Cost Control Pledges

Tue, 12 May 2009 13:10:03 +0000

Yesterday, President Obama stood with representatives of a number of health care special interest groups to announce a pledge by those groups to control the growth of health care costs. Before getting to the content of that event, I'd like to point out something that is evident in most industries. Non-binding pledges don't control costs. Genuine competition controls cost. The trick with health care reform is to get the competition out of the "pooling of risks" part and into the insurance and service delivery part. I wish that reform were moving in that direction, but we elected Democrats, so they are going to try it their way, and even if we had elected more Republicans, they haven't been pushing that agenda either.

Okay, on to the President's event. In a picture, here is what they pledged:

From CGG

I think there are four questions worth considering:

The first question is, What are they promising? From the chart, the "Before" scenario is consistent with about 5% growth in total costs adjusted for inflation. The "After" scenario is consistent with a bit less than 3.5% growth in total costs. This reduction of 1.5% in the growth rate is how they have couched the promise. It is worth noting that the promise is for the growth rate of total costs adjusted for inflation -- it is not costs per capita that would account for a rising population or costs per capita adjusted for demographic change (i.e. retiring baby boomers) that will increase the utilization of services and thus total costs even with no increase in prices. A better designed pledge would have accounted for these other factors, so let's see if there is any further refining of the pledge in the coming months.

The second question is, How will we know if they have delivered? Note that the pledge is not to keep total costs below roughly $3.5 trillion in 2019. The pledge is to keep total costs below roughly $3.5 trillion in 2019 if they would have otherwise been about $4.1 trillion in 2019. But we don't observe the counterfactual -- what would have otherwise been (also true for promises about saving or creating jobs). So there is plenty of wiggle room in 2019, if total costs are running well above $3.5 trillion, for representatives of those organizations to claim that they honored their pledges, but other factors beyond their control caused the total costs to be higher than projected. And the rest of us will have no way to tell -- unless the President has tasked OMB with carefully measuring these groups' progress on the pledge every year for the next decade. Both OMB and CBO should decompose the growth in total health care costs into the sources of the change (e.g., population growth, population aging, improvements in care, and costs for unimproved care, which is where the pledge should be focused) and make it part of their regular reporting.

The third question is, Can they deliver? Sure, why not? When you read the fact sheet that accompanied the President's remarks, you discover that almost all of the efforts are to be done within the Medicare and Medicaid programs. The adage that "He who pays the piper calls the tune" was designed for situations like this. Medicare and Medicaid can be designed to be a lot less generous than they currently are. Some of the measures that are in the President's FY 2010 budget are reasonable steps to take.

The fourth and final question is, Will they deliver? I can think of two big reasons why they won't, in addition to the measurement issues in #2 above. The first is that governments have shown themselves to be very good at increasing spending and very poor at curtailing spending. Implementing those changes in Medicare and Medicaid will reduce payments to some organized special interest groups (including all of those present at the event). These pledges of goodwill are non-binding -- I'll believe the reductions when I see them. The second is that there is tremendous scope for free-riding here, both across the groups that were represented and within each one. Every dollar forsaken by, say, the SEIU to meet the pledge is one that the AMA doesn't have to give up to meet the pledge. Every dollar forsaken by a hospital in Minneapolis is one that a hospital in Miami doesn't have to give up. Honoring the pledge within and among these groups will take an enormous amount of good faith in negotiations and monitoring for compliance. Let's see how those negotiations go.

For more, see these posts by Keith Hennessey and Paul Krugman.