Spending on health care is projected to rise from 16% of gross domestic product (GDP) in 2007 to 37% by 2050 and 49% by 2082. In other words, if allowed to grow uncontrolled, health care will eat up half of everyone's spending money by 2082. Federal spending on health care also will grow to unsustainable levels, from 4% of GDP in 2007 to 12% by 2050 and 19% in 2082.
That's the projection from the Congressional Budget Office (CBO) in its 2007 Long-Term Outlook for Health Care Spending. The report was done while Peter Orszag was director of the CBO. He is now President Obama's director of management and budget.
This level of spending is unsustainable for individuals, businesses that offer health insurance, and for the government with its spending on Medicare and Medicaid.
So what can we do to stop these costs from spiraling out of control? Let's look at the top five suggestions from Orszag in his CBO report and from the Heritage Foundation.
1. Reduce Medicare Advantage Payments
The government pays private insurers about 12% more for enrollees of Medicare Advantage than it pays toward enrollees of the traditional fee-for-service component of Medicare, according to CBO estimates. Some analysts have proposed reducing these payments so the same amount is spent on all Medicare enrollees. Insurance companies are enjoying billions in profits, while draining critical money from the Medicare system.
2. Expand Research on "Comparative Effectiveness"
Doctors and hospitals enjoy incentives to "encourage or at least facilitate the adoption of expensive treatments and procedures, even if the evidence about their effectiveness relative to other therapies is limited," the CBO stated in its report. For example, I recently wrote about stents being used as treatment for blocked coronary arteries and chronic stable angina even though research showed that medication and healthy lifestyle changes were just as effective and less costly. Many analysts believe that expanded research on "comparative effectiveness" could help change the behavior of doctors and patients, especially if payment incentives were changed to encourage fewer services and less intensive, less expensive treatments.
Statutory changes would be needed for this to happen. But if these statutory changes are made, "comparative effectiveness" studies could be used to promote higher value care. "For example, Medicare could tie its payment to providers to the cost of the most effective care or most effective treatment. If that payment was less than the cost of providing a more expensive service, then doctors and hospitals would probably elect not to provide it," the CBO stated.
3. Increase Cost-sharing
On the consumer side, increased cost-sharing by consumers could also help to encourage the use of cost-effective treatments. A RAND study looked at whether higher cost sharing by employees on drugs would lower spending on health. Companies used incentive-based formulas to encourage employees to choose drugs with lower co-payments -- RAND studied 25 private employer plans to determine that increasing co-payments results in consumers using less medication and less-expensive drugs. But RAND found that while higher co-payments do cut costs, the cost savings benefited health insurance company profits, not consumers. If cost sharing is used as an incentive to reduce costs, it must designed to benefit consumers and health providers, not primarily insurance companies. Also, consumers must be given easy access to information to help them make cost-effective decisions that are good for their health.
4. Reduce Part B and Part D Subsidies
The Heritage Foundation believes that subsidies for Part B (non-hospital medical care) and Part D (prescription drugs) should be reduced for upper-income families. "These programs are not social insurance: Enrollees did not earn their benefits with payroll taxes. Rather they are large subsidies from taxpayers," the Heritage Foundation states in its Guide to Fixing Social Security, Medicare and Medicaid. High-income seniors already pay more for Part B premiums.
5. Voucher-type Health System
The Heritage Foundation also calls for a voucher type health system with Medicare being redesigned into a defined-contribution system rather than a defined-benefit plan. The idea is that costs could be reduced if seniors are given a voucher from which they can buy competing health plans, just as federal employees do. The Heritage Foundation says the Federal Employees Health Benefits Program has held down costs using this method and may serve as a model for Medicare reform.
The Heritage Foundation also called for changing the Medicaid system into a state block program to "eliminate state incentives to overspend on Medicaid."
Another idea tossed around is better disease management and coordination of care, but so far studies are inconclusive about how much cost savings can be attained. More study is needed to find out the most cost effective strategies in the areas of disease management and coordination of care. Yet Medicare has found that 25% of Medicare beneficiaries account for 85% of the program's costs, so there's a great deal of potential for cost containment.
Lita Epstein has written more than 25 books, including The Complete Idiot's Guide to Social Security and Medicare and The Pocket Idiot's Guide to Medicare Part D.
Top five ideas to control health care costs