How Health Care Reform Reduces the Deficit in 5 Not-So-Easy Steps

It's hard to overstate how important the Congressional Budget Office (CBO)—which makes the official judgments on how much bills cost and save—is in Washington. "I consider CBO God around here," Sen. Chuck Grassley, ranking Republican on the Finance Committee, recently said.

But that's a faith peculiar to Washington, D.C. The rest of the country doesn't know what the CBO is, and it doesn't care. "Washington may live and die by the pronouncements of the Congressional Budget Office," wrote the pollsters Doug Schoen and Scott Rasmussen in the Wall Street Journal, "but 81 percent of voters say it's likely [health care reform] will end up costing more than projected."

That's left Democrats in a worst-of-both-worlds situation: They've built a bill that Washington's toughest scorekeeper says will cut the deficit by more than a trillion dollars over 20 years. They're getting attacked for the taxes and Medicare reforms that save all that money. But the country doesn't believe the savings are real.

One of the problems Democrats have had is that it's very easy to understand the one thing the bill does to spend money—purchase insurance for people who can't afford it—and considerably harder to explain the many things it does to save money. Another is that a lot of the savings have to do with changing how medicine is practiced, which people are less familiar with than how insurance is purchased.

But the fact that the cost controls are complicated and numerous doesn't mean they're absent, or that they won't work. Here's a guide to a few of the bill's best ideas, and how they work:

Create a competitive insurance market:
This is the bill's first, and most important, step. Right now, the insurance market's version of competition is pretty brutal. Companies compete to avoid the sickest people and sign up the healthiest people. Offering the best coverage for the lowest cost isn't much of a priority, because most consumers don't know whose coverage is best, and the ones who really do know are probably sick customers who spend their days researching this stuff.

Outlawing the bad kind of competition while enabling the good kind, which the bill does, is more than just a humanitarian measure. It's a cost control. The insurance "exchanges" imitate the market in which federal employees (including congressmen) purchase their health care insurance. Participating insurers can't discriminate based on pre-existing conditions, they have to answer to regulators if they attempt to jack up premiums, and consumers will be able to rate their insurers, a rating that everyone else will see when shopping for their insurance.

If all goes well, consumers will be able to log onto the exchange's Website, compare insurance plans, and choose their favorite. That means insurers will have to compete for customers. As any free-market conservative will tell you, that should drive prices down and quality up. If it doesn't, insurers will have some annoyed legislators to answer to: The bill says congressmen and their staff members need to buy their insurance from these exchanges, too.

The Medicare Commission:
The next cost control worth mentioning is an effort by Congress to solve the problem of, well, Congress. Medicare's cost problem is, in many ways, a political problem: Saving money means cutting someone's profits or someone's benefits, and politicians are afraid to do either.

Enter the Independent Medicare Advisory Board. Modeled off of the highly-respected (but totally toothless) Medicare Payment and Advisory Commission, IMAC is a 15-person board of independent experts chosen by the president, confirmed by the Senate, and empowered to cut through congressional gridlock. IMAC will write reforms that bring Medicare into like with certain spending targets. Congress can't modify these proposals, it can't filibuster these proposals, and if it wants to reject them, it needs to find another way to save the same amount of money. Making the process of passing tough reforms easier is the single most important thing you can do to make sure tough reforms actually happen.

A tax on "Cadillac plans":
The least popular, but most direct, cost control is the tax on expensive, employer-provided coverage. Today, the average employer who offers insurance pays more than 70 percent of a worker's premiums, all of it tax-free. This amounts to an annual $250 billion subsidy for private insurance for people with good jobs. But it's not just the size of the subsidy; it's how we use it that matters. People have their employers pay for their health-care insurance, which means individuals don't know how much their insurance really costs and don't have as much incentive to keep those costs down. Imagine the pressure for cost control if the 70 percent that employers pay were coming out of our own pockets, instead of quietly coming out of our wages.

In 2018, the proposed excise tax on so-called "Cadillac plans" slaps a 40 percent tax on every dollar spent on an insurance plan above $27,500 annually. So if your plan costs $27,600, the final $100 bucks would be taxed (technically, the insurer pays the tax, but it'll pass that onto your employer). But the idea isn't that people will pay this tax. It's that they, or their employers, evade it by choosing insurance that holds its costs down more aggressively. That gives insurers who hold costs down a competitive advantage against insurers who don't. because those who don't are not only more expensive, but also paying a hefty tax on their excess spending.

Medicare "bundling" programs:
The most obviously illogical part of our current health care system is that we pay doctors the way we pay car dealers: They get more money for every item they sell. But while we aren't afraid to ignore a car dealer's recommendations, we are afraid to disagree with our doctors. As you'd expect, this pushes costs higher.

The health-care bill seeds Medicare with many experiments to change this status quo, the most immediately promising of which are the "bundling" programs. Instead of getting paid for everything they do to help a diabetic, hospitals will get paid once for treating that person's diabetes and all related conditions over a certain period of time. If this leads to lower costs and doesn't harm patients, it will be expanded. That would be the beginning of the end of paying for quantity of treatment, and the beginning of paying for quality of treatment.

Changing the politics of reform:
Republicans and Democrats both agree that we need more cost control in the health-care system. But politicians don't like to actually cut costs, because those votes reduce benefits and make people angry. So we've played a game in the past: We passively control costs by letting people become and stay uninsured, or by letting their insurance deteriorate and cover less, because those things don't require a vote in Congress.

But because the individual mandate in the bill brings everyone into the insurance market and the subsidies for those who can't afford insurance on their own put Washington on the hook for costs, Congress will have to get serious about holding costs down in the system. The alternatives, for lawmakers, are high costs infuriating constituents who're being forced to buy something they can't afford, or yawning deficits forcing them to vote to take subsidies -- and thus health-care coverage -- away from people who currently have it. The days of letting inertia win the day and watching the system fall apart on its own are over.

There's more, of course. Five is just a good round number. The bill's basic theory is to try pretty much everything in the hopes that some of it works out. The net effect is to make reform a continuous, rather than occasional, process, with different cost cops patrolling different beats. Insurers will have to work hard to stay a step ahead of the excise tax because employers won't want to buy plans that trigger it. The industries that provide medical care and technologies will have to hold their costs down because they don't want to become a target for the Medicare Commission. Hospitals will need to make sure they don't spend more than their competitors because they'll lose money under bundling.

Until now, our health care system has had few internal cost controls and the comforting knowledge that Congress doesn't have the gumption to pass any. No longer. If the bill passes, it's change the health-care industry will have no choice but to believe in.