Cost control in the bill

Those of you who have heard me talk about health care reform know that I have a number of problems with the bill.  I think it’s not truly universal.  I think it doesn’t take care of the perverse economic incentives of private insurance.  I think the subsidies aren’t sufficient.

And I think it does a pretty crappy job of cost control.

That said, a number of you have written me to complain that there are some cost controls in the bill.  You’re right.  Ezra Klein does a pretty good job of summarizing them:

1) Bundled payments: A lot of the focus has been on cost controls that work through the insurance system. But costs aren’t rising because insurance is expensive. They’re rising because health care is expensive. The experiments with bundled payments are an attempt to begin addressing those drivers directly. Right now, hospitals get paid for each procedure they conduct. If you come in with symptoms of a stroke, they get one check for the diagnostic, one check for the stroke medication, one check for the surgery, etc. And if you have to come back in two weeks, they get more money for that, too.

Under bundled payments, the hospital would receive one check for everything related to your stroke over a single period of time. That means they make more money from doing less, rather than more money from doing more. It also gives them an incentive to coordinate care when you’re out of the hospital, as it’s cheaper to get a nurse to call and make sure you’re taking your medicine than it is to have you in for a follow-up procedure. For more on the bundled payments system, and Sen. Mark Warner’s efforts to strengthen it, see this post, or this article.

2) Prudent purchasing: Howard Dean gave this prominent play in his op-ed this morning, and he was right to do so. The only problem is that he said it’s not in the bill, and it is.

Prudent purchasing means that insurers can’t enter, or stay, in the exchanges unless regulators are satisfied that they’re doing a good job. That works both to ensure a good product, but also to hold costs down. If an insurer wants to hike premiums, for instance, they have to submit a justification to the exchanges and post that justification publicly on their Web site. If the exchange isn’t convinced, that insurer can be dropped from the exchange, losing all customers and profits they were making.

Do this to one or two insurers, one or two times, and the message will be pretty strong. Moreover, it will go a ways towards countering the status quo bias that current infects insurance purchasing, wherein people don’t change because, well, it’s a pain to change insurers, and so insurers aren’t forced to provide products as good as a competitive market would ordinarily demand. It also gives regulators a way to tamp down destructive marketing (an insurer can be dropped for using their marketing to try and cherrypick healthy customers — say, by advertising exclusively in Runner’s Monthly) and seed quality reforms.

3) The Medicare Commission: One reason there’s so much packed into this iteration of health-care reform is because it’s so hard to overcome the status quo outside of a massive reform effort. Common-sense delivery system reforms don’t attract sufficient interest to muscle pass interest group opposition. The Medicare Commission streamlines the reform process, forcing a panel of independent experts to suggest a package of reforms in years when spending growth is too rapid and forcing Congress to vote on the package — no amendments, and no filibuster.

The Medicare Commission enjoys a catalytic interaction with other elements of the bill, as it offers a process to take small programs and convert them into systemwide reforms. A pilot program that’s working well, for instance, might be included in the next year’s reform package, making it a policy that makes Medicare work better. This policy could be made a lot better if the Senate passes the Rockefeller-Lieberman-Whitehouse amendment.

4) The excise tax on high-value health insurance: This is, essentially, a tax on the unchecked growth in premiums. The key here is that the threshold at which premium dollars begin getting taxed at 40 percent doesn’t rise as quickly as premiums costs generally rise. Now imagine two insurers: One holds costs down quite well, and one holds costs down quite poorly. Within a couple of years, the costlier insurer’s plan is $3,000 over the threshold, while the cheaper insurer remains under it. The tax amplifies the difference between the two. The costlier insurer is suddenly $4,200 more than the cheaper insurer. In this way, plans with more successful cost-control mechanisms get an even larger market advantage. This makes the insurance market even more competitive in terms of price. For a longer explanation, read this post.

5) The individual mandate: In the last few days, an odd argument has arisen. The individual mandate, people say, must be sacrificed on the altar of cost control. The truth is quite the opposite. First, the individual mandate lowers average premium costs by bringing healthy people into the system. If the only people buying insurance are the people who expect to need to use it, the average cost will be prohibitively high. But second, the individual mandate is the political spur for future cost controls.

Here’s my two cents.  I think that (4) will work a bit, but will not hold over time.  I think that (5) works, but more for the cost of insurance than the cost of health care.

The other three have some potential for helping, but they only apply to government spending.  And, while government spending does account for a lot of care, most people get their insurance from private companies.  It’s everyone’s hope that changes to Medicare and Medicaid will trickle down to private insurance, but it’s not a sure thing.

One of the many reasons I think a single payer system would be better is that such reforms would apply to everyone, and would have more potential to have a bigger effect.

So I guess the bottom line is that there are some cost controls, and that they are likely better than nothing.  But it’s not my job to cheer “better than nothing”.  We could do a much better job.  Nearly every other comparable country does.

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