The five most promising cost controls in the health-care bill

It's hard to overstate how important the Congressional Budget Office (CBO) -- which makes the official judgments on how much bills cost and save -- is in Washington. But the rest of the country doesn't know what the CBO is, and it doesn't care. "Washington may live and die by the pronouncements of the Congressional Budget Office," wrote pollsters Doug Schoen and Scott Rasmussen in the Wall Street Journal, "but 81 percent of voters say it's likely [health care reform] will end up costing more than projected."

That's left Democrats in a worst-of-both-worlds situation: They've built a bill that Washington's toughest scorekeeper says will cut the deficit by more than a trillion dollars over 20 years. They're getting attacked for the taxes and Medicare reforms that save all that money. But the country doesn't believe the savings are real.

One of the problems Democrats have had is that it's very easy to understand the one thing the bill does to spend money -- purchase insurance for people who can't afford it -- and considerably harder to explain the many things it does to save money. Another is that a lot of the savings have to do with changing how medicine is practiced, which people are less familiar with than how insurance is purchased.

But the fact that the cost controls are complicated and numerous doesn't mean they're absent, or that they won't work. So here are five of the bill's best ideas, and how they're meant to work:



(1) Create a competitive insurance market: This is the bill's first, and most important, step. Right now, the insurance market's version of competition is pretty brutal. Companies compete to avoid the sickest people and sign up the healthiest people. Offering the best coverage for the lowest cost isn't much of a priority, because most consumers don't know whose coverage is best, and the ones who really do know are probably sick customers who spend their days researching this stuff.

Outlawing the bad kind of competition while enabling the good kind, which the bill does, is more than just a humanitarian measure. It's a cost control. The insurance "exchanges" imitate the market in which federal employees (including congressmen) purchase their health insurance. In the exchanges, insurance products have to be above a minimum level of comprehensiveness (no more insurance that doesn't cover anything) and their benefits have to be presented in a standard, comprehensible way. The insurers themselves can't discriminate based on preexisting conditions, will have to answer to regulators if they attempt to jack up premiums, and will be rated by their customers -- a rating that everyone else will see when shopping for their insurance.

If all goes well, consumers will be able to log onto the exchange's Web site, compare insurance plans and choose their favorite. That means insurers will have to compete for customers in a more transparent market, where shoppers have more information, and where the relationship between price and quality is more obvious. As any free-market conservative will tell you, that should drive prices down and quality up. If it doesn't, insurers will have some annoyed legislators to answer to: The bill says congressmen and their staff members need to buy their insurance from these exchanges, too.

(2) The Medicare Commission: The next cost control worth mentioning is an effort by Congress to solve the problem of, well, Congress. Medicare's cost problem is, in many ways, a political problem: Saving money means cutting someone's profits or someone's benefits, and politicians are afraid to do either.

Enter the Independent Medicare Advisory Board. Modeled off of the highly respected (but totally toothless) Medicare Payment and Advisory Commission, IMAC is a 15-person board of independent experts chosen by the president, confirmed by the Senate and empowered to cut through congressional gridlock. IMAC will write reforms that bring Medicare into like with certain spending targets. Congress can't modify these proposals, it can't filibuster these proposals, and if it wants to reject them, it needs to find another way to save the same amount of money. Making the process of passing tough reforms easier is the single most important thing you can do to make sure tough reforms actually happen.

(3) A tax on "Cadillac plans": The least popular, but most direct, cost control is the tax on expensive, employer-provided coverage, which should really be thought of as a disincentive to buy insurance plans that don't control their costs.

Today, the average employer who offers insurance pays more than 70 percent of a worker's premiums, all of it tax-free. This amounts to an annual $250 billion subsidy for private insurance for people with good jobs. But it's not just the size of the subsidy; it's how we use it that matters. Because it's only good for insurance that employers buy for their workers, people have their employers buy their health-care insurance for them. But that means individuals don't know how much their insurance really costs and don't have as much incentive to keep those costs down. Imagine the pressure for cost control if the 70 percent that employers pay were coming out of our own pockets, instead of quietly coming out of our wages.

In 2018, the proposed excise tax on so-called "Cadillac plans" slaps a 40 percent tax on every dollar spent on an insurance plan above $27,500 annually. So if your plan costs $27,600, the final $100 bucks would be taxed (technically, the insurer pays the tax, but it'll pass that onto your employer). That's a very expensive plan, but over time, that $27,500 threshold grows by inflation, usually around 3 percent) rather than health-care inflation (closer to 7 percent). So if we don't get health-care inflation down, this will hit many more plans.

But the excise tax is part of getting that inflation down. The idea isn't that people will pay this tax. It's that they, or their employers, will evade it by choosing insurance that holds its costs down more aggressively. That gives insurers who hold costs down a competitive advantage against insurers who don't, because those who don't are not only offering pricier insurance, but are also passing along a hefty tax attached to their excess spending.

(4) Medicare "bundling" programs: The most obviously illogical part of our current health-care system is that we pay doctors the way we pay car dealers: They get more money for every item they sell. But while we aren't afraid to ignore a car dealer's recommendations, we are afraid to disagree with our doctors. As you'd expect, this pushes costs higher.

The health-care bill seeds Medicare with many experiments to change this status quo, the most immediately promising of which are the "bundling" programs. Instead of getting paid for everything they do to help a diabetic, hospitals will get paid once for treating that person's diabetes and all related conditions over a certain period of time. If this leads to lower costs and doesn't harm patients, it will be expanded. That would be the beginning of the end of paying for quantity of treatment, and the beginning of paying for quality of treatment.

(5) Changing the politics of reform: Republicans and Democrats both agree that we need more cost control in the health-care system. But politicians don't like to actually cut costs, because those votes reduce benefits and make people angry. So we've played a shameful game: We passively control costs by letting people become and stay uninsured, or by letting their insurance deteriorate and cover less, because those things don't require a vote in Congress.

But because the individual mandate in the bill brings everyone into the insurance market and the subsidies for those who can't afford insurance on their own put Washington on the hook for costs, Congress will have to get serious about holding costs down in the system. The alternatives, for lawmakers, are high costs infuriating constituents who're being forced to buy something they can't afford, or yawning deficits forcing them to vote to take subsidies -- and thus health-care coverage -- away from people who currently have it. The days of letting inertia win the day and watching the system fall apart on its own are over.

Thus ends the list. There are more cost control ideas in the bill, of course. Everything from modernizing the system's IT infrastructure to amassing and disseminating research on which treatments work and which don't to penalizing hospitals with the highest rates of infection. Five is just a good round number.

The bill's basic theory is to try pretty much everything in the hopes that some of it works out. The net effect is to make reform a continuous, rather than occasional, process, with different cost cops patrolling different beats. Insurers will have to work to stay a step ahead of the excise tax because employers won't want to buy plans that trigger it. The industries that provide medical care and technologies will have to hold their costs down because they don't want to become a target for the Medicare Commission. Hospitals will need to make sure they don't spend more than their competitors because they'll lose money under bundling. And if we want to try other things -- a public option, say, or incentives for insurers to abandon fee-for-service -- the exchanges give us an actual structure where we can make changes and test reforms.

Also important is that the various elements work together. For instance, the excise tax and the exchanges have an important interaction. Right now, there's a substantial amount of inertia among employers. They've got a contract with a health insurer and they don't want to waste time soliciting new bids and trying to figure out the relatively quality of different providers every year. In the exchanges, however, changing would be trivial: You'd see the prices (with the excise tax built in), and it would be a lot easier to see if cheaper plans were providing a good consumer experience.

Same goes for IT improvements and the comparative effectiveness research: As the data is crunched, it could be fed into software that'll help doctors choose the most effective treatment based on the latest evidence -- a far cry from them mainly knowing about new evidence because drug companies have spent money publicizing it. Or take the Medicare Commission, which will use a lot of the comparative effectiveness program's data when making its decisions.

Adapted from my Newsweek column.