Robert Samuelson’s September 10th column in the Washington Postshould be read by every health care analyst in Washington.

He makes several important points that run counter to conventional wisdom. For starters, he argues that the urgent problem today is cost escalation, not coverage. Samuelson points to new data showing health care spending is already distributed uniformly across income groups. Why? Because health care spending is driven by a relatively small number of expensive conditions which are related mostly to age and genetics. And the poor apparently get care at nearly the same rate as everyone else when faced with these diseases because of existing government policy and entitlement programs.

Samuelson also notes that covering the uninsured would be expensive to taxpayers and would bring little or no improvement in health status.

Samuelson’s most important point, however, was this one: “Medicare is so large and influential that by altering how it operates, government can reshape the entire health care system.”

That’s exactly right. Medicare is a popular program, and understandably so. But the Medicare fee-for-service program rewards volume, not quality, and underwrites fragmentation, not coordination.

So what should be done? Here, Samuelson falls short by limiting his reforms to a familiar list: better electronic records, management of chronic illnesses, and more scrutiny of tests and procedures.

Though helpful, these reforms wouldn’t fix the problem, which is rooted in misaligned financial incentives for hospitals and physicians.

Market-based reform efforts in recent years have focused on “premium support” in Medicare as the answer. And it is still an important part of the answer. But it seems unlikely to be the full answer, given the resistance among providers to insurance-led pushes for more efficient arrangements.

But what if competition went beyond insurance to networks of hospitals and doctors? Medicare beneficiaries could be asked to select each year from among a number of competing “delivery systems,” not just insurance plans. A portion of the Medicare entitlement would go toward an insurance premium, but another portion would go toward paying an enrollment fee for a coordinated system of providing the kinds of non-catastrophic services most seniors need every year.

This kind of competition would finally put hospitals and doctors in charge of re-organizing themselves for efficiency. Successful delivery models would be those that found innovative ways to make their operations more cost-effective, thus allowing them to deliver a better product at a lower enrollment fee.

Obviously, this idea needs much more development and would raise many complex implementation issues. Still, there is no way around the fact that, to fix health care, we must fix Medicare. The reform suggested here would get the incentives right: hospitals and doctors would gain financially if they took the initiative to do their work better and more cheaply.


September 12, 2008