Health Reform and Cost Control

Regina Herzlinger, the Harvard Business School Professor and Queen-Mother of the Consumer-Driven health movement, feels nothing much will come out of the current health debate, aimed at slowing growth of health costs, unless we have realistic means of cost control. In short, no cost control, no universal coverage.

Here are some of the reasons for her skepticism, as expressed in “Can The United States Provide Health Care for All?, an article written for the McKinsey consulting firm.

• Although the Democrats tout various other magic bullets for health care cost control—invigorated health care IT, oodles of prevention, miraculous reversions of destructive lifestyles, and centers for measuring relative cost effectiveness, even President Obama’s budget director pooh-poohed their likely impact when he headed the Congressional Budget Office. Most Americans do not believe these miracle solutions will do the job, either.

• The experience of Massachusetts provides a sobering lesson about the results of expanding universal coverage without paying attention to cost control. As more than 300,000 people gained insurance, costs also increased. Not surprisingly, the number of enrollees who needed subsidies was higher than expected. When the recession hit once wealthy Massachusetts, the increase in health-care costs helped tip the state into a billion-dollar deficit. The Commonwealth is now contemplating cost control through all-payer regulation, in which the state effectively sets the prices for health insurance. If this Massachusetts solution seems like the road to a single-payer system, under which the state government controls all health care expenses, that’s because it is.

She goes on,

Medicare is alleged to be a good cost controller and one that avoids the rationing of the single-payer economies. But Medicare is low cost only because government accountants are permitted to ignore inconvenient truths: $34 trillion in unfunded liabilities plus $89 billion in underpayments to medical care providers, which are ultimately paid by private insurers. With correct accounting, Medicare’s cost would increase by more than a trillion dollars. Further, if Medicare were the sole US health insurer, it would either increase its payments to providers by $89 billion or the current near-shortage in doctors would reach crisis proportions as medical students and graduates, burdened by huge debts and limited financial prospects, chose other professions.

What is the Obama administration’s response to such criticism? To tinker with Medicare by introducing these budgetary “savings.”

• Establish competitive bidding for Medicare Advantage plans, $177 billion
• Reduce home health payments, $34 billion
• Reallocate Medicare Advantabe fund, $23 billion
• Bundle hospital-physician payments, $16 billion
• Base hospital payments on quality, $12 billion
• Reduce readmission rates, $8 billion
• Increase part D payments to high-income seniors, $8 billion
• Speed pathway for generic drugs, $6 billion
• Improve payment accuracy for Medicare contractors, $2 billion
• Minimize cost variations between high spending Medicare and low spending regions, a potentially savings of 30%, roughly $700 billion.

Given the over $1 trillion CMS budget, everybody knows these savings are either tokenism or unlikely politically, and more radical and political unpalatable changes such as eliminating the $300 billion subsidy for employer-sponsored benefits, higher sin taxes (alcohol, tobacco, sweetened drinks, high fat foods), and higher across the board income taxes will be required to cover all.

Another alternative might be to take the Republican approach of giving vouchers and tax credits of $5000 or more, or offering health savings accounts with high deductible plans, to all to spend their own money as they please. But that would require trusting consumers to assume responsibility for spending their own money, rather than depending on the wisdom of Washington.

Or one could change the health care paradigm from a government-entitlement mentality, which John Goodman of the National Center for Policy Analysis dismisses as “an unworkable government Ponzi scheme” – to a market-based consumer mindset.

In her article, “Can the U.S. Provide Health Care for All?, Dr. Herzlinger concludes.

The combination of invigorated supply and demand is the only health care reform plan that will avert the economic disaster that otherwise awaits us and, simultaneously, make health care available to all.

Sadly, it is a solution that the Washington, DC, establishment, which doubts the wisdom of consumers and the competence of entrepreneurs, is most reluctant to effect.