How We Can Pay for Health Reform

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Posted to Web: July 30, 2009
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In this paper and brief, the authors discuss alternative ways that health reform could be financed. They analyze different options including several proposals for delivery system reforms and for reduction in Medicare and Medicaid payments. They estimate the cost savings that could occur due to the introduction of a public plan option. Finally, they explore a range of revenue options. The key message of the paper is that health reform can be paid for, but it is best to obtain funds from a large number of measures to spread the burden broadly.


Paying for health reform will be one of the most challenging tasks facing the Congress. Providing universal coverage through a combination of Medicaid expansions and income-related subsidies could cost over $1.5 trillion dollars over 10 years, depending on how the plan is structured. Several ideas for financing health reform have been proposed, but all seem to generate opposition from some quarter. Similarly, proposals to reduce or contain costs impact provider revenues and are generally opposed by those who are affected. Other proposals such as greater use of health information technology, the use of medical homes and chronic care management programs suffer from limited evidence on their effectiveness at restraining spending.

In this paper, we argue that there are many realistic sources of savings and many sources of revenue that could be used to support health reform. In some cases, policy initiatives plausibly would improve quality and patient experience with care while reducing spending. However, all of the measures could negatively affect some stakeholders financially and will likely be opposed by them because of that. Nevertheless, health reform will only happen if we are willing to take advantage of a variety of savings opportunities and revenue sources, thus spreading the costs broadly and minimizing burden on any single group. In this paper we show that it is possible to obtain more than enough savings or revenue to fully finance comprehensive health care reform.

In delineating an array of savings and financing strategies, we assume a health reform approach consistent with the broad outlines being actively considered by Congress and the Obama administration. The plan would have a Medicaid expansion for all those with incomes less than 100 percent of the federal poverty level; those currently on Medicaid and CHIP with higher incomes would obtain coverage in the new health insurance exchange (described below). There would be an individual mandate for all individuals to obtain health insurance coverage. The plan would have an insurance exchange offering private health insurance plans to individual and small employer purchasers (fewer than 50 workers).1

There would be income-related subsidies for families up to 400 percent of the federal poverty level obtaining coverage through exchanges plans.2 For those with incomes below 400 percent of the poverty level, the government pays the difference between the premium and a specified percent of income. Consequently, strategies that would lower the premiums will reduce the cost of government subsidies.3

We assume that the net costs of the Medicaid expansion are fully borne by the federal government4 and would increase net federal Medicaid spending by $42.7 billion in 2010. Over 10 years net federal Medicaid spending would increase by an estimated $550 billion.5 We estimate the cost of subsidies to be $1.26 trillion over 10 years if no public plan option is included in the exchange, only private plans being offered. The costs shown in table 1 reflect these government obligations. As a whole, we estimate that this hypothetical plan would cost $1.81 trillion. This would extend coverage to all except undocumented immigrants and assumes instantaneous implementation in 2010; in other words, we do not have low early-year costs because of a phase-in process. Costs would be lower if the mandate is not fully effective, or if subsidies or benefits are less generous.

In this paper, we describe a range of policies that could reduce health care spending, both overall and for government. We examine a number of options that would generate savings to the government by reducing provider payments within the Medicare program.

We first examine the cost savings from reducing payments to Medicare and Medicaid. These include

  • reducing the pricing advantage of Medicare Advantage plans,
  • reducing prices of selected physician services,
  • reducing payment rates to hospitals and post-acute care providers, and
  • reducing funds that currently go to safety net providers (most of which would not be needed if we had universal coverage),

We then examine a set of delivery system reforms. The cost estimates for these are more questionable but we make the argument that the research evidence supports assumptions of some savings for several of these measures and that, taken together, they can make an important contribution. We recognize that significant commitment is required on the part of the federal government to make these initiatives successful. These are

  • investing in chronic care management and coordination programs,
  • reducing hospital payments for readmissions within 15 days,
  • addressing health spending at the end of life,
  • introducing a prevention program targeted at preventing diabetes and hypertension,
  • adoption of health information technology,
  • malpractice reform,
  • increased health system reliance on primary care/medical homes,
  • comparative effectiveness/public- and private-payer coverage of new technologies.

Next we estimate the savings that could result from providing a public insurance plan option in the health insurance exchange. We estimate significant savings from introducing such an option, which would provide the advantage of somewhat lower administrative costs and provider payment rates between current Medicare and private insurance levels.

Finally, we examine a number of options for raising revenues:

  • revenues that would come from an assessment on employers with 10 or more workers who do not provide health insurance coverage to their workers,
  • a revenue increase from capping the current income and payroll tax exclusions of employer contributions to health insurance, and finally
  • the revenue possibilities from sin taxes and selective increases in federal income taxes.

Estimates for the health system options are provided in table 2.

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