IPAB Unleashed

Many recent reports indicate a slowing of the growth rate of health care spending in the United States (Furman, New Report from the Council of Economic Advisers: The Recent Slowdown in Health Care Cost Growth and the Role of the Affordable Care Act 2013) and (Kaiser Family Foundation 2013). While this is good news, the US still spends far more per capita than any other country in the Organization for Economic Cooperation and Development (OECD) (Organisation for Economic Cooperation and Development 2010).

The causes of health care cost growth include the aging population, greater usage of new technology, and more wasteful spending in the US versus other OECD countries (Kaiser Family Foundation 2012) (Bentley, et al. 2008) (Furman, Reducing Costs and Improving the Quality of Health Care 2013) (Pearson 2009) (Kaiser Family Foundation 2007). Health care spending in the US is particularly inefficient compared with other OECD countries, when measured across many metrics. US life expectancy is significantly lower per dollar spent (Organisation for Economic Cooperation and Development 2010), despite our spending far more than other OECD countries in actual dollars as well as by percentage of GDP (Squires 2011). Nearly all of the difference in health care spending between the US and the rest of the OECD comes from private expenditure, as the US spends about the same in public funds as a fraction of GDP as the rest of the OECD[1] (Kaiser Family Foundation 2011).

There is also a clear connection between high health care prices in the US and poor health outcomes. Fifty percent of respondents in the US to a 2011 Kaiser Family Foundation poll indicated that they had done one or more of the following: “Relied on home remedies or over-the-counter drugs instead of going to see a doctor,” “Skipped dental care or checkups,” “Put off or postponed getting health care needed,” “Not filled a prescription for a medicine,” “Skipped a recommended medical test or treatment,” “Cut pills in half or skipped doses of medicine,” “Had problems getting mental health care” (Kaiser Family Foundation 2012). While some of these behaviors may not be cost-related, it is obvious that lower prices would incentivize many people to modify these choices.

The Independent Payment Advisory Board (IPAB) was created with the passage of the Patient Protection and Affordable Care Act in 2010 (U.S. House. 111th Congress, 2nd Session 2010). The purpose of IPAB is to slow the growth rate of Medicare expenditure and find savings inherent in the current coverage, without compromising the standard of care. Before the creation of IPAB, Congress made decisions about Medicare spending, with non-binding input from the Medicare Payment Advisory Commission. The flaw in this system has been that members of Congress are susceptible to outside pressure from interested stakeholders, such as physicians’ and drug manufacturers’ pressure groups (Aaron 2011) (Hill, et al. 2013).

Many others have proposed alternate plans to curb the growth of health care costs. The American Medical Association (AMA) has called for a reduction of risk factors for preventable disease, the encouragement of patient compliance, waste reduction, and an increase in benefit-cost analysis in decision-making (American Medical Association n.d.). While these are all laudable goals, none constitute a concrete plan. Laurence Seidman advocates a form of universal coverage he calls “Medicare for all.” Under Seidman’s plan, all Americans would automatically qualify for comprehensive health care, much in the way that all seniors now qualify (Seidman 2013). Holly Stockdale outlines many other advisory-board plans that were considered prior to the creation of IPAB. Many of these proposals were structurally similar to IPAB, but varied as to the specifics of authority, and the mechanisms for implementation of board recommendations (Stockdale 2010).

IPAB has been controversial since the planning stage. One of its foremost critics is the AMA, which argues that IPAB removes important decision making authority from Congress (Madara 2012).  The AMA has consistently backed efforts to eliminate, or reduce the scope of IPAB (Lazarus 2013). Henry Aaron writes that removal of health care expenditure decision-making authority from lawmakers susceptible to outside influence is precisely the goal of IPAB. He contends that the objections of interested parties with great political influence, such as the AMA, are a sign of the plan’s effectiveness (Aaron 2011).

The ability of IPAB to cap the growth rate of Medicare expenditures will be tested as the instruments of its mandate come into effect between 2015 and 2020 (Marciarille and DeLong 2012). Since much of the “extra” spending in the US consists of private money, the US should consider using mechanisms from the public sector to help control spending in the private sector. If IPAB proves successful, the implementation of a board like IPAB to regulate all health care spending would significantly reduce total health care costs in the US.

One area in which the US outpaces the rest of the OECD is in prescription drug usage. A higher percentage of the US population uses at least one prescription regularly than in every other OECD country. A higher percentage also uses at least four regularly. While the US allots the median percentage of health spending to drugs, it also has the highest per-capita drug spending. In most of the other OECD countries, drug prices are, at least in part, set by the government. This has clearly shown to be a useful technique to keep drug spending under control. Similar spending relationships are observed in medical imaging (Squires 2011).

One of the goals of IPAB, as a part of PPACA, is to reduce health care spending growth by way of “spillovers.” The hope is that reducing prices paid for services to Medicare patients will reduce the overall market price of those services. Whether or not these secondary effects are realized, the Congressional Budget Office projects a significant decrease in the rise of Medicare and Medicaid expenditures as a fraction of GDP over the next ten years (Council of Economic Advisers 2013). The goal of my policy is to harness these savings from reduced inefficiencies across the broad health care financing system.

Much of the recent slowdown in health care cost growth is attributable to savings achieved in Medicare through reduced overpayments (Furman, New Report from the Council of Economic Advisers: The Recent Slowdown in Health Care Cost Growth and the Role of the Affordable Care Act 2013). One reason Medicare is able to keep its administrative costs down is that the Medicare system is not burdened with the administrative duplication of the private sector. Every payment made in the private sector involves two specific administrators. One works for the service provider and is tasked with maximizing the billed amount. The other works for the insurer and is tasked with minimizing the billed amount. The negotiation between these two competing administrators determines, in large part, the final billed amount. Since administrative costs in Medicare are already 70 to 80% lower as a fraction of spending than in private insurance, utilizing these drivers of savings in the private sector is prudent policy (Bentley, et al. 2008).

Ezra Klein referred to IPAB as the “most promising cost control in the Affordable Care Act” (Klein 2010), because, like Henry Aaron, he believes it will virtually eliminate legislative meddling (Aaron 2011). The strong negative reaction of groups like the AMA, which lobby for financially interested parties, is an indication that the IPAB is a promising avenue for meaningful reform (Madara 2012) (Lazarus 2013).

Former Senate Democratic Leader Tom Daschle, President Obama’s first, but unconfirmed, choice to lead the Department of Health and Human Services, has also advocated expanding IPAB to administer cost savings more broadly. It remains to be seen however, if a board like IPAB could realize decreased cost growth in the absence of the single-payer buying power of Medicare. This is the crux of Seidman’s argument for “Medicare for all” (Seidman 2013).

One survey of cost-impact studies of a move to a single-payer system in the US found estimated savings that ranged from 89 to 280 billion dollars per year (Bentley, et al. 2008). It is clear that these savings would not be achieved in their entirety simply by regulating prices paid by private firms, but these figures provide insight as to the potential magnitude of cost savings from simplifying the payment process. It is also important to consider the potential social welfare loss to patients that could result from what some would crudely refer to as “price-fixing.” Social welfare loss, in this context, usually occurs because normal market processes are interrupted by the regulation of price. The market for health care is clearly not efficient, chiefly because buyers and sellers) often lack the necessary information to make rational decisions. The market is therefore already operating at an inefficient equilibrium.

A potential cost of restricting the growth of fees paid to doctors is that, under such a regime, there will be fewer practicing doctors in the US. The US already ranks below the median in the OECD in physicians per capita (Squires 2011). The operative question is whether or not, given the US lead in adopting new medical procedures, technologies, and norms, this is simply part of a trend toward greater utilization of physician’s assistants, nurse practitioners, and other paraprofessionals (Kaiser Family Foundation 2007).

An obvious argument can be made that setting prices through non-market processes can be inefficient. It is clear, however, that the US health care market is both informationally inefficient and more market-oriented than any other in the OECD. Perhaps it is time to expand a plan that has worked well to curb cost growth in public health care finance to all health care finance.

[1] US public spending on health care is 0.224 standard deviations above the mean in data collected from OECD countries, while US private spending is 2.999 standard deviations above the mean in the same data. (See Figure)

Figure

Public and Private Healthcare Spending as a Fraction of Gross Domestic Product, 2008
	Percentage of GDP					Private Share	Per-capita Spending
	Public	Private	Total
Japan	6.6	1.5	8.1			18.5%	$2,729
Australia	5.7	2.8	8.5			32.9%	$3,353
Norway	7.2	1.3	8.5			15.3%	n/a
UK	7.2	1.5	8.7			17.2%	$3,129
Spain	6.5	2.5	9.0			27.8%	$2,902
Italy	7.0	2.1	9.1			23.1%	$2,870
Sweden	7.7	1.7	9.4			18.1%	$3,470
Canada	7.3	3.1	10.4			29.8%	$4,079
Austria	8.1	2.4	10.5			22.9%	$3,970
Germany	8.1	2.5	10.6			23.6%	$3,737
Switzerland	6.3	4.4	10.7			41.1%	$4,627
France	8.7	2.5	11.2			22.3%	$3,696
US	7.4	8.5	15.9			53.5%	$7,538
	(Minimum)			(Maximum)
Mean	7.2	2.8	10.0			28.2%	$3,842
Std Dev	0.8	1.9	2.0			10.8%	$1,291
US Deviation	+0.224	+2.999	+2.884			+2.348	+2.86
Table created by the author from OECD Health Statistics Database data obtained via KFF (2011)

Works Cited

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