The Wonk Room

Obama Budget Lays Groundwork For Reducing Health Care Costs

President Obama’s budget allocates $634 billion towards health care reform but only half of that amount will come from new sources of revenue (namely, reducing itemized deduction rates for families with incomes over $250,000). The other half is already in the health care system, but we’re wasting it.

Up to $700 billion a year is wasted on unnecessary or ineffective care and the Obama administration believes that it can re-orient some of those dollars to fund health care reform.

Part of that waste comes from unnecessary care. In fact, according to the most recent Dartmouth study which looked at “variations in spending growth and spending patterns among U.S. regions,” certain areas of the United States were spending more on care than others because physicians in higher spending regions “were much more likely than those in lower spending regions to recommend discretionary services.”

More care, however, does not always translate into better health outcomes. In fact, evidence suggests “that the quality of care and health outcomes are better in lower-spending regions.” Here is the Medicare data:

Part of the problem is that current payment methods — which reimburse doctors for the number of treatments they prescribe — encourage “hospitals and doctors to try to expand their services”; doctors also often don’t know if certain treatments work better than others.

So to eliminate over-spending, Obama’s budget bundles payments for post-hospital providers and links a portion of Medicare payments for acute in-patient hospital services to hospital performance. The stimulus bill smartly invested in comparative effectiveness research.

The Dartmouth study argues that “to slow spending growth, we need policies that encourage high-growth (or high cost) regions to behave more like low-growth.” Some providers (like academic health centers or providers in high spending regions) may oppose restructuring the payment system, but insurance companies (who now reimburse for every procedure) and patients (who’ll be able to avoid unnecessary surgeries) would likely embrace the change. Overall it’s smart policy: it will reduce health spending and improve the qualify and efficiency of care.

Fortunately, the Obama budget adopts some of these cost-saving measures and reinvests the savings into health reform. But as the Dartmouth study suggests, there is more that can be done.