Health Reform: More on the Wrong Way Cost Curve

In my Newsweek column this week ("Obama's Malpractice: Why the health-care bill isn't reform"), I argued that-contrary to the Administration's claims-none of the various proposals now floating around Congress would reduce future budget deficits or the rapid rise in national health spending. Quite the opposite: the proposals would probably increase both deficits and national health spending. Now comes Richard Foster, chief actuary of the Centers for Medicare and Medicaid Services (CMS), a federal agency, making the same points with a lot more detail. In a study published after my column was written, Foster estimates that H.R. 3962, which passed the House of Representatives on Nov. 7, would raise national health spending by about $289 billion from 2010 to 2019. He also casts considerable doubt on whether the "savings" in Medicare that are used to pay for expanded insurance coverage would actually materialize; if not, the expansion of health-care would lead to higher federal budget deficits.

By Foster's estimates, H.R. 3962 would substantially reduce the number of uninsured Americans, from a projected 57 million in 2019 to 23 million. Most of the newly-insured would receive coverage under a liberalized Medicaid, the joint federal-state program aimed at the poor; many others would entitled to federal subsidies to buy insurance on "exchanges" where a number of insurers would offer competing plans. The costs of the expanded coverage would total about $935 billion over the 2010-2019 decade (some other non-insurance provisions would add slightly to costs). Meanwhile, "savings" mainly from Medicare would cover slightly more than half those costs. High taxes, not included in Foster's analysis, would pay for most of the rest. (Though Foster's office is an arm of CMS, it provides independent analyses of proposals and costs.)

But, Foster says, many of the Medicare "savings" may be "unrealistic." Reimbursement rates for hospitals, skilled nursing facilities, home health agencies and other health-care providers would be reduced from existing law. The assumption is that these providers would become more efficient and, therefore, could survive without the higher payments. This could be wishful thinking, Foster suggests. Providers that depend heavily on Medicare "could find it difficult to remain profitable and might end their participation in the program (possibly jeopardizing access to care for beneficiaries)." In that case, Foster indicates, Congress might reverse some of the reimbursement reductions leading to "significantly smaller actual savings." Budget deficits would increase correspondingly.

Even if all the Medicare savings materialize, Foster thinks that total national health spending-for both government and private insurance-would actually increase. "Numerous studies have demonstrated that individuals and families with health insurance use more health services than otherwise-similar persons without health insurance," he writes. With 34 million more insured people, there would be more doctors' visits, hospitalizations, more tests and procedures. Measures to curb health spending (more preventive care, "comparative effectiveness research"-restricting treatments to proven therapies and drugs) would have only modest effects. Overall health spending in 2019 could be about 3.4 percent high than under present law; the expected savings in Medicare would offset about two thirds of that. Without those savings, the overall increase would be larger.

Foster emphasizes that all his projections-for both costs and reductions in the number of uninsured-"are very uncertain." But he notes that outcomes could be worse than he's predicting. "We assumed that the increased demand for health care services could be met without market disruptions," he writes. But that might not occur. Providers, facing higher demand for their services, might raise their prices or might favor privately-insured patients over Medicare and Medicaid recipients, who typically have lower reimbursement rates. "Either outcome (or a combination of both) should be considered plausible and even probable," Foster writes.

Foster evaluated a previous House bill and also found it would increase health spending. Two studies of other Congressional proposals by the Lewin Group, a consulting company owned by United Health, also concluded that they would increase overall health spending. By and large, the Administration and its health-care allies have simply ignored these studies.