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SATURDAY MORNING HEALTH WONKERY: WILL OBAMA'S PLAN SAVE MONEY?
Brendan Nyhan questions whether Barack Obama's health care plan "would actually cause a net reduction in government health care spending." Except that Obama doesn't say it would cause a net reduction in government health care spending. In the quote Nyhan offers, Obama says, "I think over the long term we will save money because people will be getting regular checkups, regular screenings." The "we" here refers to what the "we" in health care spending usually refers to: National health care spending.* The amount we as a nation pay out for medical care and coverage. And the answer to whether Obama's plan will save us money? A definitive maybe.
First off: Barack Obama's plan is not Jacob Hacker's plan. In the update to his post, Nyhan mentions the Lewin analysis of Jacob Hacker's plan, which shows that Hacker's plan will save about $1.1 trillion over its first decade. But the mechanism for those savings are a rule Hacker places on his group market, which caps per person spending increases at the growth of GDP plus one half of one percent per year. That's a much lower rate of growth then the system currently exhibits, and Hacker is achieving it basically by government fiat -- the government will adjust reimbursement rates in order to meet the spending requirements. In other words, the group market has price controls (for a more in-depth explanation of these controls, and how the two plans differ, see this article). These controls account for approximately $1 trillion of the plan's $1.1 trillion in savings.
Obama's plan has a similar structure to Hacker's plan, but it doesn't explicitly include that provision. In an e-mail to me, Hacker argued that it could be implicit. "It really depends," he said, "on what they end up doing with the public plan alternative. Assuming it uses Medicare-like rates and bargains for prescription drug prices, it's going to have the leverage to bring down costs. The crucial issues are (a) how many people end up in the public plan and (b) whether the payments to private plans within the purchasing pool are tied to the average cost of the public plan. If the answer to (a) is 'many' and (b) is roughly as Medicare currently does it, with risk-adjusted payments based on average per capita costs, then the public plan will not only have leverage, but in addition the payments to the private plans will be contained insofar as the public plan's costs are contained. The candidates will need to spell this out, but they certainly have not ruled it out and, indeed, the architecture of their plans is set up to facilitate it."
Hacker's right about that. Obama has left the cost controls ambiguous (though a more cynical observer, like me, would say he's simply removed them), and adopted a structure that could easily support them. As a matter of policy, it's extremely easy to see how they build upon the underlying architecture of the plan to implement effective cost controls. As a matter of politics, however, it's much harder. I've little doubt that a President Obama would like his health care plan to save money. But cost controls through spending caps are a tough political sell, and if Obama can't get to 60 votes with them, he'll try and get to 60 votes without them.
The question then becomes whether Obama's plan without the "hard" cost controls will save us money. Because it does have what I call "soft" cost controls -- prevention programs, health information technology, a comparative effectiveness board that could, over time, help us waste less money on useless treatments. Will those provisions wipe out the spending from increased access? Probably not. Comparative effectiveness could have huge impacts down the road, but in the 10 year timeframe we're talking about, you can't confidently predict huge savings. These provisions will save some money, but not necessarily enough to put us in the black.
What the Obama plan does do, through promoting integration of the system, is make it easier to add cost controls later. As the Hacker example shows, the group market it creates provides a huge and powerful venue for policy experimentation. Unlike our current patchwork system, with its thousands of private insurers operating chaotically and on their own, Hacker's plan creates a parallel group market structure, which you could regulate at will. So you could add spending controls, you could add value-based insurance purchasing, you could add care managers and utilization review and monopsony bargaining. And as costs continue to grow, such policies will be an increasingly easy sell. So if it does skip out on cost controls in the short-term (which, again, isn't clear, but seems likely for any health reform), the integration of the system makes them far easier in the long-term. If, like me, you believe it's unlikely well get hard cost controls up front, then the sort of integration and system reform that these access-based proposals offer is, in some ways, a necessary first step.
*Nyhan has a bit of a sleight-of-hand at the end of his post. He concludes by writing, "In short, while the Hacker plan would reduce total national health spending, it's still projected to cost the federal government approximately $50 billion more per year than the status quo." That's like saying the new buying system will save our business millions of dollars, but it's still projected to cost our secondary checking account $10,000 more per year. Nyhan is leaving the impression that under Hacker, spending goes up. But it doesn't. Slightly more of it is shifted to the government's dime, but that's paid for through premiums. As it is, all health spending actually comes out of our pockets. We pay for it in premiums, taxes, wages, and fees. The question, then, isn't whether one or another of our intermediaries (Cigna, the government) is paying more, but whether we're paying less. And under Hacker's plan, we are. It saves money.
COMMENTS (8)
Ezra,
This post reads like an academic article devoid of reality. A few examples:
Assuming it uses Medicare-like rates and bargains for prescription drug prices, it's going to have the leverage to bring down costs.
Medicare has done a terrible job at bringing down provider costs. They try every year and the physician lobbies beat it back successfuly. Every time. Its happening again as we speak. Literally. You can say that the "physician guilds" need to be busted, but until that point, this is a pipe dream.
Because it does have what I call "soft" cost controls -- prevention programs, health information technology,
Few others in the health policy arena believe these will actually save costs, including myself. May improve quality at the same cost (i.e. better value) but that isn't cost-saving.
Comparative effectiveness could have huge impacts down the road, but in the 10 year timeframe we're talking about, you can't confidently predict huge savings.
Its at least good to hear you say that for the first time. I'd put the number more like 15-20 years-- this is very difficult stuff.
Unlike our current patchwork system, with its thousands of private insurers operating chaotically and on their own
First, its a little less than one thousand. Two, there are handful of them (Aetna, UHC, Wellpoint) that can and do send signals to the markets about controlling costs, and have done so successfully. Remember the 90's? Which gets to...
So you could add spending controls, you could add value-based insurance purchasing, you could add care managers and utilization review and monopsony bargaining.
Here's the frustrating part with your outlook on health care reform. You completely ignore the fact that private insurance companies have been able to successfully put these cost controls in place. Your whole post implies that you need a singular entity to make these things happen. The 90's proved that this wasn't the case. The problem? Cost controls aren't able to stick longer than a few years. Why? People don't want any restrictions to their health care usage. Until that changes (presumably through greater cost sharing), it won't matter whether a single public system or patchwork of private systems try implementing cost controls. Consumers pushed back against HMOs in the 90's via public pressure, and they'll do the same to a government-driven plan. This isn't about a market failure in being able to control costs. The market can do that. People don't want it- from insurance companies or government. Until you have a good reason explaining why government will do a better job overcoming this hurdle (I think its makes it work since government can debt finance), you're just shifting the problem from insurance companies to government, not solving it.
PS I like the Saturday morning health care wonk post. Keep it up.
Posted by: wisewon | June 14, 2008 10:19 AM
That should be "worse" not "work" in that last sentence.
Posted by: wisewon | June 14, 2008 10:22 AM
Real quick, a lot of what you just said isn't, uh, true.
No one doubts that centralized bargaining saves money, or that Medicare's payment rates mean they pay less than they otherwise might. The evidence here is clear, both domestically and internationally.
Few doubt that widespread use of Health IT would save money. Again, the evidence is clear, from the VA, Kaiser, and every other industry on earth.
Your point about the failure of managed care in the 90s is a good one, but part of the problem is that private insurance companies don't have the legitimacy to do this on their own. Moreover, they could only really bring down costs on the demand side, by denying care -- they couldn't bring them down on the supply side, by bargaining down care or ripping through supplier profit incentives. So patients felt much more of the brunt than they otherwise might have.
Posted by: Ezra | June 14, 2008 11:42 AM
Hmmm...
No one doubts that centralized bargaining saves money, or that Medicare's payment rates mean they pay less than they otherwise might. The evidence here is clear, both domestically and internationally.
I agree that centralized bargaining can bring down costs, theoretically. But you completely ignored my point that in actuality, Medicare hasn't done a good job. They have this theoretical advantage over private insurance, yet they haven't been able to join meaningfully different results. Cost increases are pretty much the same.
Few doubt that widespread use of Health IT would save money. Again, the evidence is clear, from the VA, Kaiser, and every other industry on earth.
I'm happy to to start trading citations/quotes of health experts that believe health IT will "save money" or not. As I said before, value- yes, savings- no. I've actually had at-length discussions with Kaiser executives connected to their IT implementation, and in a word-- you're wrong. They don't think that. In fact, my discussions with them heavily inform my and others' views on cautioning actual savings from health IT. To attribute VA's cost savings primarily to IT? The whole system is completely different. (PS-- We may have an issue that your "no one thinks" and my "no one thinks" are actually two different sets of people. There's probably 20% overlap. Thankfully for me, my "no one thinks" is based on people actually in the health care industry, not DC/think tank/academic types that just think about it. You know I've made this criticism before, now we've got a real example. And Kaiser's a good one. You can pull up the speeches from Halverson lauding health IT, but that isn't the real story. You can do your own digging on that one. I hope you do.)
Your point about the failure of managed care in the 90s is a good one, but part of the problem is that private insurance companies don't have the legitimacy to do this on their own.
It doesn't need to be "on their own." You can be for CEBs, Medicare/government agency providing treatment guidelines, quality assessments, price transparency-- all the things we currently don't have to allow markets to function appropriately in health care.
Moreover, they could only really bring down costs on the demand side, by denying care -- they couldn't bring them down on the supply side, by bargaining down care or ripping through supplier profit incentives. So patients felt much more of the brunt than they otherwise might have.
First, the primary issue with health care costs is volume, not cost. Outside of drug prices (which do have a pricing issue for some drugs), the significant driver of year-over-year cost increases is driven by volume. As an aside-- its a point I've been meaning to make for a while-- in your thinking on cost controls, you've put way too much focus on bargaining for prices versus utilization controls. The latter is the smarter, more efficient way to provide high-quality, lower cost care.
But again, the supply side advantage is a theoretical advantage, not a real one. Just this week-- after excellent front-page articles on suppliers ripping off Medicare-- their lobby seems to be successfully preventing Medicarre from using competitive bidding. Yeah-- not monopsony bargaining which you dream about, just the less earth-shattering competitive bidding.
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902585.html?hpid=moreheadlines
I agree with you these theoretical advantages exist. They exist theoretically in other industries too. But just like those, they don't materialize, and Medicare is a perfect illustration of that in health care.
My saving grace? Jason Furman is at the top for Obama, not you or Hacker. Thankfully for me, his vision on cost controls is pretty much the same as mine, from what I've read.
In fact, given people's questions on the difference between him and more liberal economists-- I'd be real curious to see you discuss that further from the prism of health care. Here's a great piece from him last year.
http://www.brookings.edu/~/media/Files/rc/papers/2007/04useconomics_furman/200704hamilton.pdf
Posted by: wisewon | June 14, 2008 12:12 PM
Its short sided to think that lowering reimbursement will lower costs. It never has and never will. It hasn't for the last 25 years why would now be any different. It will either continue to cause the drive to increase volume or decrease access by dropping out altogether.
Posted by: jenga | June 14, 2008 12:24 PM
It has now almost become the rule when mentioning health care savings and the VA. Always mention the IT system, never mention the tort system. There's no way that could possible save any money.
Posted by: jenga | June 14, 2008 12:28 PM
Lewin Group? Aren't they the Gold Standard or something? Most respected Health Consultants in the Universe...that keep a real super low profile as to not rub anyone's nose in how awesome they are. I read somewhere that 9 out of 10 clueless bloggers prefer their stories over all other consultancies. You should really let your readers know how totally awesome they are, like Solid Gold awesome.
Posted by: Nate | June 16, 2008 12:03 AM
Wisewon is right about cost controls. Medicare reimbursement for a 15 minute PCP visit in Houston, Texas is $30.72.
Thats not exactly a large sum of money. The people bitching about high reimbursements and the govt spending too much money on each procedure dont know what they are talking about.
The problem is volume, not reimbursement costs. $30 for a PCP visit is NOT too much, whats too much is the fact that the total number of PCP visits (and # of PCP visits per capita) keeps going up every year. 10 years ago a typical 70 y/o retiree had one doctor and maybe 5 PCP visits per year. Now, he's got a PCP, a cardiologist, a nephrologist, a nurse practitioner, a physician assistant, and god knows who else, ALL of them billing Medicare. This happens despite the fact that 10 years ago all of his medical problems would have been managed by one person.
Its those volume increases which are driving healthcare cost increases, NOT the reimbursements itself.
You need strict government rules on utilization. You get ONE routine doctor visit per year, not 10. You do NOT get automatic referrals to specialists unless a panel reviews your request and approves it as something beyond the scope of a PCP to fix. No more bullshit CT scans for everything that comes in thru the ER doors.
Its far better to have a government single payor who can put in these utilization controls. Make doctors federal employees and eliminate the need for them to carry malpractice insurance. Pay them on a flat salary instead of on a "per procedure" basis to avoid the enormous volume increases on a yearly basis that keep driving up costs.
Posted by: Anonymous | June 16, 2008 10:55 AM