
Under that option, successively more inclusive bundling would be phased
in: Initially, Medicare would bundle together payments for a hospital
stay and any readmissions within 30 days; after three years, the
bundling would be expanded to include post-acute care services as well;
and after three more years, the bundling would also include payments
for physicians in the inpatient setting and emergency room. Payment
amounts would be reduced immediately upon implementation and then would
continue to be restrained over time to reflect anticipated increases in
efficiency from coordination among providers. The Commonwealth Fund
estimated that this proposal would reduce federal spending by over $200
billion between 2010 and 2020.
Provide Additional Information About Treatments' Effectiveness
Concerns
about the limited evidence that is available to determine which
treatments are most effective for which patients has generated
considerable interest in expanding the supply and use of information
that compares the effectiveness of treatment options. (Limited evidence
may help explain why the use of certain treatments and the types of
care provided vary widely from one area of the country to another.)
Many analysts believe that, because of the broad benefits that
additional information could provide, the federal government should
fund research on the effectiveness of treatments and should help
disseminate the results to doctors and patients.12
Merely conducting and disseminating additional research is unlikely
to have major effects on patterns of clinical practice or health care
spending, however. For new research to have a significant impact,
providers' financial incentives would need to be aligned with the
results. For example, legislation could allow the Medicare program to
limit or deny coverage for treatments that were found to be less
clinically effective or less cost-effective than other interventions.
Alternatively, Medicare could tie its payments to providers to the cost
of the most effective treatment, or patients could be required to pay
for at least a portion of the additional cost of less effective
treatments. In all of these approaches, patients and physicians could
still choose the course of treatment they preferred, but Medicare's
payments would depend on the broad results of research.
Further challenges in reaping net savings from comparative
effectiveness research arise from the cost of the research itself and
from the lags in getting research under way, developing results
(particularly if they depend on new clinical trials), and disseminating
the findings. Although those challenges do not undermine experts'
support for additional research, they explain why such research might
not yield net budgetary savings within a 10-year budget window.
Expand the Use of Preventive and Wellness Services and Primary Care
Many
proposals to modify the health insurance system include provisions to
expand the use of preventive and wellness services and the use of
primary care. Those changes could improve people's health and the
quality of care they receive. For example, vaccines can prevent the
spread of diseases; screening tests may be able to detect illnesses at
earlier and more treatable stages; and greater focus on primary care
can foster healthier behavior and better coordination of care.
Although those policies could also lead to less spending on health
care, the impact of specific preventive and wellness services on
spending varies, depending on the disease being targeted and the
population receiving the services. Evidence indicates that some
preventive services (such as certain vaccines) reduce costs--that is,
the savings for those who avoid getting sick exceed the costs of
providing the intervention broadly. However, that outcome is far from
universal: One study of the health and economic effects of preventive
services found that only 20 percent of the services that were assessed
yielded net financial savings.13
Several factors make preventive care less broadly effective at
reducing health care spending than might be expected. For some
preventive services, clinical evidence on effectiveness is lacking: In
its 2006 review of such evidence, the U.S. Preventive Services Task
Force was neutral toward--neither recommending nor discouraging the use
of--approximately 40 percent of the services it reviewed because of a
lack of evidence. For other preventive services, clinical evidence
shows benefits, but the cost of the intervention for the many people
who might receive it would exceed the likely savings for the relative
few who would avoid the disease as a result. In addition, a decision by
the federal government to subsidize preventive care might shift some
costs to the government that would otherwise be borne by the private
sector.
A related issue is the ability of the federal government to reduce
its spending on health care by fostering healthier behavior and
lifestyles. Reducing risk factors for chronic diseases that afflict
older Americans can reduce the prevalence of those diseases and thereby
the Medicare spending that goes to treat them. However, the overall
budgetary effect also depends on the cost to the government of the
policies that reduce risk, other health care costs that are incurred by
people who live longer, and additional Social Security benefits that
are paid to people who live longer. The relative magnitude of those
effects varies for different diseases, and research on the topic is
limited. One recent study that incorporated the interactions of
different medical conditions and the cost of treating them--but did not
address Social Security outlays or the cost of risk-reducing
policies--found that controlling diabetes would increase medical costs
and that controlling obesity would reduce costs substantially.14 Unfortunately, the design and costs of effective programs to reduce obesity are very unclear.
As with prevention, the budgetary impact of greater use of primary
care would depend on the combination of increases and decreases in
spending occurred. One study of the relationship between Medicare
spending and the composition of the workforce of physicians found that,
with the total number of physicians held constant, states with more
general practitioners had lower spending.15
Achieving that outcome, however, involves reducing the number of
specialists in line with increasing the number of primary care
physicians, and the mechanism for accomplishing that change (for
example, the appropriate adjustments in payment policies) is unclear.
Savings would be less likely if the number of specialists remained the
same while the number of primary care physicians increased.
Increase Cost Sharing by Patients
Increasing
the cost-sharing obligations that individuals face in government health
programs and private insurance would strengthen the incentives for them
to use medical care prudently. Research has shown that patients are
responsive to the price they pay for many aspects of care.16
To be sure, the rationale for insurance is to limit patients'
out-of-pocket costs, so people with significant health problems or with
low income and few assets could not pay a large share of their health
costs themselves; cost sharing could be designed to maintain
appropriate financial protection while still creating some sensitivity
to cost. In addition, maintaining lower cost sharing for certain
preventive services, medications to treat chronic conditions, and other
care that would reduce future spending (which falls under the rubric of
"value-based insurance design") may make sense. Still, ensuring that
patients have some financial stake in decisions about treatment methods
would lead them to ask their doctors more questions about the
effectiveness of different tests and treatments and to make
better-informed and more cost-sensitive decisions about their care.
CBO's Budget Options volume includes a number of approaches
to modifying cost sharing in the Medicare program. One option to
increase cost-sharing liabilities for most patients but place an upper
cap on a patient's total annual liability was estimated to save $26
billion over 10 years. Making those changes and simultaneously
restricting the amount of cost sharing that could be covered by
individually purchased supplemental (medigap) insurance nearly tripled
the estimated amount of budgetary savings. In addition, changing the
tax treatment of employment-based health insurance (discussed next)
would encourage a higher degree of cost sharing in private insurance,
along with other effects.
Modify the Tax Treatment of Employment-Based Health Insurance
Nearly
all analysts agree that the current tax treatment of employment-based
health insurance--which exempts most payments for such insurance from
both income and payroll taxes--dampens incentives for cost control
because it is open-ended. Those incentives could be changed by
restructuring the tax exclusion to encourage workers to join health
plans with lower premiums; those lower premiums would arise through a
combination of higher cost-sharing requirements and tighter management
of benefits.
CBO's Budget Options volume discusses a number of such
changes. One option would replace the current tax exclusion with a
refundable but more limited tax credit. Another option would limit the
amount of health insurance premiums that could be excluded from income
and payroll taxes to specific dollar amounts that represented the 75th
percentile of premiums paid by or through employers.17
These approaches would change workers' incentives about how much
insurance to purchase and how much care to demand, and they would
increase federal revenues by several hundred billion dollars over 10
years.
Imposing Ongoing Pressure to Increase Efficiency in the Health Care System
Vigorous
implementation of specific reforms discussed in the preceding section
could save money for the federal government in the medium term; they
could also lay the groundwork for long-term savings. However, many of
the reforms would only reach fruition with substantial changes in how
medicine is practiced. Therefore, the largest savings would be reaped
slowly, as experts learn more from experience with innovative
approaches to financing and delivering care and as payment rules are
adjusted to shift behavior further and capture savings for the federal
government.
To ensure that current legislation puts the federal budget
on a more sustainable path will probably require creating a framework
for federal health care spending that imposes ongoing pressure to
increase efficiency over time--particularly but not exclusively in the
case of providers. Such pressure could be imposed in several ways,
including reducing Medicare's payment updates automatically to take
account of expected productivity gains; reducing Medicare payments in
higher-spending areas of the country; giving the Secretary of Health
and Human Services broad discretion to change Medicare to produce
savings, but imposing an across-the-board reduction in payments to
providers if savings are not achieved in other ways; and limiting the
growth of Medicare's implicit subsidy of premiums.
Yet for any of those approaches to work over time, the Congress
would need to let the legislated changes to payments take effect--even
in the face of concerns from providers and patients. If, instead, the
Congress ended up relieving the pressure by boosting payments, then the
anticipated savings would prove to be illusory. The repeated deferral
of the cutbacks in payments to physicians called for by Medicare's
sustainable growth rate mechanism is a cautionary example.
Reduce Annual Updates in Medicare's Payments to Reflect Expected Productivity Gains
Under
current law, Medicare's fee-for-service payments to caregivers in a
variety of facilities (including acute care and long-term care
hospitals, outpatient facilities, skilled nursing facilities, and home
health agencies) are determined according to preset fee schedules. The
basic payment rates are updated annually to reflect changes in the
prices of various inputs (such as labor and equipment) that are used to
provide medical services. Those prices are measured by market-basket
indexes, which combine various price increases into a single update
factor for each type of provider. Each index is designed to approximate
the changes in costs that providers incur as a result of changes in
input prices--under an assumption that the quantity, quality, and mix of
those inputs remain constant. To the extent that providers increase
their productivity over time--for example, by using fewer inputs or a
less expensive mix of inputs to produce the same or greater output--the
payment updates overstate the actual increases in costs. Indeed, the
Medicare Payment Advisory Commission (MedPAC) often recommends that
updates be set equal to changes in market-basket indexes less overall
productivity growth in the economy (as long as access to care and other
measures meet appropriate standards).
Some experts maintain that increased use of information technology
and a new focus on efficiency will yield substantial productivity gains
in the health sector.18
Some of those gains may appear as reductions in the quantity of
services and thus yield savings automatically for the government.
However, most of the gains are likely to take the form of reduced costs
per service, which would cut government spending only if the government
cut the prices it pays (and otherwise would end up boosting providers'
profit margins).19
Imposing slower growth in payments would create ongoing pressure on
providers to identify and adopt efficiencies; it would also, however,
create risks for providers and patients if the efficiency gains were
not achieved.
More generally, reducing payment updates in the fee-for-service
Medicare system could also prove to be a powerful mechanism for
shifting providers into new payment schemes and organizational
arrangements. Anticipated large reductions in payments to physicians
under the sustainable growth rate mechanism, for example, could provide
an impetus to physicians to join accountable care organizations, where
they might receive bonuses for low-cost high-quality care. However, the
fact that the Congress has intervened to prevent past cuts in payment
rates that the mechanism would have caused makes it less likely that
physicians will believe that scheduled future reductions will actually
occur.
Reduce Medicare Payments in Higher-Spending Areas
Another
tack for applying ongoing pressure to restrain spending would be to
reduce Medicare payments, or the growth in those payments, in
higher-spending areas of the country. CBO recently examined several
variants of this approach in its Budget Options volume:
reducing Medicare fees for physicians in high-spending areas, reducing
Medicare payments across the board in high-spending areas, reducing
Medicare's payments to hospitals in areas with a high volume of
elective admissions, and imposing a surcharge on cost sharing by
Medicare beneficiaries in high-spending areas.
This approach would focus directly on reducing the geographical
disparities that currently exist in health care spending, although it
would not target specific medical providers or types of services that
might be most responsible for the differences in spending. As with
reductions in payment updates, this approach would create risks for
providers and patients in higher-spending areas if the efficiency gains
were not achieved. The overall challenge in reducing the use of care
that seems to be wasteful is trying to distinguish that care from
necessary care, and that task is made only somewhat easier by focusing
attention on geographic areas where wasteful spending is more likely to
be occurring.
Combine Increased Discretion to Change Medicare With a Fallback If Savings Were Not Obtained
Another
way to ensure significant savings in Medicare would be to give the
Secretary of Health and Human Services, the Administrator of the
Centers for Medicare and Medicaid Services, or some governmental entity
broad discretion to make changes in Medicare to produce savings--but
also to impose an across-the-board reduction in payments to providers
if sufficient savings were not achieved in other ways.20
Many experts think that broader discretion for the administrators of
Medicare would help to encourage innovation and enhance efficiency in
any event. However, the fallback reductions in payments to providers
would be crucial in encouraging providers to accept other changes in
the program instead. Moreover, as noted above, this mechanism and
others in this section would only be effective in the end if the
Congress let the legislated reductions in payments take effect.
Limit the Growth of Medicare's Subsidy of Premiums
One
other mechanism for imposing ongoing pressure to achieve efficiencies
in Medicare would be to limit the growth of the program's implicit
subsidy of premiums. If increases in medical costs beyond some
threshold were borne at least partly by Medicare beneficiaries rather
than the government, the government's financial burden could be
reduced. In addition, beneficiaries would then face strong incentives
to make informed, cost-sensitive decisions about their medical care.
Such changes could be designed to maintain greater protection for older
beneficiaries or beneficiaries with lower income.
1.
The rapid growth of Medicare and Medicaid relative to the economy
during the past four decades has been, in a sense, "financed" by a
significant reduction in defense spending relative to GDP. Meanwhile,
federal revenues and nondefense spending on other programs have grown
about in line with the economy, on average. However, with health care
spending continuing to shoot up and defense spending down to about
4 percent of GDP, the historical pattern cannot be repeated.
2.
Spending growth in some other federal health programs depends on the
aging of the population as well as the increase in age-adjusted health
care costs. At the same time, the growth rate of spending on insurance
subsidies would depend on the design of the programs. If lower-income
households' costs for insurance were capped at a fixed share of income,
then federal spending would rise faster than health care costs.
Alternatively, subsidies for health insurance could be set to increase
more slowly than health care costs, although that approach would make
insurance more difficult for some households to afford over time. A
reasonable assumption would therefore seem to be that, absent
structural reforms, costs in all of the federal health programs would
grow at roughly the same rate.
3. See Congressional Budget Office, Key Issues in Analyzing Major Health Insurance Proposals (December 2008), pp. 71-76.
4. Jack Hadley and others, "Covering the Uninsured in 2008: Current Costs, Sources of Payment, and Incremental Costs," Health Affairs, Web Exclusive (August 25, 2008), pp. W399-W415.
5. See Congressional Budget Office, Key Issues, pp.112-116.
6. See John E. Wennberg and others, "Geography and the Debate Over Medicare Reform," Health Affairs, Web Exclusive (February 13, 2002), pp.W96-W114.
7. See, for example, Jack Hadley and others, Variations in Medical Care Spending per Medicare Beneficiary: The First Stage of an Instrumental Variable Analysis (report submitted to the Changes in Health Care Financing and Organization Program, Robert Wood Johnson Foundation, May 2006).
8.
In particular, many of the proposals could be implemented without
legislation, so they would not affect the budgetary scoring of a reform
proposal, although they might affect CBO's baseline projections of the
costs of federal programs. See Congressional Budget Office, Response to Questions About Health Care Industry Stakeholders' Proposals, letter to the Honorable Dave Camp (June 16, 2009).
9. See Congressional Budget Office, Budget Options, Volume 1: Health Care (December 2008) and Key Issues.
10. See, for example, Congressional Budget Office, An Analysis of the Literature on Disease Management Programs, letter to the Honorable Don Nickles (October 13, 2004).
11. See Stuart Guterman and others, Reforming Provider Payment: Essential Building Block for Health Reform, The Commonwealth Fund, Commission on a High Performance Health System (March 2009).
12. See Congressional Budget Office, Research on the Comparative Effectiveness of Medical Treatments: Issues and Options for an Expanded Federal Role
(December 2007). In addition to evaluating medical treatments and
procedures, such analysis could examine processes for delivering care.
13. Joshua T. Cohen and others, "Does Preventive Care Save Money? Health Economics and the Presidential Candidates," New England Journal of Medicine, vol. 358, no. 7 (February 14, 2008), pp. 661-663.
14. Dana P. Goldman and others, "The Value of Elderly Disease Prevention," Forum for Health Economics & Policy, vol. 9, no. 2 (2006).
15. Katherine Baicker and Amitabh Chandra, "Medicare Spending, the Physician Workforce, and Beneficiaries' Quality of Care," Health Affairs, Web Exclusive (April 7, 2004), pp. W184-W197.
16. See Joseph P. Newhouse and the Insurance Experiment Group, Free for All: Lessons from the RAND Health Insurance Experiment (Cambridge, Mass.: Harvard University Press, 1993); and Congressional Budget Office, Key Issues, pp. 73-74.
17. The dollar amounts in 2010 would be about $17,300 a year for family coverage and about $6,800 a year for individual coverage.
18. See, for example, David Cutler, "Health System Modernization Will Reduce the Deficit,"
(May 11, 2009), available at www.americanprogressaction.org/issues/2009/05/pdf/health_
modernization.pdf.
19. For an illustration of that approach, see Option 54 in CBO's December 2008 Budget Options volume.
20. For an illustration of that approach, see Option 114 in CBO's December 2008 Budget Options volume.
Crunching the Numbers . . .
