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Robert J. Samuelson on health reform's ghost savings

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By Robert J. Samuelson
Monday, December 14, 2009

We are witnessing a determined counterattack by the Obama administration and its political allies on the matter of health-care costs. Many critics (including me) have argued that President Obama's "reform" agenda wouldn't control rapidly rising health spending and might speed it up. The logic is simple. People with insurance use more health services than those without. If government insures 30 million or more Americans, health spending will rise. Greater demand will press on limited supply; prices will increase. The best policy: Control spending first, then expand coverage.

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But the administration insists that it can insure most of the uninsured and tackle runaway health spending simultaneously. There's so much waste in today's health-care system that both goals can be pursued together, Peter Orszag, head of the Office of Management and Budget, has said.

Two new reports by liberal advocacy groups echo that claim. The first, from the Center on Budget and Policy Priorities, contends that lower Medicare reimbursement rates to hospitals and other providers can pay for about half of the $900 billion or so government cost over a decade of expanded health benefits. Critics (again, including me) have said that Congress would put the Medicare cuts in today and might repeal some or all of them in the future. Nonsense, says the study. Congress has allowed many past reductions in Medicare reimbursements to take effect.

Even more upbeat is a joint report from the Center for American Progress Action Fund (CAP) and the Commonwealth Fund arguing that savings from the bills' cost-cutting provisions have been underestimated. One measure would push hospitals to reduce readmission rates; some "bundled payments" between doctors and hospitals would encourage coordinated care; taxes on gold-plated insurance plans would deter overspending. Health costs would be lower than expected: Medicare "savings" would total $576 billion over a decade (about $200 billion more than estimated by the Congressional Budget Office, which mostly counted lower reimbursement rates); the federal deficit would drop up to $459 billion over a decade; and health-care "savings" for typical families would total about $2,500 by 2019.

Who's right? Let's start with the numbers. Unfortunately, the word "savings" is used misleadingly. It doesn't mean (as is usual) actual reductions; it signifies smaller future increases. There's a big difference.

In 2009, national health spending will total an estimated $2.5 trillion, or 17.7 percent of gross domestic product. By 2019, it's projected to rise to $4.67 trillion under present policies, or 22.1 percent of GDP. With CAP's "savings," it rises a little less sharply to $4.49 trillion, or 21.3 percent of GDP, according to Harvard economist David Cutler, the study's co-author, who provided these figures. Similarly, family health insurance premiums rise from 19 percent of median family income in 2009 to 25 percent in 2019 under present policies and 23 percent with CAP's "savings." The point is simple: Even with highly optimistic assumptions, health spending remains out of control. It absorbs more of government, business and family budgets. Higher health spending would put pressure on future budget deficits, already projected to total about $9 trillion over the next decade. If new taxes and Medicare "savings" are real, they could be used exclusively to pay down deficits, not finance new spending.

But many may not be real. Writing in the Wall Street Journal, Dr. Jeffrey Flier, dean of the Harvard Medical School, gave the various health bills a "failing grade" and said they wouldn't "control the growth of costs or raise the quality of care." Quoted in Newsweek, Dr. Delos Cosgrove, head of the Cleveland Clinic, said much the same. Richard Foster, the chief actuary of the federal Centers for Medicare & Medicaid Services, doubts the cost-saving provisions touted by CAP would save much money. He's also skeptical that Congress, facing complaints from hospitals and a squeeze on services, would allow all the Medicare reimbursement cuts to take effect. True, Congress has permitted some reimbursement reductions to occur, but it has repeatedly blocked the Sustainable Growth Rate adjustment for doctors, which most resembles the new proposals.

Health cost increases might spontaneously recede, but history suggests skepticism. The relentless advances reflect an open-ended insurance and delivery system that gives neither patients nor providers any reason to restrain spending. To attack costs first would be politically challenging. It would require admitting that all good things are not possible simultaneously and that the uninsured already receive much medical care. It would require genuine bipartisanship, not just a scramble for a few Republican votes. And it would require stronger measures to dismantle a fee-for-service delivery system that now rewards more, not better, care. That's a demanding and realistic approach; Obama's is wishful thinking.


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