Fundmastery Blog

Kurt Brouwer August 10th, 2009

I think Congress and the administration made a mistake in touting the primary benefit of healthcare reform as being one of cost savings or ‘bending the cost curve’ back down.  Given that the plan has always been to add millions of uninsured Americans, it never was clear how that could be accomplished without spending more.

Yet, Congressional leaders are still claiming that there would be actual savings in healthcare reform legislation from reduced administrative costs and improved technology.  Speaker of the House Nancy Pelosi (D-CA) and House Majority Leader Steny Hoyer (D-MD) penned a passionate — at times rather strident — defense of the House healthcare reform legislation [emphasis added]:

‘Un-American’ attacks can’t derail healthcare debate (USA Today, August 9, 2009, Nancy Pelosi and Steny Hoyer)

…Reform will mean affordable coverage for all Americans. Our plan’s cost-lowering measures include a public health insurance option to bring competitive pressure to bear on rapidly consolidating private insurers, research on health outcomes to better inform the decisions of patients and doctors, and electronic medical records to help doctors save money by working together…

Unfortunately for Pelosi and Hoyer, the Congressional Budget Office (CBO) took a look at the legislation they are advocating and then shot down the idea that reform in and of itself would reduce the costs of healthcare. In fact, the CBO Director has written that the House’s proposed healthcare reform would add substantially to the deficit [emphasis added]:

…The federal government’s budgetary commitments to health care (including both spending programs and tax preferences) total more than $1 trillion in 2009.  Many proposals to significantly expand health insurance coverage would add to federal costs by providing large subsidies to help lower-income individuals and families purchase insurance.  Such proposals could permanently boost the government’s budgetary commitments to health care by something in the vicinity of 10 percent.  Improving the long-term budget outlook would require addressing that added cost in addition to the budgetary strains anticipated under current law…

Once Congress got the message that the current healthcare legislation would increase budget deficits by $100 billion per year or more, then that alone changed the dynamics of the situation dramatically.

In their USA Today piece, Pelosi and Hoyer also discussed a second form of cost saving benefits — preventive care:

…Reform will also mean higher-quality care by promoting preventive care so health problems can be addressed before they become crises. This, too, will save money. We’ll be a much healthier country if all patients can receive regular checkups and tests, such as mammograms and diabetes exams, without paying a dime out-of-pocket…

This line of reasoning that healthcare reform would save money through better preventive care is more plausible than the idea that a government plan would be more efficient than a private one.  The potential benefit for preventive care is that by covering all Americans with insurance, we would catch diseases earlier and therefore save money.

Unfortunately, the CBO has studied this factor and found that preventive medicine would save money in some cases, but all the extra tests and treatments and the extra longevity would actually result in higher costs [emphasis added]:

Congressional Experts Say Preventive Care Will Raise — Not Cut — Costs (ABC News, August 9, 2009, Jake Tapper)

In yet more disappointing news for Democrats pushing for health care reform, Douglas W. Elmendorf, director of the Congressional Budget Office, offered a skeptical view Friday of the cost savings that could result from preventive care — an area that President Obama and congressional Democrats repeatedly had emphasized as a way health care reform would be less expensive in the long term.

Obviously successful preventive care can make Americans healthier and save lives. But, Elmendorf wrote, it may not save money as Democrats had been arguing.

“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,” Elmendorf wrote. “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,” Elmendorf wrote. “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. … Researchers who have examined the effects of preventive care generally find that the added costs of widespread use of preventive services tend to exceed the savings from averted illness.”…

For more on the potential benefits and additional costs of preventive care, you can go this post on the CBO Director’s blog.

What’s the rush?

My basis position is that we do not want to rush into another huge government program.  We already have unprecedented government intervention into the economy.  What’s the rush for healthcare reform?  And, if we want to work on something, why not focus on Medicare?

Why not fix Medicare first? 

I am not the first to make this point, but I have written this before: if reform is so easy and logical and beneficial, why not fix Medicare first? It’s already underfunded and actuarially broke, so let’s get going on that:

This sentence from Virginia Postrel really struck me as one of those irrefutably obvious points:

…If simple and decisive government action can curb costs in health care, as Obamacare advocates claim, why not begin by fixing Medicare before rushing in with sweeping changes to the entire system?…

We often hear how efficient Medicare is and how low its administrative costs are.  But then, we hear about the vast underfunding of Medicare to the tune of double-digit trillions of dollars.

And, even the proponents of government-run healthcare are admitting that Medicare could be much more efficient, by 30% or so.  So, the obvious question is: why not fix Medicare and then once that’s done turn to the issue of reforming healthcare insurance for the non-Medicare public?

This short editorial from the Washington Examiner makes the point that has also been raised by others, including Virginia Postrel (see below) and Megan McArdle:

As Congress and the White House began to discuss health care reform, author and journalist Virginia Postrel offered a modest suggestion: If simple and decisive government action can curb costs in health care, as Obamacare advocates claim, why not begin by fixing Medicare before rushing in with sweeping changes to the entire system? The government already runs half of America’s health care system. According to federal statistics, federal and state governments together spent virtually the same amounts on health care in 2007 as did all private insurers and patients combined — $1.036 trillion and $1.045 trillion, respectively. Medicare, which serves the elderly, is the largest public program, accounting for 19 percent of all health care spending in the U.S.

President Barack Obama’s Council of Economic Advisers issued a report earlier this month estimating that as much as 30 percent of Medicare spending is unnecessary for improving health outcomes. Given such opportunities for easy savings within government, and Medicare’s weighty influence in the broader system (many private insurers set payments by adding a percentage to Medicare’s rates), it would make sense to reform Medicare first, see what works and what doesn’t, and then apply the lessons of that process later to any system-wide fix. Unfortunately, Obama and Democratic congressional leaders are hellbent on turning the system upside down with radical reforms that are sure to have vast and unexpected consequences…

It seems eminently sensible to me that we would reform Medicare first before subjecting everyone in the country to a wrenching change in how we insure our healthcare costs.  This comment by John Thacker (see final comment here) was picked up and quoted by Megan McArdle at the link above.  Thacker’s points seems both perfectly obvious and perfectly clear:

I completely fail to grasp this magical argument whereby Medicare is unreformable now, but adding even more patients to the rolls will create the incentive for exactly the sort of cost-cutting reforms that people hated when the HMOs were doing them in the early ’90s, and got laws passed to prevent.

John Thacker’s point is so sound, it is no wonder Congress wants nothing to do with it.

Here a longer version of the comment from Virginia Postrel that started this whole train of thought [emphasis added]:

…Think about this for a moment. Medicare is a huge, single-payer, government-run program. It ought to provide the perfect environment for experimentation. If more-efficient government management can slash health-care costs by addressing all these problems, why not start with Medicare? Let’s see what “better management” looks like applied to Medicare before we roll it out to the rest of the country.

This is not a completely cynical suggestion. Medicare is, for instance, a logical place to start to design better electronic records systems and the incentives to use them. But you do have to wonder why a report that claims that Medicare is wasting 30 percent of its spending thinks it’s making a case for making the rest of the health care system more like Medicare…

If there really are huge savings available in Medicare, then let’s fix that program right now.  That will have the virtue of saving money immediately, if it works.  If it does not work, then we that would be valuable information too.

See also:

Reform Healthcare Culture and Politics First

Healthcare Satisfaction vs. Congress

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