To Save Money, Save the Health Care Act

By PETER ORSZAG

Published: November 3, 2010

Sure, the health care law is not perfect, but it would cut the nation’s long-term fiscal imbalance by a quarter and reduce the projected deficit within Medicare by three-quarters. That may seem fanciful, given how distorted the public discussion has become. But that’s what the projections show, as long as Congress sticks to its guns and the Obama administration does a good job carrying out the provisions of the law.

Why do so many people assume that the act does almost nothing to save money? One explanation is that people’s first impressions of health care reform were formed during the summer of 2009, when the debate was dominated by the House bill. In health care reform, there’s always an underlying tension between those who are more concerned about expanding coverage and those who are more concerned about containing costs and improving quality. The House bill tilted toward coverage; the Senate bill, toward cost-effectiveness and quality.

The House bill was legitimately criticized for not doing enough to reduce costs. And that became the prism through which the legislation was and is viewed, even after improvements were later made in the Senate version and in the final law.

The act’s money-saving potential has also been clouded by an essential truth about controlling costs: it’s messy.

There are four ways to contain health care costs: by reducing payments to providers and suppliers; by rationing services; by having consumers pay a greater share; and by giving providers incentives to be more efficient.

The health care reform act includes hundreds of billions of dollars worth of cuts in payments to providers. Lowering payments within Medicare, though, without also reducing the quantity of services provided throughout the health care system ultimately only makes it harder for those on Medicare to find a doctor or hospital willing to treat them, because so many providers stop seeing Medicare patients.

The growth in health care services could be reduced by denying access to specific procedures. But even if such rationing were desirable, which is debatable, it is not remotely politically viable.

The third way to contain the expansion of health care services, theoretically, is to give consumers more “skin in the game” by increasing their share of the bill. There is no doubt that consumers would become more cost-conscious if they had to pay more. But this would not save that much money, because it would not apply to high-cost procedures. After all, the whole point of insurance is generous protection against unavoidable high costs. And the high-cost cases account for the vast majority of health care expenses: In 2001, the top 25 percent of Medicare beneficiaries ranked by cost accounted for 85 percent of all Medicare costs.

Lowering total health care expenses requires addressing the factors that drive those high-cost cases. For the most part, they involve chronic conditions like diabetes, hypertension and congestive heart failure, whose treatment varies much more than you’d think from doctor to doctor.

My previous column discussed ways of improving the information on medical effectiveness that is available to doctors and hospitals, and the potential for malpractice reform to encourage evidence-based practices. But we must find more incentives for providers to deliver higher-quality and cost-effective care.

The health care law starts the arduous process of shifting the medical payment system away from an emphasis on quantity of care and toward an emphasis on quality. For example, it creates penalties for hospitals with high rates of readmission and hospital-acquired infections. It expands the practice of making a single payment for treating a specific condition rather than paying for each treatment. And it provides for accountable care organizations that financially bind doctors and hospitals so that they offer the coordinated care that experts believe would save money in complex cases.