James Capretta Makes the Case for Premium Support

by Reihan Salam

James Capretta of Economics 21 has a piece making the case for using premium support to Medicare on a more sustainable footing. Part of his argument is that Medicare administrators can’t drive the kind of cost savings we need to reduce the high level of expenditures — which, as we’ve discussed, is what makes the U.S. health system distinctive, rather than the rate of health inflation as such:

The antidote to a fragmented and uncoordinated delivery system is a high-value, low cost network of the best providers of medical care. The architects of the 2010 health care law recognized this need and set in motion a number of initiatives that they hoped would bring about this transformation under the heading of “delivery system reform.”

Unfortunately, these efforts are doomed to fall well short of the high expectations set for them. The reason is that the federal government has no capacity to build a higher value network of providers in the Medicare program. The private-sector delivery models that are so admired by federal Medicare officials — such as the Geisinger health plan, the Cleveland Clinic, and Intermountain Health Care — operate on a principle of provider exclusivity. They do not take just any licensed provider into their fold. They operate highly selective, data-driven networks. Low-quality performers are dropped or avoided altogether, and tight processes are established to streamline care and eliminate unnecessary steps.

The federal government has never shown any capacity to enforce rules on providers that are even remotely similar to those achieved by model programs such as Geisinger, the Cleveland Clinic, and Intermountain. Indeed, the whole point of the Medicare FFS model that Congress has protected so jealously over the years is that beneficiaries may see any licensed provider of their choosing, to whom Medicare pays a fixed reimbursement rate, irrespective of quality. Past attempts to steer patients toward preferred physicians or hospitals, such as the Centers of Excellence demonstration in the 1990’s, have failed miserably because politicians and regulators find it impossible to make distinctions among hospitals and physician groups based on quality measures that are inevitably subject to dispute.

Congress and Medicare’s regulators have found it much easier to cut costs with across-the-board payment rate reductions that apply to every licensed provider without regard to any measures of quality or efficient performance. Tellingly, the 2010 health law uses this approach to achieve most of its Medicare savings. The big reductions come from arbitrary cuts in payment updates for institutional providers of care. That pattern is unlikely to change so long as Medicare FFS remains the dominant option. To cut spending fast and with certainty, the preferred solution of the American political system will always be deeper reductions in payment rates.

The danger is that these cuts will erode the quality of medical care provided to the nation’s seniors.

This is important to remember: not all Medicare cuts are created equal. Structural, architectural reform offers the possibility that we might reduce spending and increase the quality of care; across-the-board payment rate reductions in the absence of structural reform has, alas, been tried and found wanting.

Capretta proceeds to address a number of objections to the premium support concept, offering thoughts as to how to guard against the danger of, for example, adverse selection. I highly recommend taking a look.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.