September 23, 2014

Health Care Reform Consensus and Increasing "Skin in the Game" -- Post Two of Three

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

In my last blog post, I introduced the developing consensus among fiscal and health care policy experts about the steps policymakers need to take to move the nation towards a less costly, more effective and more patient-centered system. 

Recent plans by the Bipartisan Policy Center, Simpson and Bowles, the Engleberg Center at Brookings, and the National Coalition on Health Care, anticipate that by using the federal government’s market power through Medicare and the tax code, changes will filter through to the private sector, transforming the health care system as a whole. The recently produced budgets by the President, House Republicans and Senate Democrats echo some of these ideas as well.

The recent plans focus their efforts on two primary ways, through two primary means. The first blog post in my series examined the first shift: Away from one where the supply-side (doctors, hospitals and other providers) produce cost-increasing quantity and intensity, to one where quality and value become the defining goals -- a shift encouraged by altering the payment relationships between insurers and providers. 

This second blog post will look at the way the reform plans try to shift the demand side of the health care system -- the behavior of patients -- into one where patients become more sensitive to health care costs. The most consequential means through which the plans attempt this shift is by changing the tax treatment of health insurance.

The current health care system, with third-party insurance coverage by the government or the private sector, shields patients -- the consumers of health care -- from paying for most of the costs of treatment. In other words, they have relatively little “skin in the game.”

This leads to low cost sensitivity and higher utilization. Furthermore, our health care system actually shields consumers from even knowing the full costs of treatment or the full costs of their insurance. There is also little information through which to choose providers on the basis of quality or effectiveness. 

As government policies go, the exclusion of employer-provided insurance from taxes is as pernicious a contributor to this state-of-affairs as any. The tax exclusion encourages employers to provide overly generous third party insurance instead of wages. And it does so in a doubly regressive way -- higher income earners tend to work in professions and for companies that provide health insurance, and the more money you earn, the higher the subsidy you receive from the tax code, as it is with many tax expenditures.

Limiting or eliminating the tax exclusion is a goal directly put forward by three of the four expert plans (left out only by the NCHC) and the President’s budget. The House and Senate budgets leave open the possibility of indirectly limiting the exclusion, depending on how the details of their attempts to limit tax expenditures develop.

Eliminating or scaling back the tax exclusion offers a way to increase cost sensitivity on the part of patients by making insurance more costly and in some cases reducing the amount of insurance. When combined with other cost-sharing increases, like limiting first-dollar coverage in Medigap plans, or income-related Medicare premium subsidies for upper-income seniors -- as most of the reform plans do -- the overall effect is to increase patients’ skin in the game and make them more economical when purchasing health care.  

It is worth pointing out that there is a limit to the health care cost reductions achievable in this way. After all, the “high-spenders” discussed in my first blog post wind up blowing through any cost-sharing circuit breakers. However, there is plenty of evidence that slowdowns in health care inflation can arise from reduced incomes during recessions or from an increase in high-deductible insurance products. That is why all of the bipartisan reform plans include demand-side changes along with supply-side reforms.

In a comprehensive reform environment, the effect is also to enable more consumer-type behavior on the part of patients since the payment changes on the provider side will make providers more responsive to patients seeking to become consumers. This is enhanced by other supportive reforms, like increased pricing transparency and a more vibrant and open insurance market, that many of the plans recommend.

In total, this represents a complete reversal of the incentives faced by both providers and patients in the current system -- where incentives all work towards increasing costs -- to providers and patients being on the same page for cost reductions. A side benefit of this reversal, which ultimately could become the primary benefit to society, is that the patient becomes the center of gravity in the health care system.

My next blog post will wrap up this series with a look at how these reforms contribute to deficit reduction within the 10-year budget window and at the long-term cost control goals set by the bipartisan reform plans. It will also examine the backstop mechanisms the plans put in place in their attempt to decrease long-run budget uncertainty while also anticipating the need for policymakers to see favorable long-term scores from the Congressional Budget Office.

At the 2013 Peter G. Peterson Foundation Fiscal Summit, the health care panel focused on the developing consensus: 

 

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