Health – Page 6 – Donald Marron

Baucus Bill: Four Steps in the Right Direction

From a budget perspective, the Baucus bill is a major step forward from the earlier HELP and House bills. There remains lots of room for improvement, and I am certainly not endorsing the bill at this point. But I do believe that Chairman Baucus and his team deserve credit for improvements on at least four important fronts: overall budget impact, doctor payment rates in Medicare, tax increases, and communications.

1. On paper, at least, the bill satisfies three key budget tests. It doesn’t add to the deficit over the ten-year budget window, it doesn’t add to the deficit in the tenth year of the window, and it doesn’t add to the deficit in years beyond the window. Indeed, it appears to reduce the deficit over each of those periods.

As CBO hinted in its cost estimate and Greg Mankiw discusses on his blog, there are reasons to doubt whether some proposed spending reductions and tax increases would actually materialize. Thus, the actual budget effects may not be as rosy. That’s a huge issue. But even with that caveat, the Baucus bill is a major improvement over proposals that didn’t even try to hit these budget targets.

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How Much Does the Baucus Bill Cost?

Yesterday, Senate Finance Committee Chairman Max Baucus released his much-awaited health care proposal. In his announcement, he described it as a costing $856 billion over the next ten years, costs that would be more than paid for by other spending reductions and tax increases.

Later in the day, the Congressional Budget Office released its preliminary estimate of the budget impacts of the bill. That estimate shows a $774 billion cost for the bill’s provisions that expand coverage. As a result, some commentators have suggested that Baucus somehow misspoke and over-stated how much his bill would cost by more than $80 billion.

That is not correct.

Why? Because the bill does more than expand coverage. It also increases spending on various health programs.

For example, it provides a one year “doctor fix”, delaying by a year dramatic cuts in Medicare payment rates. CBO estimates that provision has a ten-year cost of about $11 billion.

The bill also expands the prescription drug benefit in Medicare. That provision would cost more than $17 billion over ten years.

Those two provisions alone imply that the bill costs a bit more than $800 billion. And there are numerous other spending increases that would cost at least a few tens of billions more. I must admit that I couldn’t find my way all the way up to $856 billion when I quickly reviewed them, but it’s clear that the true cost of the bill is notably higher than $774 billion for the coverage expansions alone.

The larger point is that we should be careful to identify all the important provisions in these competing bills, and keep track of gross budget impacts, not just net impacts. I raised this issue in my discussion of the House health bill. That bill was often touted as costing around $1 trillion over ten years, but the actual cost of expanding coverage was closer to $1.3 trillion. And a permanent fix to the Medicare doctor issues would have added more than $200 billion to that.

I haven’t gone back to look at all the details, but on apples-to-apples basis, the House bill would cost at least $1.5 trillion compared to the $800 billion plus of the Baucus bill.

I think Chairman Baucus should be commended for trying to inject some gross (in the good sense) figures, rather than net ones into this debate. That can only improve the quality of the discussion. (But it would be great to get some more guidance on how to get to exactly the $856 billion figure).

Note for budget geeks: The biggest net-vs-gross question is how to think about the $30 billion budget impact of premium interactions. If those interactions are happening because of efforts to reduce costs, then they shouldn’t be included in the gross cost figure. If they are happening because of efforts to increase costs, then they should.

Bending the Curve: Redefining Health Insurance

Over the past few months, a politically-diverse group of health policy experts has been pondering a key question: what are the “specific, feasible steps” that policymakers could use to reduce the growth of health spending? In short, how can we bend the curve?

The fruits of their labor were published by the Brookings Institution on Tuesday as Bending the Curve: Effective Steps to Reduce Long-Term Health Care Spending Growth.

I encourage everyone interested in health policy to give it a close look.

The report’s recommendations for fixing health insurance particularly caught my eye:

Governments should ensure proper incentives for non-group and small-group health insurance markets to focus on competition based on cost and quality rather than selection. Achieving this requires near-universal coverage and insurance exchanges to pool risk outside of employment, augment choice, and align premium differences with differences in plan costs.

…

[Therefore, these insurance markets should be restructured to] focus insurer competition on cost and quality through requirements for guaranteed issue without — or with very limited — pre-existing condition exclusions; limited health rating, such as those related to age and behaviors only; and full risk-adjustment of premiums across insurers based on enrollees’ risk. For market stability, these reforms must be undertaken in the context of an enforced mandate that individuals maintain continuous, creditable basic coverage.

In short, the report recommends a combination of an individual mandate and reforms that eliminate both the ability of and the incentive for insurance companies to try to enroll only the healthy and low-cost.

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Latest Data on Transfers and Income

In a series of posts (most recent here), I’ve documented that Americans are getting an increasing portion of their income from the government.

BEA released new data on incomes a couple weeks ago, including revisions back to 1995. These data reinforce the story I’ve described in my previous posts:

Transfers accounted for 17.3% of personal income in June. That’s the second highest in history, topped only by the 18.2% recorded in May, when transfers were boosted by one-time payments from this year’s stimulus act:

The increasing importance of transfers reflects both short-run developments and long-run trends. In the past year, the importance of transfers has grown because of (a) weakness in other forms of income, (b) the natural expansion of transfers due to economic weakness (e.g., increases in unemployment insurance payments), and (c) policies to expand benefits (e.g., as an attempt at stimulus). Over the longer run, however, the growth of transfers has been driven by the expansion of entitlement programs.

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Prevention, Health Costs, and Value

Cost has played a leading role in the policy debate over health care / health insurance. That’s appropriate since private health costs put such a burden on workers and families, and public health costs place such a burden on state and federal budgets.

I worry, however, that the focus on costs and spending sometimes overshadows what ought to be the real goal: getting as much value as possible from our health care system.

A case in point is the debate over preventative care.

Policymakers are desperate for painless ways to pay for expanded health care coverage. Many of them have therefore become enamored of the idea that increased spending on preventative care could reduce overall health spending. As I noted yesterday, however, there’s a problem with that idea: it generally isn’t true.

If your only goal is paying for expanded health care, that finding is both unwelcome and fatal – the search for painless pay-fors will have to look elsewhere.

If your goal is increasing the value we get from our health system, however, your inquiry isn’t done. Instead, you should say “That’s too bad; I was hoping it would save money. But while we’re talking about it, do the benefits of preventative care justify the higher spending?”

Good question.

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Does Prevention Reduce Costs?

One of the common memes in the health debate is the claim that increased spending on preventative medical care (e.g., cancer screening) can reduce overall health spending.

That idea is very attractive, since it seems to offer a free lunch: greater health at lower cost. It has just one small problem, though: it isn’t true.

As the Congressional Budget Office describes in an analysis released on Friday:

Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.

That result may seem counterintuitive. For example, many observers point to cases in which a simple medical test, if given early enough, can reveal a condition that is treatable at a fraction of the cost of treating that same illness after it has progressed. In such cases, an ounce of prevention improves health and reduces spending—for that individual. But when analyzing the effects of preventive care on total spending for health care, it is important to recognize that doctors do not know beforehand which patients are going to develop costly illnesses. To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway. Even when the unit cost of a particular preventive service is low, costs can accumulate quickly when a large number of patients are treated preventively. Judging the overall effect on medical spending requires analysts to calculate not just the savings from the relatively few individuals who would avoid more expensive treatment later, but also the costs for the many who would make greater use of preventive care.

In short, an ounce of prevention may save a pound of cure for the patients it helps. But those ounces of prevention can add up to tons of costs when spread over millions of patients.

And that’s not all.

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Good and Bad News for the House Health Bill

In my recent paper about how the Congressional Budget Office analyzes health proposals, I noted that one of the most important things that CBO does is to provide additional information about its cost estimates. Cost estimates often can’t speak for themselves, so it’s important that members of Congress and other interested observers ask for additional clarification about key issues.

Well, four leading House Republicans recently took this step, and CBO’s response is a doozy. It contains too much to summarize here, so let me focus on the two most important points:

CBO reiterated its conclusion that the introduction of a public plan (as specified in the bill) would not undermine private health insurance markets. Most Americans would continue to get their health insurance through employers.

CBO confirmed that the bill would worsen future deficits.

Supporters of the bill will emphasize the first finding as evidence that the public plan won’t gut private insurance markets. Opponents of the bill will emphasize the second finding as evidence that the bill is fiscally reckless.

Neither of these conclusions should be a surprise to anyone, since the basic facts were reported in CBO’s original cost estimate. However, the new letter does provide useful context.

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A Note on End-of-Life Health Care

It’s often said that end-of-life care makes up a disproportionate share of overall health care spending. For one very thoughtful discussion, see this article in Daily Finance.

Such claims strike me as plausible as an after-the-fact accounting matter. But I’ve always wondered how often patients and their caregivers know that they are providing end-of-life care? And how often do they have hopes – perhaps even expectations – that the patient will recover, but the treatments don’t succeed?

The recent passing of my father-in-law illustrates this question. He died early this morning after almost two weeks in intensive care fighting pneumonia and trying to recover from a recent stroke.

Until yesterday, the plan was simple: provide fairly aggressive treatment in the ICU to defeat the pneumonia so that he could return home. It would take time to assess damage from the stroke, but at least he would be able to get care at home from his extended family.

That plan collapsed yesterday as the pneumonia worsened, his kidneys failed, and he had a final stroke.

The record books will thus record about 10 days of ICU care for him in his final 10 days of life. From the perspective of Esther and her family, though, it really felt like 9 days of ICU care with the hope of improving and extending his life, and 1 day of ICU care knowing that the end was imminent.

Although my father-in-law likely didn’t benefit from that last day of ICU care, it’s also worth noting that some of his family members did, because they had an opportunity to come say their good byes in person (even if he couldn’t hear them).

All of which is to say that his end-of-life care provided some benefits – some probability of recovery plus some solace for family members – even as it ultimately failed at substantial cost. Spending on end-of-life care is a natural place to look for potential cost reductions as we try to “bend the curve” on health spending. The challenging part, however, will be balancing potential savings against the potential benefits of such care.

(For completeness, I should note that in our case, the balancing of these costs and benefits was entirely a private matter because Esther’s father had no private insurance and was not eligible for Medicare because he had moved back to Mexico. Similar episodes play out thousands of times every day, however, for people covered by private and/or public health insurance.)

Another Budget Blow to Health Reform

Policymakers are discovering that the road to health care reform in anything but smooth. The latest speed bump involves the Administration’s proposal to rein in future Medicare costs by empowering a new panel (the Independent Medicare Advisory Council) to recommend future spending reductions. If accepted by future Presidents, the commission’s recommendations would take effect unless Congress intervened.

As I mentioned the other day, there is some logic to this approach. Politics sometimes play an unseemly — and costly role — in decisions about Medicare payment rates. Limiting Congress’s role in setting those rates might therefore by a money-saver.

The devil is in the details, however, and earlier today the Congressional Budget Office concluded that the details don’t add up to much.

CBO estimates that the proposed legislation would save a paltry $2 billion over the next ten years, less than 1/500 of the 10-year cost of health reform. That estimate reflects CBO’s assessment of various possible outcomes:

[T]he probability is high that no savings would be realized, …, but there is also a chance that substantial savings might be realized. Looking beyond the 10-year budget window, CBO expects that this proposal would generate larger but still modest savings on the same probabilistic basis.

Advocates of the IMAC approach will clearly have to go back to the drawing board if they want to get larger savings in the first 10 years. The good news for them is that CBO explains why the estimated savings over the next ten years are so low and provides some guidance on what might be necessary to increase them.

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House Bill Fails Budget Tests

Lawmakers face more work if they want to pay for health reform. According to the latest analysis by the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation, the House health bill fails two key budget tests:

New spending isn’t fully paid for. House committees haven’t identified enough spending reductions or tax increases to offset the spending. As a result, the bill would increase the deficit by $239 billion over the next ten years.

The bill would widen the structural deficit. CBO estimates, for example, that the program would increase the deficit by $65 billion in 2019, the final year of the budget window.

These budget challenges stem from the fact that the House bill would increase spending in two major ways:

House Bill - Net Budget

First, the House bill would increase health insurance coverage. As noted in a previous CBO analysis (and summarized in a recent post), that effort would have a net budget impact of $1.04 trillion over the next ten years; spending would increase by almost $1.3 trillion, while tax revenues would increase by about $240 billion.

Second, the bill would change the formula that determines how much Medicare pays physicians. Those payment rates are scheduled to be cut 21% next year under an arcane formula (the sustainable growth rate mechanism). The House bill would replace those cuts with increases in coming years, at a cost of $245 billion over the next ten years.

As I’ve noted in previous posts (e.g., here), a key risk is that health reform would put the U.S. on an even worse fiscal trajectory. As shown in the following graph, that’s exactly what would happen under the current House bill:

Offsets Dont Keep Up

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