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How to Reduce Health Costs By $900 Billion

Aug 30, 2019 | Health Care

There is no single magic bullet to rein in the high cost of health care for households, businesses, and governments. But lawmakers are currently sitting on policy proposals from Congressional committees and the President sufficient to reduce national health care costs by roughly $900 billion over the next decade, according to our estimates. About three-fifths of these savings would accrue to the federal government, while the rest would come in the form of lower premiums and out-of-pocket costs for individuals and reduced costs for businesses and state governments.

Over the past year, dozens of proposals to reduce health care savings have been put forward by the Senate Health, Education, Labor, and Pensions (HELP), Finance, and Judiciary Committees; the House Energy and Commerce, Judiciary, and Ways and Means Committees; and the President's budget. These proposals would reduce health care costs for households, businesses, states, and the federal government by decreasing the cost of prescription drugs, ending surprising billing, lowering excessive payments to health providers, and reducing the cost of defensive medicine, among other changes. Most of these ideas have been developed on a bipartisan basis and are supported by both parties.

Based on estimates from the Congressional Budget Office (CBO), we estimate these health savings would reduce projected federal deficits by $535 billion through lower spending on Medicare, Medicaid, and exchange subsidies and less revenue lost through the tax exclusion for employer-provided health insurance. We focus only on policies that would save money for the government, ignoring proposals to spend those funds. These deficit-reducing policies would also save money for ordinary Americans: seniors and workers would pay less in cost sharing and face lower premiums, while lower costs from employers and states would translate into higher wages and lower taxes (or greater services) from states.

CBO doesn't estimate these additional savings, but it does offer some clues. For example, CBO has estimated that the Finance Committee's major Part D reforms would reduce premiums and cost sharing by $31 billion, the HELP Committee's surprise billing reform would reduce premiums by about 1 percent in states that don't already have surprise billing rules, and medical malpractice reform would reduce non-Medicare national health expenditures by about 0.5 percent. We also know that each $1 reduction in Medicare Part B spending translates into roughly a 25-cent premium reduction along with lower cost sharing.

In very rough terms, we use this and other evidence to estimate that recently-proposed reforms would reduce total health care costs by about $900 billion over the next decade.

Policy Federal Savings Total NHE Savings Source(s)
Re-design Medicare Part D benefit $35 billion $50 billion Senate Finance
Limit drug price growth to inflation in Medicare and Medicaid $80 billion $100 billion Senate Finance
Equalize Medicare payments for similar services $90 billion $150 billion President's Budget
Reduce and reform Medicare payments for post-acute care $70 billion $75 billion President's Budget
Reduce Medicare payments for bad debt $35 billion $40 billion President's Budget
End surprise billing $25 billion $100 billion Senate HELP
Reform medical malpractice laws $30 billion $175 billion President's Budget
Reduce and reform GME and DSH payments $150 billion $150 billion* President's Budget
Promote faster introduction of generic drugs^ $5 billion $20 billion Multiple Committees
Prohibit pharmacy benefit manager "spread pricing" $5 billion $15 billion Senate Finance/HELP
Other reforms to reduce health costs $5 billion $15 billion Multiple Sources
Total $535 billion ~$900 billion  

Sources: Congressional Budget Office, CRFB calculations and estimates. Federal savings are rounded to the nearest $5 billion; NHE savings should be considered very rough and rounded.
NHE = National Health Expenditures
*These policies may have effects on non-federal health spending, but it is difficult to determine the direction or magnitude of those effects. ^Includes the CREATES Act; prohibiting "pay-for-delay" agreements, sham citizens petitions, and "product hopping"; and allowing approval of generic drugs that use exclusivity-protected safety information.

The upshot of all this is that policymakers already know how to reduce health care costs and have already put forward a number of ideas to do so. These ideas would all save money for the federal government while also reducing costs for Medicare beneficiaries, workers, and families.

There is no lack of ideas to reduce health care costs. Rather than criticizing these solutions, policymakers need to work to enact ones with bipartisan support. Then they must develop the next round of solutions, continuing what must be an ongoing effort to curb rapid health care cost growth and make health care more affordable.