In today’s Wall Street Journal, the President’s budget director, Peter Orszag, explains that the fiscal challenges facing the U.S. government are almost entirely driven by the rise in health care costs, so that the best way to get the math right (to bring government spending more in line with government revenues) is to pursue major health-care reform. But Peter’s not talking about reform that would reduce spending by reducing access to subsidized health care; he’s talking about expanding coverage and saving money at the same time. How does this work? As Peter explains:
The good news is that there appear to be significant opportunities to reduce health-care costs over time without impairing the quality of care or outcomes. In health care, unlike in other sectors, higher quality currently seems to be associated with lower cost — not the opposite…
How can we move toward a high-quality, lower-cost system? There are four key steps: 1) health information technology, because we can’t improve what we don’t measure; 2) more research into what works and what doesn’t, so doctors don’t recommend treatments that don’t improve health; 3) prevention and wellness, so that people do the things that keep them healthy and avoid costs associated with health risks such as smoking and obesity; and 4) changes in financial incentives for providers so that they are incentivized rather than penalized for delivering high-quality care.
Already, the administration has taken important steps in all four of these areas…
But more must be done. To transform our health-care system so that it improves efficiency and increases value, we need to undertake comprehensive health-care reform, and the president is committed to getting that done this year. Once we do, we will put the nation on a sustainable fiscal path and build a new foundation for our economy for generations to come.
But wait–more, for less? There are lots of skeptical fiscal policy experts out there, as New York Times columnist David Brooks points out:
[W]hat exactly is the president proposing to help him realize hundreds of billions of dollars a year in savings?
Obama aides talk about “game-changers.” These include improving health information technology, expanding wellness programs, expanding preventive medicine, changing reimbursement policies so hospitals are penalized for poor outcomes and instituting comparative effectiveness measures.
Nearly everybody believes these are good ideas. The first problem is that most experts, with a notable exception of David Cutler of Harvard, don’t believe they will produce much in the way of cost savings over the next 10 years…
The second problem is that nobody is sure that they will ever produce significant savings. The Congressional Budget Office can’t really project savings because there’s no hard evidence they will produce any and no way to measure how much. Some experts believe they will work, but John Sheils of the Lewin Group, a health care policy research company, speaks for many others. He likes the ideas but adds, “There’s nothing that does much to control costs.”…
…and there’s even some nay-saying, or at least back-pedaling, among the very same health care leaders who the President claimed pledged to cut $2 trillion in health care spending, according to a report by Robert Pear which also appeared in today’s New York Times (emphasis added):
After meeting with six major health care organizations, Mr. Obama hailed their cost-cutting promise as historic.
“These groups are voluntarily coming together to make an unprecedented commitment,” Mr. Obama said. “Over the next 10 years, from 2010 to 2019, they are pledging to cut the rate of growth of national health care spending by 1.5 percentage points each year — an amount that’s equal to over $2 trillion.”
Health care leaders who attended the meeting have a different interpretation. They say they agreed to slow health spending in a more gradual way and did not pledge specific year-by-year cuts.
The Washington office of the American Hospital Association sent a bulletin to its state and local affiliates to “clarify several points” about the White House meeting.
In the bulletin, Richard J. Pollack, the executive vice president of the hospital association, said: “The A.H.A. did not commit to support the ‘Obama health plan’ or budget. No such reform plan exists at this time.”
Moreover, Mr. Pollack wrote, “The groups did not support reducing the rate of health spending by 1.5 percentage points annually.”
He and other health care executives said they had agreed to squeeze health spending so the annual rate of growth would eventually be 1.5 percentage points lower.
The promise of cost savings through major health care reform which includes expanded coverage is oddly (or EconomistMom-ly) similar to the promise of saving money on the family budget by getting a membership to Costco. How so?
- A membership to Costco requires an up-front investment of the annual membership fee for the privilege of shopping there and the potential to reap savings in the future so that your investment (membership) will ideally pay for itself.
- What exactly you are buying the right to in terms of future shopping options is uncertain at the time you pay the membership fee; you don’t know exactly what goods will be available for purchase at Costco over the next year, how stable the selection will be once you find some things you indeed like to purchase, or how great the prices will be compared to the prices at other stores (which don’t require a membership fee).
- Whether you actually save money from your Costco membership depends on how you view/use your Costco option. Will you buy things you would have bought at a more expensive store anyway? Will you buy only what you need and not have to waste any, given the humongous sizes of the things one must put up with at Costco? Or might you end up buying things you would not otherwise have bought? In other words, will the Costco membership actually expand your consumption possibilities, rather than help to constrain, restrain, or ration them? (When one “has to spend money to save money,” which side wins?)
- If you prove disciplined enough with your family budget and that Costco card (buying from Costco only those things you would have bought anyway from other stores), how much of your family budget is actually able to benefit from the Costco savings? What are the tradeoffs in terms of selection/product variety and convenience? Do I often choose the more expensive retail option anyway, because I’d rather pay more and get it more quickly and easily, and get bundles of goods better tailored to my short-term (as opposed to multi-year) consumption needs? (Yes, and I’m sure there are other moms out there who’ve been stuck with a hundred bags of fruit snacks or dozens of boxes of mac and cheese that their kids have tired of long before you’ve gotten through consuming them…) And would I be willing to have the Costco membership work to help me save more money if it required that I give up the option of shopping at the more convenient but more expensive stores? (No.)
- My family’s had our Costco membership for about 15 years now (it began as a “Price Club” membership); why, we’re even “Executive” members now. If you asked me now whether I’ve saved money on net for our family budget by having had the membership and spent the thousands of dollars each year there, I’m not sure what the answer would be (yes or no), and I’m not sure how I’d begin to quantify that even if I had kept track of all my Costco purchases.
So the promise of health care cost savings from health care reform is quite a bit like the promise of family budget savings from a Costco membership. It’s certainly good to have lower-cost options available to us. But we don’t know exactly what we’ll be able to buy with those options in the future, we don’t yet understand what tradeoffs we’ll face, and we certainly have no guarantees we’ll end up making better choices just because we’re faced with better options. I certainly wouldn’t take any presumed future savings from my Costco membership and go use it to buy a new car–even through Costco.