14
The Policy Agenda

INTRODUCTION

With large opportunities for cost savings identified in conjunction with multiple strategies in the first two workshops in this series for improving the efficiency of the healthcare system while increasing quality, greater clarity was needed for developing a policy agenda that maximizes the utility and impact of delivery system reforms. The goal of the third workshop was to explore the policy opportunities and potential barriers to implementing possible solutions for improving the delivery of care in this country.

In her keynote address for the third workshop, Karen Davis of the Commonwealth Fund discusses priorities for policy options to achieve cost control and affordable coverage for all. She identifies the goals of health reform as slowing growth in health spending; creating incentives for providers to take broader accountability for patient care, outcomes, and resource use; providing rewards for improved care coordination among providers; and creating an infrastructure to support providers in improving quality and efficiency. She discusses how these goals are driven by the current state of affairs, where 21 percent of adults report going to the emergency room within the past 2 years for a condition that could have been treated in a physician’s office and the existing threefold spread between those in the lowest ($947) and highest quartiles ($2,911) for risk-adjusted spending for hospital readmissions after coronary bypass surgeries.

Referencing the recommendations of the Commonwealth Fund’s Commission on a High Performance Health System—outlined in the report A High Performance Health System for the United States: An Ambitious



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14 The Policy Agenda INTRODUCTION With large opportunities for cost savings identified in conjunction with multiple strategies in the first two workshops in this series for improving the efficiency of the healthcare system while increasing quality, greater clarity was needed for developing a policy agenda that maximizes the utility and impact of delivery system reforms. The goal of the third workshop was to explore the policy opportunities and potential barriers to implementing possible solutions for improving the delivery of care in this country. In her keynote address for the third workshop, Karen Davis of the Commonwealth Fund discusses priorities for policy options to achieve cost control and affordable coverage for all. She identifies the goals of health reform as slowing growth in health spending; creating incentives for provid- ers to take broader accountability for patient care, outcomes, and resource use; providing rewards for improved care coordination among providers; and creating an infrastructure to support providers in improving quality and efficiency. She discusses how these goals are driven by the current state of affairs, where 21 percent of adults report going to the emergency room within the past 2 years for a condition that could have been treated in a physician’s office and the existing threefold spread between those in the lowest ($947) and highest quartiles ($2,911) for risk-adjusted spending for hospital readmissions after coronary bypass surgeries. Referencing the recommendations of the Commonwealth Fund’s Com- mission on a High Performance Health System—outlined in the report A High Performance Health System for the United States: An Ambitious 

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 THE HEALTHCARE IMPERATIVE Agenda for the Next President (The Commonwealth Fund Commission on a High Performance Health System, 2007)—Davis focuses particular atten- tion on the importance of aligning financial incentives to enhance value. In discussing fundamental payment reform that rewards physicians and other providers for achieving quality, she cites examples of successful experiments such as those at Geisinger Health System. Based on the commission’s report, significant savings opportunities could be wrought from implementing these recommendations, with a potential of $123 billion in savings over a decade from instituting bundled payment policies, $83 billion over 10 years from strengthening primary care and care coordination, and $70 billion from promoting health information technology. Providing additional context in light of broader discussions on the analyses of the Congressional Budget Office (CBO), Joseph R. Antos of the American Enterprise Institute surveyed the analytical framework used by CBO in developing estimates of various dimensions of health expenditures, in which he emphasized that CBO considers exclusively the impact of leg- islation on the federal budget. He also suggested that because important considerations such as the impacts of legislative proposals on private health spending and access to care are not considered in CBO cost estimates, CBO estimates provide important but incomplete guidance to policy makers on the financial impact of potential legislation. GETTING TO HIGH-PERFORMANCE Karen Davis, Ph.D. The Commonwealth Fund Despite the fact that the United States pays more than twice as much, per capita, as other nations for health care—over $7,000 for each man, woman, and child—it still has 46 million uninsured, and another 25 mil- lion who are underinsured, meaning that they have coverage that provides inadequate protection against financial catastrophe should serious illness occur (Schoen et al., 2009). Healthcare spending is expected to double to $5.2 trillion per year by 2020 if dramatic steps are not taken soon, even as the number of uninsured continues to balloon (Schoen et al., 2009). Everyday, Americans participate in a healthcare system that is plagued with avoidable, ineffective, and unsafe care that drive ever-higher costs (The Commonwealth Fund Commission on a High Performance Health System, 2008). The following discussion addresses the scope of the challenges and problems now confronting the country. No single strategy or silver bullet can transform the U.S. healthcare system into one of high performance. Rather, several key strategies are necessary to address the problem, some of which are currently under consideration in the health reform pending in Congress.

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 THE POLICY AGENDA Goals for Reform Any healthcare reform bill that is serious about controlling costs needs to have strategies for: • Slowing growth in health spending; • Creating incentives for providers to take broader accountability for patient care, outcomes, and resource use; • Providing rewards for improved care coordination among provid- ers; and • Putting in place an infrastructure to support providers in improving quality and efficiency. Spending The United States is traveling down a fiscally dangerous road. It al- ready has the most expensive healthcare system in the world, consuming 17 percent of the nation’s gross domestic product and projected to rise to 21 percent by 2020 (Schoen et al., 2009). Yet, the nation is now in last place behind 18 other high-income countries on mortality amenable to health care before age 75—deaths potentially preventable with timely, effective health care or early efforts to screen and prevent the onset of disease (Nolte and McKee, 2008). Although the United States improved on this measure by 4 percent over 5 years, other countries achieved an average improve- ment of 16 percent over the same period. The difference between the United States and the countries with the lowest mortality rates amounts to 100,000 premature, potentially preventable deaths each year. In spite of unparalleled spending, if nothing changes, an estimated 61 million people will be uninsured in 2020, and over 30 million more will be underinsured, at risk of incurring medical bills they cannot afford and accumulating debt for healthcare expenses (U.S. House of Representatives, 2009). The United States simply cannot continue on its current course. To achieve more affordable coverage and ensure access for everyone in the country, the way health care is delivered and paid for must be changed. It is time to focus on value. Accountability Several of the key drivers of unnecessary spending are the lack of em- phasis on prevention, fragmented and uncoordinated care, and variation in expenditures within and between states without commensurate value. Many hospital admissions are potentially avoidable if patients received good preventive and chronic disease care (Kottke et al., 2009). But there

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 THE HEALTHCARE IMPERATIVE is also a twofold to fourfold difference between the admission rates in top performing states and those of bottom performing states (McCarthy et al., 2009). This failure to focus on prevention—and the variation among states— results in costs beyond the admission itself, as patients end up readmitted to hospitals, undergoing surgery or expensive procedures for complications that could have been prevented, such as amputations or kidney dialysis for diabetics. Indeed, instead of acting early to stop the onset of diabetes or complications associated with diabetes, Medicare covers the costs of treat- ing end-stage renal disease without incentivizing preventive treatment and chronic care management. A Commonwealth Fund-supported study of Medicare fee-for-service claims data for nearly 12 million Medicare beneficiaries discharged from a hospital in 2003 and 2004 found that one of five patients was readmitted within 30 days, and half of nonsurgical patients were rehospitalized with- out having seen an outpatient doctor in follow-up (Jencks et al., 2009). The estimated cost of unplanned hospital readmissions in 2004 accounted for $17.4 billion of the $102.6 billion total hospital payments made by Medicare that same year. The Medicare Payment Advisory Commission (MedPAC) estimates that 75 percent of Medicare readmissions are poten- tially preventable, using well-managed care during transitions and effective handoffs as vulnerable patients leave the hospitals (MedPac, 2007). Glenn Hackbarth and colleagues have shown that a significant pro- portion of variation in Medicare spending can be traced to variability in readmissions and post-acute care (Hackbarth et al., 2008). For example, spending on readmissions can vary from hospital to hospital by 54 percent and by as much as 71 percent for post-acute care for coronary artery bypass grafting with cardiac catheterization, a common procedure. Care Coordination Another problem that is both a result of lack of insurance as well as overall access problems is an inordinately high emergency room use rate relative to other countries, even for conditions that could be treated by regular, nonurgent care (Schoen et al., 2007). A big contributor to this problem is a collective failure to focus on primary care and prevention and a growing shortage of primary care physicians relative to specialists (Bodenheimer et al., 2009). Even patients with insurance coverage are at risk, due to a fragmented, poorly coordinated care system that relies on paper medical records. Basic information about allergies, medications, medical history, or recent diag- nostic or lab test results does not follow patients through the healthcare system. As a consequence, patients confront duplication and delays when records are not available as needed, wasting time and resources and putting

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9 THE POLICY AGENDA patients at risk for medical errors. Nearly half of all adults encounter break- downs in care coordination or instances of flawed information exchange (How et al., 2008). In the Medicare program, the costs of care are highly concentrated among patients with multiple chronic conditions, and such costs are increas- ing. In 2005, annual costs of care to Medicare averaged $38,000 for patients who had all three of the following conditions: heart failure, diabetes, and chronic lung disease (The Commonwealth Fund Commission on a High Performance Health System, 2008). This represents a 20 percent increase from 2001. Dartmouth researchers have shown that costs of care vary sig- nificantly across the country, with a twofold spread between the lowest and highest 10th percentiles of hospital regions for any combination of these three conditions (Fisher et al., 2009). Focusing on these patients offers op- portunities to improve care outcomes and use resources more efficiently. Administrative Cost An uncoordinated system is also expensive to administer. The costs of insurance administration in the U.S. healthcare system totaled nearly $156 billion in 2007, and that figure is expected to double—to reach $315 billion—by 2018 (Collins et al., 2009). Indeed, the United States leads all other industrialized countries in the share of national healthcare expenditures devoted to insurance administration (The Commonwealth Fund Commission on a High Performance Health System, 2008). The U.S. share is about 7.5 percent, compared with 5.6 percent in Germany and 2 percent in Finland and Japan. The McKinsey Global Institute estimates that the United States spends $91 billion more a year on health insurance administrative costs than it should, given its size and wealth (Farrell et al., 2008). The majority of administrative costs are attributable to private health insurance. Of the $156 billion spent on healthcare administration in 2007, about 60 percent, or $94.6 billion, was paid for by consumers and employers in the form of premiums to private insurance companies (Collins et al., 2009). The remaining 40 percent included federal, state, and local governments’ administrative costs for public health programs such as Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP). It also included the administrative costs of private drug plans and private health insurance plans that contracted with the government. Administrative costs in private health plans are a higher share of insurance expenditures than are administrative costs in public insurance programs like Medicare and Medicaid. Administrative costs represent 12.2 percent of private health insurance expenditures, compared with 6.1 percent of public program expenditures (Collins et al., 2009). The complex administrative nature of the U.S. system adds costs for providers as well. Physicians, on average, spend nearly 3 weeks per year

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0 THE HEALTHCARE IMPERATIVE interacting with health plans, or 3 hours per week (Casalino et al., 2009). Converted into dollars, practices spent an average of $68,000 per physician per year interacting with health plans; primary care practices spent $65,000 annually per physician, nearly one-third of the net income, plus benefits, of the typical primary care physician. This results in an estimated $31 billion per year spent by physician practices on interactions with health plans. Eliminating Excessive, Unnecessary, and Wasteful Expenditures Any discussion of curbing spending must first pose the fundamental question: What do we want out of our health system? What most of us want is a health system that offers the best possible outcomes at an afford- able price. But our current fee-for-service system does not, on the whole, do that. It reimburses “inputs”—hospital stays, physician visits, and pro- cedures—rather than the most appropriate care over an episode of illness or over the course of a year. Fee-for-service payments create incentives to provide more and more services, even when there may be better, lower-cost ways to treat a condition. In its report, A High-Performance Health System for the United States: An Ambitious Agenda for the Next President, the Commonwealth Fund’s Commission on a High Performance Health System laid out five key strat- egies for achieving affordable, high-quality health care for all Americans (The Commonwealth Fund Commission on a High Performance Health System, 2007). The first and most important strategy is affordable coverage for all Americans. The second strategy involves aligning financial incentives to en- hance value and achieve savings. Curbing rising costs requires fundamental payment reform that rewards physicians and other providers for achieving quality and moves us away from the current reliance on fee-for-service pay- ment toward incentives for quality, bundled payments for episodes of care, or global rates for per patient care. The third strategy calls for organizing care to ensure accessible, patient-centered, coordinated care. The fourth strategy calls for meeting and raising benchmarks for high-quality, efficient care. The fifth strategy calls for establishing accountable federal leadership and better public–private collaboration in order to foster a focus on setting national goals and coherent policies. Honing in on Policy Solutions It is essential to change the way care is paid for to reward high-quality and prudent stewardship of healthcare resources and to encourage reorga- nization of care so that it is well coordinated and responsive to patients’ needs. To move away from the current fee-for-service payment system

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 THE POLICY AGENDA toward one that emphasizes value rather than volume, several strategies should be pursued. First, to strengthen and reinforce patient-centered primary care, policies should be put in place that offer incentives for the adoption of the medical home model to ensure better access, coordination, chronic care manage- ment, and disease prevention. Next, the system can facilitate appropriate care and manage chronic conditions through integrated delivery networks that provide a continuum of care or provide funding and technical assis- tance for statewide and community efforts to support and connect primary care and more specialized resources in informal or virtual networks. Third, leaders must promote more effective, efficient, and integrated healthcare delivery through adoption of more bundled payment approaches to paying for acute care over a period of time, with rewards for quality, outcomes, and patient-centered care, as well as rewards for efficiency tied to high per- formance. Finally, the country should intensify the focus on preventing and managing chronic conditions, including incentives for more coordinated care and setting goals to improve outcomes for chronic conditions that ac- count for the bulk of healthcare needs and spending. Some promising reforms are already taking shape. Geisinger Health System of Pennsylvania now charges a flat, or global, fee for surgery, in- cluding a “warranty” for 90 days of follow-up treatment—postoperative and rehabilitative services for 90 days postdischarge. Complications have consequently declined by 21 percent, readmissions declined by 44 percent, and the average length of stay declined by half a day (Paulus et al., 2008). In short, this change in delivery and payment was a win-win: it improved patient outcomes and reduced cost. Geisinger has subsequently extended this strategy to other areas, including hip replacement, cataract surgery, obesity surgery, and prenatal care and delivery of newborns. Moving broadly toward blended payments, in which compensation for physicians includes fee-for-service payments, per-patient payments, and performance bonuses, would encourage physician practices to set up their offices as medical homes, which patients could join to receive coordinated, accessible care (Davis et al., 2009b). Medical homes, in turn, should lead to improved chronic care management, ensure patients receive preventive care, and offer accessible, off-hours care. Medical homes could also reduce the number of emergency room visits. Offering a bundled acute-care payment (e.g., a global fee covering hos- pitalization and a specified set of services for 30 days following discharge) would give hospitals and other providers an opportunity to share the sav- ings from their efforts to provide transitional care, reduce complications of treatment, lower numbers of readmissions, and allow them more flexibility in allocating their resources. Over time, spending would slow as efficiency savings were shared between payers and providers. Estimates are that

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2 THE HEALTHCARE IMPERATIVE within the context of comprehensive insurance expansion and other system- wide reforms, a bundled payment approach would reduce national health expenditures by $301 billion and save the federal government $211 billion over the 11-year, 2010-2020, period (The Commonwealth Fund, 2009). By realigning financial incentives to reward quality and efficiency, pol- icy makers can eliminate the barriers to coordination among hospitals and post-acute providers built by the current fee-for-service payment system. Instead, providers will be encouraged to collaborate and rewarded for providing a continuum of care throughout the entire course of a patient’s treatment and follow-up. Experimentation with different payment reforms is clearly needed, and this can be accomplished through various types of demonstrations. If Medicare and Medicaid provide leadership, more private insurers would be encouraged to follow suit. Once new payment methods are in place, leaders can observe their effects, see what works best, and give providers time to learn how to improve through them. The country must start testing different approaches now to begin to rein in costs—and to make sure it is paying for the best available care, not just more services. The Commission on a High Performance Health System has pointed out that the more organization in delivery systems, the more feasible pay- ment reforms such as bundled payment become (Shih et al., 2008). The reforms themselves could actually spur organization, since they reward optimal care over the continuum of services. A June 2009 Commonwealth Fund publication titled Finding Resources for Health Reform and Bending the Health Care Cost Curve found that a wide range of policy options exist for achieving health system savings to help finance health reform (Nuzum et al., 2009). Estimates of savings from the Fund’s Path report, the Office of Management and Budget, and the CBO indicate that early investments could yield significant reductions in total healthcare spending over time through gains in the quality and efficiency of care. The differences among the estimates reflect primarily the scope of the policies and their particular elements. It is worth noting that the major reform bills that have passed the House committees and the Senate’s Health, Education, Labor and Pensions Committee do include provisions that address many of the issues mentioned here. The House and Senate bills include multiple provisions that would help to move the U.S. health system on the path to high performance (Davis et al., 2009a). The following provisions have the most potential to improve health system performance and control spending: • Invest in primary care by increasing Medicare and Medicaid pay- ment rates for prevention and primary care services. • Encourage the development of medical homes by creating a cen- ter on Medicare and Medicaid payment innovation charged with

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 THE POLICY AGENDA rapid-cycle testing of innovative payment methods with shared sav- ings incentives for physician practices certified as patient-centered medical homes. • Change provider payment to reward quality and efficiency through such mechanisms as pilots for rapid-cycle testing of accountable care organizations with shared savings incentives to slow expendi- ture growth. • Enhance payment for physician services in geographic areas with the lowest utilization rates. • Reduce Medicare payments for preventable hospital admissions. • Test bundled payment approaches for hospital acute care episodes and post-acute care. Reaching Further These provisions are major constructive actions, yet in the long run they are likely to fall short of what is needed. The U.S. health system is unlikely to reach its potential without more far-reaching measures. The House Ways and Means bill includes a public health insurance plan with payment linked to Medicare, while the House Energy and Commerce bill bases payment under the public plan on negotiations by the secretary and requires a review of plans in the insurance exchange with premium in- creases in excess of 150 percent of medical inflation. But neither includes other promising provisions such as those that would link insurance benefit design to comparative effectiveness research findings, or assessing taxes on tobacco, alcohol, and sugared soft drinks. The Congressional Budget Of- fice has not provided estimates of the likely effect of these two versions of health reform on the growth in total national health expenditures, employer premiums, or employer and household savings. To transform the health system and achieve much needed total system savings, Congress should consider bolder actions in five key areas: fun- damental payment reform, cost containment, comparative effectiveness, public health, and a system of establishing and monitoring progress on health reform goals. Fundamental payment reform Perhaps most importantly, Medicare, Medicaid, and private and public plans participating in a health insurance exchange should all incorporate effective innovative payment methods as soon as those have been tested in a rapid-cycle process by a center on pay- ment innovation. The center on payment innovation should be charged with testing systemwide payment reform, including Medicaid and private payers, and granting state waivers for systemwide cost containment initia- tives and harmonization of public and private payment.

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 THE HEALTHCARE IMPERATIVE Cost containment Productivity improvement requirements on increases in provider payment for plans covering those under age 65 should be similar to those on Medicare payment increases. Comparative effectiveness Evidence from the $1.1 billion allocated to various agencies within the U.S. Department of Health and Human Services by the American Recovery and Reinvestment Act for comparative effective- ness research should be used in designing coverage, payment, and patient incentives. Public health Policies such as taxing products related to unhealthy behav- iors and investing in antismoking and obesity programs should be included in health reform. Goals and targets Goals for health reform should explicitly be included in the legislation and a system instituted for monitoring progress toward those goals. Goals should include achievable goals by 2020 for share of popula- tion covered by health insurance meeting an affordability standard; bending the healthcare cost curve; share of population receiving care from patient- centered medical homes and accountable care organizations; performance on quality, safety, and disparities in care; and health outcomes. It is time to transform our current system of payment and delivery of health care into a system that not only provides better quality care, but also bends the healthcare cost curve. Current legislative proposals contain many provisions to develop, rap- idly test, and spread new payment models within the Medicare/Medicaid programs to replace current payment methods that largely reward volume. But all these vitally important delivery system reform efforts should be coordinated across the public and private sectors. Aligning public- and private-sector payment innovations would amplify the power of effective incentive approaches by sending the same signals about what is valued across different payers. It would also simplify admin- istrative complexity and reduce the burden associated with existing pay- ment methods. Such alignment would also minimize administrative burden for providers faced with responding to these new, innovative methods, as well as reduce the likelihood of payment distortions across payers and/or regions (American Board of Internal Medicine, 2009). An effort like this would require that the Centers for Medicare & Medicaid Services (CMS), through a delivery and payment system innova- tion center, have sufficient authority, flexibility, direction, and financing for its payment reform charter to support rapid-cycle testing and then broadly implement payment models that reward outcomes and better value. CMS also should foster Medicare and Medicaid participation in local payment

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 THE POLICY AGENDA pilots designed by other payers and providers that are responsive to state/ regional community needs. Conclusion In summary, health reform needs to go beyond insurance coverage to bending the curve in healthcare spending and reaping greater value for what the United States spends on health care. The essential elements of reform include opening a center on delivery and payment system innovation; rapid- cycle multipayer innovations in Medicare, Medicaid, other state payers, and private payers; and harmonization of public and private payment in Medicare, Medicaid, a public/co-op plan, and private plans. Fundamental payment reform can be brought about by accountable care organizations, medical homes, bundled hospital acute care, transitional care, and follow-on care. The establishment of a center on medical effec- tiveness and healthcare decision making will link coverage and payment decisions to evidence-based findings. Medicare reform will target high-cost areas, high-cost providers, waste, and unsafe or ineffective care through freezing payment updates to hospi- tals and physicians in high-cost regions (possible exceptions for account- able care/organized care system providers with median or below costs and average or above quality); by offering incentives for reduced hospital readmissions; and by providing pharmaceutical discounts for dual ben- eficiaries, negotiation of prescription drug prices, and global fees for sole source drugs. Lastly, an independent commission should be charged with developing policy recommendations for increasing value, eliminating waste, and bending the total system cost curve. Obviously, not all of this can be done at once—despite the desire of many to “fix” the problem today. But a focus on experimenting with, learn- ing about, and thoughtfully restructuring systems for delivering care and for paying for care is a crucial first step. Even if the focus is on Medicare, the short-term savings and reforms are consistent with the trajectory of im- provement that we need to institute for the long term. If implemented, these recommendations would facilitate more rapid development and implemen- tation of a rational payment and delivery system. CBO SCORING: METHODS AND IMPLICATIONS Joseph R. Antos, Ph.D., M.A. American Enterprise Institute The fate of proposed legislation in Congress often depends on assess- ment by CBO of the proposal’s impact on the federal budget. Created by

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 THE HEALTHCARE IMPERATIVE the Congressional Budget and Impoundment Control Act of 1974, CBO is required to provide a cost estimate for every bill reported by a congres- sional committee to show how it would affect government spending or revenues1 (CBO, n.d.). Because of concerns about rising budget deficits, CBO cost estimates for major policy initiatives are often highly influential and controversial. CBO’s Role CBO is a congressional agency mandated to provide Congress with objective, nonpartisan, and timely analyses to aid in economic and budget- ary decisions on the wide array of programs covered by the federal budget. CBO also provides information and estimates required for the congressional budget process. The agency produces reports on the nation’s budget and economic outlook, analysis of the President’s budget, cost estimates, budget options, the long-term budget outlook, and other analytic studies. Although CBO is responsible for cost estimates, the Joint Committee on Taxation (JCT) has jurisdiction over tax legislation. CBO reports JCT revenues estimates for such legislation. Cost Estimates A cost estimate provides information on the potential impact of legisla- tion on federal spending and revenue. Such estimates show how the budget would be affected by the proposal and are presented in tables that have the appearance of accounting ledgers. Nonetheless, cost estimates are projec- tions of future financial flows (generally over the next 5 or 10 years) and are subject to estimating uncertainty. The estimates are only as good as the underlying data, assumptions, and understanding of complex economic, social, and political systems permit. Estimates are incremental, showing how a proposal would change federal spending or revenues relative to the “current law baseline”—the projected stream of spending (or revenue) that would occur if there was no new federal legislation. CBO cost estimates assume that only the pro- posal at hand would be enacted, not other proposals that might be under consideration by Congress at the same time. Since a bill’s provisions can change in response to concerns raised during congressional debate, CBO often scores the same basic bill several times—when the bill is considered by a committee, when the (probably) altered bill is considered on the floor of 1 Inaddition, CBO must provide a mandate statement indicating whether reported bills contain federal mandates. If the 5-year direct costs of an intergovernmental or private-sector mandate exceed specified thresholds, CBO must provide an estimate of those costs (if feasible) and the basis of the estimate.

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 THE POLICY AGENDA the House or Senate, and again when the final bill emerges from conference and is voted on by the full Congress. In addition to numerical estimates, CBO often provides explanations of the proposal and a summary of the reasoning behind the estimate. To avoid making arbitrary judgments, CBO assumes that existing law will be enforced as written even if Congress has previously taken action to temporarily override the law. For example, the “sustainable growth rate” formula in Medicare imposes reductions in Medicare payments to physi- cians if spending increases too rapidly, but Congress has overridden those reductions in all but one year. Observers may be justified in believing that Congress will continue to override the fee cuts, but CBO must follow the letter of the law as it stands. Cost estimates assume that all scheduled re- ductions will be taken in the future unless the proposal includes a specific provision to modify the payment calculation. Cost estimates are based on a careful analysis of legislative language and generally do not rely on informal sources of information about the proposal, such as committee press releases. However, when time is critical and in the early stages of policy development, CBO’s analysis will also in- corporate information from the committee or bill sponsor’s staff. In addition to information about the proposal, CBO draws on a wide range of analytical information in developing its estimate. Depending on the specifics of the proposal, CBO may use data from Medicare, Medicaid, and other federal programs; survey data (including surveys of individuals, such as the Medicare Current Beneficiary Survey and the Medical Expen- diture Panel Survey, and surveys of providers and insurers); information from clinical and delivery system experiments; and other sources of data on the health system, demographics, and the economy. CBO analysts develop their modeling assumptions (such as the expected response of patients and doctors to a change in the price paid by Medicare for a particular type of service) based on peer-reviewed literature published in health policy, eco- nomic, medical, and other journals; unpublished studies from reputable sources; direct observation of trends in the healthcare market; comparisons with previous analyses by CBO and others of similar proposals; and consul- tation with experts, including staff from CMS, insurance actuaries, medical leaders, academics, and others. The cost of many proposals can be estimated in a straightforward man- ner, but some present greater challenges to CBO analysis. The following factors increase that challenge: • Novelty—limited or no previous experience with the proposal in- creases uncertainty • Number of provisions—additional provisions increase the chance of complex interactions • New market or administrative structures

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 THE HEALTHCARE IMPERATIVE • Magnitude of intended impact—“big” policies could generate a larger and more unpredictable behavioral response • Vague or incomplete specifications • Time pressure Example: Reduce Payment Updates One example of a relatively unchallenging estimate is a proposal to re- duce the update, or inflation, factor that is used to adjust Medicare payment schedules from year to year. This type of policy is well understood. Similar policies have been proposed and implemented over the past two decades for the program’s payments for inpatient hospital services. In addition, such a policy is directly administered by the federal government and does not in- volve changes in either Medicare’s payment structure or the health delivery system. For those reasons, there is little debate on the aggregate financial impact of such a proposal on the budget. However, the cost estimate is not a simple matter of arithmetic. Poten- tial savings (that is, reduced federal spending) may be offset by changes in admissions, patient mix, the use of services other than inpatient hospital services, and other adjustments that would be induced by the payment re- duction. Budget analysts generally assume that healthcare providers faced with a reduction in Medicare fees will take steps to maintain their revenue stream by producing more services. The magnitude of such behavioral off- sets is uncertain but must be accounted for in the estimate. In the case of a long-established policy approach, the uncertainty is minimal. Example: Prevention An example of a more difficult estimate is a proposal to expand the use of clinical preventive services, including immunizations and other medi- cal interventions to prevent disease (“primary prevention”) and screening to detect disease at early stages (“secondary prevention”) (CBO, 2008b). In both cases, the preventive service may be clinically effective (in that it improves health) and cost-effective (with costs lower relative to the health benefits) but may not result in aggregate savings to the federal budget or the health system. A variety of issues must be considered in estimating the budgetary impact of a policy to promote the use of preventive services. They include the following: • Effectiveness—savings increase if the service is more effective; the effectiveness of screening depends on both the test’s ability to detect disease and the availability of treatment that is more effective when the condition is caught early (Russell, 2009).

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9 THE POLICY AGENDA • Frequency—more frequent use of the service increases spending and may increase net cost if subsequent uses are less effective. • Targeting—savings increase if the service is narrowly targeted on those most likely to benefit. • Take-up—spending increases if more people “take-up” or adopt the service, which depends in part on the specific incentives in- cluded in the proposal. • Other costs—other costs may be induced by use of the preventive service, including the cost of treating any adverse reactions to the service, the cost of follow-up testing and treatment for patients with positive screening tests, and the cost of treating other diseases that occur because of the person’s extended life span. A portion of the benefits and costs associated with a prevention pro- posal accrues to private individuals and insurers (perhaps by helping to lower their health spending), and some may be nonfinancial in nature (such as reduced suffering related to disease). Such considerations may justify enacting the proposal, but they are not a part of the cost estimate. Because clinical preventive measures often take more than 10 years for the full benefits to be realized, some have suggested that the scoring window should be expanded to 25 years from the current 10-year period (Huang et al., 2009). That argument may be valid but ignores the need for con- sistent treatment in CBO cost estimates of all legislative proposals and all provisions in a single bill. If a prevention initiative is scored over 25 years, all initiatives should be scored over the same period to allow fair compari- sons. In addition, extending the number of years over which a bill is scored increases the uncertainty of the estimate, particularly in the later years. Conclusion CBO scoring will continue to play a critical role as Congress debates major reforms in health care and other policy areas. Although cost esti- mates are presented in very precise numerical terms, they are subject to uncertainty and depend critically on how CBO analysts interpret legislative language and previous studies and data relating to the specific proposal. Different analysts may appropriately make different judgments about the federal budget impact of a proposal, particularly complex legislation, but CBO is the final arbiter of fiscal impact for Congress. CBO’s mission is precisely defined, and its principal objective in pro- ducing cost estimates is to project the likely impact of a legislative proposal on the federal budget. Cost estimates also include other information likely to be important in congressional deliberations. For example, in addition to estimating the budgetary flows of outlays and revenues, CBO projects the number of people who would become insured if a major health reform pro-

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0 THE HEALTHCARE IMPERATIVE posal was enacted. Nonetheless, the focus is on the federal budget. Complex proposals are likely to have effects on private health spending, access to care, costs to consumers and employers, and other important considerations not included in a CBO cost estimate. For that reason, such estimates pro- vide important but incomplete guidance to policy makers, who must weigh these other factors in deciding whether or not to support a bill. REFERENCES American Board of Internal Medicine. 2009. The need to harmonize Medicare payments with the private sector. Philadelphia: American Board of Internal Medicine. Bodenheimer, T., K. Grumbach, and R. Berenson. 2009. A lifetime for primary care. New England Journal of Medicine 360(26):2693-2696. Casalino, L., S. Nicholson, D. Gans, T. Hammons, D. Morra, T. Karrison, and W. Levinson. 2009. What does it cost physician practices to interact with health insurance plans? Health Affairs (Millwood) 28(4):w533-543. CBO (Congressional Budget Office). n.d. Background on cost estimates. http://www.cbo. gov/CEBackground.shtml (accessed September 2009). Collins, S. R., R. Nuzum, S. D. Rustgi, S. Mika, C. Schoen, and K. Davis. 2009. How health care reform can lower the costs of insurance administration. Issue Brief (Commonwealth Fund) 61:1-19. The Commonwealth Fund. 2009. The Path to a High Performance U.S. Health Care Sys- tem: A 2020 Vision and the Policies to Pave the Way. http://www.commonwealthfund. org/Content/Publications/Fund-Reports/2009/Feb/The-Path-to-a-High-Performance-US- Health-System.aspx (accessed August 26, 2009). The Commonwealth Fund Commission on a High Performance Health System. 2007. A High Performance Health System for the United States: An Ambitious Agenda for the Next President. New York: The Commonwealth Fund. ———. 2008. Why Not the Best? Results from the National Scorecard on U.S. Health System Performance. New York. Davis, K., S. Guterman, S. Collins, K. Stremikis, S. Rustgi, and R. Nuzum. 2009a. Starting on the Path to Health System Reform: Analysis of House and Senate Bills. New York: The Commonwealth Fund. Davis, K., S. Guterman, C. Schoen, and K. Stremikis. 2009b. Reforming Provider Payment: Essential Building Block for Health Reform. New York: The Commonwealth Fund. Farrell, D., E. Jensen, B. Kocher, N. Lovegrove, F. Melhem, and L. Mendonca. 2008. Ac- counting for the Cost of U.S. Healthcare: A New Look at Why Americans Spend More. Washington, DC: McKinsey Global Institute. Fisher, E., D. Goodman, J. Skinner, and K. Bronner. 2009. Health Care Spending, Quality, and Outcomes. Hanover: Dartmouth Institute for Health Policy and Clinical Practice. Hackbarth, G., R. Reischauer, and A. Mutti. 2008. Collective accountability for medical care— Toward bundled Medicare payments. New England Journal of Medicine 359(1):3-5. How, S. K. H., A. Shih, J. Lau, and C. Schoen. 2008. Public views on U.S. health system orga- nization: A call for new directions. Data Brief (Commonwealth Fund) 11:1-10. Huang, E. S., A. Basu, M. O’Grady, and J. Capretta. 2009. Using clinical information to proj- ect federal health care spending. Health Affairs (Millwood) 28(5):978-990. Jencks, S. F., M. V. Williams, and E. A. Coleman. 2009. Rehospitalizations among pa- tients in the Medicare fee-for-service program. New England Journal of Medicine 360(14):1418-1428.

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