Smart Ways to Keep the Brake on Health-Care Costs

The rising cost of health care in the U.S. has been slowing over the past few years, driven both by weakness in the general economy and by some changes in the way medical services are provided. The crucial question now is, how can we make sure that progress continues?

Surprisingly, for all the recent talk about constraining cost growth, few specific proposals have been made.

That’s why the Center for American Progress should be commended for gathering a group of health-care experts and putting forward more than 10 specific proposals. (Disclosure: I was part of the group, which included a broad array of doctors and other medical practitioners and academics.) The proposals, which were published in the New England Journal of Medicine, aim to reduce costs wherever possible by curtailing care that is unnecessary and reducing the prices of procedures people need.

First, consider how drastic the recent deceleration in health-care costs has been. A common way to evaluate the growth in spending for Medicare is to compare the increase per beneficiary to income per capita. Over the past 30 years, this excess cost growth for Medicare has averaged about 2 percent a year. The goal of many policy proposals, including provisions in the 2010 Affordable Care Act, is to reduce the future excess cost growth to about 1 percent annually.

Growth Slowdown

Over the past year, though, excess cost growth has been much less than the target of 1 percent. According to the most recent figures from the Congressional Budget Office, total Medicare spending this year through June rose 4 percent from the previous year. Meanwhile, the number of Medicare beneficiaries rose by almost 4 percent, too, and income per capita rose by about 3 percent. So excess cost growth has been significantly below zero, let alone below the target of 1 percent a year.

Much of the recent deceleration is probably attributable to the economy, but as I have written before, I doubt that is the full explanation. Health-care providers are anticipating a shift away from fee-for-service reimbursement, and they are increasingly using computer software to inform clinical decision-making and are “benchmarking” physicians -- that is, comparing their practice norms with those of other doctors -- to move toward better care. These structural changes are essential to maintaining slower health-care cost growth as the economy (eventually, we all hope) picks up.

So how can the recent progress be sustained?

The proposals put forward by the experts assembled by the Center for American Progress include multiple steps to eliminate both artificially high prices and unnecessary procedures. For example, rather than have Medicare set prices for lab tests and medical devices, we should put all such purchases out for competitive bidding. In 2011, bidding reduced Medicare spending on wheelchairs and other equipment by more than 40 percent. Another suggestion is to require that all health-care prices be fully transparent to consumers.

Other proposals are aimed at the intensity of medical care rather than its price. The faster we can move away from fee-for- service payments, which encourage additional care even if it isn’t helpful, the more value we can get from our health-care system. The CAP proposals set a 10-year goal of making at least 75 percent of payments on some basis other than fee-for-service. One of the most promising alternatives involves bundling -- paying a fixed amount for the whole collection of services typically needed to treat a particular condition. A Medicare pilot program in the 1990s demonstrated the potential of bundling.

Malpractice Reform

What is perhaps most surprising about the CAP proposals, given the traditional political alignments on the issue, is that they also include reform for the medical malpractice system. Rather than impose an arbitrary cap on damages, the group proposes a safe harbor for physicians who adhere to practices that have been clinically shown to be beneficial. As I have written previously, this approach can help promote evidence- based care for patients and also give doctors more clarity about their liability.

The CAP proposals thus wisely recognize that there is no single strategy to continue the recent progress in slowing the growth in health-care costs. In contrast, the Republican budget plan put forward by Representative Paul Ryan of Wisconsin seems based on a belief that all that’s needed is to shift risks: from Medicare to beneficiaries through a premium-support program, and from the federal government to state governments by turning Medicaid into block grants. I wouldn’t bet on these steps solving the problem. The only certain outcome from them is the shifting of risk onto state governments and individuals.

Building a more valuable health-care system requires many more improvements -- which is why the CAP approach is more auspicious.

(Peter Orszag is vice chairman of corporate and investment banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

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To contact the writer of this article: Peter Orszag at orszagbloomberg@gmail.com.

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net.

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