The 'Reform' That Ate America
Mortimer B. Zuckerman

american health-care debate in Congress (c) Dick Locher
American health-care reform
(c) Dick Locher

Save the cheers for the looming healthcare "reform." It looks more and more like something that will take us over a cliff. None of the proposals offer credible solutions for reining in the runaway cost inflation that is crippling us. Laudable as it will be to cover more people with public and private insurance, the worm in the apple -- the giant serpent in the apple! -- is that numerous inflationary forces already make our medical care system unsupportable, and therefore unsustainable, and the "reforms" will literally threaten the fiscal health of America.

Ironically, the overwhelming concern of the American public about healthcare is focused on cost, not coverage. According to a poll in the Economist magazine, 61 percent of the country thinks the high cost of care and insurance is a bigger problem than the number of uninsured people. Only 21 percent would back a reform plan if it meant having to pay more in insurance premiums.

The deep-rooted sickness at the heart of our healthcare system, as it has evolved almost by accident, lies in the way we organize and pay for the (typically very good) services we get. We have a system that induces physicians, hospitals, and other medical care providers to focus at least as much on income and profit as on meeting the needs of the patient. The delivery of care in America is marked by perverse incentives.

Warped incentives

The real problem is not how much doctors and other providers are paid but how they are paid. Our perverse system of medical reimbursement so warps incentives for doctors, insurers, and patients that it leads Americans to consume more and more medical services -- without comparable benefits for the health of the nation. It is because of the way healthcare providers are remunerated that we Americans swallow more pills, undergo more scans, and submit to more and more expensive procedures -- often invasive procedures that carry their own risks. Doctors and hospitals are paid more if they provide more services, which leads to far higher costs for doctor visits, specialist referrals, scans, MRIs, and so on. But we have not seen health improvements accrue to justify the expenditure and time. This shows up not only on a country-by-country comparison but also in comparing high-test areas with low-test areas of America.

We are the only advanced country that uses the fee-for-service approach. That's why our medical expenditures are higher than any other country's and are rising more rapidly. To illustrate the point: We have 25.9 magnetic imaging machines per million people, compared with an average of 11 in the highly developed Organization for Economic Cooperation and Development countries, and we use them more than twice as frequently on a per capita basis.

It is the physicians and the providers who control most of the decisions to use medical resources. They almost never compete on price because public and private insurers, not patients, pay most of the cost. If there is little added cost, there is little motivation to avoid more visits to the doctor or extra tests, or choose a less expensive treatment option that might be just as effective. If we had to foot the bill ourselves there and then, we'd think twice and ask more questions. Nobody does. If the doctor says, "Do this test," we do it. We trust his medical knowledge. And the doctor doesn't have to think about the cost-benefit ratio either, just the income benefit. When healthcare is subsidized and consumers receive it at little direct cost to themselves, who can be surprised if people demand more of it and the costs rise? Costs aren't the concern of the patient, nor do they seem to be the concern of the political "reformers." Combine these incentives with new and more expensive technology, and you arrive at both an explanation of our inflated costs and a way out of them.

Legislating for universal or nearly universal coverage requires more than fixing the insurance system if it is to be sustainable. As more people become insured, they consume more healthcare services and practically double their health spending.

The new programs being proposed in Congress will increase our health insurance premiums for the typical family by more than $1,200 a year and roughly double healthcare spending in the next decade from approximately $2.2 trillion, or 16.2 percent of GDP in 2009, to over $4.3 trillion, or 20.3 percent of the estimated GDP by 2019. And this is based on estimated "budget cuts" that cannot be relied upon. The founding director of the Congressional Budget Office, Alice Rivlin, said: "Everyone in the process -- especially the CBO -- knows that it is very, very difficult to make these estimates and that they're no more than very educated guesses." It's as if you were to trying to estimate your grocery bill in 10 years.

Let's look at the history of healthcare

The record shows that reforming our healthcare system and controlling healthcare costs are very different things. Healthcare "reform" does not guarantee lower costs. Quite the opposite. Before Medicare and Medicaid were created in 1965, healthcare inflation was a little ahead of overall inflation. Since then, medical inflation has grown 2.3 times as fast as other cost increases in the economy. The House Ways and Means Committee estimated the first-year cost of Medicaid at $238 million. Instead, it topped $1 billion. It now costs 37 times more, adjusting for inflation, than when it began. The current cost is $251 billion -- and that is before this new healthcare bill adds millions of new beneficiaries!

Medicare follows suit: In 1965, Congress estimated it would cost $12 billion in 1990, when its actual cost was $90 billion. In 1988, Medicare home-care benefits were expected to cost $4 billion by 1993; the actual cost turned out to be $10 billion. The number of Medicare beneficiaries from 1985 to 2005 rose 37 percent, but total Medicare spending jumped by the astounding factor of 372 percent, from $71.4 billion to $336.9 billion.

The same underestimation of costs undoubtedly applies to the roughly $900 billion proposal now before Congress. The true costs are understated because most of the provisions that expand costs do not take full effect until 2014. Indeed, other entitlements, like Social Security and Medicare, must have a 75-year actuarial forecast. The "reform" bill's unfunded liabilities would exceed $9.2 trillion. That is breathtaking.

Blank check

This is nearly always the case with government programs because of their entitlement nature, which accepts everyone. Whatever the cost, the federal government will pay it. We are writing essentially a blank check, even if it means we have to borrow now and mortgage the future of our children and grandchildren.

Healthcare coverage for the average family today costs approximately $13,375, according to the Kaiser Family Foundation. Over the past decade, premiums have gone up by 138 percent, and over the past 30 years, healthcare premiums have tripled after adjusting for inflation. Put that in the context of profits and pay. While corporate profits per employee have soared by 200 percent, hourly earnings per worker, adjusted for inflation, have virtually not improved. Why? Because wage increases have been consumed by healthcare costs. If the trend continues, the estimated cost of the average family plan will exceed $30,000 by 2019. At least half of the increase in per capita GDP over the next 25 years will be consumed by healthcare, assuming it continues to grow 2 percentage points faster than GDP, extending the trend of the 30 years from 1975 to 2005.

The costs are typically hidden in the form of taxes or lost wages, and few politicians are willing to make clear how risky these estimates are. They won't -- dare not -- consider the fiscal consequences, so the tragedy is that we are about to waste yet another chance to get the strategy right.

Nobody is asking the question put forth by the esteemed former U.S. controller general, David Walker: "What level of coverage is actually affordable and sustainable?" Quite simply, unless major changes are successfully implemented in healthcare delivery and payment systems -- and none of the legislative proposals involve such changes -- costs will continue to climb at a compounding rate owing to greater coverage and a larger patient base. Deficits will balloon.

What's more, to lock in the flawed paradigm of comprehensive low-deductible, low-payment insurance will ultimately defeat the goal of making health services more affordable for everyone.

The unavoidable consequence of what we are doing is that it is going to cost the taxpayers vastly more money in the way of insurance, and it raises the risk of causing a fiscal meltdown for the country. Once the basic contours of this plan are in place, it will be all but impossible to change. The country senses this, which is why polls have been showing a majority opposing President Obama's plan.

We simply must address the perverse incentives built into our fee-for-service system. Why can't this be grasped by the legislators who are supposed to have studied and worked so hard for "reform"? Why don't they stop the relentless drive that encourages overconsumption and forces up costs without making anyone accountable for preventing illnesses and maintaining good health?

What can we do? A lot.

Here are a few thoughts:

-- Bundle payments for the treatment of a single illness so that the hospital and the physician are paid a combined fee for all of the costs associated with the treatment. This means diagnosis, treatment, and care after hospitalization.

-- Programs for preventive medicine could save us immense amounts of money. For example, we spend 40 times as much on antiterrorism as we do on the health risk of obesity, which kills about 400,000 people a year.

-- Reform the wasteful tort liability system, which forces even more unnecessary treatment.

Without such steps as these, we are facing a financial and fiscal catastrophe best summed up in the adage "The road to hell is paved with good intentions."

Instead of providing all the healthcare you need whether you can afford it or not, the United States is on the way to giving you all the healthcare you can't afford, whether you need it or not.