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What Are the Provisions in the New Law for Containing Costs and How Effective Will They Be?

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Document date: August 01, 2010
Released online: August 13, 2010


Policymakers are trying a wide array of approaches in an attempt to control costs, including competition among health plans, taxes on high-cost plans, delivery system and payment reforms, wellness programs, and controls over Medicare provider payments. The law also creates a board that can directly influence Medicare payments and make recommendations to the private sector. Based on the CMS actuaries, these efforts should allow for a significant expansion in coverage without an acceleration of costs. However, we will not know for if the health reform provisions actually result in slower cost growth and avoid the need for stronger measures.

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Health reform has several broad objectives, including expanding insurance coverage, containing the growth in health care spending, and improving quality of care. The provisions of the law related to coverage expansions are generally well-understood and likely to achieve their objectives. Policymakers used reduced payments to Medicare Advantage plans and many types of Medicare providers to finance about half the costs of coverage expansion. The types of limits put on Medicare payments have been used successfully in the past and, in addition to offsetting the costs of coverage, will extend the solvency of Medicare. Other provisions of the health reform law related to cost containment and quality improvement are less well-tested and, as a result, have greater uncertainty about their likely effects.

The lack of a clear consensus on how to contain costs led health reformers to include several provisions in the Patient Protection and Affordable Care Act to reduce costs.1 These include:

  • Health insurance exchanges that could promote competition among plans based on price and quality;
  • An excise tax on high-cost health plans;
  • Delivery system and payment reforms;
  • The Independent Payment Advisory Board focused on slowing Medicare and private spending growth;
  • Greater emphasis on prevention and wellness programs; and
  • Broader efforts to reduce waste, fraud, and abuse.

The uncertainty about the cost-containing effects of some provisions was reflected in Congressional Budget Office (CBO) cost estimates. The CBO seems to have been conservative in assigning impacts to many ideas that have been highly touted, and it focused solely on the budgetary effects as opposed to overall health care spending.2

The Centers for Medicare and Medicaid Services (CMS) actuaries performed the only available analysis of the overall impact of health reform on national health spending.3 It showed that health expenditures as a share of the gross domestic product (GDP) would increase from 17.8 percent in 2010 to 21.0 percent in 2019. Without reform, health expenditures as a share of GDP were projected to be 20.8 percent in 2019. This implies that, taking into account reduced expenditures on Medicare, 34 million people would leave the ranks of the uninsured in 2019 at a net increase in spending of $45.8 billion—less than a tenth of total projected health expenditures in 2019 under current law. This increase in spending may seem small relative to the increase in coverage. However, the provisions of the law aimed at cost-containment—especially in private health insurance—seem considerably weaker than those related to expanding coverage.

(End of excerpt. The full brief is available in PDF format.)

Topics/Tags: | Health/Healthcare

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