Insurance Reform Is Not Cost Control

Now that House Republicans, along with a few Democrats, have passed a bill to repeal last year’s health reform law, they are planning to offer some alternatives for replacing it. Not unexpectedly, health care spending — high and growing premiums and government expenditures — are dominant concerns among policymakers. But how can we tell if their plans are likely to tackle this problem?

Some ideas are hard to judge. That’s one reason why the Congressional Budget Office is so valuable. It provides a nonpartisan estimate of the budgetary effects of legislative proposals.

However, in some cases, one doesn’t need fancy math or computers to determine if an idea is likely to make a significant impact on the cost of care to families, businesses and taxpayers. Sometimes one only needs to know one simple fact. It’s this: In each of the past 50 years payment to health care providers has accounted for more than 85 percent of health insurance premiums. Thus, only a small fraction of spending on health insurance premiums is consumed as a cost of insurance. I have no doubt that there are ways to squeeze some efficiency out of the insurance system. But doing so is not likely to make a substantial, long-term impact on the inflation of health care costs.

Sure, there are things that could be done to make health insurance premiums cheaper for some people, relative to what they might otherwise cost. Some of those things are in the new health reform law. In combination, the mandate, the new exchanges and subsidies will put downward pressure on premiums, particularly for those participating in the non- or small-group markets.

Ideas not in the health law and frequently endorsed by Republicans, such as increasing competition among insurance companies and encouraging enrollment into higher deductible plans, can also reduce costs for some people, particularly those with low risk of high health care spending.

But can any of these approaches — those in the law and others — lower costs or reduce cost growth for everyone, system-wide? In thinking about this question, we need only recall the simple fact provided above. The vast majority of private-sector spending is not tied up in the insurance system. Thus, focusing on insurance reforms alone while claiming to seriously address the long-term spending issues for everyone ignores this basic math.

This is precisely why last year’s health overhaul, which is mostly an insurance reform law, may not do that much on cost control. A lot depends on the new, experimental ideas in it, like bundled payments, accountable care organizations and the Cadillac tax. And that is why we need to let those experiments play out — keeping at the cost problem.

To begin to address health care spending growth we need to follow the money. Providers, not just insurers, need to be part of the solution, and a big part of it — most of it, actually. Last I checked they have some very politically powerful organizations representing their interests, which makes this both technically and politically challenging. Reducing payments to providers takes money out of someone’s pocket.

The key question is, how might we get health care providers to go along with additional cost-saving reform? In fact, nobody knows the answer. If there is one, it’s likely to be through a slow and steady, decades-long process, not the firing of a magic bullet. How many people do you know will accept a dramatically lower income tomorrow?

Just because we don’t know how to solve the health care spending growth problem doesn’t mean we need to accept wrong answers as right. When you hear a health reform proposal, listen to how the proponents claim health care spending will be controlled or reduced. Apply this simple litmus test: if they’re talking only about insurance market reforms and innovations, be skeptical. That’s not where the big money is so it can’t be the full solution.

That’s not to say the insurance market isn’t in need of some reform. It is! But that’s not enough. And it takes knowing only one simple fact to see that: we spend a lot on health care — our premiums and per beneficiary spending are high — but we’re mostly not paying for insurance, despite who collects our premiums.