THE ECONOMIC CASE FOR HEALTH CARE REFORM: UPDATE DECEMBER
Over the past several months, the Council of Economic Advisers (CEA) has released a series of reports analyzing the impact of reform-induced expansions in health insurance coverage and reductions in the growth of health care spending. In this update to our June report on the Economic Case for Health Care Reform, the CEA reviews the case for reform that genuinely reduces the growth rate of health care costs, and presents new findings on the economic impact of recent Congressional proposals.
The necessity of slowing the growth rate of health care costs is uncontroversial, as families, businesses, and governments at every level are struggling to cope with rapidly increasing health care costs. Each year, a larger share of workers' total compensation and of Medicare recipients' Social Security benefits is eaten up by insurance premiums. Each year, fewer businesses, and especially small businesses, can afford to offer health insurance to their workers. And each year, a larger share of spending at all levels of government goes to health care, which has led to tax increases, cuts in other programs, and higher budget deficits.
Since the release of the three CEA reports earlier this year, both the House and the Senate have made substantial progress toward passing comprehensive health reform legislation. Last month, the House passed the Affordable Health Care for America Act of 2009, and the Senate is currently debating the Patient Protection and Affordable Care Act. According to projections by the non-partisan Congressional Budget Office (CBO), both bills would provide a new measure of security and stability to those with insurance and extend health insurance coverage to more than thirty million individuals who would otherwise be uninsured. The bills would also significantly lower the Federal budget deficit in the upcoming decade, and extend the solvency of the Medicare Trust Fund by five years.
This report presents new estimates that the Congressional proposals will reduce the growth of health care costs for individuals, businesses, and the government, and reviews the economic case for health care reform. Some of the many benefits discussed below include higher standards of living for workers, more private sector job creation, and lower government budget deficits.
I. HEALTH INSURANCE REFORM:WILL IT CONTROL FEDERAL HEALTH CARE SPENDING?
The President has made clear his support for health reform legislation that genuinely slows the growth rate of costs. As the Senate continues debate on its own version of health insurance reform legislation, the CEA has been investigating whether and to what extent that bill reduces the growth rate of health care spending in government programs and in the economy as a whole. To do this, we have analyzed data on projected Federal spending on Medicare and Medicaid from the CBO in each year through 2019, and combined it with data from the CBO's most recent estimates of the impact of the Senate bill.
Our findings for Medicare and Medicaid indicate that, while combined Federal spending on these two programs will initially increase (as eligibility for the Medicaid program expands), the Senate's bill will lead to a substantial reduction in the growth rate of this spending over time. These findings are consistent with the CBO score of the Senate legislation, which finds that -- Medicare spending under the bill would increase at an average annual rate of around 6 percent during the next two decades -- well below the roughly 8 percent annual growth rate of the past two decades. More specifically, we find that:
By 2019, total Federal spending on the Medicare and Medicaid programs will be lower than it would have been absent reform. These long-run savings are achieved through a reduction in wasteful spending, fraud, inefficiencies and abuse in both programs, along with a combination of delivery system reforms that gives providers an incentive to deliver high quality and efficient medical care rather than costly, inefficient care with little or no impact on quality or health.
From 2016 to 2019, the annual growth rate of Federal spending on these two programs will be at least 0.7 percentage point lower than it otherwise would have been. CBO estimates suggest that the magnitude of these growth rate reductions will increase in the subsequent decade, which will substantially improve the long-term Federal budget outlook.
These reductions will also help lower the growth rate of Medicare recipients' Part B premiums, which more than doubled from 2000 to 2008 and grew three times faster than did average Social Security benefits during the same period.
When combined with the other provisions that are in the Senate bill, CBO estimates suggest that the Federal budget deficit will be lower by 0.25 percent of GDP in the decade following 2019 than it otherwise would have been, with the effects growing over the decade.
It is worth noting that CBO projections in the past have sometimes understated the savings from delivery system reforms and revised payment policies such as those included in the Senate bill. For instance, actual savings following the Balanced Budget Act (BBA) of 1997, which changed the way skilled nursing facilities and home health services were reimbursed under Medicare, were 50 percent greater in 1998 and 113 percent greater in 1999 than CBO originally forecast. Similarly, spending on the Medicare Part D prescription drug benefit following the Medicare Modernization Act of 2003 was about 40 percent less than CBO forecast.
CBO's analysis is generally limited to the Federal budget, and does not attempt to account for savings in the health care system more broadly from policies implemented through reform. For example, the CBO's -- Budget Options, Volume 1: Health Care document found only $19 billion in Federal government savings from transitioning toward post-acute bundled payments in Medicare. However, recent research published in the New England Journal of Medicine suggests that bundled payments for chronic diseases and elective surgeries could reduce health care spending by as much as 5.4 percent from 2010 to 2019. Even if such savings applied to only half of spending in the health care sector, the result would be more than $900 billion of savings over the decade, according to CEA estimates. If bundled payments were expanded beyond post-acute care and even half of the potential savings from bundled payments were realized in the Medicare program during the upcoming decade, these savings would translate to an additional 0.2 percent per year reduction in program expenditures, or more than $190 billion between 2010 and 2019.
Similarly large reductions in Federal health care expenditures are plausible from the combination of other delivery system reforms, including accountable care organizations (a group of primary care physicians, specialists, and one or more hospitals that coordinate the care of and accept joint responsibility for the quality and cost of care of their group of patients) and incentives to reduce hospital-acquired infections. The CBO estimates of the savings from these provisions are relatively small, which may simply reflect the paucity of evidence of the real-world impact of such policies, especially when done in concert and on a national scale. When there are not historical examples for the effect of a possible reform, the CBO estimate is often very close to zero, despite the potential for significant expenditure reductions from reforms. Savings are also plausible from certain features that could spur innovation in cost-saving and quality-improvements, thereby accelerating the cost savings still further. For instance, health information technology adoption could facilitate cost-saving advances in payment methods. Additionally, provisions for administrative simplification in reform legislation -- which require the standardization and streamlining of paperwork and create standards for electronic transaction -- will help cut down on the $23-$31 billion time cost to medical practices of interacting with health plans and their administrators.
Another potentially significant cost saver within the Senate bill is the Independent Medicare Advisory Board (IMAB). The IMAB would recommend changes to the Medicare program that would both improve the quality of care and also reduce the growth rate of program spending. Absent Congressional action, these recommendations would be automatically implemented, which would give it much greater authority than the current Medicare Payment Advisory Commission (MedPAC). The CBO score of the Senate bill estimates that the IMAB would reduce Medicare spending by $23 billion from 2015 to 2019, with the savings likely to continue in the subsequent decade. An additional benefit of the IMAB is that it has the potential to increase the savings from many of the delivery system reforms described above, which may not be fully captured by the CBO estimates for the reasons previously mentioned.
Taken together, the combination of Medicare- and Medicaid-related provisions in the Senate's Patient Protection and Affordable Care Act are estimated to reduce the annual growth rate of Federal spending on both programs by 1.0 percentage point in the upcoming decade and by an even greater amount in the subsequent decade.
II. HEALTH INSURANCE REFORM:WILL IT CONTROL PRIVATE HEALTH CARE SPENDING?
The CBO score makes clear that the Senate's Patient Protection and Affordable Care Act will relieve significant pressure on the Federal budget in the years ahead. But will it also reduce the growth rate of costs in the private sector? An examination of the projected revenues from just one provision in the bill -- the excise tax on high-cost insurance plans -- strongly suggests that the answer is yes. This tax will be levied only on the most expensive private sector plans. It will, however, provide health insurers with a powerful incentive to reduce their premiums and provide a high-value package of benefits. According to estimates from CBO and from the Joint Committee on Taxation (JCT), the resulting reduction in premiums will lead employers to pay substantially higher wages to affected employees, with this effect growing over time.
Using data from CBO and JCT, CEA estimates that the excise tax on high-cost insurance plans will reduce the growth rate of annual health care costs in the private sector by 0.5 percentage point per year from 2012 to 2018.11 To the extent that insurers in the private sector mimic the delivery system reforms that are included in the Senate bill, the reduction in the growth rate of costs is likely to be even greater. This is especially true for bundled payments, as the potential savings to Medicare from this provision are smaller than in the private sector because inpatient care is already largely bundled in Medicare. And it is worth noting that the transition to bundled, inpatient care generated considerable savings to the program.
There are several additional sources of savings that would accrue to the private sector as a result of the provisions included in the House and Senate bills. For example, the legislation passed by the House of Representatives, the Affordable Health Care for America Act, would allow individuals without access to affordable coverage and firms with 25 or fewer employees to purchase coverage through a competitive, well-regulated marketplace, or exchange, starting in 2013. By 2015, firms with up to 100 workers could cover their employees through the exchange, with even larger firms admitted in subsequent years. Recent estimates by MIT economist Jonathan Gruber and by the CBO suggest that this health insurance exchange would lead to health insurance coverage that is both more secure and comprehensive, and has lower administrative costs and premiums than comparable coverage under current law. Additionally, the CBO estimates that premiums would fall by as much as 3 percent for large firms and as much as 2 percent for small firms, even before accounting for incentives to curb high-cost policies as a result of the excise tax.
Moreover, the CEA's earlier report described waste and inefficiency throughout the health care system which could be eliminated without adverse health consequences. Health insurance reform legislation is likely to diffuse care delivery reforms throughout the health care system. Public investments in patient-centered health research on quality-improving treatments, and in best practices such as bundling payments and accountable care organizations, will likely reduce cost growth in the private sector. Because hospitals, doctors, and other providers serve publicly and privately financed patients alike, the diffusion of efficient, quality-improving practices will lead to private sector savings on health care spending as well, amplifying the effectiveness of each individual component of reform.