A Plan to Save $1.7 Trillion in Health Care and Give Most to States

A new proposal could have bipartisan appeal because it places states in command of reform and offers broad flexibility.
by | September 5, 2014
Health policy advisor Ezekiel Emanuel, left, is one of the author's of the proposal.
Health policy advisor Ezekiel Emanuel, left, is one of the author's of the proposal. FlickrCC/Center for American Progress

A new proposal from a left-leaning think tank could have real bipartisan appeal, offering states strong financial incentives to hold health spending growth across public and private markets to around the level of economic growth -- no small task in American health care.

The Center for America Progress calls its plan “Accountable Care States” and estimates $1.7 trillion in savings over 10 years if only half of the states opted into the voluntary program, which would grant states wide latitude to hold health spending growth in check in return for up to 75 percent of savings over a certain rate of growth in the overall state-level economy. For context, from 1960 to 2011, health spending grew an average of 2.6 percent faster than the economy overall, though it slowed to historic lows in recent years in large part because of the recession.

Of that $1.7 trillion, the federal government would save more than $350 billion, with the rest going to states. Assuming states kept health spending growth at the rate of overall economic growth, savings would range from $5.9 billion in California to $80 million in Wyoming from 2018-2027, based on Congressional Budget Office projections and private spending data maintained by the Centers for Medicare and Medicaid Services.

Here’s how it would work: States could choose from one of two targets. Holding spending to the rate of potential economic growth (plus an additional half percentage point) would allow states to keep 25 percent of money that would have been spent above that target. States that choose to keep spending to the rate of potential economic growth without any additional percentage points would keep 50 percent of the money that would have been spent above that target. States could boost their share of the savings by 25 percent if they agreed to return federal spending that exceeds economic growth (plus one percent).

States would have the option of taking the level of savings projected over three years upfront or after they accrue, but choosing the former option would put them at risk of having to return money that exceeded the target. The federal government would measure savings each year by comparing actual spending per patient to the growth rate in federal spending per patient over the past five years or to a combination of the state’s growth rate and the national growth rate. The source of savings would cut across Medicare, Medicaid and the federal money going to private insurers in the form of subsidies to consumers shopping in the health exchanges.

But to be eligible, states would also have to meet targets for quality of care and access to doctors, though the Center for American Progress left specific benchmarks for those measures unclear. They’d also have to reduce growth rates for both public and private insurers by at least one percentage point each, which would broaden the impact of reforms. They also wouldn’t be able to credit savings to shifting costs to consumers through things like higher deductibles or by reducing benefits.

Many of the authors are current or former Obama administration advisors or officials, including former budget director Peter Orszag and health policy advisor Ezekiel Emanuel, the brother of former chief of staff Rahm Emanuel. But they insist the proposal has the potential for broad appeal because it would be voluntary, offer flexibility to meet targets and place control within states.    

“Given the current political gridlock, it is unlikely that the federal government will take the lead on reforms to control health care costs system-wide,” they wrote. “States must therefore play a leadership role, with the federal government empowering and incentivizing them to act.”

But such a proposal would still require Congressional approval, and that’s not likely to happen in the immediate future, even if leaders of both parties embrace it.

In some ways the proposal mirrors a special arrangement, known as a Section 1332 waiver, that states can take on starting in 2017, The program gives states the chance to radically remake their health systems with all the federal money they would otherwise have received in more restricted ways, but only if they forge a plan that maintains the same level of coverage. But the Centers for American Progress proposal would allow states to keep the money they save, which would further incentivize cost reductions.

Maryland and Massachusetts have already started limiting health spending growth to growth in the overall economy. Included within Massachusetts' plan are benchmarks for doctors to start using new payment methods, such as bundling services under a set price instead of paying for individual procedures, which encourages excess spending. Arkansas is implementing bundled payment methods across all payers, public and private. Tennessee is moving in a similar direction.

The Centers for American Progress plan would require states to move increasingly  in those directions with each year, bringing higher percentages of private and public insurers under different payment arrangements. But under the CAP plan, rather than seeing federal and state spending vanish with the success of reforms, states would get to keep much of the money they they'd receive to help further future reforms.