Published April 4, 2011
First, a point of consensus: unmanaged fee-for-service Medicare is at the heart of the health care cost problem. Medicare is the largest payer in most markets. The delivery system we have today has been built up around Medicare’s incentives. And that means high-volume care, without regard to any quality metrics, from a fragmented, uncoordinated delivery system.
Which then brings up the key health reform question: What process, implemented through Medicare, is most likely to succeed in bringing about continual productivity and quality improvement in the health sector? Because the only way to slow the pace of rising costs without compromising quality is by raising productivity on a continuous basis.
There are two competing answers to this question.
One was passed in the health law last year. Unbeknownst to most people, that law caps Medicare spending. Yes, the Affordable Care Act caps Medicare and sets up the new Independent Payment Advisory Board to enforce it. The sponsors of the law hope their efforts to reengineer how health care is delivered through Medicare payment reforms (such as Accountable Care Organizations) will work. But the truth is that the large Medicare spending reduction they are counting on to pay for the coverage expansion comes the old-fashioned way: with deep and permanent cuts in what Medicare pays for services. The Medicare actuary has warned repeatedly over recent months that this approach to Medicare cost control carries substantial risks for the program’s participants, as the payment cuts will be so deep that large numbers of providers will stop seeing Medicare patients. By the end of this decade, Medicare’s payments would be below those of Medicaid.
There is a bipartisan alternative, now being sponsored by Representative Paul Ryan. The idea is to move toward a system where the government provides a fixed contribution that the beneficiary controls, not the government. The key is that the government’s contribution is set independently of the choice made by any one beneficiary. If Medicare participants choose a somewhat more expensive option, they will pay higher premiums. If they choose less expensive options, perhaps through a more efficient delivery system, they will pay less. With cost-conscious consumers, the 2003 Medicare prescription drug benefit has held down costs remarkably well—and much better than anyone expected. The new Ryan proposal builds on that model.
Critics say this reform would simply shift costs and risks to the beneficiaries. That critique ignores the enormous risk now placed on beneficiaries by the Affordable Care Act. Payment-rate reductions look like cost control on paper, but they provide no guarantee that patients will be served.
Moreover, as stated previously, what’s needed in the health sector is a large step-up in productivity. What’s more likely to bring that about: Another round of government-led efforts to engineer more efficiency? Or a functioning marketplace that rewards effective cost cutting with market share?
The Ryan plan is the most important step Congress could take to fix what ails American health care—and it does so in a way that heads off a fiscal crisis, too.
James C. Capretta, an associate director at the Office of Management and Budget from 2001 to 2004, is a fellow at the Ethics and Public Policy Center.
