Making Health Care Affordable: The Painful Process Ahead

The Senate Finance Committee released a 41 page report yesterday detailing savings and enhanced revenue that could help finance health care reform, including coverage for the uninsured.  Many of the recommendations originated in the March 2009 MedPAC report to Congress. 

The report is a preview of how painful this process is likely to be. 


Cost Savings:

-          Rebase the market update for the provider fee schedule to lower increases (or impose fee cuts) on high margin procedures, and offer increased fees to low or negative margin procedures. 

§         This is an excellent idea, but  redistributes the medical dollar – and doesn’t necessarily save money.

-          Decrease market update of fee schedule (Medicare)

o        Home health (decrease fees by 5.5% in 2010)

-          Decrease direct and indirect graduate medical education funds from Medicare and Medicaid. 

§         This could save some serious dollars, but would be violently opposed by teaching hospitals, and in the past Medicare and Medicaid cuts have led to higher rates for commercial insurance.

-          Decrease disproportionate share funds to ‘safety net’ hospitals, since there will be fewer patients without insurance after health reform. 

§         That is not working all that well in Massachusetts, where under health care reform Cambridge Health Alliance is at the financial brink since ‘free care’ pool funds vanished but many patients continue not to be able to pay for their care.  

-          Base imaging technical fees on assumption that expensive machines would be operated 90% of the day, rather than 50%. 

§         This would lower imaging costs – but it would not save money as these resource value units (RVUs) would be redistributed.

-          Decrease payment for durable medical equipment.

§         This will be fought by the industry – but current rates are based on charges in the mid-1980s with inflation added – and the costs of many things, especially electronics, have dropped substantially since then

-          Increase drug rebates for Medicaid. 

§         This could net real dollars for the federal government – but there is good evidence that what is essentially  most favored nation” status raises the prices for all others.   The mandated rebates, which are calculated based on average selling price and best price, encourage the pharmaceutical companies to stick with their price discipline and avoid giving deeper discounts to anyone else.

-          Require spending reductions (through fee reductions) in geographies with high utilization or for specific providers with high utilization

§         The Dartmouth Atlas researchers have done a great job documenting small area variation and it’s clear that there is far too much utilization in some areas.   However, lowering the fees in those areas will not predictably lower utilization, and in some instances might increase utilization.   If payment reductions are done by geography, this will disproportionately hurt the higher-efficiency providers in high utilization geographies.  It would be very difficult to do calculations by provider – there is a real small number problem, it’s tough to attribute patients to fragmented providers, and the risk adjustment would likely be inadequate.

-          Decrease payments to Medicare Advantage plans

§         This is the largest element of the Obama plan likely to gain Congressional traction. There are real dollars here, although these cuts will decrease access to private plans especially in rural areas, and the insurance industry is likely to push hard against them.


Revenue Enhancements

-          Limit the tax deductibility of employer health insurance (as well as limit the tax deductibility of health savings accounts, flexible spending accounts, and itemized medical deductions as well as apply FICA taxes to student income )

§         There are huge dollars here.  Obama called taxing employer-sponsored health benefits as “the largest middle class  tax increase in history” during the campaign, so this won’t go down easy.  It’s most politically feasible to focus phasing out this deduction for high-income taxpayers

-          Limit tax deductibility of nonprofit health insurers

§         The Senate document singles out BCBS plans, but this would also apply to Kaiser and many regional nonprofit health plans.  These plans would have to raise premiums as this would make it more difficult to maintain adequate reserves.

-          Limit tax deductibility of nonprofit health providers

§         Nonprofit hospitals dominate markets in much of the country.  Their income is not taxed, they receive tax-deductible charitable contributions, and they use tax-free bonds for building.  Considering that these nonprofit hospitals are usually the largest employers in their communities, this would be a tough struggle.  Further, hospital margins are likely to take a drubbing from other elements of this health care reform plan – and adding removal of tax advantaged status would be tough. 

All told - this will be a painful process.