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Employee Benefits

Why the Health Care Bill May
Eventually Curb Medical Costs

It will take several years to know for sure, but some provisions may really help.

Make no mistake: The health care bill’s biggest change will be to extend care to about 32 million Americans who have no insurance now. It will also stop insurers from canceling coverage for many people who get sick or who have exceeded coverage caps. But on the long road to winning passage, the original goal -- slowing the growth of medical costs (bending the cost curve, in Washington parlance) was moved to the backseat.

Still, there are many provisions in the bill that can save in the long term. Most are pilot programs that need to be tested to see if they work -- a process that will take about five years. Other cost cutting moves depend on details that regulators will have to fill in. And some big ones depend on Congress having the political will to follow through. “Most of the steps represent a down payment on delivery system reform. More will need to be done,” says Ken Sperling with Hewitt Associates, a benefits consulting firm. Covering most of the uninsured should reduce cost shifting to private plans but not eliminate it. Private payers currently pay higher costs because hospitals and doctors charge them more to compensate for care that is provided to those without insurance as well as those in Medicare and Medicaid. Families USA recently estimated that families pay about $1,000 more on average each year because of this cost shifting.

Obviously, with more of the uninsured covered, this cost shifting should be affected, but given the fact that half of the newly covered will be in Medicaid, cost shifting will still go on, since Medicaid reimbursements are below market. A 2008 actuarial study by Milliman, a consulting and actuarial firm, found that Medicaid reimburses hospitals at an average of 67% of private plan rates and pays doctors at an average of 53%.

Several Medicare pilot projects could bring systemwide reforms to the health care delivery system and yield significant cost savings. The law orders pilot programs in value based hospital purchasing, payment bundling, preventable hospital readmissions and accountable care organizations. If successful, these changes would be expanded to the entire Medicare program and would become mainstream as private payers followed suit. “Medicare is a great laboratory for delivery system innovation,” says Sperling.


The hospital value-based purchasing pilot will launch in fiscal year 2013 and will base Medicare payments to hospitals on quality and outcomes. accountable care organizations focuses on coordinating the overall care delivered to Medicare patients. (Hewitt estimates that these organizations can be 10% to 15% more efficient and deliver better quality.) "Payment bundling" involves paying for services based on an episode of care rather than on fee-for-service. Bundled payments could create more incentives for efficient treatments and could be adjusted based on outcomes, say health care policy experts. "Preventable readmissions" would penalize hospitals if a patient comes back when that could have been avoided. The Congressional Budget Office (CBO) expects this to save about $2.1 billion over 10 years.

An independent commission with the job of reining in Medicare cost increases also has promise. The 15-member Independent Medicare Payment Advisory Board will be created in 2014 and will make recommendations to Congress to reduce costs and improve quality for Medicare beneficiaries. When the program’s cost projections exceed certain targets, the board’s proposals will take effect unless Congress passes an alternative that would achieve the same savings. The CBO estimates that this could yield substantial savings of $22 billion over 10 years and $7 billion a year beginning in 2019.

But if history is any guide, getting the board’s recommendations passed could be a tough sell. Earlier efforts by Congress to rein in Medicare reimbursements to physicians, for example, have been deferred year after year. “Politics often trumps policy,” says Sperling.

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