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March 11, 2017 Article 3 min read
The cost of health care is a simple equation: premiums paid plus out-of-pocket expenses. But lowering costs? That’s much more complicated.

A recent Kaiser Family Foundation poll reveals that lowering the cost of health care is the most important focus area for 67 percent of people, and lower prescription drug costs were the No. 1 priority for 61 percent. That's little surprise — premiums for the average plan on a Health Insurance Exchange will rise 22 percent this year after large increases in 2016.

As Republicans negotiate between now and the start of April about what to change to secure the votes they need, the Trump administration is set on two things: eliminating penalties associated with the individual mandate (which will certainly increase costs) and moving to Medicaid block grants by 2020. Everything else remains open to negotiation.

So how could any new plan reduce the cost of health care? The cost of health care is a simple equation: premiums paid plus out-of-pocket expenses. Consumers in general don't care what it costs for an individual provider or health system to deliver services; they quantify costs by what it consumes of their household budget. To reduce those costs, politicians have six choices:

  1. Set price controls
    A federal mandate could set prices for health-care services, a notion often raised with regard to prescription drugs. However, most economists agree that such measures would curtail innovation and the discovery of new therapies. Price controls would result in reduced access to health care because the inevitable decline in revenues would accelerate a wave of consolidation among providers. For many, the idea is contrary to the sanctity of free markets.
  2. Limit reimbursed services
    The new law could correlate a reduction in specific services to be reimbursed according to a listing of "least critical nature" of the service until total potential savings equals a targeted value. This is an approach previously taken by Oregon, which in the early 2000s put in place Medicaid benefit plan limits to manage to a predetermined state budget. No one has figured out how exactly to play "The Price is Right" with preventative health-care costs, in which providers would pay just enough for preventative care to avoid patient catastrophes, while not paying too much on unnecessary procedures or testing.
  3. Reduce waste
    Eliminating waste is one thing you might imagine we could all agree on. Some 30 percent of health-care spending is waste and there are plenty of blueprints to make things better. One study published in the Harvard Business Review laid out a road map to eliminate $1 trillion in waste. However, politicians don't like to talk about waste because it requires cutting jobs. Health-care spending now is 18 percent of GDP and even reducing spending by 1 percentage point to 17 percent would require almost 1 million job cuts. That's not the outcome politicians want.
  4. Re-engineer care
    Establishing the optimum process to undertake any treatment or procedure and holding providers accountable to explain variation from best practices should deliver better care to patients at a lower price. It's an approach that uses data and analytics to determine the most efficient way of delivering services and was an integral part of the ACA. However, to make it really work, health-care providers (care delivery) and insurers (financial intermediaries) need to be on the same team so that both are incentivized to reduce health-care costs — a model that Kaiser Permanente, a significant integrated health system, has shown can work.
  5. Enforce mandatory living wills
    Here's a startling statistic: Half of all health care is delivered to the average patient in their last six months of life. The obvious solution is requiring individuals to form living wills and to apply a national standard living will when a person has none.
  6. Quantify the consequences of not having insurance coverage
    Individuals should annually pick a health-care manager — such as an Accountable Care Organization, an insurer, a health system or a medical practice. Individuals under age 65 should be allowed to choose Medicare as their health manager. Adults can opt out but must sign a waiver indemnifying any health-care provider who does not want to provide services to them. That will mean that a hospital can deny care to someone arriving with no insurance, or the ability to otherwise pay. However, the only way to make all this work is to align the interests of health providers and insurance companies, offering them incentives to work together to lower costs. The end result will be insurance companies working with an integrated network on health-care providers, together innovating to reduce costs and boost their profits.
This article originally appeared on Morningstar >>