Wednesday, September 16, 2009

Health Care Cost Savings and the Baucus Plan

Today, the CBO released its preliminary cost estimate [pdf] of the Senate Finance Committee's health care proposal.

The new bill -- which would mandate coverage, but drop the public option -- is expected to reduce the federal deficit by about $49 billion over the next 10 years. This seems like great news. However, CBO Director Doug Elmendorf notes:

These projections assume that the proposals are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments. The projected savings for the Chairman’s proposal reflect the cumulative impact of a number of specifications that would constrain payment rates for providers of Medicare services. The long-term budgetary impact could be quite different if those provisions were ultimately changed or not fully implemented. (If those changes arose from future legislation, CBO would estimate their costs when that legislation was being considered by the Congress.)

This is, of course, the same objection that Megan McArdle has made. Greg Mankiw tries to put it into layman's terms:

[T]he plan would reduce the deficit if it were carried out as written, but there is good reason based on historical experience to be skeptical that it would be.

Let me try to put CBO's point in a more familiar setting: Your friend Joe, who says he want to lose weight, asks you for an extra slice of pie after dinner. Naturally, you are doubtful about the wisdom of the request. "Ahem, Joe," you whisper, "Aren't there a lot of calories in that?"

"Yes," he says, "but the pie is part of a larger plan. I am committed not only to eating that slice of pie but also to going to the gym every day for the next week and spending at least half a hour on the treadmill. That exercise will more than work off those extra calories."

"But that's what you said last week, when you asked for piece of cake. And you didn't end up going to the gym."

"Yes, I know" he replies ruefully, "but this time I really mean it . . . . Can you please pass the pie?"

I think this is pretty on-target. Heart-wrenching stories like this not only prevent lawmakers from following through with proposed cost-cutting plans, but often force them to expand benefits and increase funding to health care entitlement programs.

Update: Time Magazine offers this primer on the Baucus health bill.


Emily said...

This has been so confusing for me, although the Time article did help. It does seem that this new plan will cover a lot of people who can't afford health insurance, which is great, but what about the sheer cost of medical services? Does this bill do anything to keep hospitals from charging thousands of dollars for a 30 minute visit and some Tylenol? If it doesn't reduce the costs of getting care, then won't we just end up all paying more in the long run?

What about a middle class family that makes too much to receive government subsidies (I'm not sure what that number would be, maybe over $70,000 for a family of four?) that gets employer sponsored insurance. If the head of the household loses their job, and insurance, would buying into this exchange be cheaper than COBRA? If it isn't, will they get any government help?

I don't expect you to answer all these for me- but I just feel like there is still a lot left to talk about.

mikhailbakunin said...

Good questions. Let me try to answer them in reverse order.

1) If you lose your job, you would be able to buy into the exchange. Presumably, your income would drop to zero, so you would also receive a federal subsidy to purchase individual coverage on the exchange. The cheapest available plans are the "bronze" plans, which offer relatively limited coverage at a relatively low cost.

2) The subsidies are capped at 400 percent of income. (You're pretty close -- I believe that's $66,000 for a family of four.)

Initially, full-time employees who are offered coverage through their employer would not be able to receive subsidies to purchase insurance on the exchange. (This is called "the firewall.") However, there are some exceptions to this rule. For example, if a worker has to pay more than 13 percent of her annual income to purchase employer-provided coverage, she will be able to buy coverage on the exchange and her employer will be penalized.

3) Part of the cost-savings comes from altering physician and hospital reimbursement schedules. But this issue that is, in my mind, a bit more controversial. In theory, hospitals wouldn't be able to charge outrageous fees to patients who receive federally-subsidized coverage.

The federal government would also save money by cutting "disproportionate share reimbursements" -- payments to hospitals with high percentages of low-income patients -- and limiting redundant or unnecessary procedures.

The issue is that the federal government was supposed to have already done a lot of these things for Medicare patients, but ultimately didn't. I'm skeptical as to whether this bill seriously addresses the underlying problem that you mentioned with hospital fee-for-service payments.

I don't know if I answered all of your questions (this stuff is really complicated), but I hope that helped!

mikhailbakunin said...

Sorry, I meant to say that subsidies are capped at 400 percent of the poverty line, not 400 percent of income.

That would be crazy.

Emily said...

This did help. Thanks!