Think Health Reform Will Cut Costs? Think Again.

Published August 11, 2010

USA Today

If the government's current spending rate continues, “growing budget deficits will cause debt to rise to unsupportable levels,” the Congressional Budget Office (CBO) concluded in a recent report to Congress.

It's not a surprising conclusion. Last year, the CBO forecast that total spending on Social Security, Medicare and Medicaid alone would reach 11.4% of GDP within a decade — nearly triple what it was in 1970. As entitlement spending skyrockets, the U.S. government will have to radically raise taxes and cut vital programs.

The new health law was supposed to address the rapidly rising entitlement costs. But it does nothing to slow the growth. According to the CBO, spending on Social Security and federal health programs will make up an astonishing 14.7% of GDP by 2030, and that's assuming all of the law's controversial cuts and taxes are fully implemented.

Fee-for-service problem

A big reason the new law is ineffective in constraining costs is that it doesn't fundamentally reform Medicare, particularly the program's dominant “fee-for-service” reimbursement option.

That model covers over 75% of Medicare enrollees, or about 35 million people. It works exactly how it sounds: Medicare pays health care providers a pre-set amount for each service. Patients are largely shielded from costs of additional services because nearly 90% have extra insurance that covers costs Medicare doesn't.

This setup creates perverse incentives. Physicians, hospitals and clinics can make more money by providing extra treatments even if they don't improve patient health. Enrollees have little reason to refuse extra care because they pay no additional costs.

Not surprisingly, that's exactly what has happened. According to the CBO, the average Medicare beneficiary used 40% more physician services in 2005 than in 1997. Similarly, physician use of medical tests increased 40% from 2002 to 2007, according to the Medicare Payment Advisory Commission. Needless to say, Medicare spending has exploded.

Flawed ways to cut

The new health law attempts to beat back this trend in two ways, but neither will work.

The first is a pilot program to test “Accountable Care Organizations.” Under this program, physicians and hospitals are supposed to coordinate patient care and share revenue. Caregivers are paid normal Medicare rates, but if they find ways to treat patients for less money, they get to keep most of the savings.

The problem is that patients get assigned to these organizations without their knowledge. It's unlikely enrollees will agree to have their choice of doctors limited by a managed care plan they never agreed to join.

The new law also establishes the Independent Payment Advisory Board, appointed by the president and charged with enforcing an upper limit on annual Medicare spending growth. The board's only major power is to order reimbursement cuts. But payment cuts will drive out suppliers of medical services, making it more difficult for patients to get care and driving up prices.

Rep. Paul Ryan, R-Wis., has a way out of the coming fiscal crisis. Under his plan, consumers would choose between competing insurers and delivery systems based on price and quality.

Lawmakers must work to repeal the health overhaul and implement reforms along these lines. Putting consumers in charge of their medical dollars can lead the health sector to make revolutionary and cost-cutting changes the government has never been able to successfully impose by regulatory fiat.

James C. Capretta is the author of a Galen Institute study, “Why the Obama Health Plan Is Not Entitlement Reform,” and a fellow at the Ethics and Public Policy Center.

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