lic programs (and tax expenditures) that have direct effects on the federal budget. However, public-sector health care costs cannot be considered in isolation from private-sector costs. The services paid for by Medicare and Medicaid (and other federal health programs) are similar to those delivered in the private health care system by the same providers (doctors, hospitals, imaging facilities, nursing homes, etc.). Some analysts have pointed out that changes in government programs can have considerable influence and leverage over the health system as a whole (see, e.g., Finkelstein, 2007; White, 2007:160). Medicare policy, in particular, can have such effects because virtually every health care provider is affected; and private insurers often adopt Medicare payment schedules and coverage policies, with adjustments reflecting their own market conditions. Other analysts (see, e.g., Aaron, 2007) are skeptical about the possibility of practices spreading from Medicare to the private health care sector: they argue that it is more likely that providers will try to recover from private payers whatever income they lose from Medicare. Instead, they emphasize that the health care cost growth curve must be bent downward for the entire system in order to avoid major cost shifts from the federal budget to all other payers.

The nation’s health care system is complex and multifaceted, and it includes many expensive and long-lived investments in structures, equipment, and skills. Accordingly, many reforms that promise to limit cost growth through efficiencies, better practices, and organizational changes cannot be counted on to produce significant savings in the near term. Indeed, some ideas for cost savings may even require some up-front increases in spending. Furthermore, the ultimate effects of changes in such a complex system are inevitably difficult to quantify.

Given the history and structure of the broader health care system and the uncertainties just noted, the committee believes that achieving any significant near-term savings in Medicare and Medicaid spending (relative to the baseline) with some measure of certainty will most likely require taking strong measures that directly impact their costs. Such limits could take several forms, which could be adopted singly or in various combinations. For example, provider reimbursement rates could be cut, Medicare beneficiary cost-sharing could be increased, or federal cost-sharing for Medicaid could be reduced. In a more far-reaching step, Medicare coverage could be converted to a defined contribution that could be used to purchase private insurance. Essentially, each of these steps could provide estimable amounts of budget savings to keep the total budget within prescribed limits.

However, such near-term reductions in Medicare and Medicaid spending growth would not obviate the need for systemwide changes to the nation’s health care market to relieve the underlying pressures that spur spending growth. At best, they might help generate longer-term systemwide improvements by providing incentives for administrators and payers to search for major increased efficiencies, but most likely they will contain

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