CBO to Health Care Reformers: Naive Policy Makers Need Not Apply

The Congressional Budget Office (CBO) has released two comprehensive papers detailing the policy and financial options for health care reform: Key Issues in Analyzing Major Health Insurance Proposals and Budget Options, Volume I: Health Care.

I can't overestimate the importance of these documents to health care reform.

I recently did a post as sort of an open letter to the CBO: To the Congressional Budget Office: Please Keep Playing it Straight!

After reading these two reports, totaling more than 400 pages of some of the most valuable health policy analysis I have ever seen, I now know that I had no reason to worry that the CBO would just tell the politicians what they wanted to hear.

Any Congressional health care reform proposal will need to be “scored” by the CBO and, by preempting the coming proposals with this report, the career CBO health care experts have now made it very clear they will not be an easy touch. Reformers are going to have to play the game on the up and up—show real savings or find the money elsewhere. CBO Director and incoming Obama Budget Director, Peter Orszag, also deserves a lot of credit for supporting his staff and issuing this report.

It is also clear that, whoever the Congressional Democratic leadership appoints to succeed Orszag, a marker is down. The CBO is on the record about what the likely reform options will cost before anyone had a chance to bring political pressure to bear. And, that just might have been intentional.

The work contains an inventory of about all of the health care reform options being discussed complete with a thorough cost/benefit analysis detailing their impact on federal spending. There would certainly be impact on private spending from many of these options but this at least gives us a relative cost index to compare the many health care reform ideas. This is also a financial report and did not attempt to measure quality improvements.

Taken together these two documents make a number of critical points:

1. There are no one, two, or even ten silver bullets. There are literally dozens of steps that will likely have to be taken in order to achieve the savings necessary to make our system more cost and quality effective.
2. The politically easy stuff won't get it done. Democrats and Republicans have said that things like prevention, wellness, and wider use of health information technology can free-up the savings we need to make our system affordable even while we dramatically expand the number of citizens covered. But the CBO confirms that these less politically problematic “cost containment lite” proposals won’t be enough: “…approaches—such as the wider adoption of health information technology or greater use of preventive medical care—could improve people’s health but would probably generate either modest reductions in the overall costs of health care or increases in such spending within a 10-year budgetary window.”
3. Really controlling costs will be very hard and will require some courageous and politically problematic actions: “Those problems cannot be solved without making major changes in the financing or provision of health insurance and health care. In considering such changes, policymakers face difficult trade-offs between the objectives of expanding insurance coverage and controlling both federal spending and total costs for health care.”
4. Changing what we pay will have far more potential to change the system's costs than changing how we pay.
   

The CBO’s work provides a detailed shopping list of policy options complete with assumptions and an analysis of what the various steps could cost or save the federal budget.

When you read through the reports it becomes clear that there are things we can do that will help but really be a drop in the huge health care bucket. There are other things that we can do that would have a really dramatic impact on federal health care spending—and they tend to be the most politically problematic.

For example, The Baucus Health Plan makes a big deal about saving money from “waste, fraud, and abuse.” But such efforts are estimated by the CBO to save a relatively inconsequential $500 million over ten years. Using pay-for-performance systems, the health care fix de jour, yields only single digit gains while reducing Medicare physician payments in line with productivity gains would save a whopping $201 billion over ten years.

Rebasing the Medicare physician payments using the Medicare Economic Index (MEI) would cost a budget busting $556 billion over the next ten years and "equalizing" the private Medicare Advantage payments—the favored method to pay for a fix—would only save $157 billion over the same period.

Many of these proposals save a great deal of federal spending because they shift costs to the private sector—for example a “pay or play” large employer mandate would save the government $48 billion but would certainly cost the private employer community a great deal more.

Here is a partial list to give you a sense for the trade-offs. Note in particular the items, or categories, that make a big or small difference compared to others. The estimates apply to federal spending and the cumulative impact the particular proposal would have on the deficit over ten years--between 2010 and 2019.

The reports also detail the many advantages and disadvantages to do these things not directly reflected by the budget estimates.

I offer this partial list from the 115 options presented as a quick opportunity to compare many of the most mentioned policy options and other options the CBO has found will have the biggest impact. You really need to read the document and the assumptions that go with these estimates to fully appreciate the analysis.

Change the Health Insurance System

• Foster the Formation of Association Health Plans – Adds $220 million to the deficit by 2019.
• Allow Individuals to Purchase Non-Group Health Insurance Coverage in Any State - Reduces the deficit by $7.4 billion by 2019.
• Impose a “Pay-or-Play” Requirement on Only Large Employers – Reduces the deficit by $48 billion by 2019.
• Establish a National High-Risk-Pool Program – Fully subsidizing all state’s to enable them to cap high risk pool premiums at 150% of the market would add $16 billion to the deficit by 2019.
• Establish a National Reinsurance Program to Provide Subsidies to Insurers and Firms for Privately Insured Individuals – Enacting a program to absorb 75% of the cost of high cost claims would add $752 billion to the deficit by 2019.
• Create a Voucher Program to Expand Health Insurance Coverage – Providing vouchers for the uninsured with incomes below 250% of poverty with a cap of $1,500 for individuals and $3,000 for families would add $65 billion to the deficit by 2019.
• Require States to Use Community Rating for Small-Group Health Insurance Premiums – Reduces the deficit by $5 billion by 2019.

Medical Malpractice Reform

• Limit Awards from Medical Malpractice Torts – Reduces the deficit by $5.6 billion by 2019.

Change the Tax System

• Reduce the Tax Exclusion for Employment-Based Health Insurance and the Health Insurance Deduction for Self-Employed Individuals – Capping family health insurance deductions at $1,442 per month adds $452 billion in new revenues by 2019.
• Replace the Income Tax Exclusion for Employment-Based Health Insurance with a Phased-Out Deduction – Beginning to phase-out the exclusion for employer health insurance at $160,000 in family income adds $552 billion in new revenues by 2019.
• Disallow New Contributions to Health Savings Accounts – Adds $10.5 billion in new revenue by 2019.
• Replace the Existing Income and Payroll Tax Exclusion on Employer Provided Health Insurance with a Refundable Credit – A more limited credit equal to 25% of health insurance premiums that would be phased out for high earners would increase federal revenues by a whopping $606 billion by 2019.

Expand Access to Public Programs

• Raise the Age of Eligibility for Medicare to 67 – Reduces Medicare spending by $85.6 billion by 2019.
• Create a Medicare Buy-In Program for Individuals Ages 62 to 64 – Adds $1.2 billion to the deficit by 2019. CBO estimates the average single premium would be $7,600 a year in 2011.
  
• Expand Medicaid Eligibility to Include Young Adults with Income Below the Federal Poverty Level – Adds $22 billion to mandatory spending by 2019.
• Create a Medicaid Buy-In Program – Allowing the uninsured below 300% of poverty to buy-in to Medicaid would add $7.8 billion to the deficit by 2019.
• Expand Medicaid Eligibility to Include Parents with Income Below the Federal Poverty Level – Adds $37 billion to the deficit by 2019.

Quality Initiatives and Pay-for-Performance

• Reduce Medicare Payments to Hospitals with High Readmission Rates Above the 50th Percentile – Saves $9.7 billion by 2019.
• Expand the Hospital Quality Incentive Demonstration to All Hospitals – Saves $2.9 billion by 2019.
• Deny Payment Under Medicaid for Certain Hospital-Acquired Conditions – Reduces mandatory spending by $45 million by 2019.
• Allow Physicians to Form Bonus-Eligible Organizations and Receive Performance-Based Payments – Reduces spending by $5.3 billion by 2019.
• Pay Primary Care Physicians in Medicare Using a Partial-Capitation System, with Bonuses and Penalties – A net reduction of $5.2 billion in spending by 2019.
• Pay for a Medical “Home” for Chronically Ill Beneficiaries in Fee-for-Service Medicare – An increase in mandatory spending of $5.6 billion by 2019.
• Fund Research Comparing the Effectiveness of Treatment Options – The net effect on the deficit between 2010 and 2019 would be an increase of $860 million and “reduce total spending on health care in the United States by an estimated $8 billion over the 2010–2019 period (or by less than one-tenth of 1 percent).” CBO seems to be saying that more such information will be of small value unless underlying incentives that promote inefficient practice patterns are not changed.

Health Information Technology

• Create Incentives in Medicare for the Adoption of Health Information Technology Including Bonuses and Penalties for all Physicians – A reduction in the deficit of $4.4 billion by 2019.
• Require the Use of Health Information Technology as a Condition of Participation in Medicare – A savings of $11 billion on physician payments and a savings of $23 billion for hospitals by 2019.

Change Provider Payments

• Reduce Medicare’s Fees for Physicians in Areas with Unusually High Spending – A reduction of $5.3 billion in federal spending by 2019.
• Reduce Medicare’s Payment Rates Across the Board in High-Spending Areas – A savings of $51 billion by 2019.
• Reduce Annual Updates in Medicare Fee-for-Service Payments to Reflect Expected Productivity Gains - $201 billion in savings by 2019.
• Reduce the Update Factor for Hospitals’ Inpatient Operating Payments Under Medicare by 1 Percentage Point – A savings of $93 billion by 2019.
• Reduce the Update Factor for Payments to Providers of Post-Acute Care Under Medicare by 1 Percentage Point – A savings of $54 billion by 2019.
• Eliminate Inflation-Related Updates to Medicare’s Payment Rates for Home Health Care for Five Years – A savings of $50 billion by 2019.
• Modify the Sustainable Growth Rate Formula for Updating Medicare’s Physician Payment Rates With Annual Updates Based Upon the Medicare Economic Index (MEI) and Include a Part D Hold-Harmless– Eliminating the Sustainable Growth rate Formula and rebasing on the MEI would increase spending by $556 billion over ten years. Freezing payments at 2009 levels would cost $318 billion over ten years.
  
• Set the Benchmark for Private Plans in Medicare Equal to Local Per Capita Fee-for-Service Spending – Reduces spending by $157 billion by 2019.
• Require Manufacturers to Pay a Minimum Rebate on Drugs Covered Under Medicare Part D – Using the Medicaid rebate policy as a model saves $110 billion by 2019.

SCHIP

• Eliminate Allotment Caps for the State Children’s Health Insurance Program and Permit States to Expand Coverage up to 400 Percent of the Federal Poverty Level – Adds $80 billion to the deficit by 2019.

Premium and Cost Sharing in Federal Programs

• Require a Copayment for Home Health Episodes Covered by Medicare – A 10% Copay saves $47 billion by 2019.
• Impose Cost Sharing for the First 20 Days of a Stay in a Skilled Nursing Facility Under Medicare – Saves $27 billion by 2019.
• Impose a Deductible and Coinsurance for Clinical Laboratory Services Covered by Medicare – Saves $24 billion by 2019.
• Institute a Premium for Higher-Income Enrollees Under Medicare’s Drug Benefit Similar to That Used in Part B – Saves $10 billion by 2019 without adjusting for inflation.
• Increase Funding for the Health Care Fraud and Abuse Control Program in Medicare and Medicaid by $1 billion – Savings of $1.5 billion by 2019 for a net savings of $500 million.
• Increase the Payroll Tax Rate for Medicare Hospital Insurance by One Percentage Point – Increasing the Medicare tax by one percentage point on all earnings would increase federal revenue by $592 billion by 2019—doing it only on earnings above $150,000 would increase federal revenues by $77 billion by 2019.

The inescapable conclusion is that what we pay has the potential to matter more than more than how we pay for it.

You can download the CBO reports here.