The big riddle: How to lower health costs

Health reform has a lot of goals. But the hardest will be to reduce costs. Here are a few ideas under consideration.

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By Jeanne Sahadi, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- More coverage. More choice. Better care.

And lower costs.

Those are the four goals of health reform. None are easy. But reducing costs is probably the toughest of all, particularly in light of the first three.

It's essential: Unless the growth in costs is brought under control, health care threatens to break the budgets of Uncle Sam and millions of Americans.

Most of the attention has been paid to one of the biggest proposed cost savers from Democrats: a government-run public insurance plan to compete with private insurers.

But there are plenty of other cost-saving proposals that have been put forth by Congress and the Obama administration.

Here is a look at a few of them and how effective (or not) they may be.

Change Medicare cost and pay structure

Three proposals to trim the reimbursement structure for health care providers in Medicare could yield roughly $380 billion in savings over 10 years, according to the Congressional Budget Office.

One idea under consideration: Reduce the annual rate increases for Medicare's fee-for-service reimbursements.

Another is reducing the reimbursement rates for Medicare Advantage plans -- those are plans offered by private insurers to seniors on Medicare. An analysis found that the government pays 14% more for beneficiaries in Medicare Advantage than for those under the traditional fee-for-service plan. And not all of that extra payment goes to reducing seniors' costs in Medicare Advantage plans or to providing them with extra benefits.

Also on the table is a proposal based on a deal the Obama administration brokered with the pharmaceutical industry. That deal would provide discounts on brand-name drugs to Medicare beneficiaries who must pay for their own prescriptions in full when they have reached the gap in coverage known as the "doughnut hole."

The CBO estimates that changes to drug costs under Medicare could result in increased premiums for drug coverage but also offer seniors "greater protection" against higher drug costs.

On balance, "the reduction in cost sharing would outweigh the increase in premiums ... so beneficiaries' total prescription drug spending would fall on average," CBO director Douglas Elmendorf wrote in his blog. He noted that beneficiaries who buy relatively few drugs would not see a net savings, and those who do buy a lot of drugs would realize the most savings.

Come up with best practices

One set of proposals aims to cut costs by reducing inconsistencies in medical care.

Today two people with the same condition often get different treatments or the same treatments at different costs depending on where they live or which health care provider or hospital they use.

"Comparative effectiveness research" would expose the inconsistencies, and a proposed center for quality improvement would come up with "best practices" recommendations for doctors and hospitals across the country.

But in order for such research to be effective it has to be used.

"You have to create incentives for doctors," said Sara Collins, vice president for the Affordable Health Insurance Program at the Commonwealth Fund.

CBO noted the same thing. "Medicare could tie its payments to providers to the cost of the most effective treatment, or patients could be required to pay for at least a portion of the additional cost of less effective treatments," the agency said in a letter to Senate Budget Committee Chairman Kent Conrad, D-N.D.

Mandate some things, prohibit others

Underlying health reform are various proposed mandates that everyone have insurance. That would be a boon for insurers who stand to add 47 million uninsured people to their rolls. And, according to CBO estimates, it will cost the federal government to provide subsidies to help those who can't afford it.

But if a large number of today's uninsured are young and healthy, their entering the system could help reduce costs for everyone in plans with them.

Young and healthy policyholders don't cost insurers much, so plans with sizeable numbers of them tend to have lower premiums than plans where the majority of policy holders are older or unhealthy.

Insuring everyone "makes the pooling problems less severe," said Edwin Park, a senior fellow in health policy at the liberal Center on Budget and Policy Priorities.

Other mandates, or prohibitions, have been proposed for insurers.

For instance, insurers would not be able to deny coverage to someone with a pre-existing condition -- so the out-of-pocket health costs of a person with a condition who previously was uninsured may go down.

And the costs for small businesses could go down under proposals that would prohibit insurers from setting premiums based on the size of a business or the health condition of its workers.

Bundle payments, encourage coordinated care

There are proposals that call for pilot programs in Medicare to offer what's called a bundled payment that would apply not only to a patient's hospital stay but also to his or her post-hospital care (i.e., at a rehabilitation facility).

"[T]his arrangement would provide hospitals with a new incentive to coordinate the care their patients receive after they are discharged and to economize in the use of post-acute care," the CBO said in its letter to Conrad.

One possible benefit of better coordinated care is that there will be less need for hospital re-admissions.

If bundled payments are going to help lower costs across the medical system, however, not only Medicare but the private sector should be encouraged to take that route as well, said Collins and Park.

"Right now there's no new incentive to coordinate care. You have silos of payments but you don't have a payment incentive structure to coordinate care," Park said.

Support preventive care and wellness services

The idea of preventive care is "an ounce of prevention is worth a pound of cure."

For individuals, that certainly can be the case. And a health reform bill that provides preventive care not previously covered could save money for some people.

But the jury is very much out on whether proposals to support preventive care can reduce federal spending.

"To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, many of whom would not have suffered that illness anyway," the CBO wrote in a letter to Rep. Nathan Deal, R-Ga., the top Republican on the House Subcommittee on Health.

When it comes to wellness services -- that is, encouraging patients to adopt healthy habits and kick the bad ones -- cost savings could be a long time coming, the CBO said.

The agency noted that federal efforts to discourage smoking, which halved the number of adult smokers since 1965, can reduce Medicaid spending. "But public policies that discouraged smoking took decades to develop, implement and reach fruition," CBO wrote.

And then there's the macabre cost-benefit analysis. Should preventive care and wellness services work, the population becomes healthier but more costly to the government since people will live longer and therefore collect more in Social Security and Medicare benefits.

In the broader sense, however, the CBO said that successful preventive and wellness efforts could be considered "cost effective, meaning that it provides clinical benefits that justify those added costs." To top of page

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