October 23, 2014

Seizing the Moment on Health Care Costs

A recent report by the President’s Council of Economic Advisors (CEA) reviewing the recent slowdown in health care costs examined its potential causes, its sustainability and the economic impact going forward.

While the report is intended to put the administration's efforts on health care reform in the best light, that shouldn’t diminish the importance of the slowdown and the lessons we can learn from it. When looking at future fiscal policy decisions, some crucial takeaways are:

  • Changes in government policy can, at the very least, contribute to lowering health care cost growth.
  • Unlike five or six years ago, health care experts are now fairly confident they have identified some strategies to build upon and there is an emerging political consensus for encouraging their implementation.
  • The slowdown presents a unique opportunity to expand reform efforts, and is not a moment for complacency or resting on laurels.

The CEA report highlights the cost slowdown by examining how per-capita spending from 2010 to 2012 saw the lowest growth rate for a three-year period on record, less than one-third the historical average. Health care price inflation is also at the lowest level in 50 years. Perhaps most impressively for federal budget watchers is that the Congressional Budget Office (CBO) has lowered its future projections for Medicare and Medicaid spending substantially -- a $147 billion (10 percent) reduction in the year 2020 alone.

While there is legitimate debate over the extent to which government policy, including the Affordable Care Act (ACA), has encouraged the slowdown, there can be no denying that policy changes have directly and indirectly played a role. In the first place, there have been actual cuts to Medicare spending (primarily to Medicare Advantage plans). There have also been penalties for hospitals in the form of reduced reimbursements in cases of excessive readmissions. These penalties not only lower spending directly but also likely reduce it indirectly by encouraging hospitals to avoid costly admissions.

Then there is an entire category of cost-control experiments and pilot projects from the ACA, along with legislatively inspired payment reforms that have developed prior to, or concurrent with, the legislation. Attaching estimates to the results of these system changes is difficult, and even the CEA report doesn’t try. But, the evidence suggests that shifts ranging from the proliferation of high-deductible insurance plans and health savings accounts to the initial waves of Accountable Care Organizations (ACOs) have helped hold down cost growth.

Building on these successes and continuing to search for other ways to lower health care costs have somewhat surprisingly become a policy area with an emerging consensus inside the beltway. As I have written before, numerous think tanks and groups of health care experts have recently released proposals for health reform’s next steps. They recommend similar strategies to nudge the system to become more efficient, less costly and more effective -- mainly by shifting how providers practice medicine by altering payment arrangements and increasing patients’ sensitivity to health care costs. (For other thorough overviews of the emerging consensus see these reports by The National Coalition on Health Care and The Commonwealth Fund.)

The proposals also proferred reforms that would spur a longer-term transformation in the health care system -- making the system better while having savings grow beyond the traditional 10 year budget window. The plans anticipate that because of the federal government’s market power through Medicare and the tax code, the changes would filter through to the private sector. The CEA report provides evidence that this “spillover” is a real phenomenon that has already contributed to lower national health care costs. 

With this consensus, the real question is whether the cost slowdown will reduce the pressure on Congress and the President to enact legislation to solidify the already achieved gains and to press forward with other changes that could more permanently shift the cost curve downward. Doing so would dramatically improve the federal budget’s long-term outlook and thus increase future economic growth and living standards.

Yet, the brief surplus era in the 1990s reminds us that any drop of good budgetary news is often followed by torrents of claims on the federal fisc filed from the wish lists of the political party bases. Then it was tax cuts and cap-busting discretionary spending. Now, we are hearing calls for increasing Social Security benefits and “revenue-neutral” tax reform where lower rates tend to get more public airing than the base-broadeners meant to pay for them. It is not a coincidence that these proposals are gaining traction at the same time the deficit is falling.

With falling health care costs, there is at least one reason to believe the situation might be handled differently. That bright spot for optimism is the need for another “doc fix” -- and the possibility of that being the most likely vehicle for new payment reforms. As happens nearly every year, Medicare’s formula for determining physician payment levels, the Sustainable Growth Rate (SGR), will lead to a nearly 25 percent cut absent new legislation by the end of the year. Almost everyone on Capitol Hill wants to not just pass a one-year patch, but to enact a permanent fix. The reason? The slowdown in health care costs has substantially lowered the cost of such a fix.

One House committee has already passed a bill to permanently do away with the formula, replacing it with initiatives to switch doctor payments away from fee-for-service and toward value-based payments and care-coordination incentives. The bill passed on a 51-0 vote. 

The Senate Finance Committee’s chairman and ranking member, along with the House Ways and Means chairman and ranking member, have jointly released a discussion draft that is similar in its replacement effort and follows along the lines of many think-tank recommendations.

Even with the reduced cost for permanent repeal, the issue of paying for repeal so that it doesn’t increase the deficit over the 10-year budget window might still prove to be a stumbling block. Yet in this case there are many pay-fors that advance the goals of health care payment reforms and can support the changes still needed to make the delivery system more efficient. 

The Senate Finance Committee is scheduled to take up an SGR repeal bill on Dec. 12.

Betting on a permanent SGR repeal can make one look foolish. However, it is possible that this confluence of good news on health care costs outlined in the CEA report, combined with the emerging consensus on next steps for reform, will clear a path for policymakers to accomplish something further in the part of the federal budget that is our biggest problem over the long term.