Why a complex, unjust, expensive, error-prone system might end up providing the best health care

March 18

Ezekiel Emanuel of the University of Pennsylvania

Ezekiel Emanuel is Vice Provost for Global Initiatives and chair of the Department of Medical Ethics and Health Policy at the University of Pennsylvania. A breast oncologist with a doctorate in political philosophy, he served for many years as chair of the Department of Bioethics at The Clinical Center of the National Institutes of Health. From 2009 to 2011, he helped to craft the Affordable Care Act (ACA) as a special advisor for health policy to the director of the White House Office of Management and Budget. While serving in that role, Emanuel was the target of one of the most unfounded political attacks I have witnessed in health policy.

If you could only read one book about the American health system and ACA’s valuable (albeit imperfect) contribution to improving that system, his new book Reinventing American Health Care: How the Affordable Care Act will Improve our Terribly Complex, Blatantly Unjust, Outrageously Expensive, Grossly Inefficient, Error Prone System might be the best one.

The book first provides a primer regarding the various moving parts of our $2.9 trillion medical economy. It then presents a short history of health care reform. It outlines ACA’s main provisions and how the bill actually became law. Emanuel then offers a scathing account of the initial implementation failures. He then offers some rather audacious blue-sky predictions about the future of American health care.  

I caught up with him for a wide-ranging discussion of the failed rollout of healthcare.gov, why Republicans and representatives of the medical profession squandered an opportunity to achieve malpractice reform, and why the dramatic rise in health care costs as a share of the national economy may become a thing of the past.

An edited transcript of our conversation appears below.

Harold Pollack: You’re bullish on the long -term impact of health reform. Yet you are bluntly critical of many immediate decisions in the rollout of health reform. Indeed you conclude that ACA is a short-term political disaster.

Zeke Emanuel: I also say that the bad political consequences were unnecessary. Without question, there was a very tough political environment. Yet so much of the serious damage was self-inflicted, like the rollout of the exchanges. It didn't have to go so badly. There's nothing inherent in the world that dictated this outcome. Connecticut and Kentucky did their exchanges better.  California did it reasonably well. Then Jeffrey Zients was able to repair the federal exchange website pretty promptly, in about two months. It's still not Zappos quality, but it’s certainly much better.

The two key problems in creating political disaster were poor public communication, which started very early on, really the summer of 2009, and then poor implementation and execution.  The difference between policymaking and execution wasn't clearly understood and acted upon by key decision makers.

HP: People like me contributed to this problem—not that I can claim sufficient significance to bear much blame for anything.  I wrote a lot about ACA over many years. I never heard of the contractor CGI until rumors started to dribble out that the website wasn't going well. I had never even been curious about many IT issues that turned out to be critical. I've been involved in many public health efforts and certainly knew the importance of effective implementation. Particularly because so much opposition to ACA was non-substantive of the “death panel” variety, many of us in health policy developed blind spots and lost the benefits we might have gotten from constructive criticism. It was sometimes easy to become jaded to legitimate critiques in a polarized environment.

ZE:  One of the advantages of being up close and personal is you are up close and personal. You can see what implementation things are happening or not happening. That made me, along with many others, worry almost immediately after passage that this was going to be a huge challenge, and that policymakers were not necessarily the best at effective implementing those policies. That pattern is certainly not specific to the ACA. When we get such things wrong, we often hear that we “need more businessmen in Washington.” I don't know that this is the answer. I do believe that we need people who obsess about execution. That’s a different skill from policymaking…. We need more people who understand that execution requires a different management skill set to be successful.

HP:  There is something to the idea that many people in the corporate world have especially valuable skills around execution, how to hire and fire people, what to do when something is failing. This is the world that they live in. At some meetings regarding the ACA website, leaders commented that "Failure is not an option." One thing I learned in engineering school: Failure is always an option. It’s not something you can simply choose not to do. James Fallows alerted me to a wise analysis by Clay Shirky, who noted: When you say failure is not an option, you're really saying that the discussion of failure is not an option, which is a much less healthy thing.

ZE: Well again, business people focus on execution. They also focus on getting the right people who have the right skill sets to run these things. I think they can be very helpful in these areas. Talk to any venture capitalist, what do they spend most of their time on? Making sure that they've got the right person to execute challenging tasks. We can learn from that experience: how it's done, how you create the environment in which everyone's focused on execution.

By the way, this challenge remains even though the website is now working moderately well. Any e-commerce person will tell you that execution is an everyday activity. You're constantly improving. Even (or especially) if you're number one, you can't rest on your laurels. ….

The six principles of legislating health reform

HP:   Let's shift to your “Six Principles of Legislating Health Care.” Of course, you are following in big footsteps. LBJ offered his own principles. Intrigued readers might check out Dave Blumenthal and Jim Morone’s beautiful historical analysis of LBJ’s role in Medicare and Medicaid’s passage. You and LBJ are just kindred spirits. Maybe you can get Robert Caro to write your biography when he's finished with LBJ.

ZE:  Perhaps the key principle concerns the importance of speed. Every piece of legislation works against the clock. You start off, especially in health care, with 65 or 70 percent support. That support will only erode as you get more specific. So doing something quickly is absolutely essential. Wilbur Mills drafted Medicare and Medicaid within two months of the convening of the new Congress. Two months. And then he had passed it in the House. Within six months, it was signed by Lyndon Johnson. That gives you a sense for how fast you need to act if you want to survive.

We were reminded of this throughout the process of working on ACA. Phil Schiliro, head of Legislative Affairs for the White House would constantly say: "We'll solve it in conference. Don't slow the process down for some details, important as they are, because we'll solve it in conference." Our immediate task was to get the bills passed.

As a policy guy and not a political guy, I used to get annoyed by that because some of the stuff we were talking about was really, really important. Do we have a national or state based exchanges? On the other hand, Schiliro was clearly right. Every day was another day of danger from a legislative perspective.

HP:  It's amazing how many things in American health policy over the next decade are going to be problematic because Martha Coakley ran a bad Senate campaign. This led to Scott Brown’s victory, which deprived ACA of its badly-needed scrub in the conference committee. Many errors and glitches just couldn't be fixed because of the ongepatchke endgame through which ACA needed to be passed….

ZE:  So speed is one principle. You must also be aware that you're dealing with people. In particular, you're dealing with two of people’s natural tendencies: First, people prefer the familiar, the habitual, the things they know. Proposing a whole new set of ideas or approaches is inherently problematic. How did we get to finance Social Security and Medicare by payroll taxes, starting benefits at age 65. These aren't things we invented. This system was invented by Bismark and the Germans. Then it was carried through to Social Security and then adapted to Medicare Part A. This willingness to adopt familiar things, even when they're not optimal, is something I didn't fully appreciate until I saw it in action over and over again on the Hill during the health reform debate.

HP:  Hearing all this, I’m amazed to think that ACA actually passed. Viable reforms must be incremental. They can’t threaten the benefits that various protected constituencies already enjoy. You can’t change the reassuring structures of Medicare, Medicaid, or the VA. You can't say: “We're going to get rid of employer sponsored insurance,” even if you might have done something different if you could have started from scratch. With all these constraints, you're forced to quickly write this complicated new law that somehow jigsaw-puzzles everything in. Then when you do that, critics say: “Wow, that’s a lot of pages, and it seems really complicated.” The complexity is inherent in the need to constantly build on the huge structures we already have.

ZE:  In 1965, they probably had it easier. LBJ had a huge majority, and they were starting from almost Ground Zero. There were far fewer pre-existing programs you had to work around or alter. That just made it just a whole lot easier to expand Social Security and to do Medicare and Medicaid. Within ACA, path dependence limited what we could do. We faced specific institutions and constituencies that constrain what was politically feasible. Beyond the interest group politics, people are inherently conservative. They prefer their habits. That status quo bias constrains things, too.

Then you must contend with a second human tendency. To win an election, a competitive election, you must have a pretty big ego. Let's be honest about that. But then you also must work with 99 other people in the case of the Senate, or 434 other people who also have gone through the same thing. Human egos add to the complexity. Many items in ACA are there because these were someone's favorite item. Whether or not it really fit well, you had to make it go.

It's an interesting process.

HP:  Harry Reed and Nancy Pelosi were masterful in managing all these big egos within what was (in a filibuster world) a razor-thin majority. That’s quite a contrast to the Clinton era, when the personal pique of figures such as Daniel Patrick Moynihan damaged prospects for passage.

ZE:  Many people have lauded Nancy Pelosi’s efforts. One aspect is often overlooked: Requiring all three pertinent committees to work together to produce one bill. That was masterful. She completely understood the legislative process and the need for not having multiple bills. That was very, very critical.

HP:  Reid and Pelosi also had to manage the process with far greater transparency and procedural integrity than prevailed in 1965. That transparency hinders some of the things that you need to do.

For example, you obtain Senator Nelson’s vote by fully subsidizing Nebraska’s Medicaid expansion. Financially, this is barely noticeable, on the order of $100 million. Yet Americans hate to see these deals. They hate the process of legislating. They just do. The longer it goes on, the more people actually see the sausage being made, the more they hate it. And it's all visible now.

ZE:  It’s not just the public. Many people in policymaking circles don't like it either. Many might believe it's too dirty, but this is how democracy works. It's an education to anyone to actually take this apart, which is one reason I put it in the book so that readers can see that you do have these challenges.

Setting the groundwork for health reform

ZE:  We've been trying for a hundred years and, at least three times before: In the 1940s when Truman won, in 1973 when Nixon, Kennedy and Mills all on the same side, and in 1992 when Clinton won the presidency on health care predominantly. Each time, we saw the effort blow up because it's so hard to get the balance right. That's why major legislation is so rare. It just doesn't happen that frequently in America because of all these complications.

HP:  Nixon shows up several times in this story.

ZE:  At least three times in the history of health care reform, Richard Nixon played a critical role. He really supported serious health care reform. He could have authored--in some ways he did author--bills that were more progressive than ACA.

Right after World War II, Nixon became a California Congressman. His first major legislative proposal was a health care bill that he co-sponsored with New York’s Senator Javits. The bill would have supported voluntary insurance with income-linked subsidies that people could buy from not-for-profit insurers. He didn’t want for-profit insurers in the health care space. And he favored these managed care organizations, like Kaiser, which he knew from growing up in California.

So here's a guy who's proposing something that’s a lot like the Obama strategy. He re-proposes it in 1960, during an election where the Democrats are pushing hard for Medicare and he wants an alternative.

Then in 1973, he finally realizes you have to have mandatory insurance if the health care system is really going to work. A voluntary system really wasn't going to work because of the problems of adverse selection and the death spiral if only the sick buy insurance. He was very close to a Ted Kennedy proposal. The unions didn't like Kennedy moving off a single-payer approach and being willing to compromise with Nixon. Yet for all the world, it looked like we were inches away from a compromise between a Republican President and a Democratic House and Senate. And then Wilbur Mills’ sex scandal and Watergate blew it all up.

HP:  This highlights one of most impressive things about the lead up in 2006, 2007, and 2008. Speed was possible because so many players got in the same room to lay the groundwork. By the time of the 2008 primaries, you have three Democratic candidates with very similar health plans that eventually became ACA. Many of the allied constituencies didn't like specific aspects of ACA. Yet each decided that passing the bill was a much better outcome than seeing the bill go down to defeat. They hadn't gotten to that point during the early 1970s or during the Clinton era.

ZE:  Many progressives in the past had been the ones torpedoing more market-based approaches. Now they recognized: "All right, guys. The worst alternative is nothing." I think that was a very mature insight, which at least gave the ACA a reasonable chance of passage.

HP:  Many on the left of the Democratic Party made real sacrifices here. They were willing to step back from core demands to say: We're going to go with this because it can pass, even though we don't like every aspect of it. There was a definite split among single payer activists. Most were disappointed with ACA but sought pragmatically to get millions of people covered. Others brought a sort of theological absolutism and opposed ACA. Had the Democrats followed that course--

ZE:  We would have nothing.

The Congressional Budget Office

HP:  One thing that we didn't have in 1965 was the Congressional Budget Office (CBO). How did CBO influence the final product of health reform?

ZE:  If you have to communicate anything, it's this word “scoring.” No one outside of the Washington Beltway really understands this, but it’s so important to everything that happens legislatively: "What's the score?" By this, people mean: How is CBO going to evaluate this proposal?  Will CBO say that this bill is going to cost money, or that it is going to save money?

In many ways, this scorekeeping function is essential. You need someone to estimate costs, and someone to estimate how we are going to cover these costs through taxes or some other means.  Yet we also have to recognize that there's an institutional bias at a place like CBO. They tend to be very cautious about savings. They are much more expansive about the possibility that things are going to cost money. As I point out in the book, when it comes to major health care legislation, CBO has often gotten things terribly wrong. They’ve underestimated savings and overestimated costs.

Now many people might say, "What's the problem? We get more savings than we expected." The problem is that a lot of good ideas with poor budget scores never see the light of day because of CBO’s cautiousness. It's hard to see this, because it’s a sin of omission. I think that's an inherent bias in the system, and it's a danger.

As I point out, we do need this umpire. We need someone to objectively make these budget assessments. For better or worse, it is the CBO with its institutional bias. I believe it’s important to recognize this bias. It would be better if CBO recognized its own biases. It might recognize its limitations and maybe even try to counter them a little bit.

Malpractice Reform

HP:  You also write about malpractice reform and why it didn't happen….

ZE:  If you talk to Republicans, they say: "Democrats didn't do malpractice reform.” If you talk to doctors, they ask: “Why didn’t ACA include malpractice reform?" Whether like to hear it or not, President Obama has done more for malpractice reform than any other President. It may not be what you want, but no other President's done as much as he has.

Many people--myself, Bob Kocher, Larry Summers, and the President--were sympathetic to malpractice reform. This Administration was not in any way hostile to malpractice reform. We worked hard to develop policy options. The President was sympathetic. He did announce some pilot programs in September 2009 because he wanted to do something. But you have to recognize that malpractice is fundamentally a state issue, not a federal issue. It's hard to get states to go along. The federal government has to incentivize states. It can't dictate to them.

And the fact of the matter was this: there was no good political reason to do big malpractice reform. Republicans weren't going to negotiate. Trying to use malpractice to get them on board wasn't going to be fruitful. As for the doctors--despite all their public statements--when they got into the back room, they just didn’t put malpractice at the top of their agenda.

As my brother eloquently noted in an expletive-filled discussion with me: “It ain't happening. We don't need to put it in, and we're not going to offend our base for nothing. We're already offending our base with the public option and with the Cadillac Tax. I'm not going to lard it on for no reason at all.”  That's the brass tacks of it, and you shouldn't blame the President.

If there's one surprise here, it’s that the doctors could have pushed harder and made it one of their top three items. As my brother clearly stated, it wasn't.

HP:  On so many occasions, organized medicine has faced the choice between advancing a set of economic objectives and a set of delivery system objectives that would make medical practice more consistent with what physicians are trying to do.  The profession so often chooses to push its immediate interest-group objectives, whether it's SGR or something else. Medicine has paid a price for that. By any reasonable standard, the current malpractice system is quite poor.

ZE:  As I make clear in the book, whether you're a patient, a doctor, or someone who really cares about the quality of care, the malpractice system doesn't work. The President was sensitive to that. Many of us in the White House were sensitive to that. We wanted to improve it. Most of us didn't think caps and statutes of limitations would be very effective. But there are many alternatives, whether it's the University of Michigan apology policy or something else.

This could have been one of those bipartisan issues. The main people who like the current system are the trial lawyers. That wouldn't have been an insuperable barrier had the Republicans come to the table or the doctors made malpractice a more central issue behind the scenes. As you point out, typically when there's a conflict, in this case it was the SGR fix that dominated what the doctors wanted. Ironically, they didn't get this in the ACA. Their alternatives were not creative enough. Now maybe they'll get it with a creative understanding that we need to move off fee-for-service. But so far, we get close, but no cigar.

The Gang of Six negotiations

HP:  You mention the obstacles to bipartisan legislation. Do you think that the Gang of Six negotiations were real? Or were these just a Republican effort to slow things down and run out the clock on ACA?

ZE:  First, let's remind ourselves, the Gang of Six had three Democrats and three Republicans. And it was a changing group of Republicans. I can't answer your question from my vantage point. You'd have to really ask the political brother. I actually assume that for some Republicans, this truly was a delaying tactic. Yet some were genuinely interested, at least early on, in whether some deal could be made.

The skeptic will point to Maine’s Olympia Snowe. She was negotiating. We worked really hard to satisfy her requests. I remember one day Peter Orszag, the go-between for the Administration and her, brought back a list of ten things that she wanted in the bill. It was part of my responsibility, working for Peter, to work on these, to make sure that we had these ten things in the bill that would satisfy Senator Snowe. We worked really hard to get her. In committee, she voted for ACA. Then when it got to the floor, the Republicans put the screws to her. Despite the fact that she wasn't going to run for re-election, she voted against it. That suggests to me they really were never serious.

On the other hand, knowing some people like Senator Grassley, I believe he actually does care about improving the health care system. I think there was a good faith effort on his part. But again, I'm not the political brother….

More on the botched rollout of healthcare.gov

HP:  Why was the execution of healthcare.gov so screwed up?

ZE:  First of all, it's a complicated task. Yet we know it’s not fatally complicated because several states were able to succeed. Several factors seemed to go along with that success.

One, successful states typically created separate organizations with small governing boards. These organizations had more flexibility in what they were going to do, both in terms of contracting and in terms of administration.

Second, they all had an experienced administrator. I would note the Connecticut exchange. There was also Peter Lee, who had run an exchange out in California before coming to Washington and then going back to run the California exchange. Serious administrative experience in the health insurance marketplace was very important.

Third they had better contractors. I've heard it said that Deloitte is a common thread among the successful ones.

Those elements were not sufficiently present in the federal exchange. There are a few other elements, too. There was probably too much focus on political decisions, too much worry about the short-term political ramifications of a decision about the exchange that lead to delay or other problems rather than realizing that getting the exchange right was the biggest political issue of them all.

HP:  Isn't that sort of political hesitance almost inevitable, given that people were operating in such an unbelievably polarized environment?

ZE:  I'm skeptical that it was inevitable. I'm not sure and the reason I'm not sure is that Jeff Zients was able, in two months, to get the website up to speed with the right team and the right management style. It suggests to me that there's something different and less inevitable.

I would also say a major flaw was putting policymakers at the helm, as opposed to a real manager with insurance company experience. I'd been advocating for that right from the start. Many people in the White House knew how difficult it was going to be and advocated for that kind of organization right out of the box. Would such an approach have prevented poor execution of the rollout in a hyper-political environment? We're never going to know. It would have increased the odds.

HP:  On the other side, I can certainly understand how you lose a step in that polarized environment. You mention in the book that they might have benefitted by publicly producing a complicated flow diagram to show all the moving parts and how they have to fit together. As you note, the next day Republican Senators would have updated Senator Specter's Clinton-era diagram to disparage ACA as a tangled health care bureaucracy. If you put out a complicated rule ahead of time, it gives the opposition more time to pick it apart. I can readily imagine how people become very risk averse to giving any ammunition to the opposition --

ZE:  But Harold, we ended up giving them the biggest dynamite we could! The most important goal had to be getting the website, the whole exchange, to work well. Again, health reform is much more than a website. Still, the website was critical. Screwing that up would produce the biggest damage to the President--as proven. So you had to back up. Sure, there might be some political costs from an early release of a complex rule. How much more damaging is delay, if this hinders the quality of your website?

I think it was necessary to get someone everyone recognizes is talented--someone the right couldn’t really shoot at--and put them in charge and tell them to stop worrying about the politics and just make sure this thing executes. There are plenty of people who could have done that. Getting it right, branding it right out of the box as desirable, actually an enjoyable user experience. That was and remains really important.

ACA 2.0

HP:  Let's talk a little bit about what you call ACA 2.0. What are some things we should do right now, things you'd like to see to build on ACA and to make it work better?

ZE:  I have a whole chapter that outlines what I call 'shovel ready’ policy options. These are things that you can do right now. The stabilizing of health care costs is one of the most important developments over the last three years. Health care cost growth has come down, and is now pretty close to GDP growth. Many factors go into that. The Great Recession certainly accounts for some of that, but it doesn't account for all of it. Structural changes that were happening before ACA matter, too. But certainly the ACA has played a role. Exactly how much we'll sort out in a decade or so….

We need to continue that progress on cost control. Most Americans think that markets provide the best way to buy and sell things and to set prices. We should have more market competition and less government-established prices, whether for durable goods and medical supplies or for many other things that are pure commodities, like lab tests, even the Medicare Advantage insurance products.

It would be good for Medicare to get a business advisory board of individuals who are used to running these competitive marketplaces. I say, somewhat facetiously and rhetorically, wouldn't you like to have the person who runs Wal-Mart acquisition system advising Medicare on how to get prices down? If they are able to offer $4 prescriptions, wouldn't you like to have them help advise in the running of the government competitive marketplace?

HP:  We face some huge political obstacles there that have nothing to do with the usual ideological differences. Since 2008, we’ve fought this deep partisan debate between Democrats and Republicans. But then there's the political economy of our $2.9 trillion medical care economy. My guess is that your colleagues running Medicare in the Obama administration share way more common ground with the people who ran Medicare in the Bush Administration than either of you would share with a congressional committee chair from either party, who happens to have a wheelchair factory in his district.

Right now, the opponents of such competitive bidding would certainly say this is another Obamacare big government takeover. If a Republican proposed it, the same interest groups would say this is a Republican trying to cut benefits to seniors. Both arguments provide the pretext for interest groups to defend the huge subsidies they receive by selling expensive medical equipment and supplies at managed prices. That's really what this is about. Because the health reform debate has poisoned made everything look very partisan and ideological, it gives tremendous cover for every economic interest group to defend its turf.

ZE:  Fortunately, there is a way to counter that. As you point out, there are Republicans who like this idea, right? Tom Scully, former head of Medicare under President Bush, loves this idea.  Then you have to advance a bipartisan communication strategy. One way I would counter interest groups would be to say: "Look, you're saving seniors money."

We know that the competitive bidding that's in the ACA saves seniors collectively billions of dollars, and it will for the next ten years. It saves the government money. And you're right, it prevents people from getting exorbitant prices and no one, ideologically, can say, "having the federal government setting prices is a good thing. It's really an American thing." Most of us believe that's a Soviet thing and it's not a very good Soviet thing. It didn't lead to good consumer products.

I believe almost all the examples in my book are bi-partisan and shovel ready. If we were to craft a good communications strategy, many people who are normally affiliated with the Republican party might well support these ideas. I think Democrats would support them because these save the system money and these save seniors money, too.

Payment reform and prevention

The second idea is payment reform, more bundled payment for the health system. We have an example, the ACE demonstration, which bundles payment for cardiac and orthopedic procedures. As I outlined in the book, we've seen that it can save money and improve quality. We should nationalize it. We should generalize it. We gave the power to the Secretary of HHS to do that. That would send a very immediate message to everyone: We're getting away from the fee-for-service system.

The third idea concerns prevention. People complain that we didn't do enough on prevention in the Affordable Care Act. I think that's overstated. We did many things. Plus, we also, many of us who worked on ACA also worked on the First Lady's “Let's Move” initiative, which already seems to be having an impact.

Let's make a move on smoking cessation by increasing the tobacco tax. The President's proposed it. It seems to me that it’s very hard to argue against this. We know that there's a close correlation between the price of cigarettes and the number of people who smoke, that you prevent young people from starting if you jack up the prices. So let's do it. If we increase the price by fifty cents, you'll drop the smoking rate another three percentage points in absolute numbers. That's a huge, huge step.

Just to reiterate, tobacco causes more than 400,000 deaths every year. Moreover, a national cigarette tax would be more effective than city or state-level taxes because it's just so easy to schlep cartons of cigarettes across these borders. Here in Chicago, we have a high level of smuggling from just across the Indiana border.

HP: To go a step further, I would add alcohol taxes to your list. As Phil Cook and others emphasize, a beer tax would have some very important crime and public health effects. So in the paperback version of your book, I will lobby for a beer tax.

I noticed you've been non-committal on the alcohol thing.

ZE:  Harold, I got burned on the sugar tax. Okay? (laughs).

Cadillac tax

HP:  Then there’s the taxation of employer-subsidized health benefits. Many people don't like the Cadillac Tax. You do like it.

ZE:  Although I don't have a PhD in economics. I've certainly been led to the economics standpoint on that. I don't like the current tax exclusion for many reasons. Let me begin with the first, which is it's really regressive and liberals should hate it.

For two reasons, poor people get screwed by this tax. First, many working-class and working-poor people don't get insurance from their employer. So they can’t get this tax benefit. Second, the tax is such that the richer you are and the bigger your insurance package, the more tax break you get. Rich people benefit disproportionately from this tax expenditure. They benefit more because they're in a higher tax bracket. They also benefit more because they tend to get richer insurance packages. It seems to me that liberals ought to hate that.

Second, this is far and away the biggest tax-break in the tax code. It comes in at $250 billion. It's depleting much of the government.

Third, this tax break is highly inflationary within the health care system because it encourages people to over-insure and to have these very large insurance packages. Perhaps the single most effective thing we could do in the Affordable Care Act to bring down private insurance rates is to limit the tax exclusion for health insurance. Virtually every economist who has looked at this issue believes that getting rid of this tax exclusion would be good policy.

The Cadillac tax doesn’t go this far. It's a compromise that taxes the most expensive plans. It has already had an effect. Employers are the one who are going to pay the 40% marginal tax rate on the most costly insurance policies. You see them already thinking about how to keep costs down, how to reconfigure their most-costly insurance products so that they don't have to pay this penalty. Limiting high-cost health insurance plans will have a big impact as we try to figure out how to restrain health care costs. All of us are going to benefit from this.

Blue-sky predictions

HP:  Your book takes a monumental risk by providing ambitious and concrete predictions. That’s unusual. Not many people, on any side, are willing to say: "Here's an actual, falsifiable prediction."

ZE:  My colleague Philip Tetlock—arguably the world's leading expert on forecasting and predictions--has educated me. You have to be very specific about quantitative outcome. I've tried to do that. And, look, if I'm right 70% of the time, I'm a hell of a lot better than most economists and anyone else doing predictions (laughs). And I do think I'm going to be right 70% of the time.

The decline of employer-provided insurance

HP:  You believe that employer-sponsored insurance will really decline over time. One of your most audacious predictions is that the new health insurance marketplaces will grow far beyond what CBO predicts. Why do you think that?

ZE:  People must recognize two things. There is no legal requirement today for the University of Chicago to provide your health insurance or for the University of Pennsylvania to provide mine. There’s no legal obligation for a corporation or some other employer to provide health insurance.

So you ask yourself, why are they doing it? They're doing it because we all want insurance. And your employer can typically get a cheaper price than you can. It's just easier for us to avoid having to battle in the individual market. Plus, many employers believe that health insurance is good for retaining good workers.

But let's replay the scene with an alternative where an individual can very easily obtain health insurance another way, while avoiding pre-existing condition exclusions and other insurance practices banned by health reform.

Now a big employer has to ask: Do I offer insurance, or do I simply allow my workers to go into the exchange and buy insurance there? Once we have a well-functioning and credible health insurance exchange, it will make sense for many employers to pay the penalty and give their workers either a voucher so they can still get the tax exclusion or just to give them a pay raise and to let workers shop in the exchange.

Many workers will prefer this, too. Many employers don’t offer a choice of health insurance. Buying health insurance in the exchange will give workers a choice. They'll decide what plan they want, how much they want to pay, what combination of benefits and deductibles and co-pays they want. I believe that will turn out to be very attractive.

My eldest is thirty years old. She buys everything on-line after comparison shopping. Health insurance will be just another item on this list. She's used to it. Her generation is less wedded to the idea that her employer would buy health insurance for her.

Right now, many big and small employers view it as "my moral obligation to make sure my workers can get health insurance." That paradigm will become less compelling as employers and workers see really responsible employers that care about their workers allowing people to buy coverage on the exchange. Exchange-based coverage will become increasing compelling from a business standpoint, from a moral standpoint, and from an individual choice standpoint.

So that's how I see it. If—and this is a big if--the exchanges begin to function and are well-regarded, I think you will see many big employers begin to consider this. And it will be great for everyone. With a great risk-pool including many younger workers, you have more stable prices.

HP:  I was speaking with a relative who has a modest income and who has pretty crummy health coverage. She actually wishes that her employer wouldn't offer health insurance at all. She looks at the exchange and says, "If I went to the exchange and I were eligible for subsidies based on my income, it would be a much better deal than what my employer is offering me.

ZE:  I can tell you that I've talked to many HR people from big corporations, CEO's of modest sized corporations. All of them are interested in sending their workers to the health insurance exchanges, all of them.  Much will depend upon how well the exchanges work over the next few years.

The end of health care inflation

HP:  You also foresee essentially the end of health care inflation. You predict that health care costs will rise no faster than the increase in our gross-domestic product. That may be your most audacious prediction. If that happens, it will completely transform the federal budget and (over time) the American economy.  What makes you so optimistic that we will end what's really the past forty years of rapid increase in health care expenditures?

ZE:  The fact is, we know that there's a lot of waste in the system and we know that doctors could manage patients in many different ways that would both improve the quality and keep the costs down.

I think the best health care systems at the moment have transformed themselves by focusing on the chronically ill, by re-thinking how they care for the chronically ill, by focusing on prevention, keeping people out of the hospital, keeping them away from unnecessary tests and treatments. They're able to cut their costs about 20%.

That is a lot of money over time. And also, once you begin doing that, you transform the investment ideas of drug and device companies, into recognizing they're going to have to develop innovations that give you improved, higher-quality health care for lower prices. That becomes a positive feedback loop. And doctors realize that they can actually make more money by keeping people healthy and out of the hospital when payment is transformed off the fee-for-service system.

Much of these savings arise from putting fewer people in the hospital. I make predictions too about hospitals. That is another place it's going to come from. If you keep people healthy, you keep them out of the hospital. You reduce hospital-acquired infections. You reduce readmissions. You treat more people who might have been hospitalized say, for congestive heart failure or emphysema exacerbations, at home. You have really reduced the hospital and you've done it in a more efficient environment. If you do all these things, I think you can get to GDP plus zero. I think we're going to get there. There's so much pressure on the system. That's going to be, as they call it in business school, a stretch goal, but I don't think it's an impossible goal. I predict the stretch goal can be achieved.

HP:  Your comments also imply that doctors and hospitals need to change the way that they do business and what they do every day. Some of the most interesting parts of your book concern how doctors will be trained. It will be a different world for them.

ZE:  We all are conservative. Change is scary. But you could also look at the change and think: Wow, this opens up whole new possibility of things. I can practice in a different way instead of just grinding people through to with my fee-for-service model. That should excite doctors because it could be really, really wonderful.

HP:  That's a great strength-based way to end the conversation.  Thanks a lot.

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