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Liberal critics of the proposal Senate Finance Committee chairman Max Baucus (D-Mont) released this week see it as a dead end in the health care reform debate. But if President Obama actually signs legislation revamping the health care system, it's more likely that the Baucus plan eventually will be seen as the foundation.

The reason is that Baucus' draft bill offers the most fiscally sustainable framework yet devised for expanding coverage. It progresses much further than any other Congressional bill toward solving two fundamental and inter-related problems: creating a revenue stream that rises as fast as health care costs, and reshaping the incentives in the medical system in ways that should help "bend the curve" on those long-term cost increases. Without those two elements any coverage expansion will prove unaffordable, and thus unsustainable, over time.  "Whatever its other pros and cons," said one senior Obama administration official integral to the health care debate, "the [Baucus] mark provides proof of concept that you can significantly expand coverage in a fiscally responsible way."

On many fronts, it's likely that the final bill will be tilted more toward Democratic priorities and preferences because Baucus crafted his plan partially to attract bipartisan backing and it now appears that if any bill passes, it will do so without support from many, and perhaps any, Republicans. Most glaringly, Baucus devotes too little money to help uninsured middle-class families buy the health insurance they would be required to obtain under the individual mandates included in all major bills. He also asks too little of larger employers who don't provide insurance for their workers.

But those inevitable adjustments should not obscure Baucus' achievement in creating what could be a fiscally durable framework for expanding coverage while simultaneously reforming the medical system. The bill represents by far the most serious effort to implement the innovative thinking from the community of health care reformers looking to move the medical system away from today's fee-for-service model toward a system that ties payments to providers to results for patients. It contains about a dozen major ideas-most of them implemented as national programs under Medicare, not merely as pilot projects-to nudge the medical system toward adopting the integrated models used by institutions such as the Cleveland and Mayo clinics and the Geisinger Health System to deliver high quality care at lower cost.

"You are not going to replicate Geisinger everywhere, but you can replicate their functions and that's what this bill is doing," says Kenneth Thorpe, chairman of the health policy department at Emory University's Rollins School of Public Health. "They are building many of the same payment and incentive models that you see in these integrated practices that have been very effective."

Mark McClellan, director of the Brookings Institution's Engelberg Center for Health Care Reform, and the former Medicare and Medicaid director under President Bush, was similarly impressed. While the Baucus proposal didn't move as boldly as McClellan would prefer on some fronts-like reforming medical liability laws-he said the plan substantially tracked the recommendations of a widely-praised bipartisan report that he recently released outlining strategies to slow long-term spending growth. "It does bend the [cost] curve in the long term," McClellan said. "They clearly are working hard to make fiscally responsible decisions about health care reform."

The senior administration official agreed, giving the plan an overall "a-minus" grade for structural long-term reform. "The big things are all there," said the official. "Maybe the reason it's only an "a-minus" is they are not always there full blown. But it is the legislative process, and along these dimensions, it is about as good as one is going to find in a real proposal."
The Baucus bill incorporates most of the major ideas that reformers have offered to encourage long-term cost-savings in the medical system. Two common themes link these ideas: shifting the reimbursement model away from volume to value, and encouraging physicians to work more closely in teams to manage the overall health of patients, particularly those with expensive chronic conditions. The bill would implement these ideas within Medicare, though advocates hope that if these practices prove effective, private insurers will adopt hem as well.

One set of proposals would reward Medicare providers who deliver care more efficiently and penalize those who don't. Starting in 2013, the bill imposes payment penalties on hospitals who readmit too many patients for preventable reasons after treatment. It imposes more modest penalties on hospitals whose patients acquire the most infections within the hospital itself. Another proposal addresses the concerns popularized by surgeon and New Yorker writer Atul Gawande on the vast divergence between spending on medical services in different communities: that provision would compare the amount all physicians spend on patients with similar conditions, and starting in 2015 cut Medicare reimbursements by five per cent for those who order up the most care. Hospitals would receive similar treatment. Today's law requires hospitals to record whether they meet a list of quality measures, like providing aspirin to heart patients. The Baucus bill, for the first time, would link their reimbursements to their actual performance on those measures.

It's possible to quibble about whether these ideas are implemented fast enough or provide persuasive enough incentives. But their direction universally draws praise from reformers. "I love the signal because it says we are not going to tolerate business as usual," says Len Nichols, director of the health policy program at the centrist New America Foundation. And each of the four ideas discussed above are implemented in the Baucus bill as national programs, not just pilot programs. The bill does use the pilot mechanism for another big reform: it authorizes a voluntary national test on bundling payments that would provide incentives for doctors, hospitals and nurses to coordinate care for a patient admitted to hospitals. The bill would encourage such providers to work together by allowing them to share in any savings they produce.

That pilot points toward a second thrust of the bill's reform agenda: encouraging more coordination among providers. It provides similar incentives (sharing in any savings) to nudge groups of providers to establish doctor-led "accountable care organizations" to more comprehensively manage patients' care under Medicare. More modestly, it funds a $500 million three-year test of "transitional care programs" designed to help hospital reduce readmission rates by providing more coordinated follow-up for patients after they leave the hospital.

Beyond all of these specific ideas, the bill creates two new institutions that could anchor the reform cause for years. Baucus would spend $1 billion a year to create an Innovation Center within the Health and Human Services Department that would fund a wide range of further experiments in coordinated care and payment reform.

The bill creates a second new institution that could be even more important: an independent Medicare Commission, as Obama has proposed. The commission would be required to offer proposals for cost-savings whenever Medicare spending rises too fast and Congress would be required to give their proposals fast-track consideration. The commission would likely become a vehicle to move into law the most promising payment and coordinated care reforms that emerge from the tests and pilot programs that the bill's other provisions set in motion. "If it develops into a respected independent body it could be one of the most significant parts of this legislation," said the senior administration officials. "I think that's the most auspicious path forward for promoting fundamental reform."

One final element in the bill could also put downward pressure on long-term costs: the tax on the most-expensive insurance plans. That proposal achieves, in somewhat diluted form, the goal many reformers hoped to advance by capping the tax exclusion for health insurance provided through employers: encouraging consumers to pick less-expensive plans.

The insurance tax also contributes to another major breakthrough in the Baucus bill. Earlier Congressional Budget Office analysis of the House Democrats' health care legislation noted that while it was largely paid for in the first decade, the longer-term trajectory was much more precarious. In a July 26 letter to Republican Rep. Dave Camp of Michigan, CBO concluded that in its second decade the House bill's costs would rise substantially faster than its revenue and offsetting savings, which meant the bill "would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window."

But CBO reached precisely the opposite verdict about the Baucus bill. In its September 16 analysis of the proposal, CBO concluded that because Baucus' funding streams (like the provision taxing high-end health plans) are tied more directly to medical costs themselves, over the bill's second decade "the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion." So much faster that CBO concluded the Baucus bill over its second decade would reduce the federal budget deficit by as much as one half percentage point of GDP-a huge savings. "That's very important, and it is a significant departure from the previous bills," says McClellan.

In other words, CBO concluded that the Baucus bill could move close to universal coverage (reaching 94 per cent of eligible Americans) with a funding stream that not only met the cost of expanding coverage, but also reduced the deficit. And even that conclusion doesn't include meaningful savings from the payment and care coordination reforms the bill embraces because CBO typically doesn't assume much impact from such dynamic proposals. Yet experts like Thorpe believes those systemic reforms would offer large savings over time.

It's true that responding to the most trenchant criticism of the Baucus bill-the inadequacy of its subsidies for uninsured middle-class families compelled to purchase it under the individual mandate-would increase its cost and reduce its fiscal benefit. CBO estimates Baucus would dedicate $463 billion over the next decade to subsidies for uninsured families that would face the mandate; by comparison, the House legislation would dedicate $773 billion toward that purpose over ten years. The final Congressional product, if there is one, almost certainly will spend more on subsidies than Baucus proposed, perhaps by raising more from employers who don't insure their workers. (Baucus asks those employers to chip in just $27 billion over the next decade, compared to $163 billion in the House bill.) Another option might be to revive Obama's proposal of limiting itemized tax breaks for the most affluent: even freezing those deductions at a 35 per cent tax rate when the top rate returns to 39 per cent could raise $100 billion over a decade, the administration has calculated. With such potential offsets-and the potential savings from the other systemic reforms that Baucus has set in motion-it becomes possible to envision a compromise that would provide more help than Baucus offers for uninsured middle-class families without destabilizing the bill's hard-won long-term fiscal balance.

Democrats paid a high price in lost political momentum for the three months this summer Baucus spent negotiating with Republicans. Those long discussions ultimately may not produce any Republican support. But the release of the Baucus bill makes clear that even if no Republican signs on, that time wasn't completely wasted. Despite all the vitriolic complaints from the left -- Howard Dean is becoming living proof that health care reform should offer a universal entitlement to Valium -- Baucus has advanced the historic Democratic cause of providing health security to all Americans by demonstrating that it can be compatible with fiscal responsibility and long-term cost control. Baucus, to say the least, hasn't solved the entire puzzle. Yet if his party is smart enough to recognize it, Baucus' innovative ideas on financing and structural reform could move Democrats substantially closer to a final plan that will not only reach President Obama's desk this year-but achieve lasting acceptance from the American public.