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Look to the GOP’s Patients’ Choice Act and Dr. Emanuel for mechanisms to contain health-care costs

As most expected, Democrats and Republicans are no closer to a compromise than they were before the White House’s much anticipated health care summit.

As most expected, Democrats and Republicans are no closer to a compromise than they were before the White House’s much anticipated health-care summit. Unfortunately, that means that America is no closer to getting a health-care bill that controls the rising cost of health care. The reality, as well as the irony, is that a more ideal health-care proposal — one that takes an honest shot at containing costs — is also a more bipartisanship proposal.

About a year ago, Rahm Emanuel — President Barack Obama’s chief of staff — brought in his brother, Dr. Ezekiel Emanuel, to advise the White House on health care. As it happens, Dr. Emanuel has some ideas on how to control costs. He specifically outlines five “mechanisms for effective, long-term cost control” in his 2008 book, “Healthcare, Guaranteed.” Remarkably, the bill that best delivers on these cost-containment mechanisms is the Patients’ Choice Act (PCA), a proposal put forth in May 2009 by four Republicans — Sen. Tom Coburn, (Okla.), Sen. Richard Burr (N.C.), Rep. Paul Ryan (Wis.), and Rep. Devin Nunes (Calif.).

The following outlines these mechanisms and shows just how closely the Republican-sponsored PCA delivers on them.

First, tie annual increases in federal health-care expenditures to something other than the medical inflation rate, such as the overall inflation rate. Currently, expenditures on the federal tax exclusion for employer-based health care automatically increase in lock step with medical care price increases. Consequently, this federal expenditure exerts zero pressure on costs. Both Dr. Emanuel’s plan and the PCA would replace the tax exclusion with a fixed subsidy (a voucher or a tax credit), available to everyone to buy health insurance. Annual cost-of-living adjustments for these subsidies would, at least in part, be tied to the overall inflation rate, eliminating the direct connection between federal expenditures and medical-care inflation. Under this approach, health plans would receive new pressure from their customers to keep premium increases in line with their subsidies.

Democratic health-care proposals do little to untether federal expenditures from medical-care inflation. While the House bill does nothing, the Senate bill would apply new pressure on premiums by taxing so-called “Cadillac” health plans. However, the tax would only impact 19 percent of employer-based health plans. This narrow impact would be further constrained under the president’s new plan, which proposes to raise the premium threshold so the tax applies to only higher-cost “Mercedes” health plans.

Second, increase competition between health plans to encourage efficiency and effectiveness. The House bill claims to boost competition by establishing a public plan option. Both the House and the Senate bills claim to make shopping for a competitive health plan easier through a health-insurance exchange. The latter may be helpful, but Dr. Emanuel is talking about a more transformational level of competition. Health-plan administrators have every incentive to avoid insuring high risk people, because doing so reduces earnings. Dr. Emanuel’s plan encourages health plans to compete for these people by paying health plans a risk-adjusted premium based on each individual’s health status. For example, a health plan might receive a $10,000 premium for a diabetic or $30,000 for a diabetic with complications such as heart disease or kidney failure. In this scenario, health plans don’t take a loss when they enroll a diabetic and profit if they properly manage the diabetic’s care.

The House and Senate bills also adjust payments according to risk, but with lump-sum adjustments based on the entire risk pool, not the individual. Consequently, there’s no incentive to compete to serve the particular health needs of the individual. Instead of picking one risk-adjustment method, the PCA empowers states to choose and implement the method that works best for them. In doing so, the PCA keeps the door open to the higher level of competition envisioned by Dr. Emanuel.

Third, allow people to spend their own money. People will generally work harder than the government or their employer to obtain value. By replacing the employer-based tax exclusion with an individual subsidy, Dr. Emanuel’s plan and the PCA both transfer the spending power from the employer to the individual, thereby empowering the individual to make more cost-conscious decisions. This doesn’t mean that employers cease funding and administering health plans, it’s just that the individual is now the decision maker. Further, because spending above the subsidy will truly involve an individual’s own dollars, those dollars will be spent extra judiciously. In contrast, the House and Senate bills serve only to reinforce the status quo, which, of course, means reinforcing the current cost-drivers.

Fourth and fifth, establish cost-saving mechanisms derived from the creation of a new organization to evaluate the quality and cost-effectiveness of medical procedures. The research from this new organization could contain costs in two ways. It would identify procedures that could save money without compromising quality. In addition, it would encourage long-term medical research to focus on higher-value interventions. The PCA and Democratic bills would all create a similar organization and, therefore, achieve similar cost savings.

Based on this analysis, the Republican Patients’ Choice Act delivers on all five of Dr. Emanuel’s cost-containment mechanisms. Unfortunately, Democratic proposals implement only the final two — the weakest cost controllers of the bunch — and, thereby, pass over any meaningful, bipartisan approach to contain costs.

At the conclusion of the summit, Obama suggested that Republicans do some soul-searching to figure out if there are any policies they can embrace in order to increase access for those without insurance. Democrats require at least an equal amount of soul-searching to consider whether they’re willing to embrace anything that can truly bend the cost curve. A bipartisan approach would do both.

Peter Nelson is a policy fellow at the Center of the American Experiment in Minneapolis.