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Q: Will health care reform be effective in reducing health care costs?

The Debaters
printable version
Robert A. Book
Senior Research Fellow and Health Economist, The Heritage Foundation
David M. Cutler
Otto Eckstein Professor of Applied Economics, Harvard University

Robert A. Book: The reforms currently in Congress will increase health insurance premiums and health care spending, not decrease them. The Lewin Group estimates that annual premiums will increase by an average of $460 per person—that's before taking into account coverage "mandates" that the new Health Choices Commissioner would impose. Each of these mandates would increase premiums even more by forcing everyone to have "Cadillac" plans or nothing.

In addition to this spending increase in the private sector, the Congressional Budget Office estimates that federal spending would increase by $1.3 trillion over 10 years. States would spend more because of additional Medicaid expansion.

Despite the rhetoric, the health care bills being debated contain nothing that 'incentivizes' the "best" treatments over the most expensive, or encourages healthier lifestyles. In fact, the Senate bill prohibits discounts for non-smokers. The focus on preventive care is welcome because it may improve health and save lives. But with few exceptions, it doesn't save money.

David M. Cutler: America's health costs are 40 percent above those in other advanced countries, with no apparent benefit in improved health. Thus, it would be surprising if reform were not able to lower spending. Health care savings will come about in three ways:

• Reducing wasteful administrative expenses. The lack of system-wide IT leads to enormous administrative expenses, from wasted time to excessive personnel. We could take 10 percent or more out of the health care budget simply by streamlining the administrative system.

• Reducing marketing and underwriting costs. Insurance administration averages 12 percent of costs overall, but only half that in large firms. Moving individuals and small firms into larger exchanges would save tens of billions of dollars annually.

• Fewer and less expensive acute episodes. We devote far too little attention to prevention, and when acute episodes occur, they are more expensive than need be. The best health care systems, from the Mayo Clinic to Group Health Cooperative, save up to 10 percent while delivering higher care quality.

Done right, health care reform can reduce costs while simultaneously improving the quality of care. But this will not happen by magic. We need to make meaningful use of information technology, redesign public and private payment systems, and put the emphasis on prevention. The benefits would be immense.

Robert A. Book: The comparison with other countries ignores Americans' lower mortality from cancer and longer survival after heart attacks. Moreover, Dr. Cutler's excellent research shows substantial benefits from an additional $1 of spending: benefits of $7 for heart attack patients, $6 for low-birthweight infants, $6 for depression, and over $9 for cataracts. Despite inefficiencies, gains are possible with appropriate additional spending.

Taking Dr. Cutler's points:

• Savings from streamlining administration are purely speculative. Attempts to measure the physicians' administrative costs have produced a wide range of estimates, from 6.9% to 27% of revenue. Even if these costs were reduced substantially, they would never be zero. Any estimate is just a guess.

• Savings from moving small business employees into an exchange must be offset by the cost of operating the exchange, including marketing to each person or family individually. This could be higher or lower than current costs. Furthermore, expressing administrative costs as a percentage is highly sensitive to the underlying health care costs. Medicare's administrative cost is slightly higher than private insurance's on a per-person basis, but a much lower percentage of total costs because Medicare has more expensive patients.

• While preventive care extends and improves lives, with few exceptions (e.g., screening colonoscopies) it doesn't save money. One review of 1,500 preventive treatments found that while 93 percent improve health, less than 20 percent reduce costs. Futhermore, reform bills before Congress do nothing to encourage efficient providers like Mayo and Group Health Cooperative.

As President Obama's health care advisor Dr. Ezekiel Emanuel, has written: "Vague promises of savings from cutting waste, enhancing prevention and wellness, installing electronic medical records and improving quality of care are merely 'lipstick' cost control, more for show and public relations than for true change."

David M. Cutler: There are a few issues being confused here that would be helpful to keep straight. The first is the impact of health reform on national medical spending. Most estimates suggest that the increment to health spending from covering the uninsured would be minimal, perhaps 3 to 6 percent. Many of the uninsured are healthy, and the remainder receive some care—they just receive it in inefficient ways. Thus, the net impact of reform on health costs would be primarily any savings that result.
Robert Book points to an analysis from Lewin that suggests little savings. Every analyst looks at the medical system differently. In the Lewin model, the impact of changes in payment incentives on medical care delivery is minimal. Almost all savings in the Lewin analysis come from giving people insurance choice, especially among managed care plans. That is one view of the world, but not the only one or even the predominant one. Most analysts believe that up to 30 percent of medical care could be saved through delivery system reform, and that payment reform is the key to unlocking those savings. In an era where not much is agreed upon in Washington, analysts from across the political spectrum share this sentiment (for example, John McCain did in his presidential campaign).

While covering all Americans won't add much to total spending, it will increase government spending, at least in the short run. That is because the government needs to make insurance affordable to low and middle income Americans. President Obama has stated his intention to offset those costs through revenue increases or savings in other programs, through the first decade. After that point, the reduction in medical costs resulting from delivery system reform should offset the ongoing costs of increased coverage.

We know one thing for sure—the trend in medical spending will create enormous problems for the economy if it continues unabated. Enacting reforms to change that trajectory is one of the highest priorities on the public agenda.

Robert A. Book: Like "analysts from across the political spectrum," I agree with David Cutler that "payment reform is the key to unlocking those savings." The problem is, payment reform is not part of any of the health care reform bills before Congress, so these reforms aren't likely to result in cost savings.

Quite the contrary, in fact, The House bill, for example, would require all Americans to carry "gold-plated" or "Cadillac" health insurance, which will increase spending even for those who are currently covered. The bill even creates a new government bureaucracy whose main task would be to specify what health plans must cover (Section 142) and make sure they spend "enough" (Section 2714). The plans would also be directed to limit patients' exposure to the marginal cost of their own medical care [Section 122(c)(2)(C)], which precludes exactly the sort of delivery system reform that David Cutler and I both agree is essential to making health care more efficient and less costly.

The proposed bills would still leave us paying doctors for doing procedures rather than for keeping patients healthy, and would do nothing to make patients and providers consider the costs when comparing treatment options.

The result of the type of "reform" Congress is actually contemplating would indeed change the trajectory, but in the wrong direction. Medical spending would increase even faster than it does now, and not in ways that improve health.

David M. Cutler: In his response, Robert Book makes the point that cost savings are speculative. That is true. We do not know for sure whether investments in information technology, insurance reform, and prevention will save money. There are a couple of points to note, though:

A large number of providers as well as policy analysts believe these measures will work to save money and improve the quality of care. Indeed, it is often the highest quality providers, like the Mayo Clinic, the Cleveland Clinic, and others, who push the types of reimbursement and system changes that Congress is considering.

The goal is to avoid putting all our eggs in one basket. The legislation envisions a number of steps to reduce the growth rate of medical spending. It may be that stressing prevention will not save money, but incentivizing better coordination around hospital discharge will. Many people discount comparative effectiveness research as a key to savings, but not everyone. Congress is rightly taking a catholic approach to cost savings, not one driven by a particular ideology.

In every public policy endeavor, there is uncertainty. Thus, if we were deterred by uncertainty, we would never do anything. Indeed, that has been the problem in medical care for several decades. We know the result of this strategy, though: more uninsured people, higher costs for individuals and the government, and increasing strains on the quality of care. People expect the government to act, not to be paralyzed by fear.

Health Care Reform Debates

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Should the Rich Pay More?

What's Best for Seniors?

Who Won the Debate?

Viewer Comments

Commenter: Tom in Albuquerque
I believe Mr Cutler is smart to qualify his position by saying "if done correctly." And with that being said, if the current Health Care reform currently being served in a "like it or not" fashion, were indeed done correctly, then Mr. Cutler would be able to say without disclaimer that the reform could be would be effective in REDUCING health care cost. Instead, he chooses the cowardly art of stating what Americans wish this Health Care reform would accomplish, while Mr. Book states how this plan as presented will increase costs.

Commenter: Rick
Yes, a reform Bill can reduce health care costs, but only if congress will focus on cost trigger issues. A focused Bill of this type is unacceptable to either political party. Seems congress has a health care agenda and having cost reductions will be by accident, not design. I'd rather see a costless Bill that addresses inter-State availablity of insurance plans, medical tort reform, international Rx drug price equality, etc. This Bill while being tax-free to Americans, would create major health care cost savings to individuals. Let remaining tax-payer supported reform stand alone in a separate Bill. Then it can pass or fail on it's merits, the American way. Hiding behind closed doors because you're ashamed of Bill language, can't be good for the public. So... place all cost neutral and cost reduction items in one Bill, and all cost increase items in a second Bill. Shine the light of day on them and let America decide. No Trojan horses, just the facts, in plain language. I don't care what the political parties say they need. They work for us.

Commenter: Dave Skjeie
It is telling that the debaters you present are one, a representative of the Heritage Foundation, which was established and is funded to promote conservative and business interests, and two, an academic. Perhaps the academic has some economic reason promote some agenda - it is not disclosed.

But going into the argument, it is clear that the Heritage Foundation representative would not get a paycheck unless he was critical of progressive agendas related to health care. Putting aside the substance of the debate, which shifts as policy proposals shift, I find it hard to understand how anyone could accept the anti-reform agenda given the prepondence of supposedly authoritative opposition speakers drawn so consistently from entities formed and funded to further conservative interests and maintain socio-economic structures benefitting the health insurance industry.

Commenter: FreeDem
We have a new Godwin's Law. The first person to use the Lewin Group as some sort of intellectual point loses the debate. That would be like using a Brezhnev era Soviet farm report as proof of Soviet agricultural improvements.

Commenter: Roger H Strube MD
Will reform impact health care cost? It will but whether it will drive cost up or down is yet to be determined. The cost of medical care is driven by provider decisions/determinations (in error between 30% and 50% of the time) and patient wants/desires (usually unrelated to needs or what medical science can deliver). Insurance companies call this the "medical loss ratio". It is about 80% of the total cost of care. The remaining 20% is the cost of insurance administration. For Medicare and Medicaid this cost is about 3% as administration (claims processing) has been turned into a commodity rather than a profit center. If the people (the government is supposed to be 'by the people') acknowledge that health care is a right then the logical way to proceed is to expand Medicare/Medicaid for all. The total health care cost would be cut by 17%. Insurance companies would still be in the business of processing claims but would not be in the business of supporting the excessive overhead of marketing, middle management and CEOs (skimming $20M off the top). If congress simply creates an insurance company entitlement mandating that all citizens buy insurance the total cost will go up in proportion to the number of uninsured covered by the "reform". Maybe that CEO will make $22M for managing all the extra work.
Addressing the administration side (20% of the cost) has the potential of saving a large amount of money, probably enough to cover the uninsured, if Medicare for all is enacted. It does not however address the 80% cost of the delivery of health care. One presenter stated there could be 30% savings in care delivery if unnecessary care could be avoided. In my experience that number is closer to between 40% and 50%. Such a reduction does require that physicians are mandated to use criteria/standards of care and this should be related directly to reimbursement. If our government (we the people) go down this road the cost of health care administration and deliver could be cut in half. What are the chances the special interest groups and their lobbyists will let that happen?

Commenter: Mark Lowry
The question is poorly phrased. The real question is: Which reform will lead to reduced costs -- a public plan, or a plan that unleashes market forces?

How can anyone seriously believe that a government run plan will be effective at reducing costs without resorting to severe government imposed rationing?

Have you not been paying attention to the huge deficits created by Medicare, Medicaid, and Social Security?

Markets do work. What is needed is regulatory and taxcode reforms so that healthcare providers and insurers participate in vigorous competition. Also consumers must be compelled to make decisions based upon cost and provider performance. This requires a couple of reforms --

1. Consumers must be directly exposed to some level of cost for all services (except perhaps preventative services). "skin in the game" is required for the market to function. You could imagine scaling this out-of-pocket cost based upon income level.

2. Provider transparency in pricing and efficacy.

3. Allow insurers to compete across state lines.

Healthcare is a commodity, an important commodity, but a commodity none-the-less. Why should healthcare not be subject to the same market forces that provide us with low-costs in every other realm?

Commenter: PJ
When it comes to health care cost savings, it's a shame that the boundaries of the discussion do not include attacking some of the significant underlying causes of high health care expenditures, including pollution and government subsidized/controlled agribusiness artificially reducing the cost of unhealthy diets.

While there are lots of advocates for reforms in these areas, many tend to be purists that would reject reasonable cost-benefit analysis. We should focus on those issues where there is unequivocal science(reducing trans fat consumption, reducing urban particulate pollution, reducing junk food consumption) rather than fighting for things(zero pesticide residue) which currently don't have conclusive scientific evidence.

Commenter: Greg Gordon
There is no debate, the proposed government run health care program will increase costs to everyone. The CBO estimates there will be a net cost to government of about a trillion dollars, and that's undisputed. Rich Americans will pay more taxes. Poor Americans already get free Medicare and Medicaid so cost is irrelevant to them. Middle class Americans who currently have health care may pay less, but their employers may also cancel private insurance in favor of a government-run insurance. Middle class Americans who don't already have insurance will be forced to pay whether they want insurance coverage or not. The much-touted savings in paperwork will be offset by unemployment insurance paid to IT, clerical, and managerial staff in insurance, medical and dental offices all over America when they are laid off. Doctors will certainly lose income due to government "competition", yet they still must contend with malpractice lawyers who control the Democrats. Maybe these professionals can find new jobs as pothole pavers in shovel-ready stimulus programs?

Commenter: V. Jepsen
Book quotes the Lewin Group as fact - the Lewin Group has been discredited and should not be relied upon

Commenter: john dascenzo
There is only one way to cut costs and allow everyone basic health care: Anyone who wants to may go on medicare. And if they choose, purchase additional coverage through private Ins. This would be the most simple, straightforward way of solving this problem.

Commenter: Wayne Wade
I like David Cutlers comment / points. I just do NOT believe this is what Congress / White House is working on. The White House has lost all credibility when the plan was to get a bill passed before congressional recess. What would we have now if that would happened.

After pushing through a stimulus plan that just through away billions with no plan, no focus and no reading of the bill, I have no belief that the federal government can "fix" health care.

It can be improved by making small changes that are focused and have been tested. Pass a bill with ONE item at a time. Start with pre-existing conditions. It would pass. If competition is needed pass a bill allowing insurance companies compete in ALL of the USA.

If this is to affect all Americans it should be worked through in such a manner that all Americans understand and can debate. Americans and the markets could adjust to these changes and continuous improvement could be a multiplying factor.

The greatest impact for improvement lies with the individual. There is room for tax on the leading behaviors / habits that lead to poor health.

At the end of the day the government has NO place in the drivers seat.

Commenter: Mrs. Thompson
It appears that the two gentleman were debating seperate issues... or maybe the question should be rephased. Mr. Book argued that there would be no cost savings to the INSURED, while Mr. Cutler argued about savings by the INSURER. I'd need proof that any savings the insurance companies see would be passed down to the insured to believe Mr. Cutler's arguement.

The opinions expressed belong solely to the participants and do not necessarily reflect the views of NOW, PBS, or local stations. The facts stated by the participants have not been verified by NOW.

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