Coming Together to Improve America’s Health Care System — and Our Fiscal Condition

This paper is part of an initiative from the Peterson Foundation to help illuminate and understand key fiscal and economic questions facing America. See more papers in the Expert Views: Bipartisan Policymaking under Divided Government series.

By Lanhee J. Chen, Ph.D.1

For the last several years, policymakers have nibbled around the edges of our health care system. The Inflation Reduction Act included some changes, such as an extension of expanded Affordable Care Act subsidies and the institution of limited price negotiation for prescription drugs furnished through Medicare. But they have ignored the fundamental contribution of escalating health care costs to ballooning deficits and the unsustainable long-term debt picture.

If today’s policymakers are serious about addressing a legacy of growing debt and deficits, they should come together to address long-term health care cost growth. And, somewhat counterintuitively, that goal is unlikely to be achieved through short-term cuts or modest changes to the system.

Let’s begin by stating the obvious: American health care is expensive and getting more so with the passage of time. This is true for American families and businesses. It is also true for the federal government.

But policymaker and citizen alike must understand the extent of the problem. In 2023, Washington will spend over $1.5 trillion on just three federal health care programs: Medicare, Medicaid, and the Affordable Care Act. That doesn’t include the hundreds of billions of dollars spent on health care for veterans, active-duty military personnel, and federal workers and retirees. Nor does it include the billions that go to tax preferences for healthcare consumption.

The bill is growing even larger. Right now, the three biggest healthcare programs account for 28 percent of total non-interest spending. But they are projected to grow faster than the national economy, growing to 38 percent of the programmatic budget by 2052 (and motivating higher interest payments on borrowed debt along the way).

The long-term growth in health spending is a key reason why the Congressional Budget Office projected last year that the federal debt will rise from 96 percent of GDP today to 185 percent by 2052. If, instead, these programs grew at the rate of GDP, debt would only rise to 130 percent — still high, but nowhere near currently projected levels.

None of this is a secret in Washington. The stark budget math animates much of the health care reforms of the past decade.

For many, the answer has been to cut reimbursement rates to physicians, hospitals, and prescription drug companies. The prescription drug pricing reform in the Inflation Reduction Act is an obvious example: the reform empowers the Center for Medicare Services (CMS) to force drug makers to reduce the prices of expensive drugs or face punitive excise taxes. The failed Sustainable Growth Rate formula attempted to institute severe rate cuts on Medicare doctors for over fifteen years. Its successor, the Medicare Access and CHIP Reauthorization Act of 2015, is the newest attempt to reduce physician reimbursement rates in Medicare.

The same rate-cutting logic applies to new proposals like the public option, lowering Medicare’s eligibility age, or Medicare for All. Supporters of these laws believe the programs will cut total health costs, and the official scores agree. But the savings that are promised are largely based on assumed cuts to physician and hospital reimbursement rates and cut-rate prescription drug prices that are unlikely to have staying power.

The problems with the promised savings are both political and economic in nature. As we learned from years-long experiences with the Medicare Sustainable Growth Rate formula, the politics of perpetual rate cuts are challenging. Physicians argued that these cuts would limit access to and hurt the quality of care. Politicians agreed and the inevitable results were perpetual “doc fixes” that shielded providers from cuts.

The economics are bad too. Heavy-handed rate cuts produce bad incentives for physicians to refuse new Medicare patients, shift costs to other payers, or simply find loopholes to ensure inflated prices. Evidence is already mounting that last year’s prescription drug reforms are leading drugmakers to increase prices today. And actuaries at the Center for Medicare and Medicaid Services (CMS) say the projected cuts to hospitals and physicians in current Medicare law are “probably not viable indefinitely.” Even if they are, over the long-term, the cuts lead to fewer physicians, less investment in care improvements by providers, and fewer life-saving innovations.

Others have proposed aggressive spending cuts for federal healthcare programs. Their proposals promised to save money in the first year. But the only way to do that — especially with such heavily subsidized programs as Medicare, Medicaid, and the ACA — is to reduce coverage or cut reimbursement rates. They were, consequently, political dead-ends.

If we are going to reduce health cost growth and therefore improve the country’s fiscal standing, the answer isn’t fleeting rate cuts or immediate budget cuts to federal healthcare programs. Instead, policymakers should coalesce around health care reforms that lower the rate of health care inflation and producing budget savings over the long-term. That requires better incentives, which empower individuals to think more deeply about their healthcare choices.

Contrary to popular belief, healthcare is not fundamentally different from other markets. It has some difficult challenges, but many that can be solved in a way that puts downward pressure on existing prices using the same market forces that exist with every other good that people pay for. It is possible for everyday Americans to pay attention to prices and make informed decisions about most of the care they seek. And, in fact, this revolution is already happening in direct primary care, outpatient facilities, health savings accounts (HSAs), and more. These decisions represent enough of all medical spending to drive significant changes to every aspect of the market.

One solution for which there ought to be bipartisan support is to encourage individuals to pay even closer attention to the prices they will ultimately pay for medical care. Prices rarely make an appearance in conversations between providers and patients. That makes health care one of only a handful of markets where prices are only revealed weeks or months after care is provided. Until that changes, prices will continue their march upward.

This can be done in ways that benefit consumers, such as extending existing tax preferences to out-of-pocket spending. It is long past time to equalize the subsidy given to those who buy insurance through their employer by giving individuals a tax break to buy their own insurance, making coverage portable and consistent with individual needs. Gold-plated and tax-advantaged workplace health plans with high premiums and low out-of-pocket expenditures give people little reason to consider the marginal cost of their care. They result in higher premiums, as resources are misspent on medical procedures where the costs vastly exceed the benefits to patients. The tax treatment is also regressive: individuals in higher tax brackets ultimately derive more savings than those in low tax brackets.

Consumers are voting with their choices and pocketbooks by selecting consumer-directed health plans that include health savings accounts (HSAs). The growing popularity of these plans suggest that there can be bipartisan consensus on policy changes to make them more accessible and easily usable.

Healthcare expenses are a part of life, yet Americans do not have a universally available tax-advantaged health savings vehicle like they do for retirement (401ks and various IRAs) or for their children’s education expenses (529 accounts). Unfortunately, HSAs currently come with cumbersome rules and strict spending requirements that make them less attractive to consumers. Removing these restrictions would give people better incentives to opt for cost-conscious insurance plans, which would produce large cost-savings across the healthcare sector.

Similar reforms are available for public programs like Medicare, Medicaid, and the Affordable Care Act. Greater access to health-specific savings accounts would ease the burden of large end-of-life healthcare expenses for Medicare recipients and allow those covered in ACA exchanges to set aside tax-advantaged money for what are often high-deductible plans. Meanwhile, states should be able to experiment with funding HSA-like accounts for their Medicaid populations, encouraging them to cut back on unnecessary utilization while also giving them quicker access to care with the promise to medical providers of immediate out-of-pocket payments.

In addition, current Medicare Advantage rules discourage insurers from fully competing on price. Today, insurers are incentivized to offer supplemental benefits or retain profits, rather than reduce premiums. More benefits for seniors are a plus, but it effectively puts a floor on cost savings. Instead, MA payments should be reformed to improve price competition. A 2018 report (Antos, et al.)2 found such reforms would save Medicare $10 billion per year while still providing recipients with more generous coverage than traditional fee-for-service Medicare.

These reforms can give patients and consumers more control over the healthcare choices, while driving down costs for them and the government.

None of these reforms will be costless in the short run. That is why past proposals that have championed such reforms have included draconian eligibility restrictions or other immediate budget cuts. The results, ironically, have been that the good ideas that would save taxpayers money in the long run died with politically unpopular short-term budget cuts.

The fiscal state of the federal budget is unlikely to allow for either yearly surpluses or a dramatic reduction of federal debt in the next few decades. But the difference between “manageable” debt and a fiscal crisis will depend on bending the long-term health care cost curve. Our strongly partisan and ideological politics may make finding consensus on many issues difficult, but health care shouldn’t be one of them. Policymakers should work together to make health costs more sustainable and, at the same time, improve options for patients seeking care. That means looking, thinking, and acting in the long-term interest of our health care system and the country more broadly.

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About the Author

Lanhee J. Chen, Ph.D. is the David and Diane Steffy Fellow in American Public Policy Studies at the Hoover Institution, Director of Domestic Policy Studies in the Public Policy Program, and an Affiliate of the Freeman-Spogli Institute for International Studies at Stanford University. He is also a presidentially-appointed and Senate-confirmed member of the independent and bipartisan Social Security Advisory Board.

Chen is a veteran of several high-profile U.S. political campaigns and served as policy director for Governor Mitt Romney’s 2012 bid for the presidency. In that role, he was Romney’s chief policy adviser; a senior strategist on the campaign; and the person responsible for developing the campaign’s domestic and foreign policy. Previously, Chen served as a senior appointee at the U.S. Department of Health and Human Services during the George W. Bush Administration, in private law practice at Gibson, Dunn & Crutcher LLP, and has advised numerous other presidential, gubernatorial, and congressional campaigns.

Chen earned his Ph.D. and A.M. in political science from Harvard University, his J.D. cum laude from Harvard Law School, and his A.B. magna cum laude in government from Harvard College.