Who Will Bear the Real Cost of Health Care Reform?

The initial estimate on the net impact of health care reform was a reduction of approximately $140 billion in the national deficit. While many in Washington DC celebrated these estimates and viewed passage of reform as a significant victory, others remain skeptical that true reductions, both in the total deficit and health care expenditures, will ever become a reality.

To be clear, there is general consensus among virtually everyone that the U.S. health care system was and remains in need of transformation. There is no debating this issue. The concern that remains, however, is can reform as passed truly reduce the cost of health care over the long term?

I believe it is unrealistic for any of us to accept the initial estimates, and I think the only way we will accomplish a reformed system under current legislation will be through significant tax increases. Here’s why: in the reform law and discussions to date, one of the biggest issues of all has been passed over by both houses of Congress and the president. This issue is the sustainable growth rate (SGR) formula that legislates annual updates to physician payments. Each time SGR cuts are set to go into effect, Congress steps in and overrides the law. This happened four times* over the last year, each instance averting significant reductions to physician payments.

Current estimates reveal that in order to permanently fix the SGR, health care spending would have to be increased by $300 billion. Undoubtedly payment reforms, such as value-based purchasing, paying for quality, bundled payments, etc., will be catalysts for addressing at least a portion of this, but it is hard to believe this kind of spending reduction could take place without negatively impacting quality and/or access to providers (e.g., providers no longer participating in Medicare) in the long run.

A second observation is initial estimated cost reductions in Medicare included a combination of market basket adjustments and productivity offsets in annual updates to Medicare reimbursement. The adjustments will be based on the 10-year moving average of the private, non-farm, multi-factor productivity indicator.

In an April 22, 2010, report, Richard S. Foster, chief actuary for the Center for Medicare & Medicaid Studies, cites skepticism about the portion of the estimated $159 billion savings from the productivity indicator. Foster points out that for the most part, the delivery of health care is very labor intensive and different than the manufacturing industry. As a result, to assume continual gains in productivity can be achieved, without negatively impacting access to care or quality, does not seem practical; therefore, the full extent of these gains will not be achieved. He goes on to state that there remains no “empirical evidence demonstrating the medical community’s ability to achieve productivity improvement equal to those of the overall economy.” Foster also points out as it relates to hospital productivity, there have only “been small or negligible” improvements from 1981 to 2005. This represents a 24-year period, yet for some reason over the next 10 years it is estimated significant gains can be made in this area.

Additional concerns surround what the true costs of care will be due to the aging population, along with expanded coverage to individuals who currently do not have access to coverage. It is a common understanding that as people age, they use more health care services, and the cost of care for those individuals also increases. With a significant number of baby boomers continuing to enter the Medicare program, it is hard to comprehend that the cost per Medicare beneficiary could be reduced without additional significant cuts.

It is also a common understanding that those with access to health care coverage will utilize the health care system more often than those without. With an estimated 30 to 35 million additional Americans gaining access to coverage under health care reform, truly knowing the magnitude of the cost impact appears to be almost impossible.

Finally, the Congressional Budget Office (CBO) recently amended its original estimates by adding an additional $115 billion in spending. The CBO cited the need for the federal government to invest these dollars in administrative and infrastructure support to implement reform.

As I stated earlier, there is a critical need for a reformed health care delivery system, and nearly everyone agrees. While the details of how best to accomplish this can continue to be debated, many of the provisions implemented are necessary. Unfortunately, regardless of what the right strategy is, someone will have to pay the costs of reforming the system as a whole. In this case, I believe it will be bore by working Americans in the form of tax increases. When coupled with the general economic condition of the country, these tax increases will definitely be unprecedented and at a level we have not experienced before—at least not since the Great Depression.

*December 19, 2009: Department of Defense Appropriations Act of 2010; March 2, 2010: Temporary Extension Act of 2010; April 15, 2010: Continuing Extension Act of 2010; June 25, 2010: Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010.