Rising to the Challenge of Real Health Care Reform

Mark B. McClellan
Mark B. McClellan Former Brookings Expert, Director, Margolis Center for Health Policy - Duke University

October 14, 2008

Less than 10 years from now, U.S. health care spending will account for nearly 20 percent of the nation’s annual gross domestic product, or a price tag of about $13,000 per person. The high and rising cost of expanding coverage is a major reason why previous attempts to achieve universal coverage have not succeeded, and why reform will keep getting harder if we use the same approaches as in the past.

Much of our health care policy debate focuses on squeezing prices down for doctors, hospitals, and drugs, or increasing government subsidies to reduce the costs borne by Americans for coverage – essentially, working within our current methods of health care delivery. Even if we could push down prices a little further, or had a bit more money for subsidies, this would not slow the rate of cost growth or address the huge gaps in the quality, efficiency and value of health care in the U.S.

Instead, as costs rise, state and federal policymakers must increasingly focus on reform that expands access to coverage by improving the quality and affordability of health care. The most important health care policy reforms are the ones that support needed improvements in health care itself, to eliminate the well-known problems of preventable complications, errors, and avoidable costs.

First, reform must focus on changing the payments to providers to pay more for providing better quality and avoiding unnecessary costs, rather than simply paying more for more services. This can give providers the flexibility to take steps they know will work better—like using health information technology or helping patients get coordinated care for their disease—but which are not adequately reimbursed today. Unfortunately, under our current payment system, doctors and other health professionals often lose money when they take steps to deliver better care.

Second, patients must have access both to coverage options that let them save money while getting better care, and to the information they need to make smarter decisions. While there are ways to make it better, the Medicare Prescription Drug Benefit is less costly than expected because it promotes competition in how drug coverage was designed. Instead of the “traditional” insurance benefit design included in the legislation, Medicare beneficiaries today have generally chosen plans in which they pay flat amounts per prescription (with a tier for generics, a tier for “preferred” brand name drugs, and higher tiers for other prescriptions). Such benefits have the same actuarial value as traditional insurance design, but enable beneficiaries to keep more of the savings when they use a less costly drug that meets their needs. Similarly, personal health behaviors pose big challenges in health care today, and some health plans, employers, and communities are taking steps to support healthier choices. Our health system should encourage innovative benefits that can help people save money and stay healthier.

Because there is little new money available at the state or federal levels, combining reforms in coverage with those that support better health care is the best path forward. For example, coverage reforms could be joined with steps to make useful information available on the quality and cost of care. Such information could then be used to focus payments and benefits on results and value, with collaborations between employers and Medicare and Medicaid paying for better results rather than for medical services provided.

Finally, we must develop better evidence about what care delivery systems and medical treatments work best, and use this information to develop new cost and quality measures to drive improvements. We also must do a better job of measuring what we really want in health care—better quality at a lower cost. The reforms described here will reinforce these goals by increasing the payoff to developing and using better evidence.

The election debate is moving in this direction. With fewer additional funds available to add to the rapidly growing federal subsidies for health care, both candidates are talking about improving quality, promoting prevention, and using health information technology. However, neither candidate has yet taken the difficult step of describing specific policy reforms. By changing the health care debate to focus on how to support needed reforms in health care, not just health care coverage, we can speed up progress in identifying and implementing solutions.

Even with these steps, some redirection of the close to $1 trillion in government support for health care coverage will be necessary to ensure fiscal sustainability. Policymakers should consider whether Medicare’s subsidies should be directed to a larger degree to those with limited means or especially high health care costs, while still providing sufficient subsidies for all seniors to assure widespread participation in Medicare.

Policymakers should also address the tax subsidization of employer-based benefits. The income tax deduction for employer-provided health insurance is the largest tax deduction in the federal government—valued at $250 billion per year. Reforming this tax exclusion could help provide meaningful assistance for those without employer-based coverage.

Reforming the health care system is not going to be easy—but it is essential. We must achieve the promise of further medical breakthroughs and better health, while addressing the long-term fiscal and budget problems created by rising health care spending. The good news is that there is more potential to do so than ever before.