Slowing the pace of rising health-care costs is the holy grail of domestic and economic policy. It’s pretty much the key to everything that’s desirable. For starters, it’s central to heading off the debt-induced economic calamity that is fast approaching. If health-care costs in the future were to rise at something close to the rate of growth of wages (instead of a couple of percentage points more, as they have for most of the past half century), trillions in unfunded government liabilities now on the federal books would vanish altogether. The massive deficits now projected for coming decades wouldn’t necessarily go to zero overnight, but they would be in a range that is politically solvable, not hopeless. And if premiums for private health insurance rose moderately, it would be much easier to expand coverage to more people, even as employers could pay workers more with cash instead of health benefits. Our collective future would look far, far brighter under such a scenario.
So, yes, “bending the cost curve,” as the president famously put it, is the right objective. But what will actually do it?
To answer the question, it’s useful to start with a recent post from the Washington Post‘s Ezra Klein, who himself approached the issue in the form of a question. He asks what makes Congressman Paul Ryan so confident that the Ryan plan for Medicare reform (offered with former Clinton administration budget director Alice Rivlin, and so now called the Ryan-Rivlin plan) will work to control cost growth while Obamacare won’t.
From Klein’s perspective, it seems as if Ryan is applying a double standard. In Obamacare, Congress cut Medicare payment rates for hospitals and other providers of services quite dramatically — to the tune of about $500 billion over a decade. Ryan and others — yours truly most definitely included — have argued that these cuts are illusory because they are politically unsustainable. Klein wonders why that same argument doesn’t also apply to cuts under Ryan-Rivlin. After all, Ryan-Rivlin would bring Medicare spending well below baseline projections in the future by converting the Medicare entitlement into a defined-contribution payment from the government. Isn’t Congress just as likely to get cold feet about those cuts as it would about Obamacare’s payment-rate reductions? In fact, aren’t the Ryan-Rivlin cuts even more vulnerable, as they would seem to more transparently fall on the shoulders of the beneficiaries?
But that’s not how to look at this problem at all. Bending the cost curve is not a matter of simply paying less for a service. What’s needed is real and continuous productivity improvement in the health sector: doctors, hospitals, nursing homes, labs, clinics, and others finding better ways to deliver higher-quality care at less cost. Because if productivity in the health sector does not rise, then payment-rate reductions will simply drive willing suppliers of services out of the marketplace.
And that’s exactly what would happen under Obamacare. Providers of medical services aren’t going to take payments for services that don’t cover what it costs to care for patients. As Richard Foster, the chief actuary of the Medicare program, has repeatedly warned, Obamacare’s cuts would drive Medicare’s average payment rates so low that they would fall below those of Medicaid by the end of the decade. And Medicaid’s rates are already so low that the network of physicians and hospitals willing to take care of large numbers of Medicaid patients is notoriously constrained.
The Ryan-Rivlin plan is entirely different because it is based on empowering consumers to find the best value possible for their defined-contribution payment. This is the way to unleash a productivity revolution in health care. The administration says it wants everyone to have access to low-cost, high-quality models, such as the Geisinger Health Plan. The way to bring that about is with a dynamic consumer marketplace in which those kinds of plans are rewarded financially for being more efficient and of higher quality. And the way to bring that about is by giving people the control and financial incentive to become active, cost-conscious consumers both of the insurance they select and the delivery system by which they get their care. And that’s exactly what would happen under Ryan-Rivlin, which is why it would work and Obamacare wouldn’t.
Klein and others continue to tout the supposed cost-cutting potential of the various Medicare demonstrations and pilots created in Obamacare. To assume that these are the answer to the cost problem is wishful thinking in the extreme. Medicare’s administrators have been trying for years to use the levers of payment to bring about more efficient health-care delivery. The problem is that building a high-quality, low-cost network requires making distinctions among physicians and hospitals that Medicare has never been able to do. To cut costs, the government always resorts to blunt, across-the-board payment cuts that actually induce more inefficient behavior, not less.
That’s almost certainly why Foster, recently testifying before the House Budget Committee, quite plainly disagreed with Klein’s premise. Under questioning about what would work to bend the cost curve, he was (as usual) quite cautious. Nonetheless, he made it clear that he had more confidence in Ryan-Rivlin than Obamacare to bend the cost curve, because Ryan-Rivlin has the potential to unlock productivity improvements in a way Obamacare does not. I’m with Foster.
James C. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director of the Office of Management and Budget from 2001 to 2004.