On Health Care Costs: One Small Step Forward, One Big Step Back

Policy Memo
Tuesday, January 16, 2018

Last week brought consequential developments on the road to health care cost control.

On the positive side, the Trump administration unveiled a new payment reform model while the nominee for Health and Human Services (HHS) secretary indicated a willingness to reverse course and allow a key type of cost-control experimentation.

On the negative side, with the potential to vastly outweigh the positive, is news that Congress is flirting with eliminating the most consequential cost-control measure enacted in the last decade -- the tax on high-cost health insurance (the so-called “Cadillac Tax”).

Blog Post

Making Health Care Programs Sustainable Depends on Controlling Costs

Tuesday, July 18, 2017
Health care programs are the largest and fastest growing in the federal budget. These programs include Medicare (providing health insurance for older Americans), Medicaid (providing health insurance for lower-income Americans), the Children’s Health Insurance Program, and subsidies for individuals to purchase private health insurance under the Affordable Care Act. Currently they comprise almost 30 cents out of every dollar spent by the federal government.

First, the good.

HHS unveiled a new “bundled payment” model that will be open to physicians who want to become eligible to share in the highest rewards for savings and the greatest amount of downside risks for cost overruns. Previously, Medicare models based on bundled payments were not an option despite evidence that they show a fair amount of promise in increasing savings without a degradation in quality of care. (For a more detailed explanation of the new model, see this).

In a bundled payment model, surgical interventions are reimbursed with a single amount that takes into account every aspect of an intervention, from the surgeon’s work, to the medical devices used, to the post-surgery rehab. Ultimately, providers share in any cost savings and  risk penalties if there are cost overruns or quality falls short.

Towards the end of the Obama administration, there were a number of bundle programs set to take effect on a mandatory basis. Having some of the payment reform experiments mandatory is necessary to get the best data on effectiveness because otherwise you have hospitals and doctors opting in when they think they can save money and opting out if the realize they would lose money. That can skew the results and gives a misleading picture of effectiveness.

However, when the Trump administration came in, then HHS Secretary Tom Price spoke out against mandatory experiments, cancelled three budle programs and cut back a fourth. Price’s replacement nominee Alex Azar, at his confirmation hearing Jan. 9, suggested he is supportive of mandatory bundles. He said that if to test an experiment “it needs to be mandatory as opposed to be voluntary to get adequate data, then so be it."

Currently, many stakeholders in the nation’s health care system are engaged in a massive attempt to reorient towards payment systems that place an emphasis on rewarding value and outcomes over volume and intensity. While this shift may not be a silver bullet that permanently reduces costs in the United State’s uniquely expensive health care system, it is a shift with bipartisan consensus and is being led by serious efforts at experimentation through the federal government in its role as the largest payer for health care services. These pieces of news sent an important signal that payment reforms will continue in Medicare, which due to its size, is a major influence on the overall health care system.

Unfortunately, that good news was overshadowed by reports that Congress is considering permanent repeal of the Affordable Care Act’s tax on high-cost insurance plans during the rush to complete action on government funding legislation within the next month.

The insurance tax attempts to limit the tax-free treatment of employer-provided health insurance benefits by basically taxing those benefits above a certain dollar amount.

Blog Post

We Can’t Turn Back on Obamacare’s Turning Point

Monday, October 12, 2015

There has recently been a renewed focus on a key provision in the Affordable Care Act (ACA) -- the so-called “Cadillac tax.” The tax, which will take effect in 2018, attempts to limit the tax-free treatment of employer-provided health insurance benefits by taxing them above a certain amount.

This is a fiscally responsible and progressive tax because the exclusion of health insurance from taxation is very expensive for the government, only provides benefits to some workers, distributes those benefits primarily to those who earn the highest incomes, and encourages higher health care spending. Economists believe that as the tax-based preference for health insurance over employee wages dissipates, wages will rise.

During the debate over the ACA, the Congressional Budget Office found the tax to be the legislation’s single most important cost-control effort, raising revenue and holding down health care costs, allowing the ACA to reduce deficits over the long term.

However, imposition of the tax has already been delayed from 2018 to 2020 and, as we warned earlier, continual delays just increase the bipartisan political momentum to stave off the tax year after year. A one-year delay would cost around $10 billion, while a permanent repeal would cost over $100 billion within the 10-year budget window -- and substantially more over the longer term.

Getting a handle on health care costs is both the most difficult yet most essential change we need to make when confronting the government spending pressures on our long-term fiscal challenges. Taking only one step forward for every two steps back just compounds our fiscal unsustainability. Hopefully Congress will reverse course and spend more time on making payment reform work and less time making politically appealing but fiscally damaging choices.