New Plan Targets $560 Billion of Health Care Savings
Life + Money

New Plan Targets $560 Billion of Health Care Savings


Just in time for Washington’s latest debate over spending, taxes and entitlement reform, the Bipartisan Policy Center on Thursday unveiled a series of proposals aimed at lowering the government’s health care costs and improving the quality and value of medical services. 

The more than 50 recommendations outlined in the report, including a major overhaul of the Medicare system and a change in the federal tax code, would save the government an estimated $560 billion over the coming decade, according to the authors.

Nearly a quarter of the government’s $3.5 trillion of annual spending is devoted to health care, although after decades of rapid increases, the rate of growth has slowed in recent year – due in part to the impact of the recession. But the study cautions that the slowdown at best is temporary, and lawmakers and policy experts must begin preparing for a surge in demand for health care as more and more of the baby boomers retire.

“Health-care cost drivers are complex and interwoven, but the most problematic ones we identified are the inefficiencies, misaligned incentive and fragmented care delivery in the current fee-for-service reimbursement system,” the authors of the study jointly wrote. “To address these, we seek to promote coordinated and accountable systems of health-care delivery and payment, building on what has proved successful in the private and public sectors.”

The year-long study was funded by the Robert Wood Johnson Foundation and the Peter G. Peterson Foundation (Peter G. Peterson also privately funds The Fiscal Times.) The report was authored by a taskforce headed by four seasoned hands on health care issues -- former Democratic Senate Majority Leader Tom Daschle of South Dakota, former Republican Senate Majority leader Bill Frist of Tennessee, former Republican Senate Budget Committee Chairman Pete V. Domenici of New Mexico and former Congressional Budget Office Director Alice Rivlin. 

The report offers dozens of recommendations for improving health care delivery and finances in both the public and the private sector, but Daschle stressed that the two pillars of the plan are aimed largely at strengthening Medicare and moving to a more rational health are tax policy.

President Obama and congressional Republicans generally agree on the need for long term savings in Medicare, the national health insurance system for the elderly that is on course to spend more than $8 trillion over the coming decade, according to the CBO.  Obama’s and House Republicans’ latest budget proposals both would slow the growth of Medicare spending by $1.4 trillion between 2014 and 2023, but with very different approaches. 

The Bipartisan Policy Center’s cost containment initiative would achieve a major chunk of its projected savings -- an estimated $262 billion over ten years – by imposing limits on the federal tax exclusion for employer-provided health insurance, which is one of the most costly tax deductions in the federal tax code.

Under the current law, employer contributions to employee health benefits are excluded from an employee’s taxable income.  Employee premium contributions are also paid with pre-tax dollars in most cases, an added drain on the Treasury. Moreover, experts say the exclusion is regressive and generally subsidizes high-income individuals more than it benefits lower incomes.

The study recommends replacing the Affordable Care Act’s so-called “Cadillac tax” on high cost health insurance plans with a limit on the income-tax exclusion for employee sponsored insurance plans. That proposed new cap would be set at the dollar amount equivalent to the 80th percentile of single and family employee sponsored plan premiums in 2015. Employee health benefits would remain deductible as a normal business expense for employers.

“Limiting the income-tax exclusion to the cost of the 80th percentile plan [premium] in 2015 would end the current open-ended subsidy while leaving most people unaffected,” the report states.

The study also calls for major reforms of Medicare’s traditional fee-for-service program and Medicare Advantage, a type of Medicare health plan offered by a private company that contracts with Medicare to provide beneficiaries with hospitalization and physician care. More importantly, the study recommends creating  a  third program called “Medicare Networks”  that would be geared to providing financial incentives for higher quality and  more cost-effective health care delivery, while providing better coordinated care.

Medicare already has a small handful of similar programs known as Accountable Care Organizations (ACOs), which are groups of doctors, hospitals and other care providers that voluntarily came together to provide coordinated high quality care to seniors. The study says that ACOs are “a helpful start toward meaningful payment reform,” but they need critical improvement to be successful and sustainable.  Rivlin yesterday described the proposed new Medicare Networks system as “Accountable Care Organizations on Steroids.”

Rivlin, Daschle and the other study authors clearly see Medicare Networks as the wave of the future and predicted that many seniors and health care providers would gravitate to the new program to take advantage of the financial incentives and improved quality of care. “We would offer Medicare beneficiaries three choices but nudge them…in the direction of choosing value and coordination over quantity and fragmentation,” Rivlin said.

Medicare Networks typically would include small physician practices, large multi-specialty physicians groups and hospital. They might also include other providers, such as post-acute facilities or mental health practices. 

Networks would be paid through the Medicare Fee Schedules or would receive a combination of fixed per beneficiary payment and payments through the fee schedule. In any given year that actual spending falls below the target and quality goals are met, the networks would share in some of those savings. Networks that spend more than the target would be required to absorb some of the overage.
This approach would replace a confusing array of co-payments and deductibles with a single deductible and a simpler system of copayments. And it would place a limit on the out-of-pocket costs that beneficiaries could incur in any one year – a provision to protect patients from catastrophic out of pocket costs.

Rivlin, a senior scholar at the Brookings Institution, has devoted considerable effort to designing ways to control long term costs of Medicare, one of the greatest drivers of government spending. She once co-authored with Republican House Budget Committee Chairman Paul Ryan one of the earliest premium-price support proposals.

That approach would add private insurance plans to the Medicare system and give seniors a voucher so that they could choose between private and public health insurance programs. She later dropped that idea and teamed up with Domenici to draft a plan “using Medicare Advantage over time as the vehicle to bring in competition” and reduce costs.

Yesterday, Rivlin noted that while Medicare Advantage is growing and serves a quarter of Medicare beneficiaries, it has not delivered the hoped-for cost savings.  That’s because it is subsidized “and was not designed to be genuinely competitive” – another argument for turning to Medicare Networks.

“We think much of this should be attractive to the private sector and that private employers and insurers would tend to buy into the Medicare Networks,” she said. “We do envision a gradual shift of the beneficiaries towards the coordinated care.”

Daschle added that “our whole premise is that we have got to find far more value in our current market place than we do, and value to a certain extent is going to be based on outcomes and coordination. . . . So I think the value of our networks is to do just that – to create a new mechanism by which we can tear down the silos, coordinate the care and improve the outcome.”