When Health Controls Fail

When Health Controls Fail

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It will become clearer in the next few years that the costs and revenues of health reform are seriously out of whack, even if the new reform law survives repeal efforts.  Exploding deficits and debt will force huge strategy changes and a choice between three politically difficult roads.

There are good reasons to be skeptical that health costs will be checked or that many projected savings will materialize.  Congress has already blinked at enforcing the provision to hold down Medicare physicians’ fees, and is searching for a permanent “doc fix” –meaning another surge in costs.  And don’t hold your breath about a “Cadillac tax” on high-cost employer plans. The law allows seven years for unions to water that provision down before it goes into effect.

What in principle are the alternative future strategies for making a real dent in federal health costs if pessimists like me are right?

One is direct control of prices, payments and volume, tightening up the primary tool Congress has used for years in Medicare’s fee-for-service program with little success.  The new wrinkle the government could resort to, despite previous denials, would be to use the clinical effectiveness data health agencies are collecting in order to deny reimbursement for procedures deemed to be “poor value.” But that would spark fierce opposition, and invites a re-run of the “death panels” firestorm.

Another would be to increase the powers of the new Independent Payment Advisory Board (IPAB). The panel’s proposals to curb Medicare costs to finance new health subsidies will go into effect automatically unless Congress votes an alternative.  But will seniors, and future congressional members, really accept a powerful unelected board essentially running Medicare?  I doubt it.

The third and more plausible approach is to put Medicare and other federal health entitlements on a real long-term budget – meaning the federal share of spending would be limited and these “defined benefits” would become “defined-contribution” programs. The strategy has already won support from analysts across the spectrum. During the debt commission discussions, U.S. Rep. Paul Ryan, R-Wisc., and Brookings Institution fellow Alice Rivlin presented a version of this approach.

This approach directly controls total spending, rather than indirectly in the case of price controls or IPAB.  That makes it more powerful. Limited budgets could be allocated to providers or in some instances to states (as Ryan-Rivlin would do for Medicaid). Or it could be allocated to individuals as a voucher, which would go toward buying a private health insurance plan.

Questions remain for these sweeping controls: an unelected board making the tough decisions; or a fixed budget with states and individual Americans figuring out how to live within that budget?  If you are thinking of running for Congress in 2012 or 2014, start pondering which one you prefer.

Stuart M. Butler heads the Center for Policy and Innovation at The Heritage Foundation.

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