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Health Cost Holiday Will Soon Be Over - Pacific Research Institute

Health Cost Holiday Will Soon Be Over

Federal officials recently reported that health spending inched up 3.6 percent in 2013. That’s the lowest annual rate of growth in decades — and the fourth time in the past five years that health inflation has been under 4 percent.

The Obama administration was quick to take credit. “The recent slow growth in the cost of health care reflects more than just the 2007-2009 recession and its aftermath, but also structural changes in our health care system, including reforms made in the Affordable Care Act,” wrote economic advisers Jason Furman and Matt Fiedler on the White House blog.

But will Team Obama be as willing to credit Obamacare when health costs resume their rapid rise in the years ahead?

The Centers for Medicare and Medicaid Services expect the nation’s healthcare tab to jump 5.6 percent in 2014 — and 6 percent a year over the following decade. One of the reasons for “faster projected growth in health spending in 2014 and beyond,” according to CMS? The Affordable Care Act.

Simply put, Obamacare’s efforts to rein in costs are failing.

Consider the law’s penalties for hospitals with high readmission rates. Proponents of these fines argue that the previous system rewarded hospitals for failure, as Medicare paid them a second time even if patients were readmitted for the same illness.

So Obamacare cuts Medicare payments 3 percent for hospitals with “excessive” readmissions in certain health categories. Obamacare has already hit 2,610 hospitals with this fee.

That approach would seem to make sense. Why pay a provider twice to treat the same thing?
Unfortunately, the reality is more complicated. High readmissions aren’t necessarily a sign of poor care. Indeed, the 50 best hospitals in the country have above-average readmission rates.

Further, only a small fraction of readmissions are preventable. Hospitals that treat lower-income patients have readmission rates 30 percent higher than the national average. Many poor patients cannot or will not follow the treatment regimens they’re prescribed after they leave the hospital. So they’re likely to be admitted a second time — through no fault of the hospital’s.

Previous penalty schemes in Medicare haven’t improved health outcomes. They’ve just prompted hospitals to change the way they code procedures to avoid the charges.

These penalties may well encourage hospitals to avoid admitting lower income and Medicare patients in the first place.

Obamacare is also counting on Accountable Care Organizations (ACOs) to bring down health costs. ACOs are integrated networks of healthcare providers that aim to coordinate patient care and reduce waste.

The federal government sets cost benchmarks for these networks based on the Medicare status quo. If participating ACOs are able to hold costs below the benchmarks while meeting certain quality-of-care goals, they can keep some of the savings.

ACOs are supposed to save $4.9 billion through 2019. But the myriad rules and confusing financial incentives have dissuaded providers from participating — including respected healthcare networks like the Mayo Clinic, the Geisinger Health System, and the Cleveland Clinic. Thirteen of the 32 “Pioneers” that participated in Obamacare’s most ambitious ACO experiment withdrew after its first year.

Then there are Obamacare’s insurance exchanges, which were supposed to bring affordable health insurance to individuals and small businesses. The president promised dozens of times that the average family would save $2,500 under his healthcare plan.
PricewaterhouseCoopers recently reported that average premiums will increase by 7.5 percent in 2015. In one-third of states, premiums will almost double.

As the federal government has floundered, the private sector has found a number of ways to reduce health costs.

Take consumer-directed health plans, which typically pair a high-deductible health insurance policy with a tax-advantaged Health Savings Account (HSA). Patients can save money tax-free to cover routine care. The catastrophic insurance policy, meanwhile, activates in the event of an emergency.

These plans hold down costs by giving consumers control over their healthcare dollars. Whatever money they don’t spend they can keep indefinitely. The prospect of building up savings compels those with consumer-directed plans to shop for care wisely.

Research shows that this consumer-driven approach works. A 2012 study found that families moving to an HSA spent 21 percent less, on average, the first year after making the switch.

It’s no wonder that consumer-directed plans have grown from zero to 20 percent of the market since 2005.

Defined contributions — like those pioneered in private-sector 401(k) retirement plans — may also help curb health spending. Companies are increasingly giving employees a lump sum that they can put toward health insurance. Workers can then decide whether they’d like an expensive policy for which they have to pay some of the premium — or a cheaper one that would allow them to put part of their employer contribution in a tax-free HSA.

Accenture forecasts that a quarter of workers will get their coverage through private exchanges by 2018. Already, over 17 million Americans have enrolled in HSAs.

Value-based insurance also holds promise for holding down health costs. These types of plans — available through many private employers — offer a financial incentive, such as reduced copayments, to beneficiaries who effectively manage chronic conditions.

In other words, they pay people to be healthy. That saves the entire healthcare system money.

Businesses are pushing these and other experiments because they can’t afford not to. Unlike government, private firms can’t keep health plans that are bankrupting them or that their employees hate. Consequently, they’re implementing workable reforms that empower patients and doctors to lower costs, improve efficiency, and enhance quality.

If healthcare spending is to come down, the private sector — not government — will lead the way.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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