Two Trillion Dollars!

Would the health care industry’s cost-cutting plan really save that much?

U.S. President Barack Obama (2L) delivers remarks about health care reform. Click image to expand.
Barack Obama speaks about health care reform

The White House and the health care industry say they’ve figured out a way to reduce costs by $2 trillion over the next 10 years. But you’ll have to take their word for it.

We have only the barest, roughest outline of a plan. The proposal, outlined in a letter written by health care groups to President Obama and expanded on in a White House fact sheet, would reduce the number of hospital re-admissions, lower drug prices, make generic drugs more available, and rejigger Medicare payments so they reward quality of treatment, not quantity. By boosting efficiency, the health care industry says, it will cut its annual spending growth rate by 1.5 percent. (The current rate of growth is estimated at 6 percent.)

The rollout met with plenty of praise as well as some skepticism. It’s refreshing to see health care companies promising to pare down costs. But it’s clear they’re trying to pre-empt a larger battle over the so-called “public option,” which would create competition for private health care providers. By compromising on the less controversial aspects of health care reform, the companies hope to block creation of a new government health care program.

How did they arrive at $2 trillion? It looks like they started with Obama’s campaign promise and worked backward. In his speech after meeting with health care officials Monday, Obama said this is the first step “so that we can do what I pledged to do as a candidate and save a typical family an average of $2,500 on their health care costs in the coming years.” Multiply that by the number of U.S. families and multiply that by 10, and you get somewhere in the neighborhood of $2 trillion. The White House fact sheet points to three provisions that save $25 billion, $177 billion, and $12 billion. As for the rest, your guess is as good as ours.

One reason the numbers are elusive is that the plan the health care industry has signed onto is so vague. How much would insurers charge for health “episodes” as opposed to individual hospital visits? How quickly would health information technology be upgraded? How would they standardize treatment across the board? The health care companies don’t specify, and even if they did, it would be hard to quantify. (In a study released Monday, an economics professor at Harvard, David Cutler, estimated that modernizing our health system would save the government $600 billion over 10 years. * Since government spending on health care represents about 40 percent of health care spending overall, that correlates roughly with the $2 trillion estimate.)

But from what we do understand, $2 trillion seems like an outrageously generous estimate of savings. Here’s a look at the industry group’s proposals, using the language from its letter to Obama, and our best guesses about how much they’re likely to save. (Because 10 years into the future is impossible for any mortal to predict, we kept our estimates to five years.):

1.) Implementing proposals in all sectors of the health care system, focusing on administrative simplification, standardization, and transparency that supports effective markets.

“Administrative simplification” and “standardization” can refer to any one of a number of well, duh-type reforms that doctors, hospitals, and the insurance industry have resisted for decades because they involve onetime change-over costs and because the government would almost certainly have to be the entity imposing uniform standards. An oft-mentioned example would be a common billing form used by all doctors and all hospitals so that patients could understand what they were reading and so (more important costwise) computers could scan them with little difficulty. Doctors and hospitals worry that the easier it becomes to figure out who performed what service and at what price, the easier it would become for insurance companies and government programs like Medicare to notice that Hospital X in Florida was charging twice as much as Hospital Y in California to perform the same procedure. Such “transparency” might be good news for Hospital Y, which might find itself encouraged to charge more, but it would almost certainly be bad news for Hospital X, which would most likely be told to charge less. Dr. John Wennberg of Dartmouth Medical School estimates that eliminating such regional differences could cut Medicare spending by 30 percent without compromising health care.

The industry groups’ failure to state forthrightly whether this is the sort of transparency they have in mind gives you some sense of their continuing reluctance to embrace it. Princeton’s Uwe Reinhardt, a leading health economist, says price-transparency reforms “will get done and they have to get done.” But he’s skeptical that “the supply side”—i.e., hospitals and doctors—will do more than pay lip service to this goal. Even when government has summoned the will (at the state level) to impose price transparency from above, the Congressional Research Service found in a 2008 study that it “had little visible effect on pricing” thus far.

Score: $0, at least for the near term, and unspecified costs to impose standardized billing.

2.) Reducing overuse and underuse of health care by aligning quality and efficiency incentives among providers across the continuum of care so that physicians, hospitals, and other health care providers are encouraged and enabled to work together toward the highest standards of quality and efficiency.

What does this mean? “I have no idea,” Reinhardt told us. A decent guess would be cost-bundling—though again, it’s significant that the industry groups can’t bring themselves to say so. Under cost-bundling, the various doctors and hospitals involved in a particular medical procedure would not be permitted to bill separately, as they do now; instead, they would have to submit a single, collective bill and figure out how to divide up the proceeds. According to the Congressional Budget Office, that could save about $500 million in Medicare spending over the next five years. Reinhardt thinks it would take a full decade to achieve and that over the next five years the savings would be nonexistent. Let’s split the difference.

Score: $250 million.

3.) Encouraging coordinated care, both in the public and private sectors, and adherence to evidence-based best practices and therapies that reduce hospitalization, manage chronic disease more efficiently and effectively, and implement proven clinical prevention strategies.

“Coordinated care” seems to suggest integration of clinical care by hospitals and doctors. If bundling requires doctors and hospitals to knock heads over submitting a single bill, integration requires doctors and hospitals to knock heads over how the patient will be cared for. “You have to grow both organically side by side,” Reinhardt says. A good start, he added, would be getting the pediatrician, obstetrician, and gynecologist to develop a common plan for an individual childbirth; medical procedures don’t come much more straightforward than the delivery of babies. “Evidence-based best practices and therapies” refers to compiling national statistics about which clinical approaches work best and then putting some pressure on physicians and hospitals to follow them. It’s very difficult to know in advance what the budgetary impact of this information would be. In a recent article in the Annals of Internal Medicine, Theodore Marmor, Jonathan Oberlander, and Joseph White wrote, “Althoughcomparative effectiveness research may provide useful informationabout the clinical effectiveness and costs of medical treatmentoptions, that information is not guaranteed to lead to significantcost savings.” The Congressional Budget Office calculates that between the new money spent on research and the savings derived from better information about what works and what doesn’t, the net five-year cost to the federal government would be $490 million over five years. Total health care spending—public and private—the CBO says, would be reduced by $8 billion over 10 years. The CBO doesn’t have a five-year number, so we’ll slice that one in half.

Score: $4 billion.

4.) Reducing the cost of doing business by addressing cost drivers in each sector and through common sense improvements in care delivery models, health information technology, workforce deployment and development, and regulatory reforms.

The only specific here is “health information technology,” on which Congress has already spent $21 billion. Computerizing medical records is long overdue. It has been shown to reduce dramatically the incidence of medical errors and to improve care by giving doctors the information they need but don’t always get. As a cost-saving strategy, though, it’s been oversold. In the March 11 Wall Street Journal, Jerome Groopman and Pamela Hartzband wrote that President Obama’s claim that health information technology could save $80 billion per year left their Harvard Medical School colleagues “dumbfounded”; the Congressional Budget Office puts the five-year savings to the Medicare program at $65 million.

Score: $65 million. (That’s for Medicare. Cost savings for the private sector are impossible to calculate and may not exist.)

Total savings: $4.32 billion.

We’re going to have to do a lot better than that if we want to get health costs under control.

Correction, May 12, 2009: This article originally suggested that the report’s $600 billion figure referred to industry savings, rather than government savings. (Return to the corrected sentence.)