Is Richard Foster Right About Health Care Costs

JONATHAN COHN

Originally published 2/2/11 on Kaiser Health News

Last week, before a lower federal judge in Florida declared the Affordable Care Act unconstitutional, another relatively obscure government figure generated news about health care reform. It was Richard Foster, the chief actuary at the federal agency that runs Medicare and Medicaid.

During a Capitol Hill hearing, Foster was asked to judge claims that the health law would “hold down costs.” Foster said he thought the claim was “false … more than true.” Critics of the overhaul seized on his comments as proof that they have been right — and proponents have been wrong — about the law’s fiscal impact.

It’s a legitimate argument. Unlike the controversy over death panels, the issue of how much health reform will ultimately cost is both complicated and open to honest differences of opinion. And unlike, say, the right-wing scare-monger Betsy McCaughey, Rick Foster is a bona fide expert with a record of intellectual integrity. Remember those stories about the government official who, in 2003, challenged the Bush Administration’s optimistic projections about what the Medicare drug bill would cost? Foster was that official.

But if we’re going to take Foster seriously, it’s important to be clear about what he said, what he didn’t say, and what it all it means.

Keep in mind, first, that it’s not clear exactly what question Foster was answering in that snippet of testimony. After all, “cost” can mean different things. It can mean the health costs that individuals, businesses or government bear, and it can mean costs in the near future or costs in the many years beyond that. It’s possible that Foster was simply saying that, 10 years hence, the government will have spent roughly the same amount on health care as it would have if the law were not in effect.

If so, that’s neither surprising nor particularly worrisome. The idea behind the Affordable Care Act is to strengthen health insurance and give it to more people, which will cost the government money. At the same time, though, it will make the health care system as a whole more efficient, which will save the government money. Over the course of a decade, the costs and savings should be about equal, which means the net cost to the government would be roughly zero — even as we’d made insurance both more reliable and much more available. That would be a pretty good deal.

Now, if you’re worried about the government’s long-term fiscal future — and you should be! — the key question is what happens after those 10 years. The big worry is that the budgetary burden of health care will become staggeringly heavy in 2030, 2040 and beyond. The only way to avoid that scenario is to slow down the growth of federal health care spending — that is, to make sure it doesn’t keep going up as fast as it’s been for the last few decades.

This is the key area of dispute and what Foster, most likely, had in mind. The official government projections, including the ones Foster made, suggest the health law will reduce that rate of growth, albeit modestly. But in his reports, and then again in his recent testimony, Foster suggested those projections might be unrealistic. The problem is that they include some automatic, annual reductions in what the Medicare program will pay hospitals — scheduled reductions, according to Foster, that future lawmakers are not likely to allow when they actually come due.

This argument is more sophisticated and reasonable than the erroneous claim, made by many critics, that the federal government is simply incapable of reducing Medicare spending. Foster’s worry is that hospitals can’t adjust to lower reimbursements by increasing productivity, the way the law assumes they will; instead, he fears, they will just lose money and, in some cases, face the prospect of closing. In response to this threat, Foster says, lawmakers would likely cancel the reductions.

Is he right? Foster admits he isn’t sure. Among other things, he assumes that the law’s reforms of the way we organize and pay for care — everything from developing electronic records to financial incentives for coordination among doctors — won’t help them reach those productivity goals. But many experts with just as much experience and integrity disagree, citing the hospital sector’s well-known waste and the fact that these reforms have never been tried so extensively, particularly in combination with one another. These experts also point out, respectfully, that Foster has been wrong before: His projections for the 2003 Medicare drug benefit turned out to be considerably inflated.

Even if some hospitals do lose money, that might not be a bad thing. Currently, lots of smaller hospitals offer services like advanced cardio-vascular surgery or cancer treatment because those fields are lucrative. But this practice tends to drive up costs, since the availability of such services encourages more doctors and to use them. (It’s called “supply-driven demand.”) And it’s not even good for the patients, since most of those hospitals can’t do the procedures as effectively or safely as the intensive, high-level hospitals that specialize in them.

Still, suppose Foster is right about the law’s ultimate outcome — that the cuts prove too harsh and, as a result, the hospitals successfully lobby to eliminate them. What then? Well, we’d have to admit defeat, because if it’s impossible to reduce spending on hospitals then it’s also impossible to reduce government spending across the health care system. Taxpayers would be stuck writing larger and larger checks on government health programs, making the ability to balance budgets contingent on our future willingness to raise taxes or cut spending elsewhere.

In other words, we’d be in the same basic fiscal place we are now, with one key difference: We would have universal health insurance and its protections. It wouldn’t be an ideal situation, but it’d still be better than what we’d have without the law.

Jonathan Cohn is Senior Editor at The New Republic.

5 thoughts on “Is Richard Foster Right About Health Care Costs

  1. The critical issue here is not one of forecast accuracy, but of honesty. Effectively, the PPACA achieves its “deficit reduction” by bald assumption: we will buy the same services within a system that is largely, we’ll simply pay lower prices than we had planned based on previous best assumptions (short-hand for this plan is “price controls”). So how do we pull this off now, if we couldn’t before? Sounds a bit like the Sustainable Growth Rate system (which has been almost thoroughly ignored, overridden by Congress for every year except one since its introduction). Growth in costs will slow because we command that it will be so – regardless of the fact that we have introduced no new mechanism to achieve this goal! Medicare payment systems (prospective payment under FFS) will change slowly if at all. Inpatient prospective payment has a lengthy history by now (back to 1983), so there are actual measures of how well hospitals have performed in controlling costs for individual diagnosis related groups (DRGs). The conclusion? Beyond the initial years in the 1980s when there was a lot of fat in the system, productivity growth has remained close to zero. This does not say that there is no waste in the system – just that the waste is not in the bundles that are priced by the DRGs – these bundles have already been squeezed pretty tightly. The case for slower growth in Medicare rests on the far more speculative case for the broad success and expansion of pilots and demonstration projects that completely change the way Medicare pays for medical care? By the way, when we eventually finish determining what the new system is going to be that will contain the costs (accountable care organizations anyone?) has anyone explained to the Medicare beneficiaries that they will need to transition to this entirely new system in order for the promised reductions in cost growth to be feasible? That’s where the dishonesty comes in.

  2. The basics should apply. There too many metrics and scenarios for any meaningful, actuarial projection for our nation’s healthcare. For the basics, all but one developed country of the world spends 13% or less of its gross domestic product (GDP) on healthcare. In 2010, the one country that usually spends more than 13% actually spent 17.5% of its GDP on health care or about $7000 per citizen. The difference between 13% and 17.5% amounted to an excess cost to this country’s economy of at least $500 Billion. Hold on! This same country now plans to arrange health insurance for 35 million of its citizens at an estimated annual cost of more than $3,000 each, i.e., another $100 Billion. Guess who!

    If you still want to stick to the basics, then here it is. The cost of this country’s health care is substantially reducing its…our…ability to compete in the world maketplace. The national cost of our health care is high because our healthcare system is very inefficient. In effect, A Tragedy of the Commons has occurred.

    Since about 1970, there have been spectacular advances in the health care for Complex Health Needs. These advances have occured even though our nation’s healthcare system has not simultaneously developed the ablity to manage these advances justly for each citizen. I am particularly obsessed by our nation’s maternal mortality rate, usually ranked among the worst 1/3 of the world’s developed countries. Basically, its all about accessibility. Our country needs enhanced Primary Health Care that is uniformly available to and equitable accessible by each citizen. The characteristics of accessibility must be taught to each citizen bbbeeefffooorrreee they have Complex Health Needs. If you are diabetic, take medicine for heart failure and use oxygen to breathe, the sudden onset of a cough and fever requires quality medical attention within 2 hours. A delay of 6 hours could mean a hospitalization of 14 days instead of 7 days. Improving accessibility is the answer to solving the inefficiency of our nation’s healthcare.

    If you want to understand the dynamics of reversing a tragedy of the commons, read the book written by Nobel Prize winner, Elinor Ostrom: Governing the Commons.

    Paul Nelson

    1. If nothing is done to control the health cost, we ultimately will see rationing of inferior health care. There are few factors that are driving the cost up.
      1. Patient;
      Lack of understanding of payment due to complexity of the billing system.
      No penalty for lack of responsibility for their own healthcare
      Demand for expensive but sometimes unnecessary exams, just because they have coverage

      1. Unfortunately I could not complete my comment due to lack of space. I would like to add other factors like Physicians, Insurance companies and government besides patient as reason for cost.
        Physicians; Financial incentives for doing more, needs to be taken out. Malpractice needs to be controlled to reduce practice of defensive medicine. Also payment as well as cost of malpractice needs to be distributed between all the physicians to support primarycare as well as specialists. Responsibility of the patient care needs to be given to the entire multispecialty group rather than individual doctor to encourage total patient care with efficiency.

        Insurance companies; Increase the competition for better service by mandating same premium payments. Also make insurance available directly to patient rather than through employers to increase the level of competition for better service at the same premium. Availability of insurance for all as well as portability is important.

        Goverment; Control overregulations that is useless and only adds to the cost. Control malpractice awards. Medicare, medicaid and veterans healthcare program should all be privatized. Only few insurance companies with national footprints should remain in buisness for economy of scale.
        Without controling the cost and bringing efficiency in the
        healthcare we certainly will not survive.

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