Republicans have been characterized as the party of “no” regarding health reform. This is not an unfair characterization. Republican Party leaders have offered little in the way of substantive ideas about what they would regard as “true” health reform. However, a recent white paper from the American Enterprise Institute by James Capretta and Thomas Miller lays out a likely direction for a Republican version of health reform. The paper is called “Beyond Repeal and Replace: The Defined Contribution Route to Health Care Choice and Competition.” The title captures perfectly the main elements of their proposal.

Capretta and Miller argue that we have runaway health care costs because Medicare, Medicaid, and employer-sponsored health insurance are all committed to “defined benefits.” For example, a policy might say in effect: “We are going to pay for whatever surgical intervention your physician says is medically necessary.” Consequently, as the range of surgical options expands and the cost of those options expand because of advancing medical technology, the cost to taxpayers or insurance premium payers increases as well. With “defined benefits” this happens automatically.

Capretta and Miller also argue that the tax-exempt nature of employer-sponsored health insurance results in minimal cost-consciousness by employees because roughly 40 percent of those insurance costs are subsidized by the state or federal governments, roughly $200 billion per year in “tax expenditures,” taxes government would have received if the value of those health plans were taxed as normal income. Further, the size of that tax expenditure increases with rising health care costs. Finally, from a moral point of view, this tax subsidy is fundamentally inequitable in that the highest subsidies go to those with the most generous health plans. Worse still, those who must purchase insurance privately get no subsidy at all, even though they are generally very low on the income scale.

Capretta and Miller would turn all this around by moving toward a “defined contribution” approach to funding Medicare, Medicaid, and employer-sponsored plans. The money represented by the current tax expenditure would be converted into more or less flat tax credits that employees could use to purchase whatever health plan they judged as “meeting their needs” and representing “good value for the money.” Employers and employees would be free to supplement this with whatever sums they wished, but this would all be fully taxable money, thereby discouraging the purchase of “excess insurance.” Medicare and Medicaid would also be converted into vouchers with a fixed value, adjusted annually for something below the level of health care cost inflation.

What this approach is supposed to create are extraordinarily astute cost-conscious consumers who would generate intense cost-saving competition among insurers to assemble high quality, efficient packages of health services and health providers. The expected result would be that health care costs would be contained, higher quality care would be delivered to all, and inequitable subsidies unrelated to need would disappear. In addition, there would be no need for the individual mandate because individuals who failed to buy insurance would have worthless vouchers. Best of all, government would not be making rationing decisions. America would be a health care utopia (for secular folks) or a health care heaven, Nirvana, or Mecca (depending on religious preference).

This does not sound like a plan that could have substantial moral flaws, but it does. The largest flaw would also be the best-hidden. Specifically, millions of rationing decisions would occur annually but no one could be held morally accountable for the premature deaths or functional losses that might be a consequence of the failure of individuals to obtain needed and effective health care in a timely way.

Recall that one core idea in this plan is to maximize consumer choice. Consumers would not be shackled to what Medicare or Medicaid or their employer chose for them. States would be free to construct or accept whatever they found reasonable as health benefits for the poor. Consumers would be free to shop around for a plan that met their needs and their budgets. Private insurers could assemble all manner of packages with all manner of benefit choices and limitations and co-payments and deductibles. But how much bargaining power would individuals as individuals have with these insurers? Very little.

The currently uninsured would have vouchers worth $4,000-to-$5,000 dollars with which they could purchase a very barebones health plan. In theory they could upgrade to a much better plan, but they would have to use their own after-tax dollars, which are precisely the dollars they do not have because they are in the lower half of the income spectrum. Objectively these individuals are “better off” than being entirely uninsured. This is moral balm for the consciences of those who are truly better off. But we have no moral right to say that this is “just enough,” that we have no moral obligation to do more.

So what will happen in practice is that those with barebones insurance will deny themselves timely and effective primary care, which they would have to pay for out of pocket. Consequently, we would continue to see the 22,000 premature deaths associated with being uninsured or underinsured, as reported by the Institute of Medicine. In effect, these individuals would be judged to have “freely and responsibly” made these rationing decisions for themselves. There would be no government or insurer “death panels” to blame. This is precisely the outcome that political conservatives would embrace. If government is only responsible for a “defined contribution” then government is not determining what health services are or are not covered benefits. All of those decisions are made in brightly lit but morally opaque insurer offices and medical clinics. In essence, access to needed health care would largely be determined by individual ability to pay.

Capretta and Miller allow that vouchers would require some risk adjustment so that individuals with very costly health needs would supposedly not be disadvantaged in the insurance market. However, that raises some critical questions: Who does the risk adjusting? Individual employers? Do they have the option of saying that everyone gets the same supplement to their voucher, and then employees can see what the market offers them? That is, may employers dodge responsibility for doing risk adjustment to avoid the moral, psychological, and economic costs they would otherwise incur? May each state set whatever value it wishes for the Medicaid population? Who is a candidate for a risk adjusted voucher? What criteria should states or employers use for judging what would count as a fair or adequate risk adjustment? If a patient has been HIV positive for eight years and is now on drug combinations costing $35,000 for each of the next 20 years, then what would be a fair and adequate value for his voucher? What would the answer be for patients with metastatic cancer? How many care dollars would have to be converted to administrative dollars to make such an individualized system work?

Capretta and Miller believe that if their plan were adopted all the projected federal debt related to health care would be reduced to zero without raising any taxes. What they fail to take account of is the moral debt that would be incurred for the tens of millions Americans denied needed and effective and affordable health care due to lack of “their choosing” adequate health care plans.

Leonard M. Fleck, Ph.D. is professor of philosophy and medical ethics in the Center for Ethics and Humanities in the Life Sciences at Michigan State University. He is the author of Just Caring: Health Care Rationing and Democratic Deliberation (Oxford University Press, 2009).  fleck@msu.edu; 517–355‑7552.

The Health Care Cost Monitor is back. This time we will expand the scope a bit by taking on the work of three ongoing streams of inquiry at The Hastings Center that have significant overlap, and which we call “Costs, Deficits, and Priorities.” Health care costs, and particularly Medicare, are clearly part of the deficit debate. Our project on assessing national priorities is looking at priorities less in terms of government spending and more in terms of what the country needs for a flourishing future – needs that do not rely exclusively on government spending but that bear on the deficit problem. It is a complex mixture, and one we hope the blog can illuminate.

If you would like to contribute, please send us a letter, briefly stating what you would like to write about and whatever pertinent background you have for taking on the topic. Keep in mind that the ideal length for posts is 600 –to 1000 words.

—Daniel Callahan and Susan Gilbert, co-editors

Is there any evidence to show that annual health care cost escalation has begun to “bend the curve”? Is there any evidence to that the Congress understands that the curve is supposed to bend downward rather than to be helped to continue upward?

The answer to the first question is a resounding no. The health consulting firm Hewitt Associates is projecting a sharp rise in health care costs for employees, up 10 percent in 2010, the largest jump in a decade. Employees will pay an average of $4,023 in out-of-pocket and premium costs. Projections of an increase in insurance premiums for 2010 range from 6 to 22 percent, depending upon geographical region, also the highest in a number of years.

The Federal Employee Benefits Program(FEHBP), providing insurance for most but not all federal employees, has seen an increase of 8.8 percent this year. Long-advocated as a consumer-directed insurance plan that could be a model for health care insurance more generally, FEHBP offers 100 competing insurance plans with the government paying 72 percent of their cost. Blue Cross and Blue Shield accounts for some 60 percent of the enrollees, and premiums and out-of-pocket expenses for its plans rose some 13 percent. FEHBP has had lower annual premium cost escalation than at present, but it has been consistently higher than the Medicare.

All of the major reform bills coming out of the various congressional committees give the private insurers a key role in employer-mandated coverage, and greatly expanded business for the insurance industry. It is a wholly hypothetical assumption that private sector competition will slow annual cost increases to any significant degree. But none of those committees has asked the Congressional Budget Office to come up with some projections of what the expanded competition will do for cost control, with or without a public choice plan option.

There has always been competition in the insurance industry and its success in controlling costs for more than a short time is nil. To be sure, there may be ways of improving that dismal record (such as the ability to buy health insurance across state lines). But it seems to me an enormous risk to use the entire private health care system as a place to test the cost-cutting hypothesis, an idea fueled by politics, hype, and hope for the most part.

My second question, about Congress’ willingness to confront the cost issue, can be answered with a decisive maybe so, maybe not, sometimes yes, sometimes no. The Senate Finance Committee has reportedly quietly recommended that Medigap insurance be changed to include new copayments for doctor’s visits after 2015. Opposition can be expected to that idea.

Opposition can no less by anticipated for as proposal to increase Medicare premiums by 15 percent, affecting some 12 million beneficiaries, or 22 percent of them. Kathleen Sibelius, Secretary of Department of Health and Human Services, has urged the House to approve a bill that would block the increase. It is hard not to guess that the Senate will go along, showing so far little inclination to be put extra financial burdens on Medicare beneficiaries.

The response of the Senate Finance Committee bill that would cut government subsidies for Medicare Advantage by $113 billion over 10 years has so far been mixed, but the proposal is still alive. An interesting point of opposition is that it would be wrong to deprive elders of a popular program, a principle that could no less well be used to oppose any and all established Medicare policies. Whether Congress can resist this kind of pressure is unclear but it is still a possibility.

The loss by Senate Democrats of a bill that would increase Medicare payments to doctors, and thus incurring costs of $247 billion over a decade, has its amusing side. By virtue of earlier legislation, doctors serving Medicare patients are scheduled for a 21.5 percent cut in reimbursements in 2010.

Congress has traditionally and annually overruled its own legislation calling for 5 percent annual cuts, and now is faced with the requirement of imposing a much larger cut. Faced with a predictable outcry by physicians, the Democrats did not take long to introduce a bill to get rid of the old legislation and increase, not cut, reimbursements. That move failed, running into Republican and even some Democrat opposition.

What is amusing about that? Well, it will be interesting (insofar as politics has some sport features) to see which side will stand its ground in the future. Will the Democrats try again to avoid alienating doctors by getting an increase passed, or will the Republicans stand fast, thus alienating the doctors?

Daniel Callahan is editor of the Health Care Cost Monitor and author of the new book, Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System.

No reform plan that makes it through Congress this year will significantly control the growth of health care costs. Powerful interest groups are partly to blame.

Private insurers want no limitation on their ability to raise premiums and regard any strong price competitor as anathema. Drug companies want to keep buyers from gaining the authority or market clout to negotiate drug prices. The American Medical Association resists any power to redirect earnings away from highly paid specialists. Hospitals have no interest in structural change that could greatly reduce unnecessary hospitalizations. Etc.

If only such powerful interests could be restrained, might cost control have a chance? I have increasingly come to wonder whether the problem isn’t deeper and more stubborn: most people simply do not understand cost escalation. Let me cite two immediate manifestations and a third, broader speculation. 

1. Most Democrats refuse to cap the regressive tax subsidy for employer-sponsored insurance, the “taxable income exclusion” that frees compensation spent on premiums from all FICA, Medicare, and income taxes for both employer and employee. The role of this roughly 40 percent subsidy is utterly pernicious: uncapped, it encourages people to put an ever higher percentage of their compensation into health insurance. If it continues, in a few decades we will be spending more than 25 percent of our gross domestic product on health care, and our standard of living for everything else will likely have declined.

Before the election many Republicans favored replacing or capping this subsidy. A few moderate Democrats have been open to capping it, too, but now no committee, not even Senate Finance, will approve that. Only a separate tax on exceptionally high-premium plans is in the works, with a less progressive effect than capping the tax break. Liberal Democrats, why are you not willing to explain how regressive this particular tax subsidy is, and do you just not care about the runaway costs it fuels?

Behind the failure are widespread misunderstandings. First of all, people do not understand incentives. They know they are paying some of the premium themselves while their employer makes a major contribution, but most have no idea that, with government picking up a major part of the tab through a tax subsidy, their own compensation has been tilted heavily toward insurance.

Second, people do not see an exclusion from payroll and income taxes as part of the real expense of premiums. When what is not taxed is their income, their money spent on their premiums, it is hard for them to think of the tax break as an expense for the government, and certainly not as ultimately an expense for them, the taxpayers behind government. The conceptual connections here – from premiums to income, from tax break for them to expense for the government, from the government to themselves as taxpayers – are too great to make.  

2. Republicans have taken vicious shots at comparative effectiveness research (CER), and yet they have long pleaded for liability reform. Many studies cast doubt on whether the reform most emphasized – capping malpractice awards – would do much at all to hold down costs. More important is that lawsuits encourage defensive medicine. Reform needs to make evidence-based practice a legal defense, and an absolutely necessary ingredient of that is better clinical evidence from CER.

Republicans refuse to connect these dots – CER, liability reform, and cost control. What prevents them from doing this, among other things, is the tendency for people see health care as all that “wonderful stuff medicine has to help me,” whether it is really effective or not. And few understand how much of an incentive fee-for-service reimbursement gives providers to boost service volume. Thus they fail to realize how rich the soil is in which defensive medicine can grow. 

These misunderstandings complement what is perhaps the most fundamental misunderstanding of all: 

3. People have little if any understanding of how insurance distorts value-for-dollar purchasing decisions. Once the patient is insured, she and her provider have every incentive to use every bit of care that has even the slimmest, pie-in-the-sky prospect of benefit, regardless of cost. She has already paid for it, after all, and even her future premiums will not increase by more than micro-pennies because of this one current use of marginal care.

The tragedy here is that when everyone who is insured acts this way and expects her providers to act this way, the cumulative cost of care grows way beyond what people bargained for when they initially purchased insurance. Combine this aspect of insurance with a culture in which death is no longer regarded as part of life and advances in life-and-death medicine are seen as a peak achievement of civilization itself, and all hell breaks loose with costs. What insurance then gives birth to is, as Daniel Callahan says in his new book, a beast.

I used to think that we could probably tame the beast: get within its very brain by owning up to the essential problem of insurance distorting decisions. I thought we could recognize that even as patients, we remain “whole persons” who are subscribers paying for insurance, and then understand a denial of barely beneficial care as the strong medicine that doctors and we ourselves must order to keep health care healthy. But are we capable of that?

Some would call the denial of barely beneficial care rationing, and rationing may still be needed to control costs. But the “policyspeak” language of rationing more accurately portrays military triage than most prioritizing of health care. Prioritizing is the term Europeans typically use. It first embraces the care that is actually effective. CER will help on that score, immensely.

Even before prioritizing care, we need to push hard on other fronts of cost reduction: integrated institutions for delivering care, bundled payments and salary rather than fee-for-service, realignment of payment arrangements toward primary care, reform of medical education to encourage primary care, etc.

I hope our difficulties are not so deeply cultural that we never manage to control health care’s cost. I wonder, though: at what point does our unwillingness to do so indicate a collective disability?

Paul T. Menzel, Ph.D., is a professor of philosophy at Pacific Lutheran University. His research focuses on health care ethics and health policy, and he is the author of Strong Medicine: The Ethical Rationing of Health Care. menzelpt@plu.edu; 360–969-2760.

The Senate Finance Committee has completed the markup of its reform bill, and it will shortly be brought before the committee for a vote. It will then go before the full Senate for debate, likely to be a protracted process. At a moment when everything is still in flux, it might do well to step back and ask what would be a reasonable set of benchmarks for judging congressional efforts to slow annual cost escalation a success. What are some standards for judging that effort as serious and likely to be effective? Here are my priority benchmarks:

Comparative effectiveness research with teeth. No sooner had President Obama’s stimulus package been announced some months ago then its provision of $1.1 billion for comparative effectiveness research was immediately defanged. The Senate Finance Committee said in early statements that the research results could not be used to create treatment guidelines or even to make recommendations, and that limitation was repeated in early drafts of its bill.

That kind of censorship makes no sense, reflecting some physician and many industry interests at work. But physicians need science-based evidence, and some guidelines for its use to practice good medicine. The public, as well as private insurers and government agencies, need good evidence to shape their benefit decisions. Cost-effectiveness research would be even more valuable, but if that is not possible then comparative effectiveness research should be given as much clout as possible.

Management of Competition. If the democrat proposal for mandated insurance coverage makes it through Congress, it will be a windfall for the insurance industry, greatly expanding the number of people it covers. What will be left in place, however, will be the present industry, just expanded. The competition of insurers over the years has never slowed cost escalation, almost always greater than that of Medicare. The Federal Employee Benefit Program (FEHBP) has often been offered as a model employee insurance plan, allowing them to choose among many competing insurance plans. It has been popular but its average annual cost increase has been in the 7 percent to 8 percent, range and often higher. Competition has failed there as well.

The historical lesson is clear: left on its own competition in the private sector in health care will not, as is possible with cell phones and TV screens, control costs. A public choice option, whose fate is in doubt (though House bills still have it in) might make a difference, but then maybe not much. The background costs of American health care, inescapable for both the public and private sectors, will set some firm boundaries to how far they can go to save money.

The idea of a “trigger” should not be put aside. If competition does not stop or decisively slow annual cost increases after a few years, then the government should be empowered to regulate insurer competition, up to and including price controls on premiums. The insurance industry would scream, but far less than a public suffering with a continuation of a 5 to 6 percent annual increase over the next two years.

An independent Medicare advisory commission. The proposal to create an independent Medicare advisory commission– The Medicare Payment and Access Commission – to be located in the Executive branch, is a good one. Congress has had too much control over the program, too often capitulating to political and industry pressures in its oversight and often hampering the work of the Centers for Medicare and Medicaid Service (CMS). Its refusal over the years to allow costs to be taken into account in Medicare coverage decisions has been a serious roadblock to good decision-making. Whether the proposed commission would have the power to remove that obstacle is unclear, but its independence would greatly assist in confronting the cost problems more coherently and comprehensively than Congress has done.

While it would not have authority over the private sector, Medicare’s policies in the past have had considerable sway there and would probably continue to do so. Medicare, on the cusp of a massive influx of baby boomers just as it is also facing imminent insolvency, requires new and more effective leadership, and the proposed Commission might well provide it.

Daniel Callahan is editor of the Health Care Cost Monitor and author of the new book, Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System.

Imagine a nation of 307 million people representing 5 percent of the world’s population who are privileged to be using 50 percent of annual global health expenditure (more than $6,000 per person per year) for their own health care. Imagine that they recognize how privileged they are in comparison to over 60 percent of the world’s population (on whom annual expenditure on health is less than $ 40 per person).’

Imagine that they acknowledge the magnitude of their privilege by ensuring that all their citizens will have access to the best of medical care throughout their lives: all pregnant mothers will be well cared for; all children will receive all the vaccines and other preventive medicines available to ensure that they have an equal opportunity to reach their full human potential and an average life expectancy of more than 80 years (as compared with a life expectancy of 40 to 60 years in many countries); and all will have access to effective diagnostic, rehabilitative, and treatment modalities throughout their long lives.

Imagine that high cost is not a deterrent to provision of health care. Indeed, expensive, sophisticated, and effective medical and surgical treatments are strongly supported as they provide great benefits for many.

Similarly, there is support for researching costly new treatments that are essential for making progress. Imagine also that this society understands that inappropriate use of very high-cost investigations and treatments with minimal beneficial effects leads to denying much more effective, lower cost treatment to many other patients.

Imagine that they are a people who have religious faith, are well educated, have the capacity for rational moral reasoning, and are aware that all humans are mortal and will one day die. Imagine their wish to live long lives during which they would suffer minimally before dying without being subjected to aggressive, largely ineffective, and often dehumanizing interventions that could inflict physical and emotional suffering and crippling financial hardship on them and their families.

Imagine the serenity of these people opting to die peacefully and with equanimity when they are no longer cognate and have entered the terminal phase of long, satisfying, and productive lives.

Imagine that they would not want more than a small proportion of health care expenditure to be spent on administrative or legal fees so that these resources could be used optimally to ensure prompt access to treatment without significant waiting lists. Imagine their rejecting litigation and choosing some form of no-fault compensation to cover unforeseen medical complications that were not due to blatant negligence.

Imagine that while they would be in favor of research to advance the practice of medicine they would also realize the limits of life and of what medicine can achieve.

This is what could be achieved by the United States with the human and material resources this country enjoys. Such an exemplary society would achieve high standards of health and be admired globally.

Instead, of taking a hard look at an unsustainable health care ”system” and responding to the sanguine appeal for a revolution in spirit, as an article in The Nation last winter suggested, there is unseemly squabbling over sensible reform measures with little awareness of the much better health care and health that could be enjoy at significantly lower cost. There also seems to be failure to appreciate the extent of the privileged access to almost all that modern medical care offers — in contrast to the extremely limited health care to which most people globally have access.

While this society is tragically squandering the potential to achieve high quality lives and health-care for its citizens it is gradually, but progressively, losing well deserved and widely shared admiration for its many wonderful achievements. It is also losing the opportunity to lead the world into a perilous but highly challenging era in human history and global health.

Solomon R Benatar, MBChB, DSc (Med)., is an emeritus professor of medicine at the University of Cape Town, South Africa; founding director of the Cape Town Bioethics Centre; and a professor in the Dalla Lana School of  Public Health at the University of Toronto. solomon.benatar@uct.ac.za

With the fashioning of congressional legislation the health reform effort now moves into its (maybe) last phase. While the focus on cost was prominent at the beginning of the reform debate, it has gradually receded, displaced by an ideologically driven emphasis on the likely cost of extending access to the uninsured. It is imperative that cost control be brought back into prominence.

An important issue at this point is this: how high should the bar be set in pushing for a strong place for cost control measures in the final legislation? I put aside the prudent judgment about whether too strong an emphasis on cost control will harm the drive for expanded access. Possibly so. Instead, I suggest that three questions are pertinent, all turning on the proposals now extant on reducing annual cost escalation.

Priorities: which of the many proposals is most promising economically – that is, tough – and should be given priority (e.g., reduction of physician reimbursements)?

Time frame: how soon would the proposal have an impact (e.g., immediate price controls vs. a decade’s gestation)?

Political feasibility: How politically realistic are the proposals – impossible, easy, worth a fight (e.g., Medicare benefit reductions vs. information technology vs. comparative effectiveness research with mandated compliance)?

My too-brief response to those three questions is this: give priority to the tough proposals likely to have the most immediate impact and be prepared to fight hard before compromising. It has become obvious that the most politically acceptable proposals are those that are on the now ubiquitous and ambling 10-year plan – slow to make a difference, uncertain in their economic impact, but unthreatening to patient, physician, and industry interests (information technology, prevention, and toothless comparative effectiveness studies).

I raise those three questions because they are either not raised or are scanted in some otherwise recent valuable articles and reports. The articles are in the September-October issue of Health Affairs under the general title “Bending the Cost Curve,” and the reports are from The Urban Institute and the Engleberg Center of The Brookings Institution.

While many of the Health Affairs articles and the Brookings report are illuminating, the Urban Institute study, written by Robert A. Berenson and colleagues, stands out for the specificity of its proposal both for controlling costs and raising revenue. Best of all, they present some plausibly projected figures to go with their proposals (though some, such as a public plan choice, may never make it through Congress). They also usefully distinguish between tough proposals – though they present only four – certain to lower costs (reducing payment rates to hospitals) and eight proposals that they call delivery systems reform, with a less certain outcome (investing in chronic care management and coordination programs).

Taken together, their proposed measures, Berenson and colleagues say, could save the government close to $1.3 trillion over a 10-year period, surely a tremendous benefit. Or would it?

The most common cost projection without reform is for a near-doubling of national costs from the present $2.4 trillion to $4.2 trillion over the next 10 years. Their $1.3 trillion savings would give us a final figure of $2.9 trillion, a 22 percent gain – significant increase over the present baseline. The present $2.4 trillion is already wreaking havoc and the fact that we could say in the future that “it could have been worse” would not be much of a consolation.

The Engleberg Center study, also called “Bending the Curve,” sets forth nearly 50 cost reducing proposals, only a handful of which would have any immediate impact (e.g., increased payments for primary care). They also seem to be on the 10-year plan.

In the lead article in the Health Affairs collection, Michael. E. Chernew, Richard A. Hirth, and David M. Cutler write that “reforms that would dramatically slow the growth of health spending growth are necessary.” With two exceptions, no strikingly dramatic reforms are proposed in the articles that follow. Most would be slow and have no assured results, and many would encounter political and industry opposition, perhaps surmountable, perhaps not. Their fine power of diagnosis is not matched by strong, much less fast-track, ideas. A sense of urgency is almost altogether missing.

An exception is an article by Jonathan Oberlander and Joseph White. They argue for a solution to the problem of notoriously high prices in American health care. “There is evidence,” they say, “that price regulation can constrain spending and that the public will support that cost control approach.” Their evidence of public support is probably a bit weaker than they present, but they are surely correct in noting the political obstacles. Even so, Oberlander and White think that policymakers may well be drawn to price controls if the health care industry’s promise to cut health care spending does not materialize.

The other exception is an article by Bruce Vladeck and Thomas Rice, which, while more theoretical, indirectly supports Oberlander and White. We must do what other countries have successfully done, which is to “consolidate the bargaining power of purchasers [which] gives the upper hand to stronger government involvement.” Just so.

But don’t these exceptions run afoul of the three considerations for judging cost control proposals that I suggested above? Yes, true enough. They are hardly on anyone’s priority list, would take a long time to bring about, and would provoke a paroxysm of political and industry hostility.

Even so, since so many of the more conventional system-wide proposals run into the same kind of difficulties, some wishful thinking about price controls and stronger government involvement in cost control may eventually be tolerated. It would only require the sense of urgency now absent, and that may soon come, as health care disintegrates.

Daniel Callahan, president emeritus and cofounder of The Hastings Center, is editor of the Health Care Cost Monitor and author of the new book, Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System (Princeton University Press).

The posts from May to September 8 were written while the debate over health care reform was getting under way and committees of the House of Representatives and the Senate were developing their bills. We have published these posts as a collection called Cost Control and Health Care Reform: Act 1. New posts, which will constitute Act 2, will focus on the cost control details of the legislation emerging in Congress.

—Daniel Callahan and Susan Gilbert

The reform caldron is heating up. Legislative directions are beginning to appear. And some important government reports, from the Senate Finance Committee and the Congressional Budget Office (CBO), are bringing fresh clarity to the cost control debate.

Some areas of agreement can be discerned. Everyone, well almost everyone, agrees that rising annual costs, now running at 6 percent, pose severe, and now well-publicized threats to present and future health care. The long-term goal of control should be an annual cost increase no greater than that of the annual increase of the GDP, that is, about 3 percent, and the short-term goal is to move effectively in that direction. The main drivers of rising costs are technology, waste and inefficiency, administrative expenses, fee-for-service medicine, irrational regional costs variations…and on and on.

American culture and the commercial ethos of too much of our medicine are not a congenial setting for cost management. As one seasoned observer noted after a nationwide tour to prepare a health care documentary, he met no doctor who felt he was overpaid, no hospital administrator who believed she could get by with less money, and no patient who was prepared to give up anything. There is, as noted, some agreement on cost control, but too much of it is about what others should give up and about our medical neighbor’s wasteful practices.

The politics of cost control is an old, oft-told story: liberals look to government-dominated universal care to manage costs, and conservatives to increased consumer choice and enhanced provider competition. But neither the right nor the left are forthcoming with tough control ideas; and any hint of rationing is taken to be the kiss of death.

But the hard truth is that serious cost control will entail some pain and sacrifice, and of the worst kind: giving up some perceived personal benefits–as patients and as medical professionals–in the name of the overall well-being of American health care. As the Director of the CBO, Douglas W. Elmendorf, delicately put it in spring congressional testimony in March, much health spending “contributes little if anything to the overall health of the nation, but finding ways to reduce such spending without affecting services that improve health will be difficult.” At the least.

As the physician Eric Cassell once put it in an analogous situation, “We doctors often take sick people and then make them even sicker in order to make them well.” In the long run it is perfectly possible to imagine a less expensive health care system and a healthier population, everyone’s win/win dream. But there will be some misery in getting there.

Before touching on some of the specific ideas in the various reports cited above, let me suggest some pertinent questions to help judge their value.

• Is it likely to be effective in controlling cost increases?
• Is it politically feasible?
• Is it technically/managerially feasible?
• Is it a slow-paced or fast-paced plan–years or decades?
• Is it likely to have a good, bad, or neutral health outcome?

While it is impossible to summarize here all the cost control ideas presented in the two reports on policy options by the Senate Finance Committee (April 29 and May 20), many of which are likely to find their way into health reform legislation, an initial point needs mentioning: although the titles of the reports seem to referral to all American health care, the proposals focus almost exclusively on Medicare and Medicaid.

Does the private sector need no reform or is it that the committee has tacitly decided that the government can have no role in private sector reform and that it won’t even try? Or does it expect a spillover effect from the public to the private sector, as if that might be sufficient?

The April 29 report of the Senate Finance Committee focused on payment reform, infrastructure investments (principally health IT and comparative effectiveness research), Medicare Advantage, and options to combat fraud, waste, and abuse. Most notably, some proposals rely heavily on payment incentives for good clinical practices and penalties for poor ones. Those proposals would apply to hospital quality and readmission and bundling rates, health IT, physician practices, and chronic care. Another proposal would set stricter standards for the use of imaging services.

Two features of that report are especially worth noting. One of them is that, under the earlier established congressional legislation of a Sustainable Growth Rate (SGR) for physician fees, a 21 percent reduction in physician fees is scheduled to go into effect on January 1, 2010, and with additional reductions of 6 percent a year for several years thereafter.

The SGR rule has been in effect for some years and, while Congress put the legislation in place, it regularly and almost ritualistically puts it aside. Will that happen again? The Finance Committee offers some softer legislative possibilities, but just what Congress decides to do about the present legislation and its draconian cost reductions will be a severe test of its resolve to control costs in an important high cost area.

The other feature of the Senate Finance Committee report is distressing, that of its proposal for comparative effectiveness research. “The entity conducting the research,” it wrote, “should be prohibited from issuing medical practice recommendations or from making reimbursement or coverage decisions or recommendations.”

Not even recommendations? If nothing else that stance is inconsistent with is quality-improvement tactics, providing for financial incentives to meet government-formulated standards. Why are quality standards acceptable to change clinical and hospital behavior but not to control costs?

No great political sophistication is needed to spot the not-so-hidden hand of the medical industry and some physician groups behind that kind of prohibition. Their long-standing aim, going back to the 1970s, has been to neuter technology assessment efforts. Industry sees a slippery slope to price controls and physicians fear a forced use of probabilistic evidence to treat their patients; that could happen, but not necessarily, and in any event some of both could be valuable.

The public and Congress need to know the cost impact of various treatments and ways of assessing new technologies and treatments. Lacking that knowledge, cost control can only be tepid. “Cost effectiveness,” CBO Director Douglas W. Elmendorf noted in his March testimony in the House of Representatives, “will yield a somewhat larger effect on health care spending” than clinical effectiveness studies.” Just so.

The May 20 Finance Committee report offers a mixed package of cost control measures, mostly promising. Some are aimed, for instance, at reducing physician reimbursement for over-valued services and reducing geographical cost variations; and other are aimed at reducing costs, for example, by means-testing strategies, modifying the exclusion of employer-provided coverage from gross income for taxation purposes, and modification or repeal of the 7.5 percent income level of itemized deduction for medical expenses. All are potent ideas but all will run into political resistance, most notably any efforts to weaken employer-provided health insurance.

In recent months word has gradually leaked out from cost research that the most popular political nostrums–medical IT, comparative effectiveness research, and prevention–are unlikely to make a large difference in cost control, and that to boot it will take years for them to do much good. That knowledge does not leave many likely big winners on the horizon–at least powerful enough to reduce costs from the projected $4.2 trillion in 2019 to, say, $3 trillion, which would bring it close to the optimal parity with the GDP.

Is there any hope that something could make a decisive difference? Yes, if we can bring ourselves to take an open-minded look at the way European countries do it, which will be the focus of some upcoming reports in the Health Care Cost Monitor.

Daniel Callahan is editor of the Health Care Cost Monitor.

On May 11, the White House hosted a meeting of major players in the health industry – hospitals, doctors, insurers, drug manufacturers, and others – who collectively promised to shave $2 trillion off health care spending in the next decade. This announcement elicited huzzahs from some bloggers and columnists. Others were skeptical. The skeptics were right. To see why, let’s play a game.

Pretend you are a mad health care planner – insane, that is, not angry. You are setting out to design a health care financing system as immune as possible to cost discipline. Some of you are, no doubt, way ahead of me already. Your response is, “Why bother? The United States has built it.” But let’s review the blueprint.

The first design feature would be fragmentation. You would make sure that no payer had any significant leverage over spending. And if, by chance one payer was big enough to have such leverage, you would debar that payer from using it, for example, through language such as “Nothing in this title shall be constituted to authorize any Federal Officer or employee to exercise any supervision or control over the practice of medicine.” This wording is verbatim from the 1965 legislation establishing Medicare.

Next, you would insulate those who use medical care from the cost of all or most of the care they use. You might even be subtly perverse, shielding patients from costs for low-benefit and discretionary care, but imposing cost sharing on the chronically ill for maintenance drugs, thereby encouraging noncompliance that results in higher costs later on.

But the overriding fact is that despite the crescendo of complaints about rising out-of-pocket health care spending, Americans who are sick pay out of pocket for only about 12 percent of the cost of their health care, about half what that fraction was two decades ago, when it was half of what it had been two decades before that. Out-of-pocket payments are a smaller share of health care spending in the U. S. than ever before – lower than in many other developed nations, including Canada.

On the other hand, the per capita cost of care is so much higher in the U. S. than elsewhere that even a modest share of it claims a sizeable chunk of income. Even so, a thick layer of insulation separates most Americans from the full cost of their care.

A third feature of this cost-insensitive system would come on the supply side. We would pay most providers for whatever they do, whether or not it is worthwhile. We wouldn’t pay more than a minority of providers on salary. We most assuredly wouldn’t capitate patients. To the extent that we violated these principles and paid providers in ways that encouraged them to economize, we would make sure that patients saw little of the savings. That would undercut the willingness of patients to tolerate limits of any kind, which, would deter providers from economizing out of fear they would lose patients.

The final component would be a resolute refusal to spend more than a pittance on research to find out what really works. We would funnel what little we spent through politically weak organizations that would fall prey to influential groups offended by research showing that some device or procedure was not worth what it cost. And, of course, we would compare innovations not with existing methods of treatment but with doing nothing, so that costly innovations that worked no better than old procedures would be approved.

These problems are widely known, but describing them in this manner underscores a key fact: everyone talks about controlling health care spending, but no one does—or, under current arrangements, can do – anything about it. Every aspect of the current U.S. health care system conspires to prevent such control.

Yet, expenditures on health care, public and private, are growing at unsustainable rates. The Congressional Budget Office has repeatedly announced long-term budget projections showing that nasty choices await us if growth of health care spending continues at, or near, historical rates.

We could raise total taxes by half, or more. If done through the income tax alone, tax rates would have to double.

We could try cutting spending other than on health care. But that wouldn’t work because there isn’t enough spending to cut, other than health care, interest on the debt, and such essentials as national defense.

Letting deficits happen isn’t an acceptable option either. That course would result in explosive growth of government borrowing and produce a big tent calamity that would make the past financial crises in South Asia, Mexico, and Argentina seem like Lilliputian side shows.

The official projections indicate that 100 percent of the expected gap between spending and revenues can be traced to projected growth of Medicare and Medicaid. So, what should we do? I am going to list three broad recipes, two of which are, I believe, more likely to do harm than to help.

The first recipe embeds the problem of increasing health care spending in a larger challenge of an entitlement crisis. The leading edge of the baby boom has just become eligible for Social Security pensions. They will shortly qualify for Medicare, then for Medicaid nursing home benefits. Tens of millions more will follow.

The term “entitlement crisis” has been used so often and so authoritatively that anyone who denies it risks being labeled as a nut. But it is way off the mark. For one thing, Social Security doesn’t really belong in the list. The Social Security gap is politically vexing it but doesn’t come close to being a big fiscal problem. Over the next 75 years projected increased pension spending averages roughly one percent of gross domestic product.

In addition, most of the projected increase in public health care spending comes from the advance of medical technology, not from the baby boom. And most of those advances are a cause for celebration, not hand wringing. The problem isn’t rising spending but wasteful spending. And that is a problem not just of Medicare or Medicaid but of the U.S. health care system as a whole.

The second misguided approach to reining in the growth of health care spending is what I call the magic bullet approach. Adherents typically identify a single important shortcoming of the current way we pay for and organize the delivery of health care. Then, they tell us, fix this problem, and we will have controlled spending. The way to stop or sharply reduce the growth of health care spending is, variously, malpractice reform, increased use of preventive care, streamlined administration, not overtreating the terminally ill, heightened consumer cost consciousness – and the list goes on.

These proposed reforms are mostly good ideas. Many promise to improve the quality of care. Some even save money. There is just one problem – most won’t save much money and some won’t save any. To cut the growth of publicly financed health care spending significantly, sensibly, and in ways that do not subvert commitments to the elderly, disabled, and poor will require systemic change in the way we pay for and deliver health care

We have been talking health system reform for decades without much progress. The difference now is that the compassionate goal of fair access for all has been married to the hard arithmetic of fiscal balance. Changing the U.S. health care system is the work of a generation, not of a single presidency. But I believe that some steps are now on the table that can move the nation forward.

The first is a lot more research on which interventions affect patient outcomes at what costs. The research will be hard and costly, but the principle challenge is political – how to insulate the entities doing this work from the political pressures that have doomed past efforts. It may not save money immediately, but it is a precondition for rational savings later.

The second step is consolidating the number of payers in a geographical area, so they have – or a single payer has – real clout. The Massachusetts Connector, embryonic though it is, could become a revolutionary innovation if businesses and individuals are encouraged to buy insurance through it and if it becomes the conduit for subsidies to make insurance affordable. Lo and behold, a financial entity capable of effecting real systemic change could result.

The third step would be the enactment of similar reforms in other states. Assume that Massachusetts is able to solve the many problems that it faces in implementing its plan. Assume that the federal government enacts legislation to encourage other state-based reforms. Assume, finally, that a few other states implement them. Were these things to happen, I believe that the debate in Washington would cease to be whether to enact systemic reform, and would then focus on how to do it. And I ask those single-payer advocates who see state-based reform as a sellout to recall that the Canadian system began as, and remains, a provincial system.

Are these steps sufficient? I doubt it. Extending insurance coverage to all Americans, a shared goal of a majority of Americans, means eliminating even more people from any effective role in policing the cost of most health care spending. Thus, cost control can come only through collective, probably government, action, motivated by a budget constraint.

The budget constraint can come from linking payment to an earmarked tax, as with Social Security. Or it could come from competition with other government spending through an annual budget process. But until the entity that pays for health care is constrained by limits on what is spent, I believe that talk of controlling health care spending will remain just that – talk, and little else. When such budget limits become a reality, research on what works and at what cost will provide political cover for spending limits.

Henry J. Aaron is the Bruce and Virginia MacLaury Senior Fellow at The Brookings Institution. His areas of research include the reform of health care financing and public health care systems such as Medicare and Medicaid. This article was adapted from Aaron’s remarks for the twentieth anniversary of Harvard Medical School’s Department of Health Care Policy. HAARON@brookings.edu; 202–797-6128.

Efforts to control health care costs go back at least to the Nixon administration in the early 1970s. Yet with only an occasional pause costs have steadily risen since then, now standing at an all-time high and escalating at a rate of 6 percent a year, a disastrous pace. Clearly, we do not yet have a political clue about effectively and decisively managing costs, despite many ideas for doing so.

We are now at it once again, and with more intensity than in the past. President Obama has made health care cost control a centerpiece of his administration, Congress is worried about it, state Medicaid programs are suffering, and the number of uninsured continues to grow, often enough because employers are finding health care too expensive to provide as a benefit. Costs are now, many would argue, more important than that of increasing access, if only because a lack of cost control could eventually sink even a universal health care plan.

But there are, we believe, some serious problems in determining how best to talk about and approach cost problems. They have troubled my colleagues and me in thinking how best to organize and edit the blog.

How much hope is it reasonable to have about controlling costs? In a May 15 Wall Street Journal op-ed article Peter Orszag, director of the Office of Management and Budget, set forth the cost problem in a most hopeful way. He mentioned the pledge of a number of industry leaders to cut $2 trillion in costs over the next decade, the potential in reducing regional cost variations, the likely benefits of information technology, comparative effectiveness research, prevention and wellness programs, and changes in financial incentives. He did not pretend it would be easy, and he did note it would take “comprehensive health care reform” to really do the job, to improve “efficiency and increase value.”

That was a welcome agenda. But anyone familiar with recent health policy studies knows that most of those ideas do not have a great cost-cutting potential. A better management of regional variations may be the most promising, but that knowledge has been around for years without a good solution in sight. The industry pledges sounded wonderful on May 11 but then a few days later the industry leaders said that Obama had overstated their promises.

Granting the value of hope, we also think there is an even greater need for candor. In 2004 the Congressional Budget Office (which Orszag previously directed) said of Medicare and Medicaid that “to finance projected increases in spending…would require tax increases of an unprecedented magnitude….Under current policy, future generations will be made worse off by higher taxes or lower benefits.” A 2006 survey by the Kaiser Family Foundation of the full range of proposed cost control strategies concluded that “Although many of these efforts may lead to efficiency and quality gains, none would appear to be of a scale to have any meaningful impact on the overall cost picture.” Nothing has happened since then to change that picture. The former secretary of the Department of Health and Human Services, Michael O. Leavitt, said in 2008 that the growth in health care spending “could potentially drag our country into a financial crisis that would make our major subprime mortgage crisis look like a warm summer rain.”

Now it may well be that those pessimistic assessments are just wrong or overstated. But I do not think it wrong to say that the public has heard little about such judgments. We believe full candor is needed even when it hurts.

A related problem is this: how far should one go in pointing out the pain and even suffering that serious cost control could entail? A common account of the problem has it that, at base, it is just a matter of getting rid of waste and inefficiency. No one can object to that goal and no political or economic interests are threatened by it. It is inherently vague, however – the shallow, warm water that soothes anxieties. But it is hard to find any solid reform strategies whose management will be anything other than painful: raising taxes and cutting benefits (reducing physician fees and hospital reimbursements), saying no to expensive treatments with only marginal benefits (but not necessarily marginal in the eyes of doctors and their patients), cost-benefit studies of new (and old) drugs and medical devices (not just comparative effectiveness studies).

In short, in one form or another, and in one guise or another, we are talking about rationing. I was told that those who played an advisory role in the Clinton reform effort in 1994 were flatly forbidden to use that dread word. I doubt that any legislator will now speak of, much less defend, rationing – they know dangerous territory when they see it. But the rest of us can, and should. Even to talk of ridding the system of waste and inefficiency is not trouble-free. In a variation on an old health care observation: to cut someone’s wasteful job is to deprive him of a salary. But once we begin to talk openly and honestly about cost control, we can then address how to do it ethically.

To be effective, our blog will have to violate some taboos. President Obama showed that he understands that when he said recently of his grandmother’s last days that a decision was made to go forward with a hip replacement despite her terminal condition, but he knew that whether “a hip replacement when they’re terminally ill is a sustainable model is a very difficult question.” That’s the kind of dilemma we will tackle in this blog.

Our last problem is that of talking about improving access and controlling costs without hurting either in the process. An economically sustainable universal health care system will require setting limits; it can not have an open-ended budget – and all the more if those with good coverage now will have to give up something to make possible the inclusion of the presently insured. But to press that point could well scare people off from expanded access, which in itself is certain to cost considerable money.

Massachusetts now has a similar problem. Its goal of universal coverage has not yet been met, though it has been getting there. But the increasing costs of the plan stand in the way of full success, and the worry now is how to find ways of managing costs that will not alienate the various insurers and other interests in the process.

Analogous dangers are imaginable with national reform. We opt, once again, for candor about costs. We think it important to get a reform plan in place that will stand the test of time, one that has built cost control into it from the start, and that the public is fully informed about that necessity.

In principle, this country can control health care costs, and could even learn to say no to patients, doctors, insurers, and the medical industry when necessary. Other countries have done it, and with the enviable result of lower costs, better health outcomes, and higher patient approval rates. Our national dilemma comes to this: what is politically acceptable at present to control costs in the United States will not do so, and what would work to control costs is not politically acceptable. An evasion of the cost problem, or a minimizing and evading of its likely pain, will not help us out of that dilemma. Only by taking on costs directly, honestly, and with not a little nerve, can we hope to do so.

Daniel Callahan is editor of the Health Care Cost Monitor.