Committee for a Responsible Federal Budget
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Three Ways to Lower Health Care Costs

Feb 23, 2021 | Health Care

There is broad agreement on the need to address high and rising health care costs and a growing consensus on potential sources of savings. At the same time, much work is needed to develop the necessary policy interventions. 

As part of our Health Savers Initiative, a project of the Committee for a Responsible Federal Budget, Arnold Ventures, and West Health, we recently published three policy briefs outlining and estimating proposals to reduce health costs for households, businesses, and the federal government.

Our first three briefs focus on reducing Medicare and private sector health costs, addressing a number of market failures and misaligned incentives. They include:

  1. Equalizing Medicare Payments Regardless of Site-of-Care. This brief addresses the fact that Medicare payments for similar procedures vary widely based on site-of-service, incenting provider consolidation and driving up costs for the federal government and the private sector.
  2. Reducing Medicare Advantage Overpayments. This brief addresses overpayments to private insurance plans in the Medicare Advantage program that reduce market incentives for innovation by allowing plans to profit from the overpayments rather than through improvements to the quality and efficiency of their product.
  3. Capping Hospital Prices. This brief addresses the high hospital prices paid by commercial insurance plans. On average, commercial plans pay more than twice as much as Medicare, with some hospitals charging three or four times as much. Those commercial prices are fueled by several factors, including increasing market consolidation and “must-have” hospitals using their market power to negotiate higher prices.

Through its briefs, the Health Savers Initiative works to identify bold and concrete policy options to make health care more affordable for the federal government, businesses, and households. In future briefs, we will include options to address prescription drug costs.

For policymakers interested in pursuing legislative improvements, our goal is to provide well-developed, innovative, and viable policy options. We also aim to bridge the divide between the promising ideas often found in academia and the development of specific policy levers that can be legislated and implemented. Finally, our project aims to attach savings estimates to these options that, when possible, measure the savings not just for the federal budget, but also to national health expenditures, federal and state government health programs, and to premiums and cost-sharing for individuals.

These briefs highlight options meant to help policymakers gain a better understanding and weigh the costs and benefits of whatever health savings policies they choose to pursue. They do not represent official recommendations from the Committee for a Responsible Federal Budget, its board, or the partner organizations.

Equalizing Medicare Payments Regardless of Site-of-Care

Currently, the Medicare program pays higher rates for medical services performed in hospital outpatient departments (HOPDs) than it pays for the same service when they are performed at physicians’ offices or Ambulatory Surgical Centers (ASCs), even when the care is equally safe and effective. In order to lower health care costs for patients and the Medicare program, policymakers could consider changing this policy by adopting site-neutral payment reform – a change that has bipartisan support and has been recommended by the Medicare Payment Advisory Commission (MedPAC) and proposed by Presidents Trump and Obama.

This policy would not only save Medicare dollars and reduce Medicare premiums and cost-sharing, but it could also generate savings in other parts of the health system. Commercial payers could achieve savings by also adopting site-neutral payments given strengthened negotiating leverage from Medicare’s change. Furthermore, by reducing payment rates for HOPDs, there would be less incentive for hospitals to purchase physician practices to convert to HOPDs, which has led to higher private sector prices.

Over the next decade (2021-2030), this site-neutral payment policy could:

  • Reduce Medicare spending by $153 billion
  • Reduce premiums and cost-sharing for Medicare beneficiaries by $94 billion

Assuming different levels of private sector spillover savings, this policy could also:

  • Reduce total national health expenditures by a range of $346 to $672 billion
  • Reduce the federal budget deficit by a range of $217 to $279 billion
  • Reduce private cost-sharing and premiums by a range of $140 to $466 billion

Read the full brief here.

Reducing Medicare Advantage Overpayments

The Medicare Advantage (MA) program, which allows Medicare beneficiaries to enroll in federally-funded private health insurance plans, is an increasingly popular alternative to traditional fee-for-service (FFS) Medicare. However, the evidence indicates that MA plans are currently overpaid. This reduces market incentives for innovation by allowing plans to profit from the overpayments rather than through improvements in quality and efficiency.

The overpayments stem from incentives that lead MA plans to report enrollee diagnoses more completely than physicians billing FFS Medicare. MA plan beneficiaries thus appear sicker than they are relative to FFS beneficiaries, which leads to higher payments. The Center for Medicare and Medicaid Services (CMS) is supposed to adjust payments to account for differences in diagnostic reporting (called “coding intensity”) but its adjustments have fallen well short of correcting the problem.

Our paper presents a simple method to adjust for coding intensity that was discussed by CMS in 2015 and further developed and analyzed by Professor Richard Kronick of the University of California at San Diego. We also discuss the MedPAC method for estimating coding intensity and develop a range of possible Medicare savings.

Over the next decade (2021-2030), policies to adjust MA payments more accurately for coding intensity could:

  • Reduce net Medicare spending by a range of $198 to $355 billion, with just over half the savings accruing to the Medicare Part A Trust Fund
  • Reduce premiums for Medicare beneficiaries by a range of $32 to $57 billion
  • Reduce the federal budget deficit by a range of $207 to $372 billion

Read the full brief here.

Capping Hospital Prices

High hospital prices are a leading driver of high and rising costs in the U.S. health care system, resulting in insurance premium growth that outpaces the growth in wages and inflation. In particular, the cost of hospital care accounts for one-third of all U.S. health care expenditures. On average, hospitals command prices in the commercial market that are more than twice as high as Medicare, with some hospitals charging three or four times as much. High hospital prices have been fueled by a number of factors, including increasing market consolidation and “must-have” hospitals flexing their market power to negotiate significantly higher prices from commercial insurers.

Our paper examines an option to address high prices and combat the effects of excess hospital market power by capping commercial prices at 200 percent of the Medicare rate.

Over the next decade (2021-2030), capping commercial hospital prices at 200 percent of Medicare could:

  • Reduce total national health expenditures, primarily through reduced commercial payments to hospitals, by just over one trillion dollars
  • Reduce commercial premiums by $889 billion and cost-sharing by $99 billion
  • Reduce the federal budget deficit by $216 billion

If the cap were limited to highly concentrated markets, savings would shrink by about 30 percent. On the other hand, tightening the cap to 150 percent of Medicare prices would almost double the savings.

Read the full brief here.