Restoring Fiscal Sanity 2007: The Health Spending Challenge

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Restoring Fiscal Sanity 2007

Brookings Institution Press

Chapter One

Over the past half century, most Americans have experienced increased prosperity and improved quality of life. We are living longer, and advances in knowledge and technology have made medical care increasingly effective and are likely to continue to do so. But these triumphs pose serious challenges. As health care improves, Americans are spending higher proportions of their income to obtain it. Health care is crowding out other spending by individuals, businesses, and government. Moreover, our complex, fragmented health care system is demonstrably inefficient and unnecessarily costly. Americans are increasingly concerned that they are spending a great deal on medical care and not getting their money's worth. The rising cost of care is making health care coverage less affordable and adding to the already substantial ranks of the uninsured.

The health spending challenge shows up strikingly in the federal budget, where the cost of federal health programs, primarily health care promises to the elderly, is projected to grow substantially faster than federal revenues at current tax rates. The projected growth of federal health spending will force tough decisions about the federal budget. If past trends in health care spending continue it will not be possible to keep promises made to the elderly and other vulnerable populations without large continuous tax increases, even if other federal spending is drastically curtailed. Indeed, if current programs remain in place and recent health spending trends continue, within a generation the cost of Medicare and Medicaid alone will exceed the amount of national resources historically devoted to financing the whole federal government. This rapid projected growth is partly attributable to demographics-the retirement of the large baby-boom generation and the fact that Americans are living longer. More important, it is due to the fact that Americans are consuming more and increasingly expensive health care, whether that care is financed by the government or the private sector. Health care spending dominates the future federal budget crunch. If health care could be delivered more efficiently, federal budget choices would be far less agonizing.

But federal health programs are only pieces of a larger picture. Health spending is putting pressure on the budgets of families, businesses, nonprofit enterprises, states, and communities. Total national spending for health care-now approaching 17 percent of all spending-continues to rise rapidly. Attempts to reduce federal spending by cutting Medicare and Medicaid benefits and restricting eligibility will only serve to shift the burden to other payers without reforming the system in ways that could improve the effectiveness of health care or slow the growth of total spending.

Although Americans devote a considerably higher proportion of total resources to health care than people in other advanced countries, their health outcomes are worse, millions remain without health insurance, and there is considerable evidence that the health care delivery system is inefficient and wasteful. The size of the federal health programs makes their leadership essential to systemic reform. The challenging question addressed in this book is: how can federal health care programs be reformed in ways that slow the growth of total health spending and move the whole system toward greater efficiency and effectiveness, broader coverage, and better health outcomes?

Rising Health Care Spending-Federal and National

In chapter 1 we focus on current projections of health care spending. We discuss why health care spending is rising so rapidly in the United States and other developed countries. We show the dramatic effect that current rates of growth in health care programs will have on the federal budget and why we believe such growth to be unsustainable.

Strategies for Slowing the Growth of Health Spending

In chapter 2 we assess a broad range of options that could slow spending or improve long-term performance of federal health programs, while taking into consideration the interconnectedness of the entire health system. Previous attempts to reform federal health programs have often been myopic, taking aim at short-term budget scores rather than long-term efficiency; these approaches often succeed only in shifting costs to the private sector, rather than reducing total health spending.

Comprehensive reform of the U.S. health system will eventually be necessary if we are to achieve efficient production of effective, high-value health care with a rate of spending growth that can be sustained well into the future. Most policy proposals to reduce growth in health spending take one of two approaches to reform-market based or regulatory based. Market strategies rely on informed consumers who respond to greater competition by making cost-effective choices that will improve quality of care and lower costs. Regulatory strategies, by contrast, promote active government intervention through administrative rules on reimbursement rates, provider performance, or total spending to achieve the same ends.

Whether reform should move toward universal health care under a single-payer system or greater competition among private health plans has long been debated by experts, including many of the authors of this volume. We argue in chapter 2 that the country should not wait to resolve the conceptual debate over health reform before taking actions that can squeeze out inefficiency and promote better functioning of federal health programs and the health system at large. The problems are both large and complex, and solutions will inevitably involve a blend of regulatory and market elements. Consequently, many different approaches should be tried to improve efficiency, to slow health spending growth, and to promote a more equitable system. Improved information about treatment effectiveness, costs, and outcomes is critical to any strategy pursued.

Some policy proposals-such as health information technology, disease prevention, malpractice reform, and pay-for-performance-have been touted as the keys to better health care at lower cost for everyone. Unfortunately, there are no silver bullets. Although those proposals have considerable merit, no single proposal can solve the entire spending problem by itself, and each proposal requires a considerable investment of money and effort to become effective. Such ideas should be part of a broader agenda of experimentation and reform.

Many policy options considered in this chapter are likely to yield onetime savings rather than a permanent reduction in the growth of federal health outlays. Although perhaps not ideal, at least adopting such an approach would buy time for further policy development and innovation. We argue that there is no lack of policy ideas to test, but there may be a lack of political will to proceed.

Broader health system reform is not possible without implementing changes in federal programs and health-related activities. Medicare and Medicaid account for such a large share of total health spending that they must be part of wider efforts to improve health care. Federal tax subsidies help millions of workers purchase private insurance through their employers, but those subsidies could be revamped to better target those in need and minimize incentives that promote inefficient use of health services. Regulatory agencies, including the Federal Trade Commission and the Food and Drug Administration, establish the legal framework for competition in the health sector and provide important consumer protections.

Federal leadership can provide a catalyst for developing and implementing significant reforms by public and private insurers and health plans. Medicare is testing ways to improve payment and delivery systems that could increase the quality of care and reduce program spending. Many states have undertaken projects to improve the operation of their Medicaid programs. The Veterans Health Administration has led the way in developing electronic medical records and improving communications within the VA health system. Lessons from these efforts can be adopted by other health programs, both public and private.

The challenge of rising health care spending will not be resolved in the near term; at best, it will be mitigated and managed through many small but significant steps. Ultimately, Americans will be forced to decide how much of their individual and national resources to allocate to extending life and how increasingly expensive care will be allocated among citizens. A large number of reforms must be implemented over an extended period of time if we are to reduce growth in health spending while enhancing the effectiveness of care. Although some proposals in this book may preclude others, we believe that many can and should be pursued simultaneously.

The Challenge of Medicare

In chapter 3 Gail Wilensky emphasizes the interconnectedness of efforts to slow spending growth in Medicare and in the health system as a whole. The size of the Medicare program, coupled with the political unlikelihood that Medicare spending growth will be allowed to fall behind growth in total health care spending, means that future Medicare spending growth will help signal the success or failure of efforts to moderate spending growth across the system.

Medicare is currently undertaking several demonstration programs to change provider incentives in ways that will reward quality and encourage efficiency. If these prove successful, they could hold tremendous value for both Medicare and private health insurers. Political realities-a growing senior population that is unlikely to tolerate differences between Medicare and the private sector regarding access to new technologies or high-priced providers-suggest that Medicare and private-sector spending streams are likely to converge over time. Thus sustaining efficiency and lower spending growth in one system will occur only if there are comparable changes in the other system.

Wilensky reviews a range of proposals to slow spending in the Medicare program, including constraining provider payments and increasing the eligibility age and cost sharing by beneficiaries, and weighs the political likelihood and financial impacts of each. Similar to other authors in this volume, she sees the most promise for moderating spending in promoting efficient, high-quality care. Specifically, she recommends development of a national performance measurement system that would use comparative clinical effectiveness information to reward providers for high-quality, appropriate care. Investing in such a system would be an important role for the federal government-one that would realign financial incentives and enable improved care throughout the health system.

The Role of Medicaid

While Medicaid represents a significantly smaller share of the federal budget than Medicare, its anticipated rate of growth is slightly higher than that of Medicare and substantially more than anticipated growth in federal revenues. In chapter 4 Alan Weil and Louis Rossiter explore a variety of approaches that could control Medicaid's rate of growth. They note that Medicaid was established out of recognition that low-income Americans could not adequately access the health care system-any attempts to cut costs by reducing covered services or program eligibility risk recreating those problems. Instead, they believe cost solutions must be found through greater efficiency and consider several policy levers to accomplish this.

To change the incentives that states face in making Medicaid policy decisions, Weil and Rossiter consider the consequences of converting Medicaid into a block grant to states. They conclude that, while this would certainly help control federal Medicaid spending, such an approach would simply shift the financial risk to states and their beneficiaries. Another possibility is to design a generalized response to reduce the degree of fiscal gaming practiced by states. Medicaid costs could also be reduced by adopting reforms to change provider behavior, such as disease management, pay-for-performance, and managed care. These reforms are being used and showing promise in the private health sector. The authors also see possibility in a pair of policies designed to change the behavior of individual beneficiaries: Defined contributions allow beneficiaries to choose among plans that have the same costs but varying benefits, and financial incentives can encourage health-promoting behaviors, such as keeping doctor's appointments, adhering to drug treatment regimens, and lessening use of emergency rooms. Finally, they explore two ideas that could help reduce demand for Medicaid. One, establishing national eligibility standards based on financial need, would eliminate cross-state disparities and simplify program administration. The other, promoting private long-term care insurance through partnership programs, is still relatively untested but would likely remove some of the cost burden from both states and the federal government.

Leveraging Other Federal Health Systems

In chapter 5 Susan Hosek explores the growth of the Veterans Health Administration (VHA) and the Military Health System (MHS). Both systems face rising cost pressures resulting from the increasing attractiveness of their services relative to private health coverage. Over time the scope of benefits provided to veterans and military beneficiaries has grown, reaching a point today where these packages are significantly better than most private employer health plans. With these programs providing care that is of equal quality and lower cost, potential beneficiaries are increasingly switching out of private plans. Both the Department of Veterans Affairs and Department of Defense (DoD) have proposed modest increases in cost sharing to moderate the demand for care by current enrollees and to discourage additional eligible beneficiaries from shifting into these systems from private coverage. However, with so many military personnel deployed and at risk overseas, Congress has not supported these changes. One way to generate sizable cost savings for these programs is to update prescription co-pays to employer-plan levels, an approach that is less likely to encounter political resistance. VHA and MHS must also generate cost savings through improved efficiency.

VHA and MHS innovations-in efficiency and quality of care-could act as examples for the rest of the U.S. health sector. Development of electronic medical records (EMR) systems can improve care and save money. VHA pioneered the Veterans Health Information System and Technology Architecture (VistA), which it has made available to private-sector providers at nominal cost. DoD is close to full implementation of its EMR system, the Armed Forces Health Longitudinal Technology Application (AHLTA). Both systems can make valuable contributions to the entire health sector by sharing information on cost-effective design, implementation, and training requirements, as well as methods to exploit the systems to improve health outcomes. VHA has also become a leader in quality-of-care improvements, with its adoption of a quality improvement initiative that has resulted in higher standards of care by holding providers and managers accountable for measured quality performance. The federal government would be well served to encourage VHA and MHS to continue aggressively developing and testing new approaches to providing quality, lower-cost care, and disseminating this information to the broader health care sector.

Private Payer Roles in Moving to More Efficient Health Spending

In chapter 6 Paul Ginsburg emphasizes the links between the activities of private and public health insurers. He argues that not only will developments in private insurance have direct effects on the federal budget but that they will also have indirect effects by their influence on the degree to which reforms aimed directly at federal health programs can succeed. The exclusion from taxation of employer contributions to health insurance has an enormous effect on federal revenues, while direct subsidies for purchase of private insurance, especially for Medicare Part D prescription drug plans, represents another large federal health expense. Ginsburg highlights important indirect effects as well, which grow out of the reality that many providers treat patients with different kinds of health insurance coverage, both public and private. The result of this common delivery system is that strong initiatives from either payer-for instance, a change in payment policies to hospitals and physicians-will influence care across the board.

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