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Health reform that won't break the bank

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By Peter Orszag and Nancy-Ann DeParle
Friday, March 5, 2010

Health-insurance reform offers many benefits, such as common-sense rules of the road and basic consumer protections to keep insurance companies honest and prevent them from denying coverage to anyone because of a preexisting medical condition. But some critics complain that the administration has slipped in its commitment to fiscal responsibility in health reform.

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These critics are mistaken. The president's plan represents an important step toward long-term fiscal sustainability: It more than meets the president's commitments that health-insurance reform not add a dime to the deficit and that it contain measures to reduce the growth rate of health-care costs over time.

To take one recent example, some skeptics have claimed that the $100 billion in deficit reduction the president's plan would achieve over the next decade is mere gimmickry because the legislation would pay for only six years of coverage expansions with 10 years of budgetary offsets.

Now, it's certainly a time-honored Washington budget gimmick to pay for just a few years of costs with many years of savings. But if that were the course being taken, we would expect to see a large hole at the end of the first decade and ever-larger deficits in the second. Instead, the savings in the president's plan grow faster than the costs over time, generating greater deficit reduction with each passing year -- roughly $1 trillion, all told, in the second decade.

Some fiscal hawks like us have also contended that we should scrap comprehensive health reform altogether and focus on "cost first" -- devoting the savings now used mostly for coverage expansions to deficit reduction instead. Even leaving aside the moral imperative of extending coverage to millions of Americans, it seems implausible that Congress would take the crucial step of creating a dynamic infrastructure for containing costs in legislation dedicated solely to deficit reduction.

That would mean forgoing reforms that would be building blocks for a feedback loop of reform and improvement in our health-care system. For example, by bundling payments and creating accountable care organizations, as well as by imposing penalties for unnecessary re-admissions and health-facility-acquired infections, physicians and hospitals will be induced to redesign their systems, coordinate care to keep people healthy and avoid unnecessary complications.

Moreover, since health care is so dynamic, even if we thought we had the answer for containing costs and improving quality today, that would quickly change as health care evolved. With the additions of investments in health information technology, research into what works and what doesn't, and an Independent Payment Advisory Board of doctors and other medical experts making recommendations to improve the Medicare system, the legislation under consideration would create a virtuous circle in which more information becomes available, different delivery system reforms are tested and successful reforms are scaled up quickly as we learn more.

Other critiques are similarly misplaced. For example, skeptics have pointed to the five-year delay, relative to the Senate-passed bill, that the president has proposed for the excise tax on "Cadillac" health insurance plans -- a key bipartisan measure to contain health-care costs over time -- as further evidence of the administration's wavering fiscal resolve.

Here, the first thing to observe is that the key cost-containment pressure from the excise tax involves neither its start date nor the initial dollar threshold at which it takes effect, but rather the rate at which the threshold grows. And, just as with the version in the Senate-passed bill, the president's excise-tax proposal would increase that threshold more slowly than the rate of health-care cost growth. As a result, firms would have a gradually increasing incentive to seek higher-quality and lower-cost health plans.

Second, history suggests that the political system is capable of following through on just these types of fiscal reforms that are imposed with a delay and then gradually grow. For example, the delayed and gradual increase in the full benefit age from age 65 to 67 under the Social Security reforms of 1983 continues slowly but steadily to go into effect almost 30 years later.

Third, if a future Congress tried to repeal the excise tax in, say, 2016 or 2017, it would violate the statutory pay-go law just enacted -- and Congress would therefore either need to find hundreds of billions in offsets or waive the pay-go rules. Circumventing pay-go was perhaps a feasible option for Congress the last time that law was in effect during the budget surpluses of the late 1990s. But it is much less likely to be feasible in the projected fiscal environment.

Fiscally responsible health reform is now eminently doable, and we have presented a plan that will significantly improve the nation's fiscal situation. All we need is the will to act.

Peter Orszag is director of the Office of Management and Budget. Nancy-Ann DeParle is director of the White House Office of Health Reform.


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