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Starting on the Path to a High Performance Health System: Analysis of Health System Reform Provisions of Reform Bills in the House of Representatives and Senate

To achieve a high performance health system, health reform must go beyond ensuring affordable coverage to addressing health system changes that will improve Americans’ health outcomes and the quality of health care, increase efficiency, and slow the growth in total health system costs. This report analyzes how the health reform bills passed by the U.S. House of Representatives and the Senate would affect providers' financial incentives, the organization and delivery of health care services, investment in prevention and population health, and the capacity to achieve the best health care and health outcomes for all.

Congress has fashioned health reform plans that will fundamentally change our present course of rising costs and increasing numbers of uninsured and underinsured people. The bills represent a pragmatic approach to closing the gaps in insurance coverage by: building on a mix of employer coverage and other private plans in a health insurance exchange, or exchanges; strengthening Medicare; and expanding Medicaid. Most of the ideas that have been advanced by policymakers and health care opinion leaders to deal with rising costs are reflected in the bills (Exhibit ES-1). IMPORTED: __media_4F0C1DA0520940379189DA869F5C9CD7_w_300_h_225_as_1.gif

Key Provisions Targeting Costs and Quality

Following are the key changes that the House and Senate bills would make to help ensure long-run cost containment and improve the quality of health care.

1. Changing the Insurance Market
Both the House and Senate bills would establish a health insurance exchange, or exchanges, with a choice of plans; rules to shift insurers from competing for healthier enrollees to competing on value; and greater transparency. While the Congressional Budget Office (CBO) does not credit savings that would be generated from increased competition among plans, it estimates that the insurance exchange would lower administrative overhead by four to five percentage points. In the authors' view, the House provisions for the insurance exchange would be effective over the long term in mitigating the rise in premiums and costs to employers and households. These provisions include: creation of an 85 percent medical-loss ratio standard (80 percent in the Senate for individual and small-group insurance plans, and 85 percent for large-group plans); standardized benefit tiers to facilitate comparison of plan premiums; review of plan premiums by the Secretary of Health and Human Services (HHS), who would have the authority to reject plans with excessive increases (or those with unjustified premium increases prior to implementation of reform in the Senate); and repeal of the health insurance companies’ exemption from antitrust regulation. These positive effects would grow if the exchange is gradually opened to larger firms (an option after the year 2015 in the House bill, and after 2017 in the Senate bill). According to a recent Commonwealth Fund survey of health care opinion leaders, support for establishment of a health insurance exchange is overwhelming (92%).

2. Offering a Public Plan
The House bill would offer a public health plan in the insurance exchange. The HHS secretary would be charged with negotiating provider payment rates and authorized to use an array of proven value-based purchasing payment methods. Providers participating in Medicare would be assumed to participate in the public health insurance plan unless they opt out. CBO estimates that the public plan will have lower administrative costs than private plans but also will attract sicker individuals, with the net effect that its premium will be slightly higher than those for private plans. The CBO estimates that nearly all of the 6 million people who enroll in the public plan (of the nearly 30 million covered through the exchange) would be people who are currently uninsured and who would be eligible for premium subsidies.

The Senate bill does not include a public plan, but calls for the Office of Personnel Management, which administers the Federal Employees Health Benefits Program, to develop at least two multi-state plan offerings, at least one of which would be nonprofit. Both the House and the Senate bills include provisions for nonprofit consumer cooperative health plans. The CBO estimated that neither the multi-state plan option under the Senate bill nor the nonprofit health insurance cooperative would have much of an effect on either coverage or costs. CBO estimates that the cooperatives would have difficulty competing in most state markets dominated by one or two large carriers.

There is great uncertainty over the long-term effectiveness of the public plan option. Initially, health care providers that treat the uninsured are likely to participate, even at payment rates well below commercial rates because most of those newly covered would be low-income patients for whom safety-net providers now receive little or
no payment.

A Commonwealth Fund study found that a health reform proposal that includes a robust public health insurance plan—with provider payment tied to Medicare and open to all employers and individuals—could save $3 trillion in total health expenditures over the period 2010–2020. The same proposal, but with an intermediate public plan having rates between commercial providers’ and Medicare's, was estimated to save $2 trillion. A proposal with no public plan but with Medicare reforms only, meanwhile, saved an estimated $1.2 trillion. Depending on how effective the HHS secretary is in negotiating rates and lowering administrative costs, the public plan could put significant pressure on private insurers to slow the growth in premiums for employers and workers over time as the exchange is opened to larger firms. Three-fourths of surveyed health care opinion leaders support inclusion of a public health insurance option in the exchange.

3. Instituting Provider Payment Reform
The House and Senate bills would establish a Center for Medicare and Medicaid Innovation with broad authority for the HHS secretary to test innovative payment methods for medical homes that provide patient-centered coordinated care, for accountable care organizations that assume responsibility for quality and cost across the continuum of patient care, and for bundled hospital acute and post-acute care. The Senate bill also would implement a national, voluntary shared savings program for accountable care organizations. The secretary would have broad authority to sustain and spread effective payment methods.

The House bill calls for two studies to be conducted by the Institute of Medicine. The secretary would be authorized to implement the recommendations of one study, on geographic adjustment factors in Medicare payment. The secretary also would be authorized to implement the recommendations of the second study, on geographic variation in health spending and promotion of high-value health care in Medicare, unless Congress votes to disapprove it. Nearly all health care opinion leaders (97%) in the Commonwealth Fund survey support reforming provider payment to promote quality
and efficiency.

4. Adjusting Payment for Productivity Improvement
The hospital industry agreed to slow increases in Medicare payment rates in recognition of the increased revenue realized through covering more uninsured Americans and the potential for significant ongoing productivity improvements. Slowing in Medicare payment rates for all health care providers (other than physicians, whose payments are considered separately) yields $150 billion to $180 billion federal budget savings over 2010–19, according to CBO, and establishes the principle that rising expenditures cannot continue at projected rates.

5. Controlling Spending Growth
The Senate bill would establish an Independent Payment Advisory Board within the executive branch that has significant authority to identify areas of waste and additional federal budget savings. The board would first review physician and home health services; hospitals would be exempt initially. Congress would be required to make an up-or-down vote on its annual recommendations. CBO estimates the board would generate $28 billion in savings over 2010–19, mostly in the out-years. Three-fourths of health care opinion leaders (75%) support creation of an independent advisory council that has the authority to make decisions within parameters established by Congress and subject to review by the president and Congress.


6. Negotiating Pharmaceutical Prices
The House bill calls for negotiating pharmaceutical prices and for increased prescription drug rebates for beneficiaries covered by both Medicare and Medicaid. The Senate bill includes rebates, but not negotiation of pharmaceutical prices—the result of an agreement among the chairman of the Senate Finance Committee, the White House, and the pharmaceutical industry, in which the industry agreed to provide discounts of half the cost of brand-name drugs in the Medicare coverage gap, or "doughnut hole." While CBO does not score savings from the authority to negotiate prices, the experience of other countries suggests that it could in fact yield substantial savings were it to be included in a final reform bill. Four-fifths of health care opinion leaders (81%) favor using Medicare’s leverage to negotiate pharmaceutical drug prices.

7. Incentivizing Primary Care and Prevention
The House and Senate bills include a number of provisions to increase primary care payment rates under Medicare and Medicaid, cover effective preventive services without patient cost-sharing, and support community and employer prevention and wellness programs. These provisions could begin to change the orientation of our health system toward primary care and away from specialty care, counter the impending shortage of primary care providers, and lay the groundwork for more fundamental payment reforms.

8. Utilizing Value-Based Benefit Design
Both the House and Senate bills contain provisions that would permit patient cost-sharing and payment rates to be modified to encourage the use of services that promote health and value. The House bill allows value-based benefit design in the public health insurance plan, while insurance plans that reduce or eliminate cost-sharing for clinically beneficial care are exempt from certain requirements under the Senate proposal. These approaches could begin to reduce the use of overpriced and/or ineffective services and procedures over time. Eighty-six percent of health care opinion leaders favor granting an independent Medicare advisory council the authority to alter beneficiary incentives based on the effectiveness of services, drugs, and devices.

9. Promoting Quality Improvement and Public Reporting
The Senate bill would reduce payment for hospital-acquired conditions, and both the House and Senate bills would enhance public reporting of quality and cost. Under the Senate proposal, hospitals with high rates of hospital-acquired conditions would have their Medicare reimbursement rates cut by 1 percent. The House bill would require all hospitals to publicly report their infection rates.

10. Encouraging Medicare Private Plan Competition
Both the House and Senate bills would level the playing field between Medicare private plans and the traditional Medicare public health insurance plan. This would yield $140 billion to $170 billion in federal budget savings over 2010–19, according to CBO. Moreover, this policy change could provider further impetus for plans to compete on value, creating at least some downward pressure on health care costs. Three-fourths of health care opinion leaders (77%) support such a provision.


Assessing The Bills' Potential Impact

Consistent with the President’s belief that health reform should be financially sustainable and not add to the federal deficit; both the Senate and the House bills offset the cost of expanding and improving coverage with a mixture of system savings and new
revenue sources.

According to CBO, the total net impact of the Senate bill on the federal budget deficit is a reduction of $132 billion over the 10-year period 2010–2019. This figure reflects the net federal costs of expanding coverage ($763 billion), offset by reductions in federal health spending ($483 billion) as well as new revenues ($413 billion). Under the House bill, the total net impact on the federal budget deficit in the 10-year period 2010–2019 is a reduction of $138 billion. This figure reflects the net federal costs of expanding coverage of $891 billion, offset by reductions in federal health spending of $456 billion and by increased total revenue of $574 billion.

Federal reforms have the potential to produce substantial total health system savings for the nation—well beyond what is reflected in the estimated federal budget impact. The combined effect of these provisions on trends in national health expenditures, however, is difficult to estimate, and CBO has indicated that it does not have the modeling capacity to do so. Estimates released by the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS) indicate that the legislation could produce modest increases in national health expenditures, but this estimate gives little credit for savings to measures that would reform provider payment, negotiate prescription drug prices, increase competition among plans in an insurance exchange, encourage public reporting, or apply the results of comparative effectiveness research. Yet these measures are a crucial platform for developing and implementing further policies to contain health care cost growth. As such, they have broad support from health care opinion leaders and business leaders as effective ways to control costs.

For example, a recent analysis by the Business Roundtable, prepared by Hewitt, found that such legislative reforms could potentially reduce the trend line in employment-based health care spending by $3,000 per employee by 2019. One recent independent analysis put health system spending savings at $683 billion over the 2010–2019 period, slowing the annual growth in health expenditures from 6.4 percent to 6.0 percent.

CBO’s estimates of federal budget impact are fraught with uncertainty, given the multitude of changes and their potentially synergistic effects. On the last three occasions when CBO has estimated the savings or costs of major health reforms (the 1982–83 Medicare changes in hospital payment, the 1997 Balanced Budget Act, and the 2003 Medicare Modernization Act covering prescription drugs), the estimates were wide of the mark—with savings more than double those estimated in the first two cases and costs overstated by 40 percent in the third.

The measures incorporated in the bills under consideration would stimulate significant changes in the organization and delivery of health services and create powerful incentives to improve efficiency and productivity. Given the uncertainties that now exist, however, it will be especially important to establish a system for monitoring progress on agreed-upon health reform goals and to provide a mechanism for mid-course corrections and further changes as needed to move the United States toward a high performance health system by 2020. Stronger measures may be required over time to move providers toward value-based methods of payment. Estimates of cost and savings could be seriously underestimated or overestimated; if so, corrective actions may be required.

Even under current estimates, 18 million to 23 million people will remain uninsured, and many others will still face financial barriers to obtaining needed care or hardship in paying premiums or medical bills. Additional steps may be required to ensure affordability for families as well as stable financing.

Finally, the one major disappointment in the proposed health reform bills is the absence of significant incentives or levers for private insurers to control health care costs. Private insurers, in opposing a public plan, essentially have argued that they do not have the ability to slow premium growth or achieve economies, because of demands for higher prices from a powerful and increasingly consolidated health care provider sector. It is important that the HHS secretary use new discretionary authority to test multipayer provider payment reforms and to be responsive to requests from states or local groups to test innovative multipayer approaches. Over time, as experience is gained with new provider payment methods, strategies for harmonizing public and private provider payment and leveraging their joint purchasing power will be needed to avoid having public and private provider incentives working at cross-purposes.

Congress has a historic opportunity to pass comprehensive health care reform legislation this year. Multiple strategies for improving quality and slowing the growth in total health system spending will help spark economic recovery, put the nation back on the road to fiscal responsibility, and ensure that families are able to get the care they need while having financial security and relief from rising insurance premiums.

Publication Details



K. Davis, S. Guterman, S. R. Collins et al., Starting on the Path to a High Performance Health System: Analysis of Health System Reform Provisions of Reform Bills in the House of Representatives and Senate, The Commonwealth Fund, December 2009.