The greatest threat to the nation’s long-term prosperity is rapidly escalating entitlement costs. The Congressional Budget Office (CBO) projects that between 2010 and 2030, federal spending on Social Security, Medicare, and Medicaid will increase from 9.8 percent to 14.4 percent of GDP. It will only get worse from there.

Now, unfortunately, the Obama White House and its allies in Congress are pushing for changes in the health-care bills that would make really fixing the entitlement problem nearly impossible.

At the heart of the rise in entitlement costs is the Medicare program. For months, the president and his aides suggested that they could neutralize Medicare’s rapid cost growth with targeted interventions in the health sector that would make care delivery more efficient. The cost curve could be bent, we were told, with painless investments in information technology, comparative effectiveness research, and prevention and wellness efforts.

This line of argument was quickly discredited by CBO. The core problem, CBO noted, is financial incentives. Providers of medical care increase their income when they deliver more services, and beneficiaries are largely insulated from the additional costs of higher use, since those costs are paid by a third party. No amount of federal spending on health IT is going to change that.

And so the Obama administration went back to the drawing board and returned in July with another idea: the IMAC. That’s the proposed independent commission that would have the power to make sweeping changes in the Medicare program. In the original White House version, the IMAC’s recommendations would have gone into effect automatically unless Congress could muster a two-thirds majority to stop them. The commission was to have broad authority to rewrite the Medicare program from top to bottom.

I noted at the time that this was an especially audacious proposal, representing as it did a massive, unprecedented power grab by the White House. Under the Obama IMAC, the president would pick all the commissioners, and the process gave him the power to reject the commission’s annual recommendations if he wanted to — but if he accepted them, they would be nearly impossible to block in Congress.

Now Senator Max Baucus (D.-Mont.) has taken the IMAC idea and made a few very revealing changes (see page 156 of the chairman’s mark). For starters, the commission would have many more members — 15, as opposed to 5 in the original IMAC — and the expectation is that they would look very much like the members of the existing Medicare Payment Advisory Commission, or Medpac, which means there will very likely be representation from insurers, physicians, hospitals, and other segments of the health sector, in addition to some academic experts.

In addition, the commission’s mandate would be very different in the Baucus version. It would be required to come forward with recommendations to hit specific spending-reduction targets each year, beginning in 2015, but the kinds of changes it could recommend would be very limited. As stated in the Baucus mark, the commission could not make recommendations that would change the structure of the Medicare entitlement. Amendments that altered “cost-sharing, benefits, or eligibility” would be off-limits.

What does that leave? Price controls, of course. Inevitably, the Baucus commission would feel the same political pressures Congress does today, which means it would resort to the same kinds of arbitrary, across-the-board price cuts that are routinely adopted whenever budgetary targets must be hit. Just look at the health-care bill Senator Baucus is pushing through his committee this week. It is filled with cuts in payment rates for hospitals, insurers, and others, as well as new industry-specific taxes. These kinds of cuts and fees make no distinctions based on quality or value; all providers are treated exactly the same, no matter how well or badly they treat their patients.

If the Baucus commission is adopted, we can expect more of the same in perpetuity as the commission is charged with hitting future budgetary targets. Worst of all, with the commission making annual provider-payment recommendations, Congress will have a ready excuse for never taking up what’s really needed to fix the entitlement problem: a fundamental reform that brings the same kind of competitive structure used in the drug benefit to the rest of the program. And that’s a disaster that would last for generations.


September 23, 2009