central planning

The Heart of the Cost Problem

Over at the Mirror of Justice website, Robert Hockett posted a thoughtful reply to my previous defense of Charles Krauthammer’s critique of the health-care legislation wending its way through Congress. Here (and cross-posted at Mirror of Justice) I offer a short reaction to some of the points he made.

First, there seems to be some confusion over what exactly is in these congressional health-care bills. Yes, they do contain many provisions related to reworking the nation’s approach to health insurance coverage and regulation. But that is far from all that they would do. The bills are called “health care reform” for a reason. A central argument of their proponents is that rising costs is a problem — a crisis, even — that must be addressed, and the presumption of most Democrats is that the federal government can, and must, help orchestrate a “cost-control” effort. Consequently, both the House and Senate versions of the legislation are filled to the brim with provisions that are aimed at the changing how medicine is practiced in this country. For instance, the bills would penalize primary-care physicians who are outliers in terms of specialist referrals. The bills would also try, through various disincentives, to discourage physicians from practicing in small groups. And the bills would create a new structure for hospital-physician affiliation, called Accountable Care Organizations. The ambition of the sponsors goes well beyond just “health insurance reform.”

Second, the most important question in the health-care debate is this: what process has the best chance to deliver continuous improvement in the productivity and quality of patient care? That’s the only way to slow the pace of rising costs without harming patients. The Obama administration and its allies in Congress believe a governmental process is the answer. That’s why the bills are so unwieldy and complex. If the government is the answer to rising costs, then the government is going to need to get involved in nearly every aspect of resource allocation in the health sector. This is what I mean by “central planning.”

There is an alternative to central planning. Mr. Hockett indicates that he would support converting today’s open-ended tax preference for employer-paid health insurance into refundable tax credits controlled by individuals, as proposed in 2008 by presidential candidate John McCain. The McCain proposal was not just a way to expand insurance coverage, although it would do that. It would also dramatically change the cost equation, creating millions of cost-conscious consumers who are today passive enrollees in job-based plans. The government can and should provide oversight of the health insurance marketplace. But the way to drive more efficiency in health care arrangements is with a functioning marketplace in which doctors and hospitals have strong financial incentives to reorganize how they do business. Getting there would require reform of federal tax laws and the Medicare and Medicaid programs so that beneficiaries have more control over the use of their entitlement resources.

Third, Medicare is not the solution to American health care. Indeed, it is really at the heart of the cost problem. Yes, the program provides valuable insurance coverage to seniors. But the program’s design is also a primary reason for widespread inefficiency in how care is delivered to patients. Medicare’s dominant fee-for-service insurance model encourages provider fragmentation instead of integration, and organizational autonomy instead of cooperation. Medicare’s per-service payment rates are low, but providers earn more by providing more services, and the Medicare program has no effective check on volume.

Even the Obama administration admits that Medicare is more problem than solution. That’s why they argue that changes in the way Medicare buys services can lead to cost reductions system-wide.

But that’s a lot of wishful thinking. Medicare’s administrators have been trying for forty years to move the program away from unmanaged fee-for-service, with no success whatsoever. The reason is politics: Politicians don’t want to pick winners and losers among the hospitals and physician groups in their states and districts, which would be necessary in building a high-quality network. In a budget crunch, they would rather have Medicare pay all licensed providers the same exact rate, even if it is low, than to leave someone out of a government plan. So that’s exactly what is happening in the current health care bills. Despite all of the talk of painless efforts to bend the cost curve, the real “savings” in the Democratic bills come from arbitrary price cutting in the Medicare program. All hospitals and other institutions would see cuts in their reimbursement levels, without regard to any metric of quality. In fact, Medicare’s fee-for-service design would be even more entrenched than it is today.

Fourth, Mr. Hockett argues that any deficiencies found in the current bills should be brought to the attention of the sponsors, not waved around as justification for scrapping the whole enterprise. For starters, the critiques I noted are on the public record, in prominent places. A conference was held at the American Enterprise Institute highlighting the disparate subsidies that would be created by the Senate bill, and opinion pieces have been published in, among other outlets, the Wall Street Journal and Boston Globe highlighting the problem. Is that not prominent enough?

The truth is that the Democratic sponsors don’t want to fix this problem because it would blow a hole in their budget constraint. The bills provide generous subsidies to a relatively small segment of the population who would get their coverage in the exchanges, but nothing to those who would be forced to remain in job-based plans. Providing equitable treatment would drive the cost of the bills much higher, jeopardizing passage. Which is why you won’t find any Democrat mentioning it — or being able to deny that the problem exists.

Our country does need to reform our health care arrangements. But there are far better ways to do so than with the approach now emerging in Congress. A different bill, based on a different reform philosophy, would be more straightforward, less unwieldy, and less subject to influence by interested parties. Oh, and by the way, it would be more effective too.

posted by James C. Capretta | 7:38 pm
Tags: Robert Hockett, central planning, Obamacare, Medicare
File As: Health Care

Unwieldy, Complex, and Arbitrary

At the Mirror of Justice website, Robert Hockett takes exception to columnist Charles Krauthammer’s arguments against the current health-care bills being considered in Congress.

First, Hockett objects to Krauthammer’s accusation that the bills are sprawling, inelegant, 2,000-plus page behemoths. Hockett argues that this is the norm whenever Congress attempts a large-scale reform of a complex sector of American society. To condemn the current health-care bills on this score would be to suggest that no health reform legislation should be considered — because any credible one would look equally unwieldy once the congressional sausage-making process got a hold of it.

But Hockett misses Krauthammer’s larger point. Yes, the bills under development in Congress are unwieldy messes partly because the subject is health-care. But the bills are much more unwieldy, complex, and bureaucratic because the authors start from the premise that the federal government has the capacity to centrally plan one-sixth of the American economy from Washington, D.C. That’s the main reason the bill contains scores of new agencies, mountains of regulations, and pages and pages of taxes, mandates, and fees.

Krauthammer is also right that, if enacted, all of this complexity would create perverse incentives and unintended consequences. For instance, as this paper from the Heritage Foundation demonstrates, the Senate bill would create powerful financial incentives for employers to discriminate against low-wage workers from low-income households. Employers that hired teenagers from poor neighborhoods could face penalties for not complying with the government’s new health insurance requirements, but they would face no such penalties if they hired teenagers from more well-to-do families.

Moreover, the bills would create massive inequities by treating households with identical incomes very differently depending on where they got their health insurance. At a recent session at the American Enterprise Institute, Eugene Steuerle of the Urban Institute presented data which shows that a family of four with $42,000 in compensation from an employer in 2016 would get $7000 more in governmental subsidization if they got their insurance through an “exchange” instead of at the workplace. This massive disparity is created by the complex rules in the bill which were written into it to artificially hold down costs. But, if enacted, it would only be a matter of time before Congress greatly increased the cost to the government by giving the same subsidy to everyone with the same income.

Krauthammer is also correct that many of the fines and fees are arbitrary. For instance, the fine for not obtaining health insurance is set at $750 in the Senate bill. Was this picked because it was found to optimize coverage at the lowest possible amount? No. As Jon Gabel explains in this Health Affairs blog post, no effort has been made to calibrate where the fine should be set to induce robust participation without being overly punitive. What’s happened instead is that Congress picked an arbitrary number for the fine and crossed their fingers that it would result in favorable budget and coverage numbers. There wasn’t any sophisticated modeling of the effectiveness of the $750 fee. It’s a guess, and nothing more.

Finally, there is the issue of what Krauthammer proposes as an alternative. For starters, Hockett says that savings from tort reform are overblown, but the Congressional Budget Office disagrees. CBO’s latest estimate shows the federal government alone would save $54 billion over ten years from a serious reform plan. Private costs would fall even more. In addition, Krauthammer’s proposal to convert today’s tax preference for job-based insurance into something that is fair, uniform, and limited — a proposal also suggested by Senator John McCain in his presidential campaign last year — would have dramatic implications in the health sector. All American households would have access to an equal level of insurance subsidization, thus solving the uninsured problem. In addition, there would much more pressure for decentralized efforts to control costs, without any need for clumsy governmental efforts which always lead to queues and lower-quality care. Yes, such a reform would be difficult to pass. But mainly because President Obama and his allies oppose it. They want a reform that is centered on full governmental control of health care. That’s why the bill is 2,000 pages and filled to the brim with governmental micro-management of every corner of the health sector. It doesn’t have to be so.

[Cross-posted to Mirror of Justice.]

posted by James C. Capretta | 10:12 am
Tags: Robert Hockett, Charles Krauthammer, central planning
File As: Health Care

The Central-Planning Conceit

This weekend, House Democrats are planning to pass two health-care bills. One is a sweeping plan that would shift nearly all power over the organization of American health care to Washington, D.C. The other — a full repeal of the “sustainable growth rate” (SGR) formula governing Medicare physician fee payments — is proof positive that the first bill’s strategy of centralized planning is ill-conceived and dangerous to the quality of U.S. medical care.

To understand why, it is worth reviewing how the SGR came to be. In the late 1980s and 1990s, the Medicare bureaucracy set out to reform the way physicians are reimbursed for providing services to the program’s enrollees. The idea was to shift more resources toward generalists, who were then thought to be undercompensated for spending time with patients, and to control overall costs by limiting the growth of aggregate payments to growth in the size of the U.S. economy. After several years of study, lengthy payment regulations were issued, including a predecessor to the SGR formula, which had immediate and profound financial consequences for nearly every practicing physician in the United States.

And so what happened? The exact opposite of what was intended. Instead of encouraging more physicians to enter into primary care, the Medicare physician-fee schedule has rewarded more specialization. The fee schedule only controls prices, not volume. As Medicare’s administrators have tried to hold down costs with fee cuts, specialists increased their share of the pie with more tests and procedures, at the expense of primary-care reimbursement rates. Not surprisingly, the trend of physicians entering specialist practices has accelerated dramatically in the last twenty years. Moreover, overall costs have never been brought under control. With volume soaring, the SGR formula governing annual fee updates has gone completely off the rails. In 2010, fees are supposed to get cut by 21 percent unless Congress overrides it yet again. To secure the AMA’s endorsement of their health-care bill, House leaders are planning to scrap the SGR component of the physician fee system altogether, at a cost of more than $200 billion over a decade.

The irony of the situation seems to be lost on House Democrats: Congress is moving to repeal a prime example of health-care central planning run amok while simultaneously extending federal control to every corner of American health care.

For its part, the Obama administration has been promising for months that it would deliver new and improved central planning to “bend the cost-curve.” The White House Budget Director, Peter Orszag, in a February interview with Politico, suggested that the incoming Obama team was working on groundbreaking ideas that would use the levers of government payment policy to painlessly eliminate inefficiency in American health care. As Orszag put it, “Medicare and Medicaid are big enough to change the way medicine is practiced.”

Now, nine months later, it turns out the Obama administration doesn’t actually have any new ideas of what to do. It is instead proposing to empower an unelected, unaccountable commission to come up with the whiz-bang ideas, which would go into effect automatically without further congressional action. But House Democrats found the commission approach unacceptable, as it would take too much of the central planning power away from them. And so they have instead filled their bill with assorted pilot projects and tests of new Medicare payment approaches. Orszag touts these as good ideas with potential, too. But these ideas would have virtually no impact on federal spending, according to the Congressional Budget Office, and they certainly are not up to the task of offsetting the costs of the massive increase in entitlement spending contemplated in the House leadership bill.

Instead of clever new ideas that painlessly root out waste and inefficiency, the House bill finds savings the same way all central planners ultimately do: with deep and arbitrary across-the-board payment rate cuts. Despite all of the talk of delivery system reform, there’s no real effort to make distinctions based on the quality of patient care. Everyone gets cut the same.

And that’s the real danger of the House bill. There’s no prospect that the federal government will become more nimble overnight at managing the vast and complex health sector in the United States. To control costs in health care, the federal government will do what it always does — it will set prices. In time, that will have the predictable result of driving out willing suppliers of services, leading to queues and access problems. Call it centrally-planned rationing of care.

posted by James C. Capretta | 9:29 am
Tags: central planning, House vote, Medicare, Peter Orszag
File As: Health Care