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How to Control Health-Care Costs?
Set up incentives and let markets work.


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It turns out that the private sector can control health-care costs.

A survey just released by the consulting firm Mercer found that employers of all shapes and sizes have done so well at controlling per-employee health-benefit costs that the 2012 growth rate was at a 15-year low. And why shouldn’t it be? Employers have every incentive to keep their costs low and keep their employees healthy and productive. Government mandates don’t change that.

One of the biggest sources, by far, of cost savings was the widespread use of consumer-directed health plans; 59 percent of the largest employers offered them. These plans generally have a high deductible and low premium, and are coupled with a health-savings account, or HSA, to which employees can contribute pre-tax dollars to spend on routine medical expenses. Employees get more control of their health-care dollars, and employers face lower costs — saving about 20 percent over more traditional plans with high premiums.

And it’s not only by gaining more control that employees come out ahead. Because companies benefit from having a healthy work force, many are experimenting with various wellness programs. Some, for instance, offer a discount on premiums if employees take an annual health assessment. Other strategies include offering incentives for maintaining or progressing toward specific health targets, such as quitting smoking or losing weight, particularly if the employee is judged to be at risk for diabetes or other chronic diseases.

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Another growing trend, particularly among large employers such as Wal-Mart, has been to offer health centers that focus on a certain set of treatments for employees. American Express, for example, has established wellness centers in a few cities, offering free or low-cost blood tests, prescriptions, and physicals. Employers benefit from healthier employees, employees benefit from low-cost or free routine medical services, and insurers benefit from a healthier coverage pool. 

Controlling costs is all about incentives — for employers, for consumers, for health-care providers, and for insurers.

This is where new payment models come in. Current fee-for-service approaches (driven by Medicare and Medicaid) often reward overuse of health-care resources and can encourage inefficiencies and fraud. Bundled payments, a system in which providers receive a fixed sum of money to provide a range of medical services, have enormous potential. In particular, bundled-payment systems offer a novel approach to controlling growth in Medicare spending without affecting coverage or cutting provider-reimbursement rates.

United Healthcare has been experimenting with a bundled-payments approach at several cancer-treatment centers around the country. Though we have only preliminary results so far, early studies indicate that a payment model focused on rewarding the quality of care rather than the volume can cut costs at no detriment to the patient.

The lesson here is that private companies respond well to incentives. Government mandates aren’t necessary to control costs, and the Affordable Care Act in fact makes it harder to cut costs because of burdensome new insurance rules.

As fiscal-cliff negotiations move forward, policymakers should bear in mind that we also face an entitlement cliff. Medicare is projected to be solvent only through 2024, and Medicaid’s access and quality problems won’t go away any time soon. Congress should consider premium support for Medicare as an innovative alternative to the current trajectory; the American Medical Association’s recent endorsement of premium support should lend the idea credence with left-of-center policymakers, because the AMA also supported the Affordable Care Act. Meanwhile, state legislators should consider requesting waivers (like Rhode Island’s global waiver) from the Department of Health and Human Services to experiment with more cost-effective ways of managing their Medicaid programs.

Employers and insurers are finding ways to control costs without strangling innovation. Congress should follow their lead — or at least get out of their way. 

— Yevgeniy Feyman is a research associate at the Manhattan Institute. He blogs on health care and entitlement reform at MedicalProgressToday.com.



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