Obama: Constraining Health Care Costs A Must

"This is a necessity. This is something that has to be done," President Obama said Tuesday with respect to health care reform. "We cannot avoid bringing about change in our health care system."

After meeting with key senators to discuss health care reform, the president emphasized the need to control ballooning health care costs.

"If we don't get control over costs, then it is going to be very difficult for us to expand coverage," he said. "These two things have to go hand-in-hand."

The president met with the senators in the afternoon, hours after his Council of Economic Advisers released a report linking health care reform to the nation's overall economic health. The CEA assumed in its report a 1.5 percent reduction in health care costs. Now, as President Obama said on Tuesday, the question remains of how to actually achieve that cost reduction.

"What we've got to figure out is how do we create the incentives, in terms of how we reimburse, how we deal with getting doctors to work together more effectively, how we're working on prevention and wellness so that we're driving down costs across the board," Mr. Obama said. "Soaring health care costs are unsustainable for families, they are unsustainable for businesses, and they are unsustainable for governments."

Indeed, a new report released Tuesday funded by the Commonwealth Fund shows that adults with employer-provided coverage have shouldered increasing out-of-pocket expenses for medical services.

"What we find is every measure of access -- such as affordability or insurance -- everything got worse from 2004 to 2007, and it got worse despite an expanding economy," Jon Gabel, lead author of the study and a senior fellow at National Opinion Research Center, told CBSNews.com

While coverage has become slightly worse over time, the real problem is growth in overall health care spending, Gabel said.

"We have to change the incentives for providers of care," he added. "If you pay people for doing a lot of procedures, you're going to get a lot of procedures, whether it does any good or not."

Mr. Obama echoed that sentiment Tuesday. Reforming the incentive structure, he said, "means promoting best practices, not just the most expensive practices." He pointed to the Mayo Clinic in Minnesota as an example of an institution that provides first-rate care at half the cost of care in other parts of the country.

Gabel said that constraining costs could take a combination of approaches -- along with changing the incentive system for providers, he said, insurers could implement "comparative effectiveness," which would give consumers incentive to choose a less costly plan, given the choice between two that offer the same potential results.

For instance, if a patient had a choice between two treatments with similar outcomes but one cost $175,000 while the other cost $15,000, he could choose either but would only be reimbursed $15,000. Health and Human Services Secretary Kathleen Sebelius has said comparative effectiveness could result in cost savings.

"People would say this is rationing," Gabel said, "but for your money, if you had perfect knowledge, you'd make the same decision. We're already rationing on the ability to pay. I'm suggesting rationing on need and effectiveness."

Sen. Max Baucus' proposal to tax health care benefits could also help constrain costs, Gabel said, though it may be complicated to achieve politically.

"Try to explain that not paying taxes on your employee benefits somehow fuels health care inflation, that's a pretty complex idea to understand," Gabel said.

The tax exemption on benefits, though, creates incentive to over-insure, he said, especially for those with a higher marginal tax rate. For instance, a consumer with a 40 percent marginal tax rate can get a dollar in additional benefits or 60 cents in additional income. In that sense, the exemption could also be viewed as a regressive policy.

While it may seem as if an additional tax could be a hard sell to the American people, a CBS News/New York Times poll from April showed a majority of Americans would pay higher taxes if it meant health insurance for everyone.