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The Discipline Of Efficiency The Discipline Of Efficiency

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The Discipline Of Efficiency

Much remains to be done to control health care costs.

As the Senate nears a historic vote on health care reform, the latest comprehensive analysis of the Democratic legislation shows how far it goes toward squeezing inefficiency from the medical system -- and how much remains to be done to control costs.

The study was released last week by Richard Foster, Medicare's chief actuary, which is an independent position. His assessment reinforces the Congressional Budget Office's November analysis of the bill that was crafted by Senate Majority Leader Harry Reid, D-Nev. CBO concluded that the bill's savings (primarily from slowing increases in Medicare spending) and new revenues (notably from a tax on high-end "Cadillac" insurance plans) would exceed its spending to cover the uninsured. In all, CBO projected that the bill would reduce the federal deficit by $130 billion over its first decade and by much more during the next -- even while vastly expanding insurance coverage.


The actuary's report filled in the picture by assessing something that CBO didn't measure: the legislation's impact on total health care spending by government, individuals, and businesses. Foster projected that under current policies the nation will spend $35.25 trillion on health care through 2019. Under Reid's bill that total would increase, but by only $234 billion over 10 years -- a difference of just 0.7 percent. Put another way, Medicare's actuary projects that the Senate bill would insure 33 million uninsured Americans while increasing total national health spending by less than a penny on the dollar.

If these projections are credible, both studies suggest that the Senate legislation substantially meets the standard that President Obama has set of funding expanded coverage mostly by redirecting money now wasted in the health care system. So, are the projections credible?

Reform advocates believe that, if anything, the forecasts understate the Reid plan's savings. That measure includes extensive reforms designed to nudge the medical-payment system away from today's fee-for-service model toward an approach that more closely links providers' compensation to results for patients. Many experts consider that evolution the key to constraining costs. But the bill's ideas for advancing it (such as providing financial incentives to hospitals and physicians for better coordination) are mostly new, and a few would only be pilot projects. Some studies predict big savings from those reforms, but CBO and the actuary cautiously project little or none.


Critics dismiss the projected savings as wishful thinking. Their core argument is that Congress won't implement the bill's nearly $500 billion in Medicare reductions through 2019. They focus mostly on a provision that would require more productivity from hospitals and other Medicare providers. Medicare now increases provider payments each year to reflect rising costs. The Reid bill, aiming to compel greater efficiency, would reduce those increases by an amount that reflects annual productivity gains across the entire economy -- from 1 to 1.5 percent. Hospitals, though, have typically increased their productivity by less than half that much, and other providers haven't matched even that. Foster, the actuary, projects that they can't do any better. So he estimates that under Reid's approach one-fifth of hospitals would become unprofitable and many providers would stop accepting Medicare patients.

Other analysts say it is absurd to believe that providers can't become more efficient. Len Nichols, health policy director at the centrist New America Foundation, notes that hospitals that now claim the biggest losses from treating Medicare patients operate with the fewest local competitors. Demanding more productivity, Nichols argues, would "force a discipline of efficiency" on hospitals now sheltered from competition.

It would be an enormous achievement if the Medicare savings are realized and expanded coverage essentially funds itself. But even if the bill meets those goals, Foster's projections suggest that it wouldn't significantly change the long-term trajectory of health care spending (albeit while covering many more people). "If you get better health for Americans at this price, it's a bargain," says Alan Garber, director of Stanford University's Center for Health Policy. "But if you are worried about deficits, you say, 'This is good, but we have to do better.' "

Garber wants to toughen Reid's cost-control provisions, as does a group of first-term senators who crafted further reforms that the majority leader appears likely to adopt. Still, Sen. Mark Warner, D-Va., who helped lead that effort, warns that containing costs will require "a process" of continual reform. That's undoubtedly correct. But if Congress doesn't take a first step now, many years may be lost before it tries again.


This article appears in the December 19, 2009 edition of National Journal Magazine.

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