Can Congress Reduce Healthcare Costs?

As a healthcare reform bill draws ever nearer to enactment, I think it’s reasonable to ask whether, regardless of their aspirations, Congress will be able to reduce healthcare costs? The Center on Budget and Politics has produced a report that addresses exactly that question. In the report the authors analyze Congress’s earlier track record of controlling healthcare costs, engage in a lengthy critique of the “sustainable growth rate” mechanism enacted in 1997 for which Congress has repeatedly postponed enforcement.

The authors of the report identify a number of measures in the bills that are making their way through the Congress which have the potential to control costs:

  • Creating a health insurance exchange
  • Establishing an excise tax on high-cost insurance plans
  • Reducing administrative costs
  • Researching comparative effectiveness
  • Promoting prevention and wellness
  • Licensing follow-on biologics
  • Strengthening primary care
  • Establishing quality measures and priorities
  • Promoting high-value care
  • Establishing a center for innovation
  • Enhancing program integrity
  • Reducing avoidable hospital readmissions
  • Promoting accountable care organizations
  • Examining payment bundling

Before I begin my critique I’d like to make one point about the report itself. The authors are quite optimistic about the prospects for the bills that are making their way through the Congress actually reducing costs. I sincerely hope they’re right. If they’re wrong the course of action we’re embarking on will be ruinously expensive.

Rather than enter into a point by point critique of the various different proposals for “bending the curve”, I’m going to concentrate my comments on just a few areas: scoping the task, quantifying the prospects, and the relevance of prior Congressional behavior.

The Scope of the Task

The enormous scope of the task that restraining the increasing cost of healthcare can be illustrated in two graphs. The first graph shows the per capita percentage increases in healthcare spending over the period of the last thirty years on a year over year basis:

As you can see healthcare has rarely increased at a rate lower than 4% and generally has increased at a rate greater than 8%. The principle of compounding explains why the issue is so serious. How does this relate to other costs? This graph illustrates that:

As you can see healthcare costs have risen significantly faster than costs, generally. Indeed, with the healthcare sector comprising roughly a sixth of the economy (although employing significantly fewer than a sixth of workers), healthcare costs increase now comprise a substantial portion of all cost increases. Consider the following graph of CPI percentage changes:

Over the period of the last 25 years the CPI has generally remained below 4%. Since healthcare costs are included in the CPI, the non-healthcare CPI has clearly been even lower. The bottom line of all of this is that, simply for things to remain as they are now, between 4% and 12% will need to be trimmed from the projected growth of healthcare spending. With a total healthcare sector size of just under $2 trillion annually that translates into required savings of from $80 billion to $240 billion will need to be realized. No plan currently in Congress trims a dollar from current spending. Indeed, they all spend more. Savings are left for the future.

Quantifying the Prospects

I found two problems with the prospects for cost savings as delineated in the report. First, there was very little in the way of actual quantification. Second, nearly all of the cost savings are hypothetical. This is particularly troubling in the light of the fact that the increased costs of the legislation are real. Let’s take just two of the items, insurance administrative costs and comparative effectiveness.

The administrative burden of healthcare insurance costs is a contentious and disputed subject. I’ve seen estimates everywhere from 2% (from the insurance industry) to 30% (from an article in the Journal of the American Medical Association). This report, for example, finds an overall administrative cost of roughly 17%. That’s not a great deal different from the target cost of 15% in the CBP report. And if it’s less costs could actually go up and still fall within the constraints being touted there.

This Heritage Foundation report suggests that the real total healthcare insurance administrative costs could rise as a consequence of the bills making their way through the Congress.

The press releases for “comparative effectiveness” suggest that it’s the study of what works best for which patients under what circumstances. The subject is worthy of a post on its own and I’ve been working on one for some time now. I think there are several things to keep in mind on this subject.

First, comparative effectiveness is not identical to evidence-based medicine, with which it often seems to be conflated. Second, comparing actual treatments provided to actual patients is incredibly difficult. Medicine is an art as much or more than it is a science. Evidence-based medicine is an attempt to nudge the practice increasingly into science and I favor it. I think it is benign. However, I am very concerned that comparative effectiveness may well be hooey—statistical balderdash masquerading as science. Comparing the non-comparable to justify the least costly option. Bad medicine.

Finally, of itself research into comparative effectiveness won’t reduce healthcare costs by a dollar. Only the implementation of the results of comparative effectiveness research will do that and what’s in the bills making their way through the Congress is research not implementation. At this point there is no reliable estimate of how much can be saved through implementing the results of comparative effectiveness research let alone whether anything will ever be realized from it.

The Relevance of Prior Congressional Behavior

This is the part of the CBP report that I found the most baffling. Congress is not uniform over time and, consequently, comparing the performance of the present Congress to the performance of past Congresses isn’t likely to tell you very much. In a general sort of way the Congress is subject to the same sorts of pressures, e.g. Congressmen want to get re-elected. However, just as today’s Republicans aren’t a great deal like the Republicans of 1956 and today’s Democrats aren’t much like the Democrats of 1960, today’s Congress isn’t much more like the Congress of 1996-2005, for which the study has substantial praise, than it is like the Congress of 1866.

For me the critical point isn’t that the Congress of 1996 or some hypothetical Congress was able to control healthcare costs but that the present Congress has shown no predisposition to doing so, indeed, they’re preparing a whopping increase. This suggest to me that this Congress is unlikely to exhibit any particular interest in controlling or reducing healthcare costs. If they had such an interest, they’d be doing so now.

14 comments… add one
  • steve Link

    I guess I still do not understand your concerns about cost effectiveness research. I guess it is a good thing I will be using that data and not you. We already use it when we can.

    Administrative costs. Taiwan, reportedly, has theirs at between 2% and 3%, so we can potentially reduce them a lot. You are probably right that it is less likely to happen within a private insurance system.

    Several of those others, while not quantified, should, if Verdon is correct, decrease costs. If we tax the things we wish to have less of, then taxing the high priced insurance programs, should make them decrease in frequency. If the exchange opens up sales across state lines, it should reduce costs.

    Reducing readmissions. You should also include the emphasis on avoiding infections here also. This is being done solely by Medicare. No private insurance company is pushing these kinds of issues that will increase quality and decrease costs. This has puzzled me TBH. You would thing private companies would be concerned about costs.

    The one quantification they do provide is on Medicare where they are cutting some costs, unless they get torpedoed by the Republicans. Isn’t this a good thing? Pretty unusual for anyone to risk touching the third rail.

    What about the Medicare Advisory Board? If Medicare exceeds expectations on spending, they can cut up to 1.5%, eventually. Congress has to accept their recommendations unless they can get a bill through both houses and past the president. I guess you can question putting that much authority into a small group, but methinks we need something pretty drastic that will be difficult for Congress to screw up.

    Finally, this will increase total spending, but when you say that, you should also note that it will cover many more people. Just achieving Medicare cuts this large is an achievement, if it passes. No one got elected on a controlling health care costs platform.

    Steve

  • Andy Link

    Great post Dave.

    One line from the report:

    Although covering the uninsured will necessarily increase the level of national health expenditures at first, the key question is what will happen to the rate of growth of health expenditures thereafter. Even a modest slowdown in annual cost growth will more than offset the initial cost increase within a short period of time.

    That last sentence is troubling. A modest slowdown is still unsustainable, it only makes the day of reckoning a bit more distant. Using the estimated “savings” from such a modest decrease to offset some real cost is not really savings at all. It’s like saying I can buy that new TV and put it on my credit card because its cost is “offset” by all those savings I’ll get when the card company lowers my interest rate, which I predict WILL happen.

  • Reducing readmissions. You should also include the emphasis on avoiding infections here also. This is being done solely by Medicare. No private insurance company is pushing these kinds of issues that will increase quality and decrease costs. This has puzzled me TBH. You would thing private companies would be concerned about costs.

    I think I can cast some light on this. Back in the 1980’s the insurance companies made some attempts at controlling costs through these sorts of measures, denying payment for non-compliance. The backlash was so severe that they determined that it was safer and easier (for them) to stop trying to control costs. Remember: since insurance companies are compensated largely on the basis of a percentage of premiums paid they are incentivized for costs to increase. That’s still true under healthcare reform legislation.

    What about the Medicare Advisory Board?

    There are two problems. First, I’m skeptical that Congress actually has the power to delegate its authority to such a body. Second, I doubt they’ll actually avoid interfering with it. I think that Congress’s incentives are to interfere with that board to keep voters happy rather than allow it to function and listen to angry constituents.

  • Finally, this will increase total spending, but when you say that, you should also note that it will cover many more people.

    We already have experience with just this sort of process: when Medicare and Medicaid were first enacted. Costs rose as should have been expected for several years through increased utilization. However, for the next half dozen years even though utilization had steadied costs continued to rise simply as a result of price increases. I think that’s what we should expect this time around, too.

    The basic problem is that we can’t afford what we’re paying now let alone the increased amount and we even more can’t afford the cost increments as the now higher base costs rise with inflation.

  • Using the estimated “savings” from such a modest decrease to offset some real cost is not really savings at all.

    Yes, that’s exactly my point.

  • steve Link

    “Second, I doubt they’ll actually avoid interfering with it. I think that Congress’s incentives are to interfere with that board to keep voters happy rather than allow it to function and listen to angry constituents”

    Maybe, but it makes it very clear who is supporting increased spending and increasing deficits. This is one point where the filibuster may be a good thing. A small group could hold the line on spending. The advisory board can take the heat, letting Congress off the hook. The president can veto also, so more chances to hold down costs.

    I dont remember that bit from the 80s. Maybe my presenile dementia is kicking in or it just didnt reach the east coast. Either way, I think this shows we cannot really expect private insurers to hold down costs.

    Steve

  • Andy Link

    Dave,

    Another issue is that both these bills are partly funded by taxing parts of the health care system itself – “device makers” and such. Wouldn’t that be, at best, a net zero gain since those taxes will simply be passed on and increase the costs in the system?

  • I dont remember that bit from the 80s. Maybe my presenile dementia is kicking in or it just didnt reach the east coast. Either way, I think this shows we cannot really expect private insurers to hold down costs

    Several of my clients are insurance companies. They frequently complain about this.

  • Norris Hall Link

    If the recent debate on health care has taught us anything…it’s that the consumer is not in the driver’s seat on this.
    Drug Companies, Insurance companies, Hospitals, and doctors…the ones that set the pricing for medical care…all have their high paid lobbyist prowling the halls of congress, dishing promises of golf outings, campaign contributions, future employment and other goodies to the hungry members of congress.
    As long as money is being waved in front of our elected representatives…don’t expect them to pay much attention to voters. After all even elections are won by slick ads that cost money…so follow the money , right?

    My wife and I have found a solution that seems to work for us…
    Health care beyond America’s borders.
    With medical costs a fraction of what the health care industry charges us in the US, we’ve found excellent affordable health care in Thailand, of all places..even without insurance.
    To woo the cash strapped and weary American uninsured and underinsured, The Thais (and Indians, Malaysian, and Singaporeans) have built excellent private hospital system that provide top notch care for a fraction of the costs in the US.
    These hospitals are accredited and follow the same standards as in the US. In fact they outperform US hospitals in service and care.
    Yet you can expect to pay 1/10th to 1/20th what it cost for the same procedure in the US.
    Heart Bypass…US $150,000.
    Hear Bypass..Thailand $15,000
    My minor throat surgery for disphagia…US $2500
    Thailand $100.
    (That was 1 year ago today and I am back in the US… very much alive.)
    In fact in Thailand most people have no use for health insurance. Prices are so affordable that Thais would rather save the insurance premiums and bank it.
    While we in the US get hit twice….once by the insurance company…and the second time by the medical profession. So we pay twice for health care.
    And don’t think that you are safe with insurance in America. Check your insurance policy for hidden costs like deductibles, copays and insurance caps and you will be shocked to find that health care coverage is VERY LIMITED

    The US health care system is a train wreck hurtling down the mountainside with NO hope that anything…even the health care proposals in Congress can fix.

    As long as the people who stand to gain the most profit from health care are calling the shots…people who rely on the US health care system are SCREWED.

    And here’s the rub. People would like you to believe that the American health care system is a free market system driven by competition.
    Nothing could be further from the truth.
    A few giants control the insurance industry and a few medical associations strive to keep competition from putting downward pressure on compensation.

    Like… when was the last time you saw a hospital post it’s rates like a restaurant posts it’s dinner prices???

    When was the last time you saw a physician run a TV advertisement offering lower cost medical care like every hotel, car dealer, grocery chain, clothing store, bicycle shop, and fast food outlet in the United States?

    So while everyone in the United States seems so wrapped up in tinkering around the edges of heathcare with tort reform, purchasing insurance across state lines, living healthier, public options, providing insurance for everyone…..the real culprit is staring us in the face: the people who make a living off of health care.

Leave a Comment