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Five cost controls in the Senate health-care bill

One of the impulses you have to resist as a writer is the desire to say things that are new, as opposed to things that you've already learned. A lot of this post will be stale to longtime readers, but in my chat today, someone asked after the cost controls in the Senate. A bit later, I was on the radio and heard Darcy Burner say that this bill lacked any real cost controls.

Herewith, a partial list of the cost controls in the Senate bill:

1) Bundled payments: A lot of the focus has been on cost controls that work through the insurance system. But costs aren't rising because insurance is expensive. They're rising because health care is expensive. The experiments with bundled payments are an attempt to begin addressing those drivers directly. Right now, hospitals get paid for each procedure they conduct. If you come in with symptoms of a stroke, they get one check for the diagnostic, one check for the stroke medication, one check for the surgery, etc. And if you have to come back in two weeks, they get more money for that, too.

Under bundled payments, the hospital would receive one check for everything related to your stroke over a single period of time. That means they make more money from doing less, rather than more money from doing more. It also gives them an incentive to coordinate care when you're out of the hospital, as it's cheaper to get a nurse to call and make sure you're taking your medicine than it is to have you in for a follow-up procedure. For more on the bundled payments system, and Sen. Mark Warner's efforts to strengthen it, see this post, or this article.

2) Prudent purchasing: Howard Dean gave this prominent play in his op-ed this morning, and he was right to do so. The only problem is that he said it's not in the bill, and it is.

Prudent purchasing means that insurers can't enter, or stay, in the exchanges unless regulators are satisfied that they're doing a good job. That works both to ensure a good product, but also to hold costs down. If an insurer wants to hike premiums, for instance, they have to submit a justification to the exchanges and post that justification publicly on their Web site. If the exchange isn't convinced, that insurer can be dropped from the exchange, losing all customers and profits they were making.

Do this to one or two insurers, one or two times, and the message will be pretty strong. Moreover, it will go a ways towards countering the status quo bias that current infects insurance purchasing, wherein people don't change because, well, it's a pain to change insurers, and so insurers aren't forced to provide products as good as a competitive market would ordinarily demand. It also gives regulators a way to tamp down destructive marketing (an insurer can be dropped for using their marketing to try and cherrypick healthy customers -- say, by advertising exclusively in Runner's Monthly) and seed quality reforms.

3) The Medicare Commission: One reason there's so much packed into this iteration of health-care reform is because it's so hard to overcome the status quo outside of a massive reform effort. Common-sense delivery system reforms don't attract sufficient interest to muscle pass interest group opposition. The Medicare Commission streamlines the reform process, forcing a panel of independent experts to suggest a package of reforms in years when spending growth is too rapid and forcing Congress to vote on the package -- no amendments, and no filibuster.

The Medicare Commission enjoys a catalytic interaction with other elements of the bill, as it offers a process to take small programs and convert them into systemwide reforms. A pilot program that's working well, for instance, might be included in the next year's reform package, making it a policy that makes Medicare work better. This policy could be made a lot better if the Senate passes the Rockefeller-Lieberman-Whitehouse amendment.

4) The excise tax on high-value health insurance: This is, essentially, a tax on the unchecked growth in premiums. The key here is that the threshold at which premium dollars begin getting taxed at 40 percent doesn't rise as quickly as premiums costs generally rise. Now imagine two insurers: One holds costs down quite well, and one holds costs down quite poorly. Within a couple of years, the costlier insurer's plan is $3,000 over the threshold, while the cheaper insurer remains under it. The tax amplifies the difference between the two. The costlier insurer is suddenly $4,200 more than the cheaper insurer. In this way, plans with more successful cost-control mechanisms get an even larger market advantage. This makes the insurance market even more competitive in terms of price. For a longer explanation, read this post.

5) The individual mandate: In the last few days, an odd argument has arisen. The individual mandate, people say, must be sacrificed on the altar of cost control. The truth is quite the opposite. First, the individual mandate lowers average premium costs by bringing healthy people into the system. If the only people buying insurance are the people who expect to need to use it, the average cost will be prohibitively high. But second, the individual mandate is the political spur for future cost controls.

In a world without a universal health-care structure and an individual mandate, premium increases are a shame, but not much of a political problem. In a world with an individual mandate, large premium increases are Congress' problem. It focuses the mind on cost control. Given a choice between passively letting people become uninsured and taking on providers and insurers, Congress will choose the path of inaction. But given a choice between voting to take people's insurance away and taking on providers and insurers? That's a harder decision. Right now, the pressure in the political system comes from organized interests. The mandate levels the playing field. More on that here.

And that's not all, of course. There's the interaction of comparative effectiveness review and health information technology. There's the hope that regulations on insurers force them to innovate on price and quality, rather than on denying coverage to sick people. There are the good points Jon Gruber makes in this interview.

Will it all work? Define work. Will it be enough? Almost certainly not. Is it more than we've ever done before? Absolutely. And does it do more for cost control than the continuation of the status quo? Again, absolutely.

By Ezra Klein  |  December 17, 2009; 4:20 PM ET
Categories:  Health Reform  
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Next: Private insurance in theory and in practice


I go away for a week, and the Democrats ruin health care reform. Dr. Dean is right. This bill is a disaster for the party, the progressive movement, and the country. Scrap it and start over.

Posted by: bmull | December 17, 2009 4:33 PM | Report abuse

But what if the Obama administration decides that enforcing the new rules will make Republicans too mad at him so they just let things slide? That seems like the kind of thing that our current wuss-in-chief would do.

Posted by: mellifluent | December 17, 2009 4:40 PM | Report abuse

In reference to #2 -- this strikes me as a leap of faith contrary to experience.

Look at the case of Pfizer -- they have been engaged in at least a couple major criminal actions in recent years. Yet, aside from paying a civil fine, it's business as usual in terms of their relationship with the federal government.

In reference to #5 -- I think you're missing the point.

Yes of course, expanding a risk pool has the potential to lower cost for each member of the risk pool -- especially if largely healthy participants are opting out of the current system (e.g. the largely healthy folks who are outside of coverage now will technically see an increase in their costs in most cases from $0, or whatever they pay out of pocket. Once in the insurance pool, most of the time they will be subsidizing the care of others in the pool -- on top of subsidies to those via Medicare, Medicaid taxes). This is true of the majority pushed into the new exchange.

The main concern isn't purely cost -- it's a question of whether people are actually getting optimal value for this new product that they're being compelled to purchase. Value can be defined in more ways than just price.

Are they getting the best value possible for their dollar, or are they effectively being levied with a new tax to purchase a shoddy, overpriced product?

Posted by: JPRS | December 17, 2009 4:42 PM | Report abuse

I'm starting to have a hard time believing I've ever had common cause with the liberal kill-the-bill people. I believe the exact opposite of bmull: if this bill is defeated, THAT would be a disaster for the country. (It would be a disaster for the party too, but I don't really care about that, majorities are no good if you don't do the right thing with them.) What's more, this is so self-evident to me that I have almost no response to those who so vehemently. Except maybe to scream at them, and/or link to this blog.

Posted by: Chris_O | December 17, 2009 4:44 PM | Report abuse

But it doesn't offer a chance to make a vague point about how government totally whips the private sector's butt, so, y'know, it's "worthless."

Posted by: NS12345 | December 17, 2009 4:49 PM | Report abuse

Oh but also, it may have been foolish to even pitch this as an "individual mandate." The way this actually works is that you get hit with a tax penalty if you can afford insurance but choose not to buy it.

It seems pretty reasonable to think that it would have been smarter to call it a "utilization tax" or whatever, but then give everyone who buys insurance an "exemption." It's 100% the same thing but it sounds so much nicer. Although maybe anti-tax sentiment on the Hill is so bad that it would have been impossible...

Posted by: NS12345 | December 17, 2009 4:52 PM | Report abuse

Ezra a couple of points:

"Prudent purchasing means that insurers can't enter, or stay, in the exchanges unless regulators are satisfied that they're doing a good job."

These are the exchanges that won't be set up until 2014, right? Until then insurers are free to set any premium the market will bear. And since there is an anti trust exemption, insurers can collude to fix the prices artificially high. Come to think of it, even when the exchanges are in, insurers can collude to fix prices and effectively neuter the exchange. After all, if all insurers are charging the same rates, what difference does the exchange make? What happens if/when all insurers raise their rates beyond with the exchange regulators think is proper? If there are no insurers in the exchange, then how can people buy insurance?

"Within a couple of years, the costlier insurer's plan is $3,000 over the threshold, while the cheaper insurer remains under it. The tax amplifies the difference between the two."
With the antitrust exemption intact, won't the insurers collude to set prices to that everybody gets the tax, which the employee ultimately pays not the insurer, and drive health care prices up even more. Doesn't this penalize people who have adequate care now? How about a limit so that people making under 100K indexed for inflation are exempt from the tax?

"First, the individual mandate lowers average premium costs by bringing healthy people into the system. "
What evidence is there that insurers won't price their insurance the same and just take in more profits? Without knowing what the penalties are for violating the regulations, it may be that insurers would rather gouge people and pay a small fine instead of lowering premiums. This is the strategy that corporations use when dealing with infractions of labor law. Its cheaper to pay the fine after years of litigation and arbitration than it is to pay the workers. Why do you think insurers are any different from any other corporation?

"But given a choice between voting to take people's insurance away and taking on providers and insurers?"
Well when does this choice come up and why would it be any better than trying to pass HCR with the public option or medicare buy in? We couldn't get those past the filibuster, why do you think that getting cost control will be any easier than getting holy joe and ben nelson to agree to positions that they believed a few weeks ago? Where is the evidence that congress will actually try to cut costs instead of just blaming the system and what cost cutting strategies does congress have that have any chance of passing?

It wouldn't hurt you to answer these eminently reasonable questions.

Posted by: srw3 | December 17, 2009 4:58 PM | Report abuse


"Kill the bill" doesn't mean "Kill health care reform altogether" -- it means "this so-called compromise is unacceptable".

Passing this bill will be a disaster for the party. Sure it might mean some additional campaign money for the party, but money doesn't always translate into votes.

Matthew Dowd outlined some pretty sound reasons for this in his Post column today.

Posted by: JPRS | December 17, 2009 4:58 PM | Report abuse

JPRS, you are completely wrong. If this bill dies, health care reform dies for at least a decade, and what comes next will probably be worse. Just like this bill is worse than what was proposed in 1993, and like that was worse than what was proposed in the 1970s. Ezra has made these points multiple times.

And again, I don't give a crap about what's good for the party, I want people to stop dying due to lack of health insurance.

Posted by: Chris_O | December 17, 2009 5:05 PM | Report abuse

As for all of the regulations on preexisting conditions and the elimination of recission, what are the penalties and are they onerous enough to get insurers to actually follow the law? My guess would be that insurers would use their standard 3D technique (discuss, delay, deny) and if consumers have the energy to fight for months (while paying for their own healthcare and working full time) they might get some of their coverage back and/or money for covered care. Who pays while the insurers dance the 3Ds? What if you lose your house (because of medical bills) or job (because of sickness) while fighting the insurance 3D infrastructure? Partial payment of your medical bills would be cold comfort. As I mentioned above, with out regulation with robust enforcement and hefty fines and penalties, it is often easier to pay the fine than to pay the claim, especially after the 3Ds.

Posted by: srw3 | December 17, 2009 5:07 PM | Report abuse

We are going to start to work on this again whatever happens. However, if we scrap the bill all the good stuff in it will need to be renegotiated. If we pass it, all the good stuff is a given and is not at risk when NEW policy is made.

Anyone thinking that this bill should be scrapped needs to spend some time writing out answers to Nate Silver's questions here:

Once you have answers and a coherent argument for scrapping the bill consistent with your answers, then let someone know. I think it would make front page news.

Posted by: bcbulger | December 17, 2009 5:09 PM | Report abuse

--"That means they make more money from doing less, rather than more money from doing more."--

Is *that* what you want from *your* health care provider? Eh, Klein?

Seems to me, if people were allowed (in a free country!) to contract with their own doctors, decisions as to more or less could be made on an individual basis. Now, apparently, America is only going to get "less". At the business end of a gun.

Posted by: msoja | December 17, 2009 5:09 PM | Report abuse

--"We are going to start to work on this again whatever happens."--

Because you just can't mind your own business, can you?

Posted by: msoja | December 17, 2009 5:15 PM | Report abuse

Here's a song I wrote for the occasion:

Tax the middle class to buy your neighbor's insurance
That's what Obamacare is.
Tax the middle class to pay down the deficit
That's what Obamacare is.

You gotta buy insurance now yeah
Obama says you gotta have it now yeah
And you know he's collecting health industry moolah yeah
So eff you America yeah


Posted by: bmull | December 17, 2009 5:26 PM | Report abuse

"At the business end of a gun."

Oh, hush, you silly paranoid Randroid. Go and tend to your compound.

Posted by: pseudonymousinnc | December 17, 2009 5:44 PM | Report abuse

"Until then insurers are free to set any premium the market will bear. And since there is an anti trust exemption, insurers can collude to fix the prices artificially high."

What kind of fantasy world are you living in? They are free to set any premium the market will bear now now, yet somehow they still only make 3-6% margins. And I would love to see your evidence of any collusion.

Do you really expect to be taken seriously with these kind of arguments?

Posted by: ab13 | December 17, 2009 5:48 PM | Report abuse

Ezra, thanks for the post. Is there any chance, you may clarify following points?

1. Bundled payments – Is it a pilot program or applicable across the board immediately?

2. Medicare Commission – Indeed Rockefeller-Lieberman-Whitehouse amendment is great. What are the chances that it will be passed? Is it for voting yet or not?

3. Excise tax on high-value health insurance – Will it withstand House pressure in Conference?

4. Individual mandates – When an individual buys an insurance from exchange (I believe that is the case isn’t it?); money spend on buying that insurance - is it pre-tax or post-tax? The reason is those who get insurance from employer, their premium contributions are all pre-tax. Otherwise it is unfair for those folks to pay premium post-tax even if they get subsidies.

Posted by: umesh409 | December 17, 2009 5:58 PM | Report abuse

Thanks Ezra for explaining so much of this. How about this: Once we have the individual mandate, there will be increased pressure on Congress to improve the bill. If premiums go through the roof, there will be pressure to regulate more. This is what Ezra means when he says that this bill transforms individuals' problems into Congress' problems.

And yes, there are many cost controls in the bill, and the architecture to improve them. If this bill fails, everyone in Congress is NOT going to just pick up the pieces and start over, because they have the jobs bill, climate change, education and more to think about, plus reelection. Besides, only a masochist would want to go through this charade again, and if there is anything we know about Congress, it is that they are timid and risk/pain averse. Only if the bill PASSES will there be the will to revisit any problems next year or next Congress.

For me, who has Medicare paid by my former employer, the most important things in the bill are the expansion of Medicaid, the subsidies for lower income people, the pilot and other programs for cost control and increased regulations. I'd like to see all these beefed up before the final vote, and no further retrenchment on reproductive health than the current (unsatisfactory) status, but I won't sacrifice those who really need this bill so I can somehow feel better or more powerful.

Posted by: Mimikatz | December 17, 2009 5:58 PM | Report abuse

Thanks for the breakdown. It sounds like you are saying cost control will come from a combination of government regulation and market forces.


How many times do you have to catch on fire before you realize you've been burned to death?

As a liberal, I'm done with the Democratic Party. Yep, government will fall back into the hands of the right wing. Yep, they'll roll this stuff back.

Welcome to the world of using an entire group of people with no intention of showing them an ounce of respect.

Let it burn down again. Maybe next time the lesson will be learned.

Posted by: DAinLA | December 17, 2009 6:44 PM | Report abuse


If the bill dies, the reform is dead for the next ten years?

Come one. Is this written into the Constitution?

Yes, in theory we could have another economic expansion like the one that took place during the Clinton years, and the issue could fall off the table.

Let me know when that happens.

Posted by: JPRS | December 17, 2009 6:45 PM | Report abuse

Please explain how the excise tax won't lead to poor coverage for workers. Workers who have effectively no alternative to the bad policies.

Posted by: eRobin1 | December 17, 2009 7:05 PM | Report abuse

i have been reading you for probably 6 months, so i know about all this because of your great informative posts, but i'll bookmark this post since its all nicely together :)

Posted by: schaffermommy | December 17, 2009 7:25 PM | Report abuse

The continual mention of the tax on Cadillac plans, its effectiveness, and its implementation forthwith is dogma like.

The latest from Health Affairs raises many questions, and opened my eyes to conventional wisdom, mainly, high cost plans correlate to their actuarial value. Not even close. You need to review.

Posted by: BradF1 | December 17, 2009 9:27 PM | Report abuse

--"Welcome to the world of using an entire group of people with no intention of showing them an ounce of respect. Let it burn down again. Maybe next time the lesson will be learned."--

That's the funniest thing I've read all day, and I've read some funny things.

What la la land are you living in that you can't recognize the very face of the socialism you crave? You're looking at it, begging for it, and it's killing you, and you can't wait for it the "next time", as though everything might suddenly go right and there will be prancing ponies and fluffy bunnies everywhere forever (except for those evil righties).

In the old Soviet Union they couldn't even keep bread on the shelves, for the same reasons that five hundred and thirty five megalomaniacs won't be able to keep health care flowing, and even have trouble passing the law to really begin screwing it up, but you want, like ... I dunno, what? You want the fluffy bunnies!

Good grief.

Posted by: msoja | December 17, 2009 10:01 PM | Report abuse

Ezra, you've got some good points here. Some comments:
1. Bundled pricing. Makes sense to move from the fee-for-service world that encourages unnecessary testing and procedures. But HOW to bundle is a very complex matter. It already exists for many hospitals who are paid for inpatient stays on a DRG basis (fixed price per diagnosis, with some adjustments for outliers). Episode treatment groups (ETGs) could be used instead of the complex and cumbersome CPT coding currently used by providers, but this will take a lot of work to refine and apply.
2. Prudent purchasing. I am skeptical that the exchanges will work well. Why? Because providers generally don't want to deal with MORE payers; they already deal with many and this is an administrative headache. What I think you should substitue here is "insurance reform". It would be characterized by a) not allowing non-coverage due to pre-existing conditions, b) no individual underwriting, c) standard definitions of bronze, silver, and gold coverage so people can compare "apples to apples".
3. Medicare Commission. A big role of this body should be to determine comparative effectivenss of different treatmetn approaches. Critics will call this rationing. But how many of us want to pay for treatments that are wasteful and have not been demonstrated to provide true benefit?
4. Tax on so-called "cadillac plans". YES! This is consistent with individual choice and the underlying logic that you pay more for a beefed up benefit
5. Individual mandate. This is absolutely essential. Every adult should pay SOMETHING. Because every adult will eventually be receiving benefits. Thsi is not unlike the mandate around social security or Medicare that we all pay into.

Posted by: reformdoc | December 18, 2009 2:08 PM | Report abuse

Will you post an update on these provisions, whether and where they fit in the Senate's latest bill? It's easy to find the official bill, not so easy to thumb through it.

Posted by: Matt10019 | December 21, 2009 4:45 PM | Report abuse

I am all for health care reform but the taxes and control of this bill are disgusting. True Medicare and Medicaid reform would yield 150ish billion dollars a year without lowering the quality of care for the poor or elderly (you know ... adding that little thing call "Fraud Detection"). The "reform" they have in the bill is nothing more then reducing payouts to doctors. That isn't reform ... that is a lame attempt squeeze doctors out of money and to cost shift to the private care holders.

I reject the taxes, I reject the control and I reject the people who wish to place these responsibilities upon me without my consent. This isn't me denying my obligation to society, this is me recognizing this attempt to control the individual and companies as tyranny and naming it such.

If a state would succeed the union, I would move immediately. I can think of nothing more just then to allow those who want this bill to reap the consequences of their choices without the productive paying the way for them.

Posted by: jfelce | December 22, 2009 5:11 PM | Report abuse

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