The Agenda

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

Steven Pearlstein Says Something Very Astute


I’ve been critical of Steven Pearlstein in the past, but in a reply to his Washington Post colleague Ezra Klein he makes a very valuable point, one that James Capretta has made very persuasively. 

Most of Medicare now is fee for service, and that is not transformational — in fact, it will bankrupt the country. And piggybacking on Medicare’s monopsony power to dictate hospital rates that are below cost doesn’t really solve the cost problem as exacerbate the cost-shifting problem. In the column, I give a couple of other suggestions for bringing down prices.

In the column, Pearlstein dispels some misconceptions about a public option.

You also hear the argument that government-run insurance would have lower costs because it wouldn’t have to generate a profit (that’s true) and would be more efficient than private insurers (that isn’t). The evidence of greater efficiency is Medicare, which spends about 2 to 3 percent of its budget on administration. But if a government-run plan had to spend its own money to collect premiums, market itself to customers, maintain a reserve, and manage care in a way that lowers costs and raises quality — none of which Medicare now does — then you can be sure its administrative costs would be nowhere near 2 or 3 percent.

David Cutler, the Harvard economist who has advised the Obama campaign and now works closely with the left-of-center Center for American Progress, emphasized in his excellent book Your Money or Your Life that paying for quality will necessarily raise administrative expenditures. This is a concept that shouldn’t be hard to grasp, yet it’s often glossed over. 

As for so-called government-chartered co-operatives, Pearlstein writes:

Finally, there are the government-chartered cooperatives that key members of the Senate Finance Committee are pushing. Although public-option enthusiasts scoff at the idea, the experiences of a number of communities show that cooperatives could significantly contain costs, provided the cooperatives are big enough and built around networks of hospitals and physician practices that accept a fixed, annual fee for treating patients rather than billing for every procedure. The key isn’t that the cooperatives would be not-for-profit, but that the annual payments would give doctors and hospitals a financial incentive to control costs, better coordinate care, and eliminate procedures with little or no benefit.

This is a very important point: as conservative reformers have been arguing for years, fee-for-service medicine is the heart of the problem. Spurring the creation and spread of efficient provider networks is not a bad idea, provided it can be done at a sustainable cost. 


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