Careful observers who are encouraged that our economy may be taking the first tentative steps toward recovery should be concerned that any fragile hopes of lasting economic growth are threatened by our ongoing failure to embrace sensible, market-based reforms to address the rapidly increasing cost of health care.
All of us want the U.S. to have the premier health care system. But, unchecked growth in health care costs in general, and government spending on Medicare in particular, represents one of the greatest threats to our long-term prosperity. The $525 billion spent on Medicare in 2010 was 3.6% of gross domestic product. Medicare and Medicaid spending accounted for nearly one-quarter of all federal outlays in 2010. Every wasted health care dollar spent today is a dollar not spent investing in the technologies, businesses and innovations that will fuel growth tomorrow. In addition, failure to rein in Medicare and Medicaid spending will result in additional money being diverted from the private sector in by higher taxes needed to fund these inefficient programs.
Last year, a study by the National Bureau of Economic Research projected how high tax rates would have to climb in order to fund government health care programs, based on forecasts by the Congressional Budget Office (CBO) that “new tax revenues equal to 8 percent of baseline GDP will be needed to fund health care costs in 2060.”
In one scenario, the authors assumed marginal tax rates would be raised to “maintain the shares of taxes paid by high-income taxpayers, middle-income taxpayers, and low-income taxpayers.” In this case, marginal tax rates would increase 18% to 21.8% for the lowest income group and 42% to 70% for the highest income. The authors concluded that tax increases of this magnitude would “slow GDP growth, so that in 2060 per-household GDP [would be] 11 percent lower than it would have been otherwise.” Unless changes are made, the cost of health care will be paid for with slower growth and less economic opportunity.
In fact, declines in economic growth brought on by higher taxes and rising debt fueled by government spending on health care may happen at a much faster rate unless sensible solutions are enacted. Last year, the CBO stated that large budget deficits “would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment — which in turn would lower income growth in the United States… [it] also reduce lawmakers' ability to respond to economic downturns and other challenges.”
A growing federal debt also would “increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.”
Based on the above, it is very disturbing that the CBO recently released a revised estimate of the gross cost of the insurance coverage portions of the Patient Protection and Affordable Care Act ( (ACA) that was “about $50 billion higher than last year’s projection” of $1.5 trillion through 2021. This projection does not take into account federal administrative costs or the “explicit authorizations for spending by a variety of grant and other programs” called for under the ACA. In all, over the 10-year period from 2012 through 2021, enactment of the coverage provisions of the ACA will increase federal deficits by more than $1 trillion.
No one wants to deny our seniors the health care they have earned and deserve. But, the Medicare program, like our health care delivery system overall, is strained to the point of breaking. Medicare pays out billions of dollars more each year than it takes in (about $17 billion more in 2010) and faces a flood of newly eligible seniors who are poised to draw benefits. Medicare is burdened by a convoluted and misaligned payment and reimbursement structure that does not reward quality and unfairly attempts to cut costs by reducing payments to providers.
Just one example of this: nearly two-thirds of all U.S. hospitals lose money, on average, treating Medicare patients. Medicare amounts to “a price-fixing centralized bureaucracy” that is often used by private payers as a benchmark for reimbursements, causing Medicare’s pricing distortions to be imported to the rest of the commercial market.
Finally, the Medicare system is rife with fraud and abuse, costing taxpayers an estimated $60 billion a year. Crushing bureaucracy, bad economics, and too much waste add up to a bad deal for patients as well as tax payers.
Rationing is not reform
Fortunately, the magnitude of this looming fiscal disaster has finally caught the attention of lawmakers in Washington. Unfortunately, the proposals to deal with the dilemma of unsustainable growth in government health care spending put forth by the current administration will do nothing to solve the long-term problem, but rather it will create more bureaucracy and government interference in decisions that should be left to physicians and patients. The controversial Independent Payment Advisory Board (IPAB), created as part of ACA, is emblematic of this administration’s misguided approach to reform.
Portrayed as a means of relying on the experience and insight of health care experts to identify cost-saving measures for Medicare, IPAB is in fact an unaccountable board appointed by the president that can make binding decisions regarding Medicare without Congressional or judicial input or oversight.
Former director of the CBO Douglas Holtz-Eakin has called the IPAB “the ultimate in government price controls” and wrote that the cuts to reimbursement to providers that will be the likeliest cost-cutting route taken by IPAB will create de facto rationing of health care services. Holtz-Eakin and his co-author concluded that repeal of IPAB is “the right prescription for improving American health care and protecting access to innovative treatments for seniors. Unless repealed, IPAB will quash medical innovation and make it even harder to adopt Medicare reforms that can improve quality and lower costs.”
Giving seniors a choice
If we want to effectively reduce government health care spending in a way that affirms our commitment to America’s seniors, supports innovation and entrepreneurialism, increases individual economic liberty, and strengthens doctors’ and patients’ ability to make individual health decisions, we should reject the path of greater government interference and control and instead turn to proven, market-based solutions.
One such approach is the premium support model of Medicare reform. Under the premium support model, citizens would determine their own coverage needs and receive vouchers which they could use to purchase insurance on the private market that meets those needs. A primer on the subject prepared by the Brookings Institution called premium support “the most promising reform concept available, with the potential to bring about serious and continuous cost discipline without eroding the quality of care provided to Medicare’s participants.”
One bipartisan variation of the premium support model proposed last year in Congress would preserve the current version of Medicare for current retirees, and in 10 years introduce a premium support model that would allow seniors to choose either a traditional Medicare plan or a Medicare-approved private plan. According to its sponsors, this plan would “strengthen traditional Medicare by permanently maintaining it as a guaranteed and viable option for all of our nation's retirees,” and expand choice for seniors “by allowing the private sector to compete with Medicare in an effort to offer seniors better-quality and more affordable health-care choices.”
Reform that preserves quality of care while cutting costs
There are several variations on the idea of a premium support model of Medicare reform, all of which promote spending reduction not through greater government control and interference in the market, but by emphasizing individual responsibility and economic freedom. More importantly, these options preserve the integrity of the patient-physician relationship by leaving care decisions in the hands of patients and their doctors.
We cannot afford to kick the can down the road any longer when it comes to unsustainable government spending on health care. We can afford even less to double down on the mistakes of past by insisting greater government involvement in health care is the solution to our problems.The health care of our seniors today and the health, prosperity, and economic opportunities of future generations depend on our finally making the right choices. Neither will be served by the current direction.
Mike Hennessy is Chairman and CEO of MJH & Associates, the publisher of many influential journals, including The American Journal of Managed Care, Pharmacy Times, MDNG, Politics, Oncology & Biotechnology News, and Physician's Money Digest. As a businessman, entrepreneur, and a publisher of magazines and websites that focus on the financial and professional needs of physicians, Hennessy is intimately familiar with the challenges physicians face in today's competitive practice environment.
Hennessy's Highlights dissects the healthcare policy issues that impact physicians, particularly those who are running their own practices.