JAMA Forum: What Is Health Care Cost Containment?

Larry Levitt, MPP

Larry Levitt, MPP

With the Republican convention over and the Democratic convention under way, we will no doubt continue to hear charges and countercharges between the parties about who can be trusted to save Medicare.

I am not going to adjudicate that issue here. However, what is striking about this debate is that we seem to have lost the ability to distinguish between reducing health care benefits (which virtually everyone purports to be against) and controlling costs (which everyone appears to be for).

As a country, we have never been particularly bold or successful in our efforts to address the rising cost of health care. President Jimmy Carter’s hospital cost containment proposal went nowhere, and President Bill Clinton’s plan to cap increases in health insurance premiums attracted political enemies and no doubt helped derail his own attempt at health system reform, the Health Security Act. As Drew Altman, president and chief executive officer of the Henry J. Kaiser Family Foundation, and I have written, previous efforts to control health care costs have, at best, met with temporary success, and the cost trend always bounced back up.

One person’s cost containment is another person’s revenue or income, so controlling health care costs will always be a challenge. But it will be insurmountable if any effort to legitimately address the growth in health care costs is perceived as taking health care away from people.

We will continue to hear plenty of ideas during this election season. Democrats will point to elements of the Affordable Care Act, including the reductions in future increases in Medicare payments to hospitals and insurers, delivery system reforms, and the rebates insurers are required to issue if they spend too much on administrative expenses and profits and not enough on medical claims. Republicans will talk about shifting Medicare to a premium support system, transforming Medicaid into a capped block grant, and encouraging high-deductible insurance plans.

The 2 parties and the Presidential candidates offer radically different visions to deal with health care costs, and even experts disagree about the best direction for the country. A debate like this will never be devoid of spin and demagoguery, but in a more optimistic spirit, I offer 4 questions to keep in mind when assessing any proposed health care cost containment idea:

  1. Who will be targeted? Not surprisingly, federal policy debates over health care costs tend to focus on budgetary costs, primarily Medicare and Medicaid. To be sure, reducing the cost trend in those programs is a worthy goal, but it may do little to lower health benefit costs for businesses or out-of-pocket expenses for people. (Interestingly, the tax exemption for employer-provided health insurance costs the federal government more than $200 billion per year and is driven largely by growth in private health costs, but it is often ignored when considering how to control federal health spending.)
  2. Does it reduce costs or just shift them? In the context of the federal budget, saving a dollar by controlling underlying health care costs may look no different from saving a dollar by shifting the expense to someone else. However, while one approach may lead to greater efficiency in the health system, the other may simply be a benefit cut. For example, raising the age of eligibility for Medicare—which people may support or oppose from the perspective of federal budget policy—does nothing to make the delivery of health care more cost-effective and shifts costs to beneficiaries and employers. Similarly, capping federal costs for Medicaid through a block grant could shift costs to states and low-income individuals.
  3. Does it result in 1-time savings or a reduction in the rate of growth? Efforts that produce 1-time savings in health care costs—eg, reducing hospital readmissions—are certainly worth doing, but the compounding effects of annual growth in costs will make any savings look small over time. The holy grail of cost containment is to lower the rate of growth and get the cumulative effects of compounding in reverse. (Of course, some argue persuasively that we can lower the rate of growth in costs by continually taking a series of 1-time steps.)
  4. Who is at risk if it doesn’t work? Policies to achieve cost containment generally use carrots and sticks to get the supply side of the health care equation (health care professionals and institutions) or the demand side (patients) to behave differently. Sometimes, the effects are reasonably clear. For example, paying a bundled rate for all services associated with an episode of care induces hospitals and physicians to find efficiencies and leaves them at risk for having to absorb any cost overruns. Or exposing people to higher deductibles gives patients an incentive to use care more wisely but also leaves them with higher out-of-pocket costs if they are sick and need more services. Depending on where you sit, you will undoubtedly perceive these policies differently. Other times, the effects are murkier. Cutting payment rates to physicians, for instance, might appear to leave clinicians at risk, but lower rates could also make it more difficult for patients to find a doctor.

Ironically, we are in a period of historically low growth in health spending. Expectations are that this slow growth will continue for several years due to the lingering effects of the economic downturn and possibly factors we don’t yet understand (as described here and here). Yet few believe that we have permanently bent the health care cost curve, and upcoming budget debates will almost certainly revolve around the future cost of Medicare and Medicaid. If we ask the right questions, maybe we can focus those debates on how to truly contain health care costs.

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About the author: Larry Levitt, MPP, is Senior Vice President for Special Initiatives at the Kaiser Family Foundation and Senior Advisor to the President of the Foundation. Among other duties, he is Co-Executive Director of the Kaiser Initiative on Health Reform and Private Insurance.

About The JAMA Forum: To provide ongoing coverage throughout this election year, JAMA has assembled a team of leading scholars, including health economists, health policy experts, and legal scholars, to provide insight about the political aspects of health care. Each JAMA Forum entry expresses the opinions of the author but does not necessarily reflect the views or opinions of JAMA, the editorial staff, or the American Medical Association. More information is available here and here.