President Obama and the Price of Health Care Reform

Barack Obama addressed Congress this evening; the full text of his speech is available at this link. 

It was a long speech – setting the historical stage and rebutting many of the arguments against health care reform.  Obama delivered some real specifics, including an endorsement of individual and employer mandates (like Massachusetts’ system), tax credits to help lower income Americans afford coverage, a public option for those ineligible for private health insurance and increasing insurance regulation to protect consumers.

Obama promises that health care reform will meet three objectives:
(1) Provide more security and stability to those who have health insurance.
(2) Provide insurance to those who don't.
(3) Slow the growth of health care costs

Many others will be commenting on the first two objectives;  this blog addresses the third.

Obama spends a few paragraphs talking about paying for this expansion of coverage.  A few key quotes:

“Reducing the waste and inefficiency in Medicare and Medicaid will pay for most of this plan.”

Waste and inefficiency are rampant in health care.  Some have commented that 30% of all medical dollars are wasted. While I don’t disagree – the savings from decreasing variation and increasing the integration of the provider community are not going to come quickly.   This link  is to a past posting, where I note that if we immediately cut all this waste we would cut so many jobs that we would create Detroits all over the country.

“Much of the rest would be paid for with revenues from the very same drug and insurance companies that stand to benefit from tens of millions of new customers.”

This represents what Victor Fuchs calls cost shifting.   I have no disagreement with Obama – new revenue will be needed to pay for expanded access.  But this tax will be passed on as higher premiums to others – and will not lower the cost of health care.

“Reforming our medical malpractice laws”

This got a big cheer from the Republican side of the aisle. The real costs of torts include substantial defensive medicine, so tort reform is a good idea.  Savings will take a long time, though.

“Medicare is such a big part of the health care system, making the program more efficient can help usher in changes in the way we deliver health care that can reduce costs for everybody.”

True that!  Medicare is such a large payer for most hospitals and many physicians that reforming the way Medicare pays can have an enormous positive impact on the health care delivery system.  There will be losers, though, so this won’t be easy.  Obama is wise not to divulge too many details of his administration’s thinking on this.

“This reform will charge insurance companies a fee for their most expensive policies.”

Again, this will be passed on to purchasers of health insurance policies – so this doesn’t represent cost savings, but rather a cost shift. Economists on the right and left agree that offering full tax breaks to ridiculously high benefit policies is regressive and a bad idea. But health insurance plans in high cost states (Massachusetts, Florida, New York among them) are much more likely to be subject to such a tax – and our legislators won’t go easily.

So – the speech was inspirational (especially the nod to Ted Kennedy, who wrote a stirring deathbed endorsement of health care reform), and there is serious substance here that forms the heart of a health care reform bill.  It’s not surprising that the President offered far more details on access than on cost saving.  Cost saving is necessary, but won’t be easy to attain.