Cost-control measures in the health care law

In class on Wednesday, we talked about the recently enacted health care law and touched on its immediate impact on health care spending in the United States. Per that discussion, I wanted to break down a few of the features of the bill that we didn’t touch on but have the potential to fundamentally reshape our health insurance system and “bend the curve” of growing health costs.

The exchanges

The law requires each state to set up a health insurance “exchange”—a health insurance marketplace, accessed online, in which insurance companies have to list their plans in clear detail for consumers to compare on the merits of quality and price. All plans sold in the exchange will have to meet minimum standards of coverage. In today’s insurance market, most consumers don’t know which coverage is best and how much it should cost, except for really sick people who spend time researching this kind of stuff. In the exchange, the relative quality of plans will be clearly indicated through both government and consumer ratings; in this transparent market, the economics of competition will work naturally to improve quality and reduce prices. At first, the exchanges will be open only to individuals and small businesses; in 2018, states will have the option of banding their exchanges together with those of other states, and allowing larger businesses to buy insurance on the exchanges. If this happens, we may see the kind of system-wide cost reduction we need.

The excise tax on “Cadillac” health plans

Though highly unpopular, this is the law’s most direct incentive for cost control. Basically, in 2018, a 40% tax will be applied on every dollar over $27,500 spent on a health insurance plan. This threshold will increase with inflation, which is slower than health care cost growth; unless costs start growing more slowly, more plans will fall under the tax. The ultimate goal is not to have employers pay the tax; the goal is for them to avoid paying the tax by choosing plans for their employees that cost less money. This, consequently, gives insurers who charge less a competitive advantage against those charging more.

The Medicare Commission

Right now, Congress has authority over Medicare payment rates and spending targets. The recently enacted law creates the Independent Medicare Advisory Commission, a 15-member board of experts appointed by the president and confirmed by the Senate. The commission is empowered to bring Medicare in line with certain spending targets and institute reforms in Medicare to make meeting those targets easier. The key is that their recommendations are not subject to amendment by Congress; after they are made, the recommendations must be explicitly rejected, as a package, by both houses of Congress within a certain amount of time before they take effect. Congress hates to implement changes to Medicare that might hurt those who benefit from the current system; the commission solves this political problem. Most importantly, the commission can use Medicare to experiment with reforms in payment and delivery systems that, if they work, could be emulated system-wide.

The bundling of Medicare payments

With a few pockets of exception, our health care system currently operates under a “fee-for-service” model, in which doctors get paid more for every consultation, test, procedure, or prescription they order. And consumers do not want to second-guess the recommendations of medical professionals, no matter how skewed their incentives. A good explanation of the perils of this system is found in Atul Gawande’s article in The New Yorker from last June. You should be able to find it on Google.

Under the new law, instead of getting paid for each treatment and test, hospitals serving Medicare patients will receive a single fee for treating all of a patient’s ailments over a given period of time. This will give incentive for doctors to communicate with patients and other doctors, and provide a disincentive to order tests and procedures that might not be necessary. It could be the beginning of Americans paying for the quality of their health care rather than the quantity of their health care.