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Frum Forum


Bending the Cost Curve Up

December 11, 2009

By David Gratzer

It’s a deal. With a compromise reached in the Senate, the White House has scored a political win and Democrats took a giant step toward passing sweeping health-care legislation. But, assuming a Rose Garden signing ceremony in the months ahead, we need to ask a simple question: would the nation be the better for it?

In a recent New York Times’ column, Paul Krugman argues that fiscal responsibility demands the passage of Obamacare, literally arguing that this is our last best hope.

Health care reform hangs in the balance. Its fate rests with a handful of “centrist” senators — senators who claim to be mainly worried about whether the proposed legislation is fiscally responsible.

But if they’re really concerned with fiscal responsibility, they shouldn’t be worried about what would happen if health reform passes. They should, instead, be worried about what would happen if it doesn’t pass. For America can’t get control of its budget without controlling health care costs — and this is our last, best chance to deal with these costs in a rational way...

Prof. Krugman writes on a major speaking point — no, obsession — of the White House since Inauguration Day: the imperative of cost control. Presidential speeches have tied America’s economic recovery to future health-care savings; he mentioned the word cost 71 times at a press conference.

In recent days, Administration officials are pushing hard on the theme that healthcare costs are unsustainable and that proposed legislation would help tame costs. White House Budget Director Peter Orszag and Director of the Office for Health Reform Nancy-Ann DeParle have both conducted interviews to argue that the Senate bill would “bend the curve.”

The message is not lost on Senate allies. While debating the Reid bill, for example, Senate Jeff Bingaman (D-NM) bemoaned health inflation in a speech from the Senate floor, and held up a chart noting the future rise of health spending.

And Prof. Krugman isn’t the first columnist to consider the issue; Ronald Brownstein’s 2,600 word essay in the Atlantic Online trumpeted the proposed reforms as a “milestone” — the piece was required reading at the White House.

Prof. Krugman continues:

Are we talking about real savings, or just window dressing? Well, the health care economists I respect are seriously impressed by the cost-control measures in the Senate bill, which include efforts to improve incentives for cost-effective care, the use of medical research to guide doctors toward treatments that actually work, and more. This is “the best effort anyone has made,” says Jonathan Gruber of the Massachusetts Institute of Technology.

For those of us on the right, the argument could have purchase: costs are rising too quickly in health care. Health-insurance premiums have more than doubled since 2000 — would even the slickest Washington lobbyist attempt to make the claim that health care is twice as good as it was earlier this decade? Health costs have gobbled up wage increases, leaving median family incomes to stagnate long before Lehman Brothers collapsed. Looking forward to a world without Obamacare, corporations would need to allocate more and more to pay for health benefits, while state and federal governments would need to draw heavier from the treasury for Medicare and Medicaid.

But as every good physician knows, it’s not enough to get the diagnosis right, you need to offer the patient the right treatment.

It’s too early for serious work to have been done on the Reid bill, but others have looked at its Senate and House predecessors. Start with the different analyses themselves. The nonpartisan CMS, a federal body, considered health spending if the House bill becomes law, concluding: “In aggregate, we estimate that for calendar years 2010 through 2019 [national health expenditures (NHE)] would increase by $289 billion, or 0.8 percent, over the updates baseline projection that was released on June 29, 2009.” The reforms would bend the curve — up.

While the CBO scored the Senate Finance bill, the Director declined to comment on the potential legislation’s effects on total health spending. Others have: the Lewin Group, for instance, felt health costs would continue to grow, hitting 25% of GDP by 2029. Again, it’s too early to judge the Reid bill, but its core assumptions are similar to Finance’s. (Lewin also looked at one of the House bills earlier this year, predicting a rise in costs.)

These analyses are crude, drawing on numerous assumptions. But even the analysts close to the Administration concede that costs are likely to rise in the future.

Prof. Krugman quotes Jonathan Gruber. But is he correctly representing the MIT economist’s view? Prof. Gruber, an informal Obama advisor, has said that proposed legislation “really doesn’t bend the cost curve.” Though he added (perhaps tepidly): “The alternative is doing nothing. Relative to doing nothing, I think we are a lot closer to bending the curve.”

Prof. Gruber joins many doubters, including the Washington Post’s Robert Samuelson and Harvard Medical School Dean Jeffrey Flier. Dr. Flier writes in The Wall Street Journal: “In discussions with dozens of health-care leaders and economists, I find near unanimity of opinion that, whatever its shape, the final legislation... will markedly accelerate national health-care spending rather than restrain it.”

Why the potential increase in spending despite the White House’s stated intentions?

James Capretta, a former Associate Director of OMB under President George W. Bush, explains:

Both the House-passed bill and Senator Reid’s proposal would put in place the most costly entitlement expansion in more than four decades. They would add millions of households to the Medicaid program and promise all Americans between about 100 and 400 percent of the federal poverty line — some 127 million people under the age of 65 in 2008 — that their health insurance premiums will not exceed a certain percentage of their incomes. They would also extend subsidies to small businesses offering insurance coverage. The Congressional Budget Office expects the combined federal cost of these new commitments to reach about $200 billion by 2019 and to increase eight percent annually every year thereafter.

Mr. Capretta makes a solid argument, and reaches a solid conclusion: “So the bar for what constitutes credible ’bending of the curve’ potential should be set very high indeed.”

Let me expand on his points. One of the reasons that healthcare is so expensive in the United States is because, paradoxically, it’s so cheap — with Americans paying just 13 cents on every health dollar directly, they tend not to economize. They opt for a brand-name drug when a generic is as good; they get the extra test when it isn’t indicated; they demand specialist consults when good primary care would suffice.

Obamacare does little to address this fundamental economic problem. It would allow millions of Americans to join Medicaid (essentially, a zero-dollar insurance) and lavish subsidies on millions more; it would demand first dollar coverage for many health services and dictate the size and scope of insurance. In other words, it would address a system plagued by subsidies and regulations with more of the same.

The White House touts various aspects of the legislation as being consistent with future cost savings. Director Orszag, for example, is a big proponent of “game changing” new ways of delivering health care. He is particularly excited about the House and Senate bills including the rewarding of Accountable Care Organizations. ACOs are the flavor of the month — even a New Yorker essay waxed poetic about their potential — but little evidence supports the benefits of their widespread implementation.

Of course, the White House pushes other “pillars” of cost saving. Director Orszag writes about them in a recent Washington Post essay.

First and foremost: deficit neutrality. But the House and Senate bills are effectively gaming CBO scoring — both bills collect tax for years before actually achieving program implementation, thereby skewing the numbers to look more responsible than they are. It’s difficult to see how this actually has anything to do with “bending the curve” for a sixth of the national economy.

Next: a tax on high-cost insurance plans. A tax on “Cadillac” plans, as they have become known, isn’t necessarily a bad idea and does have the potential to encourage people to get lower-cost insurance policies; the basic proposal is not unlike what President George W. Bush proposed in a later State of the Union address. Follow the logic: if the issue is that people are over-insured, in part because the tax code allows employer-sponsored health insurance to be paid in pre-tax dollars, we’ll target the gold-plated plans.

But Obamacare has a gross limitation: it also sets up a bureaucratic structure to define what is a basic insurance policy. In the House bill, for instance, all insurance policies will have to cover orthotics. Mandated services and providers push up the cost of coverage. In other words, yes, the tax on Cadillac plans would encourage people to shop for more basic coverage, but would basic plans really exist? Looking at states like Massachusetts and New York, the answer seems to be potentially no.

Finally, Director Orszag favors the idea of a commission to temper and steer Medicare spending. He originally called it IMAC (The Independent Medicare Advisory Commission); the Senate bill establishes IMAB (The Independent Medicare Advisory Board). Semantics aside, the Commission would use a “comparative effectiveness analysis” to direct how doctors prescribe treatments, restraining health inflation by imposing cost-cutting decisions on doctors. IMAC will have the power to reject treatments, devices or drugs for Medicare coverage unless specifically vetoed by Congress. In theory, IMAC’s guidance on Medicare costs will then be adopted by other government agencies and the private sector.

IMAC sounds bold; both the Senate and the House have been busy watering down the idea. See, for example, the excellent article by Time’s Karen Tumulty — among other exemptions that Senators have been working into proposed legislation: hospital funding would be untouchable before 2019.

There’s a larger issue here, though: is the IMAC idea even practical? It assumes that government management results in cost savings.

Now, granted, it’s long been established that countries with government-run healthcare systems have ended up with rationed care. On a per capita basis, for example, Canada has half the number of CAT scanners and a third the MRIs of the United States. One result: waiting lists for practically any health service. And the quality of care suffers, witness the superiority of American cancer outcomes.

But do these systems actually restrain costs? Historically the answer has been yes. Countries like Canada and Britain spend a fraction of their GDP on health care, compared to the United States. But, in recent years, the spending trend has been quite similar — government-run healthcare, like American healthcare, has seen significant health inflation. Between 2000 and 2006, the average real annual growth rate for health expenditures for OECD member countries was 4.9%; American health inflation over the same period was 4.95%. Thus, the general point about cost control is debatable.

Britain is a good example. Even with top-down management, the annual budget of the National Health Service grew 5% to 10% faster annually than inflation through most of the decade. Here though is a more important observation: government planning committees are exceptionally unpopular and impractical. Britain, for instance, tried to contain the surge by creating NICE — the National Institute for Health and Clinical Excellence, an agency empowered to save money by delaying or rationing “cost-ineffective” treatments. The White House hopes to cut countless billions from Medicare with the same approach, passing tough decisions to an independent commission separate from Capitol Hill.

Unfortunately, sick patients have a funny way of ignoring tidy lines on government charts. Time and again, NICE ruled against drugs, only to find doctors and families were more persuasive than its reports. An anti-blindness drug — rejected unless patients had already lost one eye — was later approved after a public outcry; NICE dismissed a life-extending kidney drug until a PR campaign forced a reversal. American lawmakers are familiar with such reversals: Congress has often overturned Medicare cuts it enacted. NICE — or an American version like IMAC or IMAB — can’t restrain costs because people rebel.

Many of us who study American healthcare will acknowledge that we need to “bend the curve.” At this point, though, the Obama White House has engineered a reform package that would seem to bend the curve — up.

Original Source:



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