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Lowering Health Care Costs

July 07, 2010 By Aaron Sinner, Undergraduate Research Fellow
Part Two in a Two-Part Series
read part 1

Yesterday, we examined how the federal Patient Protection and Affordable Care Act expands access to health care. Today, we'll look at how the bill lowers costs and how we're paying for wider access to care.

Bending the Cost Curve

The new bill uses a mix of more open market-based mechanisms and value-driven efficiencies to help control costs. Insurance exchanges are a big part of the free market approach. Right now, the health insurance industry isn't much of an open market because companies compete to attract the healthiest customers and avoid covering the less healthy, rather than working to indiscriminately attract as many customers as possible. The exchanges will move us toward a more competitive market by providing clearer information about the cost and benefits associated with insurance plans in side-by-side comparisons, helping consumers make more informed decisions.

Lawmakers are also using outcome-based metrics in hopes of lowering costs. Congress created a "Patient-Centered Outcomes Research Institute" where teams of researchers will examine all health care methods to determine which offer the best outcomes, regardless of cost. This research should provide doctors with a trusted source of information independent of drug and medical companies trying to sell their products, and allow them to prescribe the most effective treatments, cutting down on rounds of ineffective care.

The Independent Medicare Advisory Board is another oversight Congress built into the law to ensure Medicare spending is on target. This watchdog has some major teeth. If Medicare spending is over budget, its recommendations for how to bring costs back in line will automatically become law unless Congress acts to save the same amount of money in a different way.

All of these reforms nibble around the edges of what really drives up costs. The strongest move, most reformers would argue, is toward a system that rewards healthier patients. This requires a major shift away from the current per-procedure payment system. Ensuring quality outcomes means rewarding coordination, efficiency, and preventative care. The overhaul includes a handful of trial programs aimed at creating this shift. One such example is the Medicare reform that experiments with a "bundling" program where care providers are paid per-patient rather than per-procedure, rewarding providers who keep costs down so long as they maintain quality outcomes. As Minnesota 2020 has detailed, Rochester's Mayo Clinic has long advocated such a practice. If successful, these experiments will almost certainly be expanded.

Reform Outcomes for Minnesotans

Initial estimates for all of the Affordable Care Act's cost-savings measures suggest, before subsidies, by 2016 Minnesota families will each be paying $1,590 -- $2,280 less in premiums annually for the same degree of care than if the law hadn't passed.

Since an estimated 60% of Americans filed for bankruptcy due to medical bills in pre-recession 2007, the overhaul will likely save 7,700 Minnesota families from bankruptcy within the first year of full insurance expansion.

Paying for Reform

Congress also put a number of mechanisms in place to pay for widening access to health care. First, the law raises some revenue through expanded Medicare payroll taxes. Individuals making $200,000 or more and couples making $250,000 or more will pay an additional 0.9 percent on what they make above the $200,000 and $250,000. For example, the payroll tax increase for an individual making $250,000 or a couple making $300,000 amounts to $450 more a year.

Investment income for individuals in these same groups will also be taxed at 3.8 percent, requiring "[a] single taxpayer making $1 million in wages and $100,000 in capital gains income [to] pay an additional $11,000 into Medicare than he does today," both payroll tax expansions included.

It's very difficult to estimate exactly how this will impact Minnesotans. However, according to the 2009 Tax Incidence Study, 119,551 Minnesota households (not individuals) are projected to make $201,167 or more in 2011-about the top 4.6%. This tax doesn't take effect until 2013, and this is clearly a very crude estimate of the number of Minnesotans who might see their Medicare payroll taxes rise, but it at least provides a rough estimate of the new taxes' impact.

Another major payment mechanism is new taxes and fees on drug manufacturers, health insurers, and medical device manufacturers. In negotiations with these groups, President Obama made the case that since they'll see an influx of customers under the new health reform law, they ought to help pay for it. However, the new 2.9 percent tax on medical device manufacturers could have a disproportional impact on Minnesota, since manufacturers Medtronic, St. Jude Medical, AGA Medical, and others are based here.

A third way Congress pays for the overhaul is through reduced Medicare payments. In particular, the law cuts payments to Medicare Advantage (MA), which includes plans run by private insurers that generally cost more per person than traditional Medicare and offer more benefits. MA plans have long suffered from complaints of fraud against both Medicare beneficiaries and the government, and are thought to include a fair amount of overpayment. With government reducing payments to Medicare Advantage, it's likely that private insurers will bring the plans more in line with traditional Medicare.

Other Medicare cuts include reducing government payments for home health care, such as hospice, and for Medicare Disproportionate Share Hospitals, which provides extra money to hospitals caring for lots of individuals on Medicare, Medicaid, and without any health insurance, a group that should be shrinking with the increased access the Affordable Care Act provides.

And of course, the Tanning Salon Tax is another tool that helps pay for the law. Here in Minnesota, about 10% of adults use indoor tanning salons, according to the International Smart Tan Network.

Finally, there's the "Cadillac Tax," a tax on high-end, employer-based health insurance that goes beyond typical coverage. This tax will be applied to employer-based plans costing $10,200 annually for an individual, or $27,500 annually for a family. For reference, plans in Minnesota averaged $4,704 per individual and $11,938 per family this year.

The "Cadillac Tax" also works to lower health care costs for workers and their employers by encouraging individuals and plan administrators to manage costs more effectively and prioritize preventative and diagnostic care, so it's another reform aimed at bending the cost curve.


Major pieces of legislation take shape and change over time. That's likely what will happen with the Affordable Care Act. While the law takes major steps to expand access to care, many of its cost-saving measures are experiments and not clear solutions to the cost problem; therefore, this health care overhaul should be seen as the beginning of reform. More changes will need to occur in the coming years and decades in order to truly have a health care system that rewards healthy outcomes and works for all Americans at a manageable price. But by understanding the logic of the current law as a comprehensive whole and its effects on our state, Minnesotans can begin to contemplate what the next steps in health care policy should be.

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