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Future Directions for U.S. Health Care Policy

Remarks at the Harvard Kennedy School Health Care Leadership Council Roundtable
April 22, 2016
Douglas Elmendorf

Let me begin by offering a warm welcome to Harvard Kennedy School. We are not physically in the school’s buildings, which are undergoing massive construction now, but we are in the school’s intellectual environment. That environment is one where leading researchers meet leading practitioners in order to craft more effective public policies. The leading researchers who work with us and are here today include not only professors who spend most of their time at the Kennedy School, like our host Amitabh Chandra, but also professors whose primary appointments are at Harvard’s medical school, school of public health, business school, or law school, or are elsewhere at Harvard or at other universities. The leading practitioners who are here today represent organizations whose activities are having profound effects on health care today and may have even more significant effects in the future. Our aim at the Kennedy School, in all of our work and in this conference, is to draw together everyone, regardless of affiliation, who has the knowledge and commitment to help advance the public interest.

Amitabh has succeeded wonderfully for today’s program. The lists of topics, presenters, and participants could hardly be better. I am especially delighted that this conference is occurring because strengthening Harvard’s already large role in health care policy is one of my priorities as dean. For many years, Harvard and its affiliated hospitals have played a central role in health care delivery, analysis, and policy development. When I was director of the Congressional Budget Office, I came to know Amitabh, Mike Chernew from the medical school, Kate Baicker from the school of public health, and others on the Harvard faculty through the advice they gave us for our analyses. The research and commentary of Harvard faculty members had a very large influence on the information and analysis that CBI provided to Congress. Amitabh’s and my goal now is to build on Harvard’s past accomplishments and work together even more effectively, because health care policy is becoming more challenging and more important as time goes on.

I am honored that Amitabh asked me to lead off today’s meeting. I will use this opportunity to offer some recommendations on future directions for U.S. health care policy, focusing on the federal government, which is the actor I know best. I want to say a little about insurance coverage, where I think federal policy has established the right framework, and future directions for policy involve refinements within that framework. Then I will say more about health care costs, where I think federal policy has made less progress, and more significant changes are needed. I will not talk about pharmaceuticals, because you will be discussing them for most of the rest of the day.

Health Insurance Coverage

Let me begin with insurance coverage. As you know, the Affordable Care Act (ACA) significantly expanded federal subsidies for health insurance for lower-income people, and it made important changes to the rules governing insurance markets. In my view, the system of rules and subsidies established by the ACA is the right system in its fundamental elements, and therefore future policy should work within that system.

The first part of my reasoning is a value judgment: I think we should bear the cost of achieving nearly universal health insurance in this country. The incomes of people across most of the income distribution have benefited only a little from the growth of total output and income in this country in the past few decades. To me, that pattern increases the importance of focusing economic policy on helping people of modest means. And health insurance is valuable for people to have, so expanding insurance coverage as has occurred under the ACA is indeed helping people of modest means.

The second part of my reasoning is an analytic judgment: There are no alternatives to the ACA framework that would achieve nearly universal insurance coverage at notably lower cost. This year, more than 10 million people are insured through exchanges and more than 10 million others are covered by Medicaid because of the ACA; nearly all of them would otherwise be uninsured. The share of the population under age 65 without health insurance is falling nearly in half, from about 20 percent to about 10 percent. So, the increase in coverage under the ACA is striking.

The costs of that increase are about $5,000 of direct federal subsidy per newly insured person in 2016 and a collection of significant changes in insurance rules. (Including not only the direct subsidy but also the tax revenue lost indirectly from a reduction in labor supply would raise that figure a little.) That’s a significant amount of money but not surprising given the costs of health care in this country. To put the ACA subsidies in context, note that they will be less than 10 percent of total federal subsidies for health insurance over the next decade: About half of total subsidies will go to Medicare, about 20 percent to Medicaid apart from the ACA, about 20 percent to tax expenditures for employer-sponsored insurance, and the remaining less than 10 percent for the ACA’s subsidies. The changes in insurance rules represent another type of cost of the ACA, but they have caused no major change in coverage for the great majority of people who had health insurance before the ACA. Some people are now forced to buy broader and therefore more expensive insurance coverage than they would like, and some people are able to buy broader insurance coverage they prefer but could not buy previously because of adverse selection. But those groups are much smaller than the group whose health insurance has continued with no notable changes.

Are there alternative ways to expand health insurance coverage relative to what it was before the ACA? One sort of alternative involves a larger federal role, such as Medicare for all. That approach could achieve high levels of insurance coverage, but would have significant disadvantages in my view. Most critics of the ACA support a smaller federal role, with much less money spent on subsidies and much looser rules imposed on insurance markets. That approach would have various advantages, but it would not achieve the same level of insurance coverage as the ACA. Because health care is expensive, raising coverage without imposing an excessive burden on lower-income people requires substantial subsidies. Because health care spending varies widely among people in ways that can be partly predicted and because society provides emergency care for those who need it, health insurance markets cannot function entirely like markets for most goods and services. Nothing I saw at CBO in six years of analyzing alternative policy changes suggests that there are less costly ways to significantly expand coverage than the ACA. That conclusion is confirmed by the fact that, six years after passage of the ACA, there is no alternative on the table with a reliable, independent estimate showing comparable effects on insurance coverage.

In sum, achieving the substantial increase in insurance coverage that is occurring under the ACA requires subsidies and rules similar to those of the ACA, and my value judgment says that the increase in coverage is worth the costs. Of course, within the ACA framework, we could make many specific changes, and I expect we will in the years to come.

Health Care Spending

The second broad topic of health care policy is costs—or, more accurately, spending, because the issue is not the cost of individual services but rather the total amount we spend on health care and what we spend it on.

How Should the Federal Government Respond to High Spending?

One might take the view that the high level of health care spending in this country, relative to spending in other countries and relative to our own past spending, is not a particular problem. After all, we have high income, on average, and maybe we simply have a high demand for medical care; in addition, the growth rate of health care spending in this country has been much slower in the past decade than in the decade before that. However, those arguments should not make us sanguine about how much we spend on health care, for at least two reasons.

First, the evidence suggests that we are not getting as much good health from our health-care dollars as one would hope. Americans are not healthier than people in many other countries that spend much less on health care, and Americans in parts of the country that spend more on health care are not healthier than Americans in other parts of the country. To be sure, those simple comparisons are confounded by many factors besides health care spending, but given the huge differences in spending, one might expect to see a clearer imprint on health.

Second, we do not have a sensible structure or mechanism for deciding how much to spend on health care—and in the absence of that, it would be quite a coincidence if we ended up spending an appropriate amount, and not at all surprising that we would spend too much. Public subsidies for health care are mostly open-ended, with greater subsidies provided to people who have more extensive health insurance and who have additional services performed. And the amounts involved are huge: Federal subsidies for health care this year will be about 1½ trillion dollars or 8 percent of gross domestic product, and that figure will grow as the population ages even if health spending per age-adjusted person does not increase.

To make better choices about health care spending will require smart and hard work by health care analysts, health care providers, health insurers, private purchasers, and state and local governments. My focus, though, is on the federal government, which could pursue two broad strategies: One is to increase the role of the federal government in centrally managing the health care system; the other is to increase the role of market forces. Advocates of greater federal management can make comparisons to other advanced economies and can note that market concentration for hospitals and for insurers is already quite high in many places. Advocates of a larger role for market forces can explain that competition is effective in many contexts and that government insurers inevitably have less flexibility than private insurers to experiment and change. Those are complex substantive issues. In any event, given many Americans’ distrust of the federal government and negative reaction to the ACA, I think that increasing federal control of health care is a nonstarter at this point.

If that is true, then make better choices about health care spending requires us to strengthen the role of market forces. We need people to have incentives to make choices about health care that are more cost-effective, but we also need to protect them from excessive costs. That combination is a tall order, but let me make four suggestions.

Stop Providing Public Subsidies for Insurance That Is Unduly Expansive

First, we should stop providing public subsidies for health insurance that is unduly expansive.

In the ACA’s insurance exchanges, subsidies are based on the cost of insurance that meets minimum standards; they are not open-ended, which is good. By contrast, our income and payroll tax systems provide an open-ended subsidy for employer-sponsored insurance: However broad the scope or high the actuarial value of the insurance, employers’ payments are fully excluded from taxable income. That feature encourages insurers to reduce deductibles and co-payments, and it discourages them managing utilization and negotiating aggressively with providers. The ACA tried to limit that subsidy by imposing an excise tax—the so-called Cadillac tax—on plans with premiums above a threshold. Congress’ decision to defer that tax was a mistake, and repealing it permanently would be a much bigger mistake.

A complementary way to reduce subsidies for expansive insurance is to prevent medigap policies from covering all of Medicare’s cost-sharing requirements and thereby eliminating a key incentive for restraining use. We should prevent medigap policies from doing that.

Move to a Premium Support System in Medicare

My second suggestion is that we should increase competitive pressure in Medicare by moving to a system of premium support.

In a premium support system, all beneficiaries would choose between competing insurers and would bear the entire difference in cost between their choice and a benchmark. In this way, it would be similar to the subsidies in the ACA’s insurance exchanges. A premium support system in Medicare could be viewed as an expansion of the current Medicare Advantage program that would strengthen price competition between private insurers and strengthen competition between private insurers and fee-for-service Medicare.

To be sure, a premium support system would have significant risks and disadvantages. Some beneficiaries who remained in fee-for-service Medicare would pay substantially more than they would pay under the current system. In addition, setting benchmarks that are too low or making benchmarks grow more slowly than premiums over time could increase beneficiaries’ burdens even more. Moreover, risk adjustment of payments to insurers would be much more challenging than in the current system. However, a premium support system would have significant benefits as well. As we have seen with Medicare Part D and the ACA’s insurance exchanges, competition does restrain costs. In CBO’s analysis of premium support systems a few years ago, we estimated that, relative to what would happen under current law, Medicare spending would be lower in the short term and would grow slightly more slowly in the long term. Also, beneficiaries’ choices in such a system would provide a useful signal of how much they value the benefits of additional spending for health care.

Even under a premium support system, a substantial share of Medicare beneficiaries would enroll in the fee-for-service option because of the combination of price and other characteristics it would offer. That brings me to my next suggestion.

Restructure Payments to Medicare’s Fee-for-Service Providers to Increase High-Value Care

Third, we should restructure payments to Medicare’s fee-for-service providers to create stronger incentives for high-value health care.

Everyone understands that traditional fee-for-service payments provide incentives to deliver more care and more complex care, but not necessarily care that is more appropriate, more cost-effective, or higher-quality. Fortunately, the Department of Health and Human Services is now developing and implementing alternative payments models, and this effort should proceed with as much vigor and urgency as possible. Significant changes in Medicare would lead to higher-value care not only for Medicare patients but also for patients with private insurance, which often follows policies adopted by Medicare. The process of change will be difficult, and some experiments will fail, but we need to keep trying.

I will not offer many specifics here, but let me highlight one possible change that I think deserves greater attention—namely, not paying the full cost of every new treatment that is developed. The most important driver of health care spending in the long term is the adoption of new treatments; sometimes those treatments have significant effects on people’s health at low cost, sometimes they have significant effects at high cost, and sometimes they have insignificant effects. We currently pay for medical care in ways that do not differentiate well between those categories, and that can hardly be expected to generate a sensible allocation of resources. Certainly, moving in this direction needs to be a deliberate process, because there are considerable risks and difficulties, but not moving at all seems difficult to justify.

Make the Underlying Markets More Competitive

Fourth, we should aim to maintain as much competition in the underlying markets for health care and insurance as possible.

That means limiting further consolidation by health insurers and by hospitals and other health care providers. It means exploring a relaxation of scope-of-practice laws, increasing the number of positions in medical schools, and allowing more people trained outside the country to practice medicine here. It means providing people with more information about the insurance plans and medical services they are considering, and providing people with other tools to help make them more-effective buyers of insurance and users of care. And it means providing strong support for the work of the Center for Medicare & Medicaid Innovation, the Agency for Healthcare Research and Quality, and the Patient-Centered Outcomes Research Institute, without whose data, research, and experimentation our ability to strengthen market forces in health care would be greatly limited.


Let me conclude. The ability of our elected leaders to enact forward-looking health care policy during the past five years has been greatly limited by their preoccupation with two issues—the Affordable Care Act and the Sustainable Growth Rate (SGR) mechanism for Medicare’s payments to doctors. The SGR has finally been eliminated, and I hope that the debate about whether to keep the ACA framework in place is largely behind us. We should use the time and attention that has been devoted to those issues to address our other challenges in health care policy. Thank you.