Hard Choices on Healthcare Reform

by Mortimer B. Zuckerman

healthcare; insurance; hospoitals; doctors medical factories | iHaveNet.com

In the 1980s, if you had a heart attack and got to the hospital, you had about a 60 percent chance of living a year. Today, it is over 90 percent.

We have been able to transform the health of the American public because of the rapid development of new medicines and technology. These innovations have come at a cost: They are responsible for as much as two thirds of the annual spending increases in healthcare.

We'd like to get back to the costs of 1980, but nobody is willing to go back to 1980 medicine. However, Americans want the most advanced diagnostic tests, drugs, and surgeries -- and doctors want the freedom to prescribe them.

Cost is the central dilemma facing the ambitious plans of President Obama -- and the nation -- to introduce a universal new system that won't break the already fractured bank.

We have to find the hundreds of billions of dollars (dare we say trillions?) to cover the nearly 50 million people who lack insurance. The president was vague about how he will foot the previously estimated $1.6 trillion bill over the next decade. But our entire political leadership has been set back by the recent Congressional Budget Office estimate, as reported by the Washington Post, that it would cost $1 trillion over the next decade just to cover 16 million uninsured. In effect, this means it would exceed $3 trillion to cover all the uninsured. This has thrown the political calculations about costs into turmoil, particularly since the president has promised that his healthcare program will be deficit neutral.

A costly burden

Obama has been leaving too much to the lawmakers of Congress. The danger is that Congress will pass a bill that isn't fully paid for and will make the fiscal hole we are in even greater. Then the president will sign the bill with the usual clich� that political compromise is called for, leaving the country with a hugely expensive entitlement program whose cost will burden the nation for generations. Who can forget the Medicare prescription drug bill that saw Congress and the Bush administration work together to impose a massive entitlement without addressing problems in the Medicare system or finding a way to pay for it?

We have come a long way from the days when the cry of "socialized medicine," led by the medical profession and the insurance industry, scuppered every sensible reform, beginning with President Truman's. Now the American Medical Association gave Obama a standing ovation even when he said our system is a model that has taken the pursuit of medicine "from a profession--a calling--to a business." We trust the medical profession to guide us, but he touched a nerve: A dollar saved in costs is a dollar's loss of income for the profession. Hospitals and doctors account for 62 percent of the soaring costs, and they have shown little interest in taking a hit on their income.

We'd rather trust the doctor than some bureaucrat in a government or insurance office, but it is imperative that the system we devise relates costs to results. Americans receive more costly medical services than people in comparable economies--without noticeable benefit. And there is striking evidence of waste. Costs vary significantly across regions and among hospitals and doctors within regions, and even for those diagnosed with similar conditions. Medicare spending in 2006 varied more than threefold across U.S. regions, mostly because of the volume and intensity of care provided for similar patients. And expenditures in the final six months of life are nearly twice as high for Medicare patients at the top academic hospitals, again with no discernibly better outcome.

Dartmouth researchers conclude that the more costly areas and institutions providing a lot more test services and intensive hospital care don't have better results for their patients than lower-cost centers; indeed, the patients can suffer from overtreatment. The researchers estimate that up to 30 percent of Medicare spending is wasted on needless care for patients who have little incentive to use less care or shop for lower-cost public services because they don't pay their medical bills, while providers, doctors, hospitals, and drug companies have no interest in limiting care.

If this, in fact, is the case, then the highest-spending areas could be smoothed down to the lowest-spending areas, theoretically saving as much as $700 billion a year.

How to do that? Some favor government intervention

Instead of having employers shop around for insurance for their workers, we could have the government provide the insurance or at least offer insurance in competition with insurers. This "public choice" would resemble the program that covers federal workers. Having a powerful single player to counter the vested interests, and thus contain costs, is seen as the attraction. The industry is fighting public choice, arguing that a government scheme would enjoy unfair advantages and huge pricing power.

One thing we should do is modify the open-ended fee-for-service system offered by private insurance, Medicare, and Medicaid. It simply encourages everyone involved, consumers and providers, to use more resources than necessary. A typical patient goes to the doctor and has no idea of what anything costs, except that he pays about 15 percent of the bill. The doctor gets paid for everything he does, so he, too, has an incentive to perform costly and sometimes unnecessary procedures--especially when a doctor who omits a test is at risk of a considerable award for damages if a lawyer can convince a jury it amounted to negligence. This is just a small part of an out-of-control medical malpractice system that greatly increases the cost of care. (Yet the Obama administration seems to be taking a pass on this.)

A matter of choice

We just have to have a system that puts more responsibility on the individual and encourages cost-consciousness through higher deductibles and copayments. This is one of the reasons there is no enthusiasm in Congress for a free, comprehensive, centralized system almost entirely funded by tax revenues like the British "single-payer" National Health Service.

The biggest available pool of money to pay for the healthcare reform package is the tax exclusion granted on employer-provided health insurance for 60 percent of Americans. This harks back to when wage controls were introduced during and after World War II and firms offered benefits instead of pay increases. The main benefit was health insurance, which employers bought with pretax dollars. It is not only costly but also inequitable. Self-insured individuals have to pay for similar health insurance with after-tax dollars rather than pretax dollars that companies use, and higher-paid, higher-taxed workers enjoy a comparably larger benefit. This encourages individuals to use healthcare they would not if they had to buy it with after-tax dollars.

Sens. Ron Wyden, a Democrat from Oregon, and Bob Bennett, a Utah Republican, make a strong case for their Healthy Americans Act, which would convert the tax exclusion into a tax benefit for individuals and families so they can shop around and purchase coverage on their own--and would make insurance more portable.

But now politics come into it

Can the exemption be rescinded in the face of strong union opposition? Even a partial cap would be helpful. For example, excluding tax benefits above the current average cost of $13,000 per family would generate $1.1 trillion in additional tax revenues over the next decade. This would still produce significant revenue while avoiding the destabilizing effects of totally eliminating this exclusion. It would also create incentives for firms and insurance companies to redesign their policies so the costs stay below the cap. Safeway has shown it is practical. By giving employees a monetary incentive to judge the value of health spending, Safeway's costs have stayed flat with no diminution in patient satisfaction, by comparison with a ruinous nearly 40 percent increase at other companies.

In fact, the tax exemption is anachronistic, for employer-based coverage makes workers afraid to change jobs in an economy where flexibility is essential. The chairman of the Senate Finance Committee, Max Baucus of Montana, is apparently open to at least capping the exemption. Congress must simply redirect as much of the vast subsidies now prevalent in a job-based health insurance system as possible.

To inject responsibility into our runaway system, we should insist on an individual mandate for every American to have coverage. Without such a mandate, too many healthy people choose not to pay for insurance, which leaves less money to cover the sick. It can also save money because billions of dollars are spent today on the uninsured who get late and expensive care in emergency rooms. But this means the federal government would have to subsidize people who couldn't afford it themselves, upping federal costs.

Increased individual responsibility for medical decisions is a key.

When people aren't exposed to the true cost of their care, although it might be paid in forgone wages and higher taxes for public programs, they simply consume more.

Increasing cost sharing would discipline the health spending curve. Today, with 84 cents out of every medical dollar spent by someone other than the patient, the insured has little incentive to make cost-conscious decisions.

Who is going to make the hard choices on healthcare reform?

The president should give more of a lead. Legislators are not good at making the difficult decisions that governing responsibly often requires. They rarely seem capable of asking the voters to sacrifice anything by way of taxes or entitlements or services. We cannot just have public rhetoric from the Obama administration that implies that the problems have been resolved when they haven't and then enables the White House to claim credit for a legislative success. Rhetoric cannot substitute for real policy.

It would be a disaster to exacerbate federal deficits by placing an increasingly unsustainable burden of additional healthcare entitlements onto the national budget.

The independent Congressional Budget Office must publicly assert that any new health program pays for itself, or else we will risk another failure to arrest the climb in unaffordable U.S. health spending.

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