Strategies for Containing U.S. Healthcare Costs

Amid mounting healthcare expenses, policymakers often face legislative proposals to save on healthcare costs, as they are with the Inflation Reduction Act of 2022.

Historically, these recommendations have ranged from targeted and incremental measures to major restructuring such as to a single-payer system, or a “Medicare for all.” In the most recent federal legislation regarding healthcare changes, the Inflation Reduction Act of 2022, signed into law Aug. 16, 2022, includes provisions that affect the Affordable Healthcare Act (ACA).

Here, you’ll learn more about several possible strategies for containing healthcare costs, including more details about the Inflation Reduction Act.

Key Takeaways

  • The Inflation Reduction Act of 2022 extends financial assistance to those enrolled in Medicare and allows Medicare to negotiate drug costs.
  • U.S. healthcare costs are expected to be almost 20% of the GDP by 2028.
  • Cost-cutting ideas have historically ranged from price transparency to a single-payer, Medicare-for-all plan.

The Politics of Healthcare

Government action on healthcare has long been a source of political debate. Lawmakers have continued to debate ways to evolve healthcare policies since the enactment of the latest major federal legislation, the Affordable Care Act (ACA). Among today’s common key points of contention: how to subsidize the insurance market and lower drug costs.

The Inflation Reduction Act, or H.R. 5376, aims to lower inflation and reduce the deficit, but it also includes measures lowering the cost of prescription drugs and lowering premiums. It accomplishes a longstanding Democratic goal of allowing Medicare to negotiate lower drug prices and and it will place a $2,000 annual cap on out-of-pocket drug costs. It extends the ACA program for three years through 2025. Under this act, ACA healthcare premiums will be lowered for millions of Americans.

Healthcare issues often trigger hot debates because conflicting interest groups that would be affected by changes to the healthcare system have significant economic and political power. They include: independent private practitioners, pharmaceutical giants, integrated insurance, and provider conglomerates to the hospital systems in important positions of influence in every Congressional district. So, even minor reforms meet substantial resistance.

The Inflation Reduction Act meets some but not all of President Biden’s goals in his campaign platform. They included adding a “public option,” or a government-run, public health insurance plan. He had proposed allowing Americans to buy prescription drugs from other countries, as well as increasing access and affordability through premium tax credits and other benefits. Biden had said he intended to take measures to reduce maternal mortality, end restrictions on women’s reproductive care, advance mental-health parity, and increase support for community health centers.

Medicare Expansion

Healthcare economists, recognizing that Medicare operates at a lower cost than private insurance, have long studied the adoption of its payment structure. They’ve also evaluated its potential for transformation into a broader system as methods for reducing national healthcare spending.

The lower rates paid by Medicare, if extended to more providers, would result in substantial savings. If Medicare rates were used for private insurance reimbursement, the reduction in spending would have been an estimated $350 billion in 2021, according to one Kaiser Family Foundation study. More and more frequently, this major restructuring is proposed as a single-payer system. 

Single-payer program

Conversion of the Medicare program to a single-payer, Medicare-for-all program has had support from major political figures, but the complexity of switching from the current system and the political impediments it would need to overcome make its adoption unlikely.

If a single-payer system provided the present Medicare benefits and cost-sharing structure, it likely would result in significantly lower spending than that of present levels because Medicare pays for services at lower rates than private insurance does. It also bears lower administrative costs.

Different designs for a single-payer system, all of which are generally variations on a Medicare-for-all system, produce higher or lower savings depending on their features. 

The Centers for Medicare & Medicaid Services (CMS) is given the authority to negotiate drug prices with pharmaceutical companies under the Inflation Reduction Act, so additional savings are expected. The legislation also includes a 95% sales tax penalty levied on companies that won’t negotiate drug prices with Medicare.

Many single-payer proposals would provide more generous benefits than the current Medicare program would. By providing richer benefits, such as dental, vision, hearing, and long-term care—and by lowering or eliminating cost-sharing by beneficiaries—these more comprehensive proposals would save less.

And, if especially generous, these alternatives could cost more than a system more closely modeled on the current Medicare program would.     

Alternative models: CBO, Urban Institute, and RAND studies

The Congressional Budget Office (CBO) has compared the economics of a comprehensive, single-payer system to those of the status quo. The CBO found that a comprehensive Medicare-for-all program could reduce overall health spending while providing universal coverage, bolstering revenues for clinical services, and eliminating most copayments and deductibles.

CBO experts evaluated five alternative structures using different assumptions about provider payments. They considered enrollees’ copays, demand for services, coverage of long-term care, vision, dental, and hearing services, and the impact of a single-payer, governmental plan on Medicaid and other government programs. 

In 2020, the CBO estimated that spending would fall even as healthcare utilization rose because the single-payer system would involve simpler, less costly administration than the present system with its multiple private insurers and wide variety of plans. The CBO analysis emphasized at the time, the Medicare system spent only 2% of its revenues on administration, while private insurers spent approximately 12% on administrative overhead.

The Urban Institute and RAND also published studies about the cost and coverage effects of changes to the healthcare system. The Urban Institute evaluated six plans to add, incrementally, to the changes made by the ACA and also considered two single-payer alternatives, one a “lite” version and the other a more comprehensive plan closer to the system studied by the CBO. RAND evaluated a comprehensive, single-payer system proposed by state legislators for New York State.

Differences in the assumptions and methodologies used by the three organizations hinder a direct comparison of their “comprehensive” studies with each other and with current national expenditures. The comprehensive plans evaluated by the Urban Institute and RAND covered more services than are provided under Medicare at the time. Their plans were also more generous than all but the most expensive of the five alternatives considered by the CBO.

The Urban Institute and RAND concluded that the cost for their richer models would exceed total national spending at the time. However, the extent to which any excess may be attributable to their broader range of services was unclear.

In addition, the CBO noted that the three studies relied on critically different assumptions about administrative costs. Though the CBO generally assumed administrative costs would be consistent with Medicare’s current low rate of administrative expenses, the Urban Institute and RAND analyses were based on higher rates that were closer to those reported at present for private-sector plans. 

Potential Targeted Savings Measures

Along with a major restructuring of the healthcare system, analysts have also explored targeted savings measures to reshape some elements of the system with the aim of reducing costs.

Here are five areas of potential healthcare savings:

Prescription drugs

Americans generally pay far more for prescription drugs than those in Canada and in most other countries. Policymakers have considered various approaches to reducing the costs of prescription drugs.

Regulating pharmaceutical company practices: Recommendations for reducing drug prices have included laws and regulations that would directly affect pharmaceutical-company pricing. The Inflation Reduction Act authorizes Medicare to negotiate to reduce prices on some high-cost established drugs for its beneficiaries and potentially lower costs throughout the drug market.

Critics of pharma behavior discount industry arguments that drug companies’ investment in research and development (R&D) necessitates high drug prices. They recommend that legislators and regulators ban questionable market practices, such as anti-competitive “pay for delay” agreements to prevent or delay the introduction of lower-cost generic drugs and biosimilar drugs.

Additional reform proposals have included patent-law changes such as limiting secondary patents that have no effect on a drug’s safety or clinical efficacy or restricting the granting of multiple, related patents. Some analysts have studied stricter qualification rules for:

  • limiting some benefits of orphan drug status
  • implementing more efficient approval processes
  • adopting pricing regulations that recognize government funding supports the development of some drugs.

Limiting the role of pharmacy benefit managers: Critics of high drug prices also question the conduct of pharmacy benefit managers (PBMs). PBMs serve as intermediaries, negotiating payment rates for prescription drugs on behalf of insurers and their networks, employers, and other plan sponsors.

Some question whether PBMs are fulfilling their primary purpose, which was to use the market power of their large clientele to reduce drug pricing for plan members. Economic and policy analysts have focused on the role played by these intermediaries and are challenging PBMs’ current practices and impact.

PBMs’ operations, the prices they negotiate with drug companies, and their allocation of costs and savings lack transparency. Without transparency, it is difficult, often impossible, for plan sponsors to understand how their payments are directed among the PBMs, drug companies, and pharmacies comprising their networks.

Price transparency

Some policy analysts have promoted better consumer education as an approach to reducing U.S. healthcare spending.

They call for transparency to encourage consumers to choose less-expensive providers. However, most consumers are covered by private or governmental plans that establish the rates paid to their in-network providers and generally set standard cost-sharing formulae for plan members.

So consumers’ need for and use of specific pricing information is most important for services receiving no or very limited insurance coverage for things like dental services, hearing aids, eyeglasses, and fees charged by out-of-network providers. 

Federally mandated hospital price disclosures have had limited utility because of the complexity of thousands of billing codes, technical language, and inconsistent presentation on hospitals’ websites. So, transparency assists consumers in purchasing a narrow range of services, but it seems unlikely to deliver significant, direct cost containment.

What healthcare price transparency can do, however, is help the healthcare sector develop a more rational and equitable economic structure. Transparency has facilitated more and better systemic studies. It provides substantive information to policymakers and analysts from extensive data collections that help them to understand the present system and to evaluate policy changes.

Transparency does raise a potentially problematic question that needs to be considered: Would the disclosure of the negotiated rates of providers facilitate anti-competitive behavior in some
markets and lead to increased costs as lower-cost providers seek higher fees from insurers? Preventing abusive practices while reaping the benefits of transparency is imperative.

Increased consumer cost-sharing

It was widely thought that increases in consumer cost-sharing—through higher insurance deductibles and copays—would discourage unnecessary services, motivate consideration of costs versus benefits, and reduce expenses, particularly for employers.

A study by the National Bureau of Economic Research on the effect of increased out-of-pocket costs on consumers indicates, however, that consumers are generally unable to evaluate costs against benefits with respect to medical care. Researchers found that when faced with higher personal expenses, individuals forgo treatment indiscriminately, without regard to whether it has a high or low benefit.

Tackling waste and inefficiency

Waste has been estimated to constitute as much as 25% of healthcare spending, ranging from $760 billion to $935 billion. But identifying waste and addressing it have been elusive.

A broad, vague category, waste has been described as including overtreatment, inappropriate pricing, failure in healthcare coordination or delivery, administrative complexity, and fraud and abuse. Focusing more on inefficiency than on ill-defined waste might be a more productive approach to containing costs.

Metrics: Volume Versus Value

Similarly, emphasizing value in healthcare, rather than volume (i.e., the number of services) entails reconciling different definitions of value and assessing cost versus quality. Stressing different metrics can lead to different results.

A Medicare effort to reduce hospital readmissions by lowering payments to hospitals with high readmission rates reduced these rates to a limited extent. A review of this program, moreover, underscored the need to anticipate the potentially harmful effects of well-intended changes in policy or practice. Some studies of this Medicare program (but not all) indicated it also was associated with an increased risk of death.

Prospects for Future Savings

Serious concern about the cost of healthcare spending has prompted extensive research and numerous proposals for reducing these costs—or at least tempering their current rate of increase. The complexity of the healthcare sector and the power of diverse private interests make any change challenging and politically difficult.

The urgency felt by both the public and government officials will keep the problem high on the public policy agenda. The growing enthusiasm for the ACA’s coverage and payment reforms may increase support for governmental action. Targeted and incremental changes such as the Inflation Reduction Act brings would likely be more accepted than a wholesale restructuring or a single-payer system.

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