Three Ways the Health Reform Package Helps Control Costs

March 22nd, 2010

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This piece was originally published in Reuters.

Among the many unfair accusations leveled at the health reform package just passed by the House is that it “does nothing” to control soaring health care costs.

In fact, nothing can be further from the truth.

At the same time that it will provide unprecedented stability in health care coverage to middle-class Americans, health reform will also bring about a quiet—but far-reaching–transformation of how our nation pays for health care. The result will be more efficient, better quality care, along with cost savings estimated by the non-partisan Congressional Budget Office of $138 billion over the next decade.

One way reform will bring about these savings is by reforming the current “fee-for-service” system, where doctors are paid for individual procedures they perform but not for the overall result.

The current system, for example, lets doctors who cause infections through improper hand-washing send more bills to treat it. In effect, doctors are paid more if they make mistakes and fix them than if they get it right the first time. Tens of thousands of medical errors are committed every year, ranging from gross errors such as the amputation of the wrong leg to accidental errors in dosing medication.

Health reform will require hospitals to effectively put a warranty on their care by limiting the payments they get from Medicare or Medicaid if a patient is readmitted to the hospital for what is considered a preventable reason. The result will be fewer medical errors, including fewer preventable re-admissions and fewer patient injuries and deaths—and a reduction in the $17 billion and $29 billion per year that hospitals now spend to fix medical errors.

Another major aspect of cost control in health reform is the limit it will place on tax subsidies for excessively generous benefit packages. Under current law, employee health benefits are paid for with pre- tax dollars—a subsidy that amounts to 35 to 40 percent of the total cost of premiums. In 2008, taxpayers spent $226 billion to subsidize employer-provided insurance.

While employers should continue to be rewarded for providing benefits to their workers, the current system does not differentiate between efficient and inefficient health care plans, and there’s no reason why taxpayers should subsidize an over-the-top package for an executive with a multi-million dollar salary.

The health reform bill would limit this subsidy by levying a 40 percent excise tax starting in 2018 on the annual premium amount over $27,500 for family coverage and $10,200 for individual coverage with adjustments for inflation, age, and other factors. Most of the revenue generated by the provision would not come from the tax itself. Instead, it would come from employers eliminating bloated benefits, which in turn would mean higher wages that are subject to taxation.

Thus, this provision will not only reduce health care costs, it will increase worker wages.

Third, the health bill will ensure more head-to-head competition among insurers. Most workers today can’t choose among competing health plans based on price and quality, which means less pressure to hold down costs. Because employers pay for most of the health care coverage in the United States, the vast majority of private-sector employees don’t have the chance to save money for themselves by choosing more economical health plans. Reform will create an electronic marketplace, or “exchange,” where plans will compete for business. This will mean more choices for consumers and more competition among plans to keep prices lower while providing better benefits.

A successful example of an insurance exchange is in Madison, Wisconsin, where the market is dominated by state employees who can make their own choices about their coverage and the cost they pay. Health insurance in the Madison area costs 14 percent less than the statewide average.

Health care reform takes on an entrenched and inefficient system with bad habits that have accumulated over decades. It will bring a new level of accountability to the health care system that it lacks today.

When the political storm finally quiets down, and there is again room for measured and rational debate, the supporters of reform will no doubt find themselves vindicated by history.