The all-consuming COVID-19 pandemic has pushed many pressing matters off of the national agenda, including better control of rising health expenses. It also upended political assessments of what an acceptable cost-control plan would entail. With the crisis now receding, there is an opportunity to advance reforms relying on incentives and consumer choice because they are more compatible than price regulations with improved readiness for emergencies.
The U.S. has struggled with rising health costs for decades in part because payments for care are neither fully regulated nor subject to effective competition and market discipline. Many critics say the problem is misguided faith in laissez-faire economics, but the health sector is hardly a market paradise. The federal government sets its terms through heavy regulation and extensive insurance subsidies. The dysfunction stems from confused signals and half measures. Proponents of government-run health care have never been able to implement their full agenda, and neither have market advocates.
President Biden favors regulating health costs but seems hesistant to advance an aggressive plan. His budget did not include proposals for controlling costs in Medicare and Medicaid, or in the private sector, which is remarkable given the financial pressures rising expenses are causing for the federal government, the states, and American households. He reaffirmed his support for a new public option insurance plan but offered no details on how it would work, or if it would cut costs.
The president's reticence is surely due to a changing political environment. While COVID-19 case counts are falling, memories are still fresh from the early days of the crisis when concerns were real that hospitals and medical personnel would be overrun by surges in desperately sick patients. Congress responded by pouring money into the nation's medical facilities and delaying planned cuts in reimbursement rates. The worst case scenarios never came to pass, and U.S. hospitals weathered the storm better than did those in many other advanced economies. Even so, the realization that something far worse was entirely possible is still affecting views on what are acceptable steps for trimming expenses.
Cutting hospital spending by extending Medicare's regulatory reach to the commercial sector was once seen as a leading cost-control idea. With heightened concerns about resilience and readiness, cutting hospital revenue is no longer seen as a positive reform. Public option plans which rely on Medicare rates are now much less likely to pass in Congress for this reason.
Regulatory controls are especially risky for system resilience because of their inflexibility. Once in place, it is difficult to force a bureaucracy to accommodate changing circumstances. Moreover, budget imperatives dominate the process. To hit spending targets, the path of least resistance is often a modest trimming of government reimbursement levels for medical services. The problem is that repetitive cuts add up, and can lead facilities to trim staffing and eliminate the redundancies that are important in an emergency.
Market reforms are less threatening because they rely on voluntary decisions by facilities and practitioners. Hospitals can set their fees as needed to meet their revenue goals while also satisfying goverment requirements for surge capacity. Public health funding can provide resources to help facilities meet emergency preparedness standards.
Implementation of improved incentives for cost control will require significant reforms, in price transparency rules, Medicare, and employer-sponsored insurance plans.
The Trump administration issued important regulations requiring price transparency by facilities, practitioners, and insurers, but these disclosures will not fully solve the problem. The next step should be strict standardization of what is being priced, with providers required to specify "all in" fees for full episodes of care. Consumers could then compare prices for high-volume services on an apples-to-apples basis across practitioners and facilities.
Medicare is poised for greater reliance on competition to discipline costs. Private Medicare Advantage (MA) plans submit bids that affect what they get paid, but the competition is flawed because the traditional program is exempt (beneficiaries enrolling in it pay the same national premium regardless of its relative cost in a given market). The government's contribution toward coverage should be set based on a fair competition between private offerings and traditional fee-for-service. Further, hospitals and physician groups should be allowed to form their own managed care plans (the next iteration of Accountable Care Organizations). The combined savings from these changes would be significant. The Congressional Budget Office (CBO) estimates a version of this reform would reduce total costs by 7 percent.
While employers are free to implement cost-control strategies on their own, in practice that is not an attractive option for most firms because they use their health benefits to attract and reward their employees. Reform will only occur through new public policies that rewrite the rules for all companies at the same time. Significant cost reduction would occur if employers converted their support for insurance into defined contributions that encouraged strong competition among insurance plans and incentivized their workers to migrate into lower-premium plans.
The COVID-19 pandemic has made the world aware of the dangers of insufficiently resilient health systems. Critics of market-driven health care claim that cost-cutting for profits is what threatens adequate capacity in a crisis, but the evidence says otherwise. Officials in countries with tightly regulated health systems lived in fear that their undercapitalized systems would be overwhelmed, and some were. Markets are more flexible and can be combined with public subsidies ensuring a minimum level of emergency preparedness.
While controlling health costs remains an urgent necessity, the COVID-19 pandemic is forcing elected officials to rethink how to proceed. Market reforms would deliver more discipline without risking the resilience required to meet the needs of all patients when the next crisis emerges.
James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute.