Ethics & Public Policy Center

Obamacare Is Not Entitlement Reform

Published in National Review Online on July 15, 2010


White House budget director Peter Orszag stated in February 2009 that “health-care reform is entitlement reform.” As Mr. Orszag prepares to leave the White House this month, it's clear the health-care-overhaul law that President Obama signed in March falls far short of what was promised. Instead of solving our entitlement crisis, it makes matters worse.

While our enormous current deficit is mostly attributable to the severe housing and financial crises and the deep recession that then ensued, the large deficits and debt projected for the coming years also reflect increased budgetary pressure from the rapid growth in federal entitlement spending.

The Congressional Budget Office last year projected that spending on the “Big Three” entitlements — Social Security, Medicare, and Medicaid — would reach 11.4 percent of GDP in 2020, or almost triple what it was in 1970. The growth in entitlement spending has been fueled by rapidly rising per capita health costs and a growing elderly population.

Entitlement-spending growth will accelerate in the coming years as the baby-boom generation enters its retirement years and health spending continues to escalate rapidly. The jump in entitlement spending over just the next two decades — 4.6 percent of GDP — is roughly equivalent to adding a program the size of Social Security to the budget.

The health plan was never aimed at addressing the problem of population aging. But the president did promise that it would begin to “bend the cost curve” of health care.

In that regard, the recent health-care debate brought to the surface a surprising consensus about what must change to get a better handle on costs: Medicare.

For many years, most Democrats believed Medicare was an innocent bystander to the problem, something like a rail car hooked onto a runaway freight train. But now many Democrats realize that Medicare is the engine pulling the health-care train down the track at an accelerating and dangerous pace.

American health care has many virtues, but it is highly inefficient because it is so fragmented. Physicians, hospitals, clinics, labs, and pharmacies are all financially independent of one another. They all send separate bills when they render services; what's worse, there's very little coordination among them when they are taking care of patients, which leads to a disastrous level of duplicative services and low-quality care.

At the heart of this dysfunction is Medicare — and, more precisely, Medicare's dominant fee-for-service (FFS) insurance structure.

For FFS insurance to make economic sense, the patients must pay some of the cost when they receive care. In the vast majority of cases, though, FFS enrollees face no additional cost when they use more services — and health-care providers earn more by providing more services and billing the program. Not surprisingly, Medicare has suffered for years from an explosion in the volume of services used by FFS participants.

FFS compounds this by stifling much-needed service-delivery innovation through its use of outdated and inefficient payment rules. The result is that today's fragmented and dysfunctional system is virtually frozen in place — for everyone, not just Medicare beneficiaries.

The new health law attempts to address these problems through a top-down payment-reform program, with the federal government using the leverage of Medicare reimbursements to essentially build new, provider-run, managed-care entities.

But the federal government has never shown any capacity to build such a network, despite many attempts in the past. Politicians and regulators have found it impossible to withstand the political pressure that comes when they try to make distinctions among hospitals and physician groups based on quality measures that are themselves subject to dispute.

Instead, Congress and Medicare's regulators have cut costs in the past with payment-rate reductions that apply to every licensed provider, without regard to any measures of quality or efficient performance. Tellingly, that's exactly how the recent health law achieves most of its Medicare budget cuts.

There is an alternative to clumsy, government-dictated cost controls. It's a bottom-up approach, with cost-conscious consumers choosing from among competing insurers and delivery systems based on price and quality. Congressman Paul Ryan's “Roadmap” for entitlement reform embraces this concept.

The government can and should play an important oversight role in such a reformed system. But the difficult organizational changes and innovations necessary to provide better care at lower cost must come — with prodding from empowered patients — from those actually delivering the services, not the Congress, or the Department of Health and Human Services, or some independent rate-setting board.

James C. Capretta is the author of the 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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