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.