Three ways the health reform package helps control costs

March 22, 2010

DavidKendall-photo-full size— David Kendall is senior fellow for health and fiscal policy at Third Way. The views expressed are his own. —

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.


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Universal healthcare does not promote a healthy workforce. There are millions who take advantage of the system today. Healthcare reform will just make those individuals less prone to find a job? Getting welfare, food stamps and free healthcare promotes laziness. Paying taxes is for those folks that work? So there might be more incomme to tax but that is for those who work.

This bill should help those who can’t help themselves, not those who just don’t want to?

Why contribute to society, if you are going to get it for free anyhow?

Posted by helpme | Report as abusive

I can’t believe what I am reading. Do you really think this? Here is a question you can’t answer: how will what you say be implemented?

“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.”

Or, and much more likely, hospitals will just fudge the reasons on why you were readmitted. “Oh, this person was readmitted because something new happened, not because we did anything wrong.” To think otherwise is incredibly naive!

Posted by terets | Report as abusive

Limit the liability of the health care industry: care providers and drug companies and the cost of providing the health care would drop significantly. You would lower the cost of malpractice insurance, and the costs of providing new drugs. Curious why this obvious component which permeates the cost of health care throughout somehow escaped consideration in containing runaway heath costs.
That is the reason for many redundant tests, and extended times to bring new medicines to market. It is not all greed but fear of liability which is a large component of spiraling heath costs.

Posted by ToThePoint | Report as abusive

We already have much of this “healthcare reform” in Massachusetts and our premiums are now the highest in the country. Premiums are skyrocketing. There are better ways to resolve these issues. And people are dancing around the real problems, in my opinion. (I have been in the insurance business for 25 years and my educational background is in economics).

I believe there are several reasons for the excessively high cost of health insurance – and the excessive cost plays a very significant role in keeping those of modest means from purchasing it themselves:

1) We need to allow insurance companies to sell across state lines. Increase competition.

2) Governments need to stop controlling/mandating the specific coverages so tightly. All of these good intentions – wanting everyone to have everything covered – drive costs through the roof.

3) Individuals need to have greater direct contact with their premiums. Right now, many (if not most) people have the vast majority of their premiums paid either by their employers and/or taken out of their pay like taxes. As a result, they don’t always have a solid idea of how much is really being paid for their insurance. More direct involvement (sending out a monthly check, for example) will tend to lead to more control/awareness.

4) As we have more disposable income as a people, we have generally realized that having “stuff” isn’t really very important without being healthy. We want to live — well and long. And so, demand along with technology has provided amazing advancements that allow us to live longer and more actively than in the past. This is great, but it’s naturally expensive. We want the very best, the latest technology, etc. That comes with a cost. And it’s a decision we have said “yes” to, so far with our dollars. It’s not right or wrong, it’s a value judgment/decision.

5) Co-pays and deductibles should be considerably higher than the typical $20. That would drive the consumer to be much more discerning about whether or not a trip to the doctor/prescription is really necessary. The lack of economic pain they feel right now leads people to over-use the system.

6) Health insurance has mutated into something it was never designed to be. We actually *expect* to use it. That’s a *maintenance* policy, not an *insurance* policy. If we treated homeowners insurance and auto insurance like we do health insurance, the premiums would be 5-10x what they are.

That’s my $0.02

Posted by MikeWF | Report as abusive

[…] This piece was originally published in Reuters. […]

Posted by Three Ways the Health Reform Package Helps Control Costs « Third Way Perspectives | Report as abusive

When you look at where he works, you can understand why he put out this propraganda piece with a disregard of the facts and truth.

Posted by veracity | Report as abusive

I don’t see that at all. Costs will keep going up 10-12% per year

Posted by Story_Burn | Report as abusive

Keep down costs? The hospital and the physicians bill the insurance companies for services rendered. They will find the codes and the procedures where they will recieve the best reimbursement.
Where will they find the medical personnel who will volunteer?
Hospitals are closing all over the country to keep the costs high. The same as homes are being destroyed to keep the real estate market high.
80% of pharmacuticals are produced overseas.
We are done as a country.

Posted by Anna123 | Report as abusive

Its astonishing I read nothing about assembling a team of networking and industrial engineers to perform a full study of healthcare with one predominent purpose to determine applications of economic justification for automation for the care of human health.

The Bill panders to the existing MD realm that sadly sticks to its old empty gun that it requires a certified MD as the instrument of treatment for both preventative and implemented medical procedures, in an industry where information is doubling every few years, and the variables of identifing and treating disorders is astounding, and well beyond human capacity, in a system where Information Technology is used for billing more than diagonistic/ treatment procedures.

For the first time in literate mammal instrumentation, we have the ability to matricize the entire healthcare industry (Autocad) now in a few dozen generations has totally revolutionized the industrial world, costwise.

It would, if implemented, reduce costs and improve care. One such anomoly that would be exposed is the legal-medical-insurancefraud system, whereby fenderbenders suckup an enormous sum from the high element of unscrupulous doctors and lawyers, immediately exposing the need for nofault insurance, thereby improving the quality of life for all americans as the trillions illegally extorted from the american people would be available for for the quality of life, ie; automated healthcare, universal education, no person left behind (end of homelessness)

Perhaps the reality that our government , supposed to act in the best interest of our citizens, who expose the fact they are run by lobbyst, by the very core of the healthcare bill, could also act in our interest by returning our manufacturing infrastructure (the one stolen by the NYSE and setup in slave countries) by resurrecting the import taxation that would allow us to make what we use-vs-they tell us what to buy , and then sell it to us. In the 60’s we made 95%+ of our durable goods, now we import them, controled by the woeld class mafia in our one brand economy of owners, a club you can work for but you can’t join.

Our country, where minium wage jobs are tripling every 10 years, homelessness numbers in 10’s of millions. Our largest employer, wallys pays less than poverty level, While the separating class system enacted by congress continues an upward spiral of income for the elitest, and a downward spiral for the vast majority.

The other countries have a firm import taxation system that protects the precious jobs that both build their economy while increasing the quality of life. Here in the USA politica has imposed a goods and services economy on us, the only players in a world economy, with us as the mark of the world class mafia, firmly in control of our newsmedia and political system. We are their herd of cattle, Its clearly in the healthcare system, designed and enacted into law by the lobbyst of the healthcare industry.

For the first time in humanity we have the instrumentation and information technology to remove the inferior human element predatation from our wellbeing, and its completely ignored.

We should remove all the bums from office, and setup a government developed by referendum, and continue to be run by the real professionals who devote their entire lives to service to this great country. Marshall law, now, ridding ourselves of bondage of; Treason, appointed overseers, predatory legal and medical system, federal reserve, all forms of lobbyst, a close examination of journalistic integrity, etc

Posted by jackiecox | Report as abusive

This bill does virtually nothing to address medical inflation; instead, it will hurt insurers (and insureds) terribly.
A lack of competition in health insurance has little to do with thereimbursement rates that are paid to hospitals and medical groups, where there IS virtually no competition.
The largest, most powerful medical providers will continue to receive the highest payments, to all our detriment.
In addition, failing to address the huge discrepancies between what government plans pay and what private insurance pays guarantees that even more medical costs will be passed on to people who pay for their own coverage, along with everyone else’s.

And I’m sorry, but a bit more hand washing and a bit more floor mopping in the hallways will NOT provide billions in savings, any more than will a 10% tax on a tiny industry such as indoor tanning.

The Obama administration really needs to address the fact that America isn’t so stupid or naive.

Posted by Drewmba | Report as abusive

The wife works at a local hospital. I pick her up every night at the emergency room, and I can’t help but notice the INCREDIBLE amount of people that are jammed into a single room waiting to be seen. My wife tells me that the doctors are TERRIFIED of being sued so they order every test available so they can cover their butts in case of a lawsuit.

Our health plan covers emergency care right?
Well, If I want to be seen for athletes feet, it costs me
about $100 to go see my doctor, But if I (now get this) Go to the emergency room, my plan pays for the cost! IT costs them about 500 dollars and they pay it! I have to pay about 12 bucks for the cream!

I complained to my doctor that he is always rushing. He seems to spend about 15 seconds listening to me, then he rushes out the door telling me to pick up a perscription. After I complained, he told me that his LIABILITY INSURANCE is around 250,000 a year. And that with paying his staff, he is hard pressed to make a decent living. I believe him.

Is adding another THIRTY MILLION PEOPLE to the system, going to change these things? Do you think that I am going to get better care? Cheaper care?

Comon! Wake up, and lets repeal this monster, and put in place common sense reforms

Posted by RogerUSA | Report as abusive

I went to the “third way” that this guy is a “senior fellow” for. ITS A SOCIALIST RAG, You want to know more about progressives? Listen to Glenn Beck, He’ll warn you about these communist wanna be’s Heres a quote from Beck===

Beck: All right, now, if all of this sounds like a government out of control, go back to the progressive movement. It is not what our founders of this country intended. One hundred years of this movement, and the government growing while our rights are shrinking. I’ve been saying now for awhile, and it really has clicked in my mind, um, that it is the progressive movement, it is the cancer that is inside both parties. It’s why you don’t feel like there is a choice. It’s why John McCain and Barack Obama, you’re going, ‘You gotta be kidding me, right?’

Posted by RogerUSA | Report as abusive

So–this is going to decrease costs?? Then why has my Ins. just gone UP and Med. Costs went UP…and coverage went DOWN…explain that to me…I work for a living..and the living part is getting worse..meeting NEEDS all the time..not able to get WANTS once in awhile for kids is frustrating..with taxes..TAXES going up..STATE/City’s/Gov./Fed.explain to me where I a WORKER/TAX payer is benefitting..

Posted by rgw | Report as abusive

[…] to get started on an effort to control health care costs. Some of the new law’s provisions do move in that direction. Doctors will no longer be rewarded by receiving payments for treating their own medical mistakes. […]

Posted by Medical Inflation Triples Overall Inflation in 2010 | Report as abusive

[…] to get started on an effort to control health care costs. Some of the new law’s provisions do move in that direction. Doctors will no longer be rewarded by receiving payments for treating their own medical mistakes. […]

Posted by MD-Writer Blog » Blog Archive » Health Care Costs Again Rise Much Faster Than Other Costs | Report as abusive