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Finding the Nerve to Cut Health Costs

December 9, 2009
Economic Scene


Over the next several weeks, members of Congress will be confronted with one scary story after another about what will happen if they try to cut health care costs.

Tax the costliest health insurance plans? Workers will be denied medical care. Reduce the growth of spending on home health care agencies? Elderly patients living alone will be left to fend for themselves. Set up a commission to reduce Medicare waste? Again, the elderly will suffer. Impose a tax on plastic surgery? That’s unfair to unemployed women looking to enhance their appearance. (Seriously, the plastic surgeons are making that case.)

But here’s the thing: It is abundantly clear that our medical system wastes enormous amounts of money on health care that doesn’t make people healthier. Hospitals that practice more intensive medicine, to take one example, get no better results than more conservative hospitals, research shows. And while the insured receive better care and are healthier than the uninsured, the lavishly insured — those households with so-called Cadillac plans — are not better off than households with merely good insurance.

Yet every time Congress comes up with an idea for cutting spending, the cry goes out: Patients will suffer! You’re cutting bone, not fat!

How can this be? How can there be billions of dollars of general waste and no specific waste? There can’t, of course.

The only way to cut health care costs is to cut health care costs and, in the process, invite politically potent scare stories.

I’m as skeptical as anyone of the ability of the United States Congress to formulate good policy, but the last few days have offered a reason to hope that its members may be summoning the political courage to endure the scare stories.

That would be a big deal. Health costs, through Medicare, are the main source of the huge long-term budget deficit. In recent years, they have also caused insurance premiums to rise so quickly that employers haven’t had the money to give workers a decent raise. David Cutler, a Harvard health economist, estimates that the measures already in the health bills will increase the typical family’s income $2,500 a year by the end of the decade.

Real health reform also has the potential to save lives. Because we now pay doctors to provide more care rather than better care, we have not given them an incentive to reduce hospital-acquired infections and other avoidable errors. A new amendment from three senators — Susan Collins, a Maine Republican; Joe Lieberman, the Connecticut independent; and Arlen Specter, the Pennsylvania Republican turned Democrat — would increase the financial penalty for giving patients such infections.

Even this idea, however, has its own scare story. The Washington Post reported on Sunday that hospital groups were & quietly steaming; over it and suggested their support for health reform could be in danger.

One piece of encouraging news came on Saturday, when the Senate finally began listening to its own health care advisers.

To help it oversee Medicare, Congress set up an outside board of doctors, economists and other experts in 1997, called the Medicare Payment Advisory Commission. Medpac, as it’s known, tries to figure out which services Medicare may be paying too little for, thus creating shortages, and which ones it may be overpaying for.

Perhaps the single clearest example of an overpayment is home health care. Home health agencies, which care for Medicare patients with specific health needs (as opposed to those receiving general long-term care), have been proliferating in recent years. Yet, according to the most recent data, they still had fat profit margins on Medicare, 16.6 percent. One reason, the Government Accountability Office found, was that fraud was rife.

So MedPAC has recommended cutting home health payments, and the Senate bill would do so, by 13 percent over 10 years. On Saturday, the Senate rejected a Republican amendment, supported by a few Democrats, too, that would have blocked that cut.

The home health provision is actually typical of the cost-cutting measures that have made it into the Senate bill: it’s pretty good. It won’t be perfect, obviously. Some people somewhere may indeed have to stop working with a home health agency they like and find a new one. But that’s not a reason to waste billions of dollars a year subsidizing an industry’s profits.

The real problem with the Senate bill is that it doesn’t go far enough to cut costs and improve care. Here too, however, there are positive signs. For months, centrist Democrats have been saying that cost containment was one of their biggest priorities, but they had not done much to help the cause. That has now started to change.

“ Senators are now really focused on cost containment,” says Mr. Cutler, who has been advising some of them.

The day before the Senate defeated the home health care amendment, Senators Collins, Lieberman and Specter introduced an amendment with some measures to push medicine away from the insidious fee-for-service payment system. The cost-cutting momentum continued on Tuesday when 11 of the 13 freshman Democratic senators announced their own package of measures. Neither proposal is earth-shattering, but both would make a difference.

Among other things, the freshmen’s proposal would do more than the current Senate bill to push insurers to use a standardized payment process. Right now, doctors and hospitals often have to fill out different forms for different insurers. “There’s a lot of money there,” Len Nichols, head of health policy at the New America Foundation, says.

Intriguingly, officials from a rainbow of special interest groups showed up at the freshman senators’ news conference to praise the proposal. To me, their presence highlighted both the biggest strength and the biggest weakness of the proposal. On the one hand, it has a real chance to make it into the final bill. On the other hand, it, like the Collins-Lieberman-Specter amendment, also fails to fix the single biggest flaw in the Senate bill.

Last month, Senator Harry Reid, the Democratic leader, gutted an independent commission — a more powerful version of MedPAC, meant to shield Medicare payment decisions from political interference — that many economists consider necessary. Mr. Reid’s bill would allow the commission to take action only if Medicare spending was rising even faster than total health spending. If total spending rose 8 percent one year and Medicare spending rose 7.9 percent — a miserable situation — the commission would have to sit on its hands. AARP, unfortunately, has emerged as an opponent of a strong commission.

But without one, health reform will be hobbled. And the Senate may be the only hope for changing it.

The House has shown little interest in cost control. President Obama and his administration have pushed aggressively for it, but they have limited leverage. Mr. Obama can’t credibly threaten to veto any of the health reform bills that now seem likely to emerge from Congress.

So after the 11 freshmen announced their plan on Tuesday, I caught up with Mark Warner, the Virginia Democrat who is the group’s leader, underneath the Capitol building and asked him how he and his colleagues would deal with the inevitable scare stories still to come: How do you respond to a lobbyist who effectively accuses you of killing patients?

“I don’t know any other way than you take incremental steps,” Mr. Warner said, “and you hope you get to the tipping point where fear and misinformation don’t have an effect, because people see these things don’t do what they are accused of doing.”

That, obviously, is the long-term strategy. In coming weeks, we’ ll see how well Mr. Warner and his colleagues deal with the immediate pressure. The Grim Reaper is a tough opponent.

Originally published: Wednesday, December 09, 2009; most-recently modified: Friday, May 17, 2019