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Commentary: Health-care reform can pay for itself in the long run

This article first appeared in the St. Louis Beacon, Aug. 5, 2009 - The country is in the midst of an intense debate regarding whether the federal government should make health insurance affordable for all. Such an expansion of the health-care system will likely cost between $1 trillion and $1.5 trillion over 10 years, according to the nonpartisan policy think tank, Center for American Progress (CAP). This, of course, comes on top of the financial sector bail-out and the economic stimulus package, each costing several hundred billions of dollars.

How do we pay for this much-needed expansion of health-insurance coverage? The Obama administration has identified $600 billion of cost savings in health care, which includes the following:

  • Using the expected productivity improvements resulting from reform to lower costs in payment updates for hospitals
  • Competitive bidding for the privately insured Medicare Advantage program
  • Reallocation of the Medicare and Medicaid payments to hospitals that care for uninsured people, resulting from the increase of coverage, to include more people currently without insurance
  • Reduction of Medicare and Medicaid pharmaceutical spending
  • Linking home health payments more closely to costs
  • Reallocation of already-approved Medicare improvement funds

The CAP estimates that $400 billion in additional cost savings can be achieved. This figure was arrived at by a combination of health-care policy changes and changes in general tax policy. The changes in health-care policy include imposing a "pay-or-play" requirement on businesses over a certain size. In the case of pay-or-play, a company can choose to contribute toward an insurance pool rather than directly insuring its employees. Another health-care policy change entails limiting preferential tax treatment of employer-provided health insurance.
Other changes might include eliminating exclusions for health spending from flexible spending accounts and health reimbursement accounts or eliminating the itemized deduction for medical spending over 7.5 percent of income.

Finally, taxes on tobacco, alcohol and sugar-sweetened beverages can be increased. By doing this, two health care-related objectives can be achieved: Raise significant revenue to support health-care reform and cut back consumption of products that have been shown to have a harmful effect on health.

Besides these cost savings, the CAP also advocates long-term costs savings, which can be achieved through modernizing the health care system. Current health-care delivery is very inefficient, which leads to higher costs and lower quality. Applying the principles of shared savings, lowering medical costs will result in sharing costs savings with health-care providers while still cutting the federal budget deficit.

This is possible because current profit margins in the health-care industry are still low despite high costs (the typical hospital's profit margin is only 4 percent). Thus, in the example provided by CAP, if reform reduces hospital costs by 15 percent, the federal government would increase hospital payments by 4 percent, at the same time keeping 11 percent for itself. Therefore, hospitals would see a doubling of their profits and taxpayers would also gain.

Health-care modernization would entail broad changes in several areas where structural inefficiencies now exist. One area that is in need of greater investment is health information technology, which includes electronic medical records and IT-driven changes in management, staffing and payments. The health-care industry can use the IT efficiency pioneered by big box retailers to reduce back office personnel and lower costs through billing system harmonization.

Health IT can also be used to shift medical tasks from more expensive providers, e.g. primary care physicians and specialists, to less expensive providers, e.g. nurses and physician assistants.

Comparative effectiveness research, which provides both providers and consumers with information on the most effective available treatments, is another key component of a long-term cost-cutting strategy. Health IT and comparative effectiveness research can help to eliminate wasteful care, reduce the cost of providing services and stimulate new and more efficient care-providing innovations.

The CAP discusses two other areas of health-care modernization: empowerment of health care professionals and consumers, and changing the payment system to reward quality over volume. Empowering health-care professionals and consumers means involving everyone more effectively in the system. For the consumers, it means patients receiving valuable price and quality information and taking more responsibility for their own health. For the health-care professionals, it means greatly expanding the scope of practice for nurses and physician's assistants.

Under the current system, cost inefficiencies, associated with rewarding volume of high-cost procedures over high-quality care, significantly run up the tab of medical care. Major cost savings, however, can be achieved by focusing on prevention and more efficient management of patient care, especially patients with high-cost chronic conditions. For example, one innovation that holds considerable promise is "bundling" services into one payment that are typically separated into several payments. This approach gives health-care providers an incentive to collaborate and coordinate their services to a far greater extent than they do now.

Having a health-care system that works for everyone and is budget neutral is possible but requires fundamentally revamping an antiquated system. It will not be easy, as the current heated debate indicates, because so many special interests have a huge stake in the present, inefficient system.

Robert Cropf chairs the Department of Public Policy Studies at St. Louis University.

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