So How Will We Save?

After reading my column from last week, my sister asked, “Will someone please explain to me how we are supposed to save money when Medicaid, Medicare, and Social Security are going broke, and we are going to cover 32 million more people? Why don’t I understand this?” She is certainly not alone in finding it difficult to understand how health care reform can reduce the deficit. In fact, a recent Rasmussen poll reveals that a whopping 81% of Americans believe the reform will cost more than the CBO projections. Since every other large entitlement program has mushroomed in size and cost, it’s no wonder Americans are skeptical about this one.

It’s easy to see how reform is going to cost us – the government will subsidize the premiums of many of those buying insurance and will add many more to the Medicaid rolls. It’s not so easy to understand the saving part. Frankly, I don’t think the Democrats have done a very good job of explaining it in terms that ordinary folks like me can understand. I’ve been doing my own research online and found a recent Newsweek article that attempted to explain it in five easy steps.

First, the formation of health insurance exchanges should create more competition among insurance companies. Now any good capitalist knows that competition results in better quality and lower prices. I get that. But I really didn’t know what the exchanges would be and how they would work, so I’ve been looking that up as well. My understanding is that the exchanges will be created by individual states, and states can decide to join together to create regional exchanges if they choose. The exchange will simply be marketplaces managed and regulated by the government. They will consist of private insurance companies that desire to be a part of the exchange. It stands to reason that companies would want to participate because that is where most customers would go to buy insurance. It will have a web site where various policies and prices can be compared Theoretically, the companies will seek to offer better coverage at lower prices to get your business. Companies within the exchange will have to meet certain standards of coverage.

Obama admits that not everyone will have lower-cost premiums as a result of the exchanges. Some people now have low-cost plans that have high deductibles and not-so-great coverage, because that is all they can afford or want to pay for. They will be required to buy better insurance under the new legislation and can expect to pay more as a result. If they earn less than 400% of the poverty level, that higher cost will be offset by government subsidies to help pay for their premiums. People who make more than that will pay more for their insurance; the CBO projects premiums will increase 10 – 13%.

There is considerable question as to whether the exchanges will actually work as they are intended. Massachusetts already has an exchange like the ones that will be created nationwide beginning in 2014. The state also has some of the highest insurance costs in the country.

A second means of saving money will be the Independent Medicare Advisory Board. One reason Medicare continues to cost so much is that Congress does not have the political will to cut benefits. The advisory board will do it for them. It will be made of 15 members appointed by the President and approved by the Senate. IMAC will write proposals for limiting Medicare’s costs. These measures will go into effect automatically unless Congress votes to reject them, and if they do, they must find another way to cut costs by the same amount. The idea is to make it easier for tough decisions to be made. Obviously, older adults may find this worrisome. Young people, on the other hand, may be tired of paying so much for the elderly and welcome the change.

A third method of controlling costs is called “bundling.” Right now, doctors get paid for each service they provide – every office visit, procedure or test. The more they do for a patient, the more money they stand to earn. It’s easy to see how greed might enter the picture here. With bundling, doctors would get paid one price to treat a condition for a certain period of time. If you have diabetes, you pay a set price for treating it for a year. It would no longer be in the doctor’s interest to prescribe more procedures. Fewer procedures means fewer insurance claims, thereby lowering costs for everyone – theoretically. Of course, it would now be in the doctor’s interest NOT to order procedures, and it remains to be seen if this will result in poorer care.

Fourth, the so-called “Cadillac” plans offered by some employers will be taxed a hefty 40%. The idea is to discourage employers from offering such plans. That would mean fewer people seeking medical services that are no longer covered. That would lower demand, and lower demand leads to lower prices.

Finally, the government will now have a huge stake in keeping costs down, since it will be subsidizing so much of health care. If they fail to do so, they will have to face angry voters who are upset about rising deficits and/or higher premiums. Of course, the fact that they have already been on the hook for Medicaid and Medicare has not resulted in keeping costs under control so far.

These measures should produce savings – we just don’t know how much. What we do know is that the CBO projects the cost of reform to be $940 billion dollars over the next ten years. Whether or not we can really offset those costs and actually cut the deficit remains to be seen.
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