Liberals’ Agenda: Tax Health Benefits to Fund Corporate Welfare

feature article in Sunday’s Washington Post provided the latest summary of Obamacare’s woes: Premiums set to spike dramatically, insurers leaving in droves, and millions of Americans held hostage to a lengthening comedy of errors. But liberals stand ready with their answer: More of the same government taxes and spending that created the problem in the first place. To wit, the Left would tax Americans’ employer-provided health benefits to fund a permanent bailout fund for insurance companies.

In a brief released earlier this month, the liberal Robert Wood Johnson Foundation had several possible “solutions” to solve the problem of low enrollment, and low insurer participation, in Obamacare’s health insurance exchanges. In the document, the foundation suggested making program of reinsurance now scheduled to expire at year’s end permanent:

Extending [Obamacare’s] reinsurance program and its mechanism of financing would more likely have a stabilizing influence [on insurers]. The program could be authorized permanently…or for a set period of time, with authority for CMS [the Centers for Medicare and Medicaid Services] to continue it if needed….Funds for the reinsurance pool would need to be, as they are currently, collected from individual market insurers, group market insurers, and self-funded plans.

In other words, individuals who do not purchase coverage from an exchange should have their benefits taxed, to fund more corporate welfare subsidies to health insurers, in the hopes that they will continue to offer exchange coverage.
That was the basic premise of the law’s reinsurance mechanism. Put slightly more charitably, Section 1341 of Obamacare imposed an assessment on Americans with employer-provided coverage, or those who purchase health coverage directly from an insurance carrier rather than through a government-run exchange, to help subsidize exchange insurers with high-cost patients.

The assessments were set to last three years—from 2014 through 2016—serving as a transition while the new marketplaces developed. But after three years, the exchanges are in worse shape than ever. Healthy and wealthy individuals have not purchased coverage, making the exchange population sicker than the average employer plan.

Rather than fixing a problem that onerous government regulations—a mandated package of benefits, and rating requirements that have raised premiums so substantially for healthy individuals that many have chosen to forgo coverage—the Left just wants more of the same. The Robert Wood Johnson Foundation paper included numerous “solutions” straight out of the liberal playbook: Requiring insurers to participate on exchanges; a government-run “public option” intended to destroy private coverage, richer subsidies; and new penalties for late enrollment. In other words, more of the taxes, spending, and regulations that brought us this mess in the first place—not to mention the permanent insurer bailout fund.

Two clear ironies stand out when it comes to the reinsurance proposal. First, the Obama administration has already given insurers far more than they expected—or the law allows—on the reinsurance front. Government officials have repeatedly increased reinsurance reimbursement levels, giving insurers nearly 50% more support from the program in 2014 than they originally expected. And the non-partisan Congressional Research Service believes that the Administration has violated the law by prioritizing payments to insurers over payments to the Treasury—giving insurers billions of dollars in extra funding that legally should be returned to taxpayers.

Second, Barack Obama himself campaigned vigorously against “taxing health benefits” in 2008. He ran ads attacking John McCain for making health insurance subject to income tax, saying the tax would fund subsidies that would go straight to insurance companies. Yet Obamacare contained not one, but two, separate “assessments” (read: taxes) on health plans—the first to fund comparative effectiveness research that could be utilized by health plans reimbursement and coverage decisions, and the second for the “temporary” reinsurance program. After violating his campaign pledge not once, but twice, in Obamacare itself, the president’s allies want Congress to make permanent the tax on health benefits—to finance a bailout fund that will go—you guessed it!—straight to the insurance companies.

With labor force participation still historically low, and Americans struggling with high health costs, now is certainly not the time to tax the health coverage that businesses provide to working families so that insurers can receive billions more dollars in bailout funds. Congress should not even think about throwing good money after bad in a vain attempt to keep the sinking Obamacare ship afloat.

What Is Government’s Role in Comparing Medical Treatments?

The personalized medicine initiative that President Barack Obama announced on Friday was previewed in the State of the Union address and is scheduled for inclusion in the budget to be released Monday. But in devoting federal funds to this, the administration may have made an argument against another type of medical research funded as part of Obamacare.

Section 6301 of the health-care law creates a Patient-Centered Outcomes Research Institute (PCORI), designed to study the comparative effectiveness of treatment options for diseases. Comparative effectiveness research has proven controversial for several reasons. The idea that the price of various treatments are taken into account, using cost metrics to determine coverage decisions for government health programs, raises the specter of rationed care.

But beyond the potential question of government rationing–and whether the restrictions included in Obamacare are sufficient–lies a more nuanced problem: As one administration scientist noted ahead of the president’s announcement on Friday, “Throughout history most medical treatments were designed for the average patient, meaning they can be very successful for some but not for others.” Comparative effectiveness research involves comparing the effects of treatment on average patients or average groups of patients; others may not benefit, or may even be harmed, by the average treatment or course of action.

The challenge for policymakers and medical professionals is how to respond to the growing personalization of medical treatments. In creating PCORI, Obamacare attempted to acknowledge this trend, noting that the institute should engage in “research and evidence synthesis that considers variations in patient subpopulations.” The president’s new initiative may make such research obsolete. It also raises a different question: When personalized medicine may turn patient “groups” into a subpopulation of one, what is the proper role for the federal government in comparing treatments?

This post was originally published at the Wall Street Journal Think Tank blog.

Pediatric Research Bill: Obamacare’s Road to Rationing?

A PDF of this Issue Brief is available on the Heritage Foundation website.

Later this month, the House of Representatives could consider legislation regarding pediatric research.[1] Legislation regarding this issue (H.R. 1724) was first introduced in April, and a new version of the bill (H.R. 2019) was introduced in May.

Although largely similar, H.R. 1724 would require the director of the National Institutes of Health (NIH) to provide a justification for any existing grants studying health economics, and would prohibit new grants until “a federal law has been enacted authorizing the National Institutes of Health to use funding specifically for health economics research.”[2] Press reports indicate that H.R. 2019 excludes the restrictions included in H.R. 1724 “in order to please Democrats who favor the research.”[3]

This is a mistake. The House should ensure that H.R. 1724’s proposed restrictions on health economics research remain in any NIH-related legislation that comes to the House floor. To do otherwise would provide tacit approval to Obamacare’s road to government-rationed health care.

Proposed Restriction a Necessary Protection

The provision omitted from H.R. 2019 would have instituted an important and necessary protection on taxpayer-funded research on cost-effectiveness in health care. In recent years, the federal government has funded numerous such studies. For instance, a June 2011 Government Accountability Office report examining projects funded by the “stimulus” highlighted NIH grants studying the cost-effectiveness of various medical treatments, including:

  • “A Comprehensive Model to Assess the Cost-Effectiveness of Patient Navigation,”
  • “Cost-Effectiveness of Hormonal Therapy for Clinically Localized Prostate Cancer;”
  • “Clinical and Cost-Effectiveness of Biologics in Rheumatoid Arthritis,” and
  • “Cost-Effectiveness of HIV-Related Mental Health Interventions.”[4]

Liberals Favor Cost-Effectiveness Research

Setting aside the wisdom of using taxpayer funds to examine the cost-effectiveness of various treatments, such research could eventually be used to deny patients access to certain kinds of care. Quotes from key policymakers reveal how some would use cost-effectiveness research as a way for government bureaucrats to block access to treatments that are deemed too costly:

  • Former Senator Tom Daschle (D–SD), President Obama’s first choice for Secretary of Health and Human Services, wrote in 2008 that “we won’t be able to make a significant dent in health-care spending without getting into the nitty-gritty of which treatments are the most clinically valuable and cost effective. That means taking a harder look at the real costs and benefits of new drugs and procedures.”[5]
  • In a 2009 interview with The New York Times, President Obama argued that “the chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here.… There is going to have to be a very difficult democratic conversation that takes place.”[6]
  • Former Medicare Administrator Dr. Donald Berwick, in his infamous 2009 interview, strongly argued in favor of taxpayer-funded cost-effectiveness research when stating that “the decision is not whether or not we will ration care—the decision is whether we will ration with our eyes open.”[7]

Lawmakers have already expressed their desire to use cost-effectiveness research to restrict access to certain treatments. A report prepared by the House Appropriations Committee in 2009, discussing “stimulus” funding for the types of projects highlighted above, noted that thanks to the research funding, “those items, procedures, and interventions that are most effective to prevent, control, and treat health conditions will be utilized, while those that are found to be less effective and in some cases more expensive will no longer be prescribed.”[8]

Road to Rationing

Although research comparing the relative merits and costs of medical treatments may sound appealing, past experience has demonstrated that such research can, and often is, used as a blunt tool by governments to restrict access to certain kinds of care. At a time when genetic advances have opened the door to personalized medical treatments, Obamacare has moved health policy in the opposite direction, expanding the federal bureaucracy in an attempt to micromanage the health care system.[9]

Imposing the restrictions on cost-effectiveness research included in H.R. 1724 would represent a good first step in restoring the balance between federal bureaucrats and patients.

 



[1]Daniel Newhauser, “Mindful of Previous Defeat, Cantor Pushes Bill to Increase Pediatric Research,” Roll Call, June 10, 2011, http://www.rollcall.com/news/mindful_of_previous_defeat_cantor_pushes_bill_to_increase_pediatric-225436-1.html?zkPrintable=true (accessed June 13, 2013).

[2]The Kids First Research Act of 2013, H.R. 1724, § 4.

[3]Newhauser, “Mindful of Previous Defeat.”

[4]U.S. Government Accountability Office, HHS Research Awards: Use of Recovery Act and Patient Protection and Affordable Care Act Funds for Comparative Effectiveness Research, GAO-11-712R, June 14, 2011, http://www.gao.gov/new.items/d11712r.pdf (accessed June 13, 2013).

[5]Tom Daschle, Scott Greenberger, and Jeanne Lambrew, Critical: What We Can Do about the Health Care Crisis (New York: Thomas Dunne Books, 2008), pp. 172–173.

[6]David Leonhardt, “After the Great Recession,” The New York Times, April 28, 2009, http://www.nytimes.com/2009/05/03/magazine/03Obama-t.html (accessed June 13, 2013).

[7]Biotechnology Healthcare, “Rethinking Comparative Effectiveness Research,” June 2009, http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2799075/pdf/bth06_2p035.pdf (accessed June 13, 2013).

[8]Helen Evans, “Comparative Effectiveness in Health Care Reform: Lessons from Abroad,” Heritage Foundation Backgrounder No. 2239, February 4, 2009, note 3, http://www.heritage.org/research/reports/2009/02/comparative-effectiveness-in-health-care-reform-lessons-from-abroad.

[9]Kathryn Nix, “Comparative Effectiveness Research Under Obamacare: A Slippery Slope to Health Care Rationing,” Heritage Foundation Backgrounder No. 2679, April 12, 2012, http://www.heritage.org/research/reports/2012/04/comparative-effectiveness-research-under-obamacare-a-slippery-slope-to-health-care-rationing.

Weekly Newsletter: February 23, 2009

Orszag, Liberal Groups Support Health Care Rationing

Today President Obama will host a “fiscal responsibility summit” at the White House, followed later this week by a submission to Congress of his outline for the federal budget in Fiscal Year 2010 and beyond.  Press reports indicate that health issues will predominate both events, as entitlement spending in Medicare and Medicaid will serve as a focus of the fiscal summit, and health initiatives will be given a prominent place in the President’s budget proposals.

However, some Members may take a skeptical view of comments by Office of Management and Budget Director Peter Orszag and others that health care can be reformed—and the entitlement crisis resolved—primarily through government rationing of health care goods and services.  While head of the Congressional Budget Office, Orszag prepared a report on comparative effectiveness research that advocated rationing’s beneficial effects—while alluding to its potential downsides for patients.  The December 2007 report asserted that such research “could …yield lower health care spending without having adverse effects on health.”  However, the report also admits that “patients who might benefit from more-expensive treatments might be made worse off” as a result of changes in reimbursement patterns.

Orszag’s view of health reform is shared by the left-leaning Commonwealth Fund, which last week released its own report outlining ways to generate savings within the health sector.  The largest chunk of proposed savings—$634 billion over ten years—would come from comparative effectiveness research and subsequent rationing of care.  The report asserts that “merely making information available” about the relative merits of treatments “is unlikely to produce” outcomes yielding sufficient savings—and therefore recommends that the new comparative effectiveness center help “to create financial incentives for patients and physicians to avoid high-cost treatments.”  The Fund proposes that the comparative effectiveness center—similar to the Council established in economic “stimulus” legislation signed into law last week—“make benefit and pricing recommendations to public insurance plans, including Medicare.”

While supporting the need to slow the growth of health spending, and entitlement spending in particular, some Members may be concerned by the implications of these recommendations, which would place government bureaucrats between doctors and patients, leading to denials of critical care.  Some Members may instead support alternatives that would slow the growth of health care costs through additional competition (both inside and outside Medicare), while preserving and enhancing a culture where patients and doctors—not insurance companies or government bureaucrats—determine the appropriate course of medical care.  Some Members may also support means testing for the Medicare Part D benefit—requiring Warren Buffett and George Soros to pay more for their prescription drugs—as an additional way to bring our entitlement obligations in line with projected future revenues.

The Outlook Ahead

The President’s address to Congress Tuesday night, coupled with his submission of a budget outline on Thursday, will commence a six-week period leading up to Congress’ Easter recess where health issues will remain prominent.  As indicated above, the budget may include additional provisions regarding comparative effectiveness research and rationing of health care, as well as proposed cuts to Medicare Advantage plans that have proved popular with seniors—particularly those with low incomes—in recent years.  At this time it remains unclear whether the President will use the budget submission to fulfill his statutory obligation to present Congress with Medicare funding reform legislation, as required by the “trigger” provisions inserted into the Medicare Modernization Act at the behest of House Republicans.

Hearings and other legislative activity are also likely to continue regarding comprehensive health reform; Sen. Ron Wyden (D-OR) introduced his comprehensive bill on February 5, and Senate Finance Chairman Baucus—who pledged to introduce legislation early in the 111th Congress—may follow suit in short order.  The House may also consider legislation related to food and drug safety, as well as a bill (H.R. 1108 in the 110th Congress) giving the Food and Drug Administration (FDA) the authority to regulate tobacco products, funded by “user fees” on tobacco companies.  Particularly as many Democrats have harshly criticized the FDA for lax enforcement related to food safety matters, some Members may believe now is precisely the wrong time to distract the FDA from its current mission in order to have the agency regulate the tobacco industry—and the wrong time to burden working families with the second tobacco tax increase this year, on the heels of the 62 cent tax increase used to fund the State Children’s Health Insurance Program (SCHIP) expansion.

Weekly Newsletter: November 12, 2008

Medicaid Bailout Once Again on Congressional Agenda

This Thursday, the House Energy and Commerce Committee will hold a Subcommittee hearing on various ways to “stimulate” the economy during the current downturn. Witnesses are expected to focus on both additional federal spending, in the form of an enhanced federal Medicaid match and higher funding for the National Institutes of Health, as ways to promote economic growth.

Some conservatives may be skeptical of the effectiveness of both approaches. An enhanced federal Medicaid match would merely substitute federal dollars for state spending, and provide a perverse disincentive for states not to undertake structural Medicaid reforms. Higher NIH funding would similarly lack any short-term “stimulative” effect, as long lead times to evaluate and conduct research trials would likely preclude any impact on economic growth for years. With some experts predicting the federal deficit this fiscal year could top $1 trillion, conservatives may question whether and why Congressional Democrats are attempting to enact all manner of increased federal spending under the guise of economic “stimulus.”

The RSC has prepared a new one-pager articulating 10 reasons why conservatives may oppose a Medicaid bailout for states; the document can be found here.

British U-Turn Illustrates Problems with Comparative Effectiveness

Last Tuesday, the British Department of Health announced a reversal of a ban on “top-up” payments within the National Health Service (NHS). Previously patients who wished to use their own money to purchase drugs not deemed cost-effective by the NHS needed to forfeit their right to basic NHS care. The Government’s reversal will allow patients purchasing their own therapies to maintain their right to NHS care under certain conditions. In addition, the report proposed to raise the National Institute on Clinical Effectiveness’ (NICE) cost-effectiveness threshold for certain drug therapies, potentially allowing British patients access to some cancer drugs which the NHS had previously refused to pay.

Conservatives may view both these developments as illustrative of the premise that comparative effectiveness research may not yield the potential savings its adherents claim. Practical political concerns, sparked by an outcry from the British public over rationed health care, prompted the Government’s reversal of measures designed to save NHS funds. Given that efforts to tie Medicare reimbursement and coverage decisions are likely to prompt the same response from the American public as it did in Britain, some conservatives may argue that market-based reforms to Medicare, rather than government-imposed rationing, would have a more beneficial and long-lasting effect at slowing the growth of health care costs.

The RSC has previously issued a Policy Brief analyzing comparative effectiveness research in greater detail; the document can be found here.

Weekly Newsletter: July 7, 2008

Medicare Votes Likely This Week

After returning from its Independence Day recess, Congress will once again return to debate legislation addressing physician reimbursement levels under Medicare. Because Senate Democrats objected to Republicans’ unanimous consent requests to pass a “clean” physician payment bill before the recess, physicians will take a 10% cut in their reimbursement levels unless and until Congress passes a retroactive fix. Additional Senate votes are likely later in the week on this issue.

While all parties agree on the need to address the physician reimbursement provisions, Senate Republicans have called for passage of bipartisan legislation that would forestall the significant cuts to Medicare Advantage plans made in House-passed legislation (H.R. 6331). Some conservatives may be concerned that the House-passed bill’s significant cuts to Medicare Advantage would have the effect of driving beneficiaries away from a privately-run model of health insurance that has provided enhanced benefits and choice for millions of seniors, especially the 2.2 million beneficiaries in private fee-for-service plans. Some conservatives may also believe that the short-term nature of current physician reimbursement extensions, coupled with their potential to become entwined in unrelated disputes and/or “held hostage” due to various political considerations, makes a powerful argument for more comprehensive reforms to Medicare, including a long-term solution to physician reimbursement policy.

While it is currently unclear whether Democrats will continue to block Republican attempts to pass noncontroversial physician payment legislation, or what precise form a more bipartisan bill designed to address the reimbursement provisions will take, the RSC will weigh in with conservative concerns and updates on H.R. 6331 and any other physician payment legislation which may be introduced or considered.

The Legislative Bulletin on H.R. 6331 can be found here.

There are additional RSC Policy Briefs on issues related to the Medicare bill: Physician Payments; Medicare Advantage; Bidding for Durable Medical Equipment; and the Medicare Trustees Report.

Article of Note: Report Finds Comparative Effectiveness Rationing Not So NICE

A report released in Great Britain last week on the occasion of the National Health Service’s (NHS’) 60th anniversary noted the need for reforms in the way the NHS administers care based on comparative effectiveness research. Health Minister Lord Darzi’s study admitted problems with the existing National Institute for Health and Clinical Excellence (NICE), established in 1999 to review the effectiveness of drugs and other therapies. Specifically, the report conceded that “it has sometimes taken too long for NICE appraisal guidance to be made available on newly licensed drugs” and that “there remains unexplained variation in the way local decisions are made on the funding of new drugs before the appraisal takes place.”

With the Congressional Budget Office (CBO) holding up the British establishment of NICE as one model way to achieve comparative effectiveness research in the United States, some conservatives may be concerned by the implications such an institute would present. At a time when the British government has admitted that NICE’s introduction has led to years-long delays in drug approval times and inherently arbitrary rationing of access to drugs from location to location, some conservatives may believe that such a heavy-handed—to say nothing of bureaucratically ineffective—role for government to play in American health care would be both counter-productive and inappropriate.

Read a summary of the clinical effectiveness provisions from BBC News here.

The RSC has prepared a Policy Brief on comparative effectiveness research, which can be found here.

Comparative Effectiveness Research

Background:  The debate about the growth of health care costs has in recent years begun to focus on disparities in health spending and treatment.  A recent Congressional Budget Office study demonstrated that regional spending on health care varies widely, yet improved care cannot be assumed by higher levels of expenditures.

Amidst rapidly growing health spending and inconsistent levels of care, policy-makers have begun to discuss the development of a research institute to study the comparative effectiveness of medical treatment programs, either by synthesizing and analyzing existing medical data or by conducting firsthand clinical trials to gauge treatments’ efficacy.  Advocates believe that such a center, by generating comprehensive data about the clinical and cost-effectiveness of courses of action for various diseases, could reduce health care cost growth by targeting patients with the most effective treatments and discouraging the use of costly but unproven medical techniques and methods.  While many stakeholders agree that such research should be undertaken, there is less agreement on the composition and funding of the entity that would be empowered to research clinical effectiveness options.

Legislative History:  Last July, the House passed—but the Senate has not considered—health legislation that included the creation of a comparative effectiveness institute.  Section 904 of the Children’s Health and Medicare Protection (CHAMP) Act (H.R. 3162) would create a “Center for Comparative Effectiveness Research” within the Department of Health and Human Services’ Agency for Healthcare Research and Quality (AHRQ).  The center would be tasked with researching “outcomes, effectiveness, and appropriateness of health care services and procedures in order to identify the manner in which diseases, disorders, and other health conditions can most effectively and appropriately be prevented, diagnosed, treated, and managed clinically.”

The Center would be financed through the establishment of a Health Care Comparative Effectiveness Research Trust Fund within the U.S. Treasury.  The Fund would receive transfers from the Medicare Trust Funds to finance the research program for fiscal years 2008-2010.  Beginning in fiscal year 2011, funding would continue to flow from the Medicare Trust Funds, but it would be supplemented by a new tax on healthcare insurance policies.  The tax would be imposed on most health insurance policies (except for workers’ compensation, tort liabilities, property, credit insurance, or Medicare supplemental coverage) at a per capita amount needed to generate $375 million annually, in conjunction with resources from the Medicare Trust Funds.  The Secretary of the HHS would determine the “fair share” per capita amount, but the bill’s provisions are expected to generate at least $2 billion over ten years.  While H.R. 3162 states that insurance carriers (or the sponsors of self-insured policies) will pay this new tax, it does not (and cannot) account for the fact that this tax will likely be passed along to consumers, raising premium costs and potentially increasing the number of Americans who cannot afford private health insurance.

H.R. 3162 would also draw down substantial funds from the Medicare Trust Funds over time, $300 million over the first three fiscal years and up to $90 million each fiscal year thereafter.  Medicare Part A (hospital services) is financed by payroll taxes, and according to the nonpartisan Medicare Trustees, it is scheduled for bankruptcy in 2019—thus committing its resources for additional research will further expedite its bankruptcy.  In addition, Medicare Part B (supplementary services) is financed in part from beneficiary premiums that rise as the cost of the program rises—thus tapping these funds for research amounts to a tax on every senior enrolled in Medicare Part B.

Future Outlook:  Because provisions unrelated to comparative effectiveness make action on the CHAMP Act unlikely in the Senate, lawmakers and various stakeholder groups continue to engage in discussions about the way to create a research institute.  Senate Finance Committee Chairman Max Baucus (D-MT) and Budget Committee Chairman Kent Conrad (D-ND) have discussed introducing stand-alone legislation on this topic; news reports indicate that their bill would fund a comparative effectiveness research institute solely from federal coffers, while House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) believes that a premium tax should help to fund the institute, so that private insurance carriers would have a financial stake in its work product.

With the current Medicare physician payment “fix” scheduled to expire June 30, and lawmakers on both sides of the aisle promising legislative action to address physician reimbursements, it is entirely possible that some form of comparative effectiveness center could be established as part of such legislation.

Implications of Comparative Effectiveness:  Apart from the concerns some conservatives may have regarding any new federal taxes to finance a comparative effectiveness institute, the research undertaken by such a center could well have significant repercussions for the role of the federal government in health care.  Any research undertaken would likely have an impact on the number and types of services covered by Medicare and Medicaid, as well as the treatment options and techniques utilized by physicians desiring reimbursement.  Congressional Budget Office Director Peter Orszag recently admitted that “the big kick” in savings associated with comparative effectiveness research would stem from insurers—and likely the federal government—implementing “changes in financial incentives tied to the research.”[1]  Although the CHAMP Act did not include provisions altering reimbursement levels to reflect comparative effectiveness research, or empowering the ostensibly non-partisan institute to do the same, such legislative measures would be a likely outcome from creation of an effectiveness center.

In addition, examples of comparative effectiveness institutes established overseas have raised concerns about whether such an approach would lead to delays in obtaining care and/or rationing of services.  In the United Kingdom, Sarah Anderson, an ophthalmologist working in Britain’s National Health Service (NHS), recently published an article criticizing the NHS for inhibiting access to care for her critically ill father.  Her father’s kidney tumor could be treated by a new drug—but while the pharmaceutical has been approved for use in Europe for two years, Britain’s National Institute for Clinical Effectiveness (NICE) will not complete its assessment of the drug’s usefulness until January.  Until then, local NHS branches can refuse to provide the drug, leaving Anderson’s family to pay for their father’s treatment on their own, or face the inevitable consequences that will follow if he cannot obtain it.  Anderson’s ultimate verdict on her family’s dilemma is a sobering one: “If Dad should lose his life to cancer, it would be devastating—but to lose his life to bureaucracy would be far, far worse.”

Some conservatives may find these overseas examples of the delays resulting from a publicly-run comparative effectiveness institute a cautionary tale for those who would establish a similar institute under the aegis of the federal government.  Conservatives may not only believe that such an approach would put bureaucrats, and not doctors and patients, at the center of medical policy, but would also result in the types of costly delays and care rationing that put lives at stake.

Conclusion:  While the goals of a comparative effectiveness institute are certainly commendable in an era of rapidly rising health spending, some conservatives may be concerned at both the means of financing an institute and its impact on the federal role in health care.  Although an institute voluntarily created and funded by private insurance or other groups could be useful, a public-private entity financed by premium taxes may only encourage lawmakers to enact additional legislative measures designed to micro-manage the doctor-patient relationship and expand an already considerable bureaucracy within the Centers for Medicare and Medicaid Services.  In short, some conservatives may be concerned that comparative effectiveness research done by the public sector could become a euphemism for government-rationed health care.

If the federal government wishes to slow the growth of Medicare spending, some conservatives might find a better solution in comprehensive Medicare reform that transforms the current program into a system similar to that under the Federal Employee Health Benefits Program (FEHBP), whereby beneficiaries would receive a defined contribution from Medicare to select a health plan of their own choosing.  These health plans could employ the results of comparative effectiveness research in their reimbursement policies, and consumers could use those criteria—as well as any “Consumer Reports”-type publications released by private entities—in evaluating both a health plan to purchase and treatment options for a particular medical condition.

 

[1] Quoted in Fawn Johnson, “Bills Pushed to Gauge Effectiveness of Medical Treatments,” CongressDaily 17 March 2008, available online at http://nationaljournal.com/pubs/congressdaily/dj080317.htm#5 (accessed March 18, 2008).

Health Care Spending Growth

Background:  Last month, the Centers for Medicare and Medicaid Services (CMS) released its annual report projecting health care spending over the next decade.  The report concluded that nationwide health expenditures are expected to rise 6.7% annually in the next ten years, causing health care spending to rise to 19.5% of gross domestic product (GDP) by 2017.  These projections are consistent with a November report by the Congressional Budget Office (CBO) highlighting the long-term projections for health care spending, which estimated that health expenditures could comprise just under half (49%) of GDP within 75 years.

Ten Year Projections:  The report by the CMS actuaries, released online by the journal Health Affairs, documents the continued growth in health care spending and hints at upcoming trends associated with the retirement of the Baby Boom generation.  In 2007, health care spending is projected to have grown at a 6.7% rate, reaching $2.2 trillion, or approximately 16.3% of GDP.  The report provides a snapshot of current health expenditures, and also cites several projected spending trends over the next decade:

  • Private health insurance premiums grew at a slower rate (6.0%) than overall health care expenditures in 2007, consistent with trends evident since 2004.
  • Prescription drug spending grew by 6.7% in 2007, a measurable slowdown in spending when compared to the increases for the prior two years (12.0% in 2005 and 8.5% in 2006), due in large part to increased price competition and generic drug usage.
  • Private spending on health care is projected to grow more slowly in the latter part of the projection period (2007-2017), while public spending “is expected to accelerate…as the leading edge of the Baby Boom generation becomes eligible for Medicare.”  While the aging population will have minimal effects on overall health expenditures, its effects on public spending, particularly through Medicare, will be significant.
  • Enrollment in private Medicare Advantage plans is expected to rise to 27.5% by 2017, up from 16.4% in 2006.
  • Just over half of the growth in health care spending comes from increases in medical costs, with about one-quarter of the increase due to utilization (volume and intensity of services), and the remainder due to population growth, demographics, and related factors.

Overall, the report’s conclusions indicate that although all health spending continues to rise, the increase in public health spending has accelerated.  While the competition created by the Medicare prescription drug benefit may have contributed to the considerable slowing in pharmaceutical expenditures, an aging population moving to Medicare will only hasten the growth of public spending.

In fact, the true size of the government’s future obligations for health spending is likely underestimated by the model used in the actuaries’ report, which presumes that existing law adjustments in physician reimbursements under the sustainable growth rate mechanism (SGR) will take effect.  If the SGR’s proposed reductions are instead replaced by a 0% increase—in other words, if physician payments are held steady through 2017—Medicare spending will rise by 8.0% annually over the next decade, instead of the 7.4% projected under the trustees’ current law model.

Historical Examples and Long-Term Projections:  The report produced by the CMS actuaries follows on the heels of a study, conducted by CBO and released in November 2007, which examined both historical trends in health care spending and long-term projections for its growth over the next 75 years.  Most notably, the report documents a historical shift in health care expenditures: a significant reduction in out-of-pocket spending, which declined from 31% to 13% of all health expenditures between 1975 and 2005, and the nearly commensurate increase in third-party payment by insurance carriers, which increased from 25% to 37% of health spending nationwide.  While the growth in new technologies and services has helped drive the growth in health spending which CBO documents, the continued rise of third-party payment—which can insulate patients from the marginal costs associated with additional treatments—may well have had inflationary effects.  This shift away from out-of-pocket spending occurred despite the findings of a landmark RAND Institute study, which concluded that higher cost-sharing helped constrain health care spending at little to no adverse effect on patients’ health.

On a forward-looking basis, CBO projects that overall health care spending will more than double in the next thirty years, rising from 14.9% of GDP in 2005 (and 4.7% in 1975) to 31% in 2035, growing thereafter to nearly half the nation’s economy (49% of GDP) in 2081.  The net federal spending on Medicare and Medicaid is projected to rise at a higher rate than overall health spending, growing from 26% of total spending on health care currently to 30% within thirty years, and 38% of total spending by 2082.

These 75-year projections are materially divergent from the projections made by the Medicare trustees in their annual report.  The trustees project Medicare spending to consume nearly 11% of total GDP by the end of the projection period, while CBO estimates that Medicare will consume more than one in six dollars spent in the United States (17% of GDP).  As the Medicare trustees’ projection notes $36 trillion in unfunded liabilities for the program over the next 75 years, the significantly higher projections made by CBO in its study should provide yet another impetus to enact comprehensive entitlement reform that addresses the unchecked growth in health costs.

Excess Cost Growth:  Both the CMS actuaries’ report and the CBO study projecting long-term health expenditures highlight the issue of excess cost growth in health care.  In this context, “excess cost growth” does not imply a value judgment as to whether or not the spending is necessary or appropriate; rather, the term connotes spending that exceeds economic and productivity growth.  For instance, the CMS actuaries project that health spending will rise by 6.7% over the next ten years, while nominal (i.e. non-inflation-adjusted) GDP will rise by 4.7%, resulting in excess cost growth of 2.0% annually for the decade.

The CBO report projects that the growth of overall health care spending will exceed the rate of economic growth by more than 2% annually for at least the next decade, and will continue to exceed economic growth throughout the entire 75-year projection period.  The report also projects that excess cost growth for Medicare and Medicaid will continue at rates far exceeding cost growth within the private sector,  noting that “that aspect of the projections may appear unrealistic, but it highlights the core problem—the unsustainability of current federal law.”

Over and above the unrealistic nature of the promises made in current federal law, and the need for comprehensive entitlement reform to remedy a looming fiscal crisis for Medicare, the excess cost growth discussed in the CBO report could also have significant macroeconomic implications by displacing other spending.  While CBO projects that per capita economic consumption will increase by $15,000 (in current dollars) from 2005-2035, more than three-quarters of that higher spending will be spent on health care.  Absent external action, health care costs could grow to consume all marginal increases in economic productivity—at which point both consumption and growth of other sectors of the economy could stagnate, and standards of living apart from health care (e.g. clothing, housing, etc.) could fall over time.  Although this pessimistic scenario remains somewhat distant, it highlights the need to understand the factors behind the growth in health spending, and substantially reduce excess cost growth in the coming years.

Geographic Variations:  Another CBO report issued in February examined one source of excess cost growth in health care: geographic variations in total spending.  The report notes that state per capita health expenses in 2004 ranged from a low of about $4,000 in Utah to a high of nearly $6,700 in Massachusetts—a more than 50% disparity.  Analysis of Medicare claims data showed a similar disparity among states—ranging from a per-beneficiary expenditure of $5,600 in South Dakota to $8,700 in Louisiana—and additional variations in areas within states.

The report also notes that geographic differences in price inputs (i.e. cost of labor, etc.), health status, and demographic factors (e.g. income, race, education level) likely constitute at most half of the observed deviation in expenditures, meaning that much of the geographic variation in health spending cannot be explained by known factors.  In other words, similar patients with similar diseases, living in areas with similar prices, are likely to receive differing levels of medical treatments and services.  Of particular note is the fact that patients living in areas with higher spending yield no better results with respect to both health processes and outcomes than patients in low-spending areas—and on some measures at least may receive worse care.

While the CBO report cites studies attributing some geographic variations in health spending to areas with a high supply of health providers (particularly hospitals and specialist physicians) creating additional demand for services, competition among a greater number of providers is likely to exert downward pressure on prices, if not the number of services performed.  To the extent that geographic variation in health costs are in fact driven by excess supply, some conservatives may be wary of government efforts—such as a Certificate of Need model for approving new hospital construction, or restrictions on physician-owned specialty hospitals—that impose bureaucratic regulations to stifle the supply of health providers, as they are likely to have adverse and unintended consequences that reduce access to care.  Many conservatives might prefer a more productive solution focused on mechanisms to place reasonable restraints on demand, by reducing the historical trends that have increased reliance on third-party payment, and making price and quality measures more transparent, so that consumers can have more information about available treatment options—and make a rational choice as to whether or not the additional treatment justifies the marginal cost.

Summary and Conclusions:  The growth in health care spending projected in the coming decades, following upon years of sustained increases, is likely to place significant and exacting demands on both the private and public sectors of the American economy absent external action.  Many conservatives believe that a discussion of ways to stem the growth in health care costs should be a part of any discussion to achieve so-called universal coverage, as health insurance would become much more affordable for all Americans at the point when premium costs and related expenditures rise at a more modest (and therefore more sustainable) rate.

The geographic variations in Medicare spending, particularly those portions of which cannot be explained by regional differences in income or health status, might prompt some Democrats to call for a centralized, government-controlled mechanism to reduce spending in higher-cost areas, likely through rationed care.  One popular variation on this approach has emerged in the form of comparative effectiveness, which would attempt to conduct research on the cost-effectiveness of various treatment options with an eye towards establishing more uniform practice standards.  While such efforts by the private sector could help reduce costs, many conservatives might have strong concerns as to whether a government-run effectiveness institute—such as the center proposed by Democrats in a wide-ranging health bill last July (H.R. 3162), which would have been funded by tax increases on insurance premiums—would result in a federal bureaucracy micro-managing the doctor-patient relationship, and ultimately, rationing care to patients.

A better alternative might lie in the data showing that private health spending is not rising as dramatically as expenditures on public health programs, suggesting that competition—and placing health care dollars in control of patients—holds the true solution to containing health costs.  The significant decline in out-of-pocket spending over the past three decades, and the escalating rise in costs during that time, demonstrate the perils associated when third-party payment of health expenses, particularly incidental (i.e. non-catastrophic) expenses, insulates patients from the marginal costs of additional treatment.  Likewise, the geographic variations in Medicare spending stem from a publicly-funded system where the costs for additional treatment can be minor—especially in areas where a high percentage of seniors own Medigap policies that can insulate beneficiaries from any increase in marginal costs.

The funding warning issued by the Medicare trustees, and the subsequent action required by Congress to act on legislation addressing this “trigger,” provides an opportunity for conservatives to construct a system designed to address the geographic variations in Medicare costs—with an impact that could stretch throughout the entire health system.  An improved and enhanced Medicare system similar to the Federal Employee Health Benefits Plan (FEHBP)—where beneficiaries receive a defined contribution from Medicare to select a health plan of their choosing—would eliminate much of the geographic variations currently present within Medicare, slowing the growth of health costs and restoring the program’s long-term stability.