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Health Care Reform: What Needs to Come Next

President Obama has called a bi-partisan meeting on Thursday to discuss ideas for health care reform. This development, along with recent indications from Democrats that they are going to push forward on health care reform one way or the other, indicates that the stalled health care reform process is back in motion.

A key question, one that is receiving considerable attention, is what will be in the health care bill if and when it emerges from Congress. Health care reform bills have already passed the House and the Senate, but there are differences between the bills that must be resolved before the process can move forward. Finding a compromise bill that is acceptable in both the House and the Senate has proved to be a daunting task.

A very nice visual side by side presentation of the House bill, the Senate bill, and the Obama proposal to bring the two sides together can be found here (the main summary table is repeated at the end of this post). The main features of the Obama proposal are a requirement that individuals purchase insurance or pay a fee, a requirement that large employers offer insurance or pay a fee, a combination of excise and payroll taxes to finance the reform effort, and measures to improve affordability for low income households.

The Obama proposal is closer to the Senate bill than the House version, but as noted in the discussion accompanying the side-by-side comparison, it's unclear whether House members will be willing to accept the compromise position the administration has proposed:

The Obama plan maintains key elements of the Senate proposal but also incorporates stronger anti-fraud provisions and allows the federal government to review insurance rate hikes. ...[T]he bill's substance suggests that Obama is hoping to bypass a prolonged-Senate debate and use the reconciliation process to fix the Senate bill and convince reluctant House progressives to pass the Senate legislation. ... But it's unclear if progressive House members will embrace the new compromise.
There are two separate issues that must be addressed through health care reform. The first is expanding coverage. Currently, 46 million people do not have health insurance, and those that do have insurance -- mostly through their employers -- are finding that either the insurance coverage is being scaled back to cope with rising costs, or coverage is being eliminated altogether. Thus, the lack of coverage, which was already a big problem, is only going to get worse without some sort of changes to the health insurance system. Current reform proposals from Democrats are mostly, though not exclusively, focused on the coverage issue.

The second issue that must be addressed is the growth in health care costs, and many of the Republican counter-proposals focus on this problem. Growth in health care costs will be an issue whether or not coverage is expanded. To see this, take a look at this graph from the Congressional Budget Office showing how health care costs will rise over time within the Medicare and Medicaid programs:

As the graph shows, the aging of baby boomers is not the main factor in the growth in health care costs; the effect of this demographic change is minor relative to overall cost growth. In addition, though the graph shows the expected costs of government programs, this is not just a government problem -- the private sector faces increases in health care costs that are just as dramatic.

Republicans have focused mainly on cost control measures, while Democrats have targeted expanded coverage, so it's not clear there is much common ground for compromise. It's clear that the cost growth shown in the diagram is not sustainable since the effect on the government budget and the budgets of households trying to afford care in the private sector is too large. Changes must be made, but what type of reform is needed?

Here's a list of ten options that have been proposed by both parties as a means of reducing health care costs:

1. A strong public insurance option. This proposal, favored strongly by many in the Democratic party, allows the government to use its bargaining power to purchase medical goods and prescription drugs at lower prices thereby reducing costs. In addition, a public option would also serve as a competitive alternative to the insurance oligopoly that currently exists, and put downward pressure on the rates that insurance companies offer to their customers.
2. Effectiveness studies and evidence-based care. The goal of this proposal is to eliminate spending on medical care that cannot be justified on a cost-benefit basis. Democrats have been supportive, but this proposal has been problematic politically because it appears to take away patient choice, and there are fears that it will be used to ration care. Both charges have been leveled by Republican opponents of reform. But more knowledge about what works and what doesn't would be very helpful.
3. Eliminate bad incentives. When physicians own testing equipment and laboratories - whenever they stand to gain from prescribing a particular procedure - there will be an incentive to order more rather than fewer tests, i.e. an incentive to provide too much of that type of care. Short of putting physicians on a salary (which may not be a bad idea), it's not possible to eliminate these incentives entirely. But they can be minimized, and more care needs to be taken to eliminate conflicts of interest.
4. Reduce administrative costs. Administrative costs are one of the fastest growing components of health care costs, and the growth in administrative costs needs to be addressed. A good start would be to reform the payment system in a way that eliminates all the waste from fighting over who should pay medical bills.
5. Impose a Cadillac Tax. Under current tax rules, there is an incentive for employers to provide high cost, high coverage plans. A "Cadillac tax" eliminates this incentive, and also has the side benefit of providing revenues that can be used to address other problems such as making coverage affordable to lower income households.
6. Anti-trust legislation. The idea here is that lack of competition leads to high prices, and the administration has recently proposed removing the anti-trust exemption that protects health insurance companies. More competition is undoubtedly needed in these markets, and it would likely lower the level of prices. But unless monopoly power continues to grow over time, which is unlikely given how concentrated these markets are already, growth in market power cannot be the source of continued cost growth.
7. Benefit cuts. This favorite of Republicans, but it is a non-starter politically and, as explained below, it does not resolve the cost growth problem.
8. Tort reform. This is another Republican favorite. There are certainly changes that can be made, but this is a minor component of cost growth.
9. More transparency in pricing. This is part of the Republican push for market based reform. The idea is that making prices transparent will allow consumers to shop around, and the competitive pressures will reduce insurance rates. While more transparency in pricing is certainly better than less, consumers of medical care have little ability to judge the quality of the care that they are getting, or to make comparative cost judgments when there are serious and immediate health issues. So more transparent pricing does not adequately resolve the problems consumers have in "shopping around" for care.
10. Allow insurers to cross state lines. The idea is to increase competition, and this has been proposed recently by Republicans. But some states such as California are already quite large, and this hasn't solved the health insurance problem. Allowing insurers to cross state lines is unlikely to make much difference.
As indicated in the discussion of the items on the list, the last four items, i.e. items 7-10, are cost control measures that Republicans have advocated and they are consistent with the general push from Republicans toward market-based solutions. Many Republicans will oppose reform with little motivation beyond handing Democrats a loss, but for those who are willing to offer their own ideas, some if not all of these will undoubtedly appear as the core of Republican counter-proposals to the administration's reform plan.

Though lately Republicans have flip-flopped on item 7 and positioned themselves as defending against benefit cuts, they have traditionally opposed spending on social insurance programs, Medicare in particular. In any case, benefit cuts are a poor solution because it's the growth not the level of costs that is the problem. Benefit cuts cause costs to grow from a lower starting point, i.e. a lower initial level, but the growth itself is unchanged. As for the other items, 8-10, as Uwe Reinhardt notes in his analysis of Republican proposals, "All of these measures would have at best a marginal influence on costs."

The health care lobby is powerful, and cost control means, in essence, lowering the collective income of doctors, nurses, hospitals, pharmaceutical and medical device companies, etc., and they won't give in without a fight, a fight that is rigged in their favor by the considerable political influence that health insurance companies have. Cost control won't be easy, and that's why expanded coverage is the main focus for now.

It will be hard enough for Democrats to agree on legislation to expand coverage, adding effective cost control measures makes compromise even harder, so the current legislation is unlikely to do much about this problem.

However, health care cost control is essential, even more so as coverage expands and total costs rise, and we will have to address it at some point. A strong public option, comparative effectiveness research, and reform of the payments system that reduces the incentive to fight about bills and to prescribe unnecessary tests and procedures, would go a long way toward controlling the growth in health care costs. But for now, expanded coverage is the main priority, and we need to make affordable coverage available to as many people as we possibly can.

Here is the table referenced above showing the side-by-side comparison of the Obama compromise proposal, the House bill, and the Senate bill (source):
Provision Obama's Bill House Bill Senate Bill
Affordability Improves the Senate bill's subsidies for lower income Americans. Families below $44,000 and above $66,000 would pay less in premiums. Also raises the percent of health costs that are paid by insurers from the Senate proposal. Families earning below $55,000 would still receive more subsidies under the House bill, but Americans earning more than $55,000 would pay higher premiums (as compared to Obama's proposal). The percent of costs paid by the insurers is higher than Obama's proposal. Families making under $55,000 would see higher premiums than Obama's proposal and the percent of costs paid for by health insurers is lower than Obama's proposal.
Excise Tax 'Labor agreement' for everyone. Changes effective date of the Senate policy from 2013 to 2018. Raises the amount of premiums that are exempt from the assessment from $8,500 for singles to $10,200 and from $23,000 for families to $27,500 and indexes these amounts for subsequent years at general inflation plus 1 percent. No excise tax. 40% excise tax beginning in 2013 on individual polices worth $8,500 or higher and family policies starting at $23,000.
Payroll Tax Adopts Senate bill approach and adds a 2.9% assessment on unearned income. 5.4% surcharge on high-income households. Payroll tax increase of 0.9% on earnings above a specific threshold for a total employee assessment of 2.35% on these amounts.
Individual Mandate Mixed bag. May be easier for younger Americans to opt out. Lowers flat dollar amount to $695 by 2016 from the Senate bill and raises the alternative percent of income to House levels that individuals will pay for not having health insurance. Hardship waiver when premiums over 8% of their income, and couples under $18,700 are exempt from the requirement. 2.5% of income by 2016 with a limit of the average national health premium. Flat rate of $750 by 2016 and hardship waiver when premiums exceed 8% of income.
Employer Mandate No mandate, free rider provision. Large employers (50+ workers) have to pay a fee if employees receive subsidies. Improves transition to free-rider policy by subtracting first 30 workers. (A firm with 51 workers that does not offer coverage will pay an amount equal to 51 minus 30, or 21 times the applicable per employee payment amount.) Employer mandate. The House bill requires a payroll tax for employers that do not offer health insurance that meets minimum standards. No mandate, free rider provision. Large employers have to pay a fee if taxpayers are supporting the health insurance for their workers.
Grandfathered plans Plans have to conform to new regulations. Plans have cover adult dependents up to 26yo, prohibits rescission. After exchanges begin in 2014, plans can't institute annual and lifetime limits or pre-existing condition exclusions. Beginning in 2018, the President's Proposal requires "grandfathered" plans to cover proven preventive services with no cost sharing. "Grandfather" policy that allows people who like their current coverage, to keep it. Abide by all rules after 5 years. "Grandfather" policy that allows people who like their current coverage, to keep it.
Medicare Donut Hole Completely closes donut hole. Replaces $500 increase threshold increase limit with a $250 rebate to Medicare beneficiaries who hit the donut hole in 2010. Closes donut hole by phasing down the coinsurance so it is the standard 25% by 2020 throughout the coverage gap. The House bill fully phases out the donut hole over 10 years. Raise the dollar amount before the donut hole begins by $500 in 2010. The Senate bill provides a 50% discount for certain drugs in the donut hole. Raise the dollar amount before the donut hole begins by $500 in 2010.