It’s the Incentives, Stupid

by Paul Howard

To paraphrase James Carville, when it comes to fixing the U.S. health-care system, you have to get the incentives right. And the incentives in our current system — before and after Obamacare — are deeply perverse. This is the central theme health law expert David Hyman explores in his short but enlightening essay in the current issue of Regulation magazine. Opponents of Obamacare would be well served to raise the theme of perverse incentives and unintended consequences again and again in the next Congress.

Hyman writes that the biggest incentive, of course, is money, because “what we pay for and how we pay for it profoundly affect the care that is provided (and not provided), the settings in which care is provided…and the lives and fortunes of those providing and receiving the care and those presented with the bill.” 

In other words, you get what you pay for. The biggest spenders in that respect are the federal Medicare program for the elderly, and a tax system that favors employer-provided health insurance. Medicare is a fee-for-service program replete with thousands of price controls that encourages provider fragmentation and overconsumption of some highly reimbursed services, and the underconsumption of more poorly reimbursed services. The tax preference for employment-based insurance drives employees to favor comprehensive plans with high (pre-tax) premiums and low (after-tax) deductibles and copayments, which pushes up health inflation while leaving millions of uninsured without affordable access to care. One should also mention the state-federal Medicaid program, which massively underpays doctors, leaving millions of poor patients unable to find physicians who accept Medicaid’s rock-bottom rates. 

Let’s recap: What does the Affordable Care Act accomplish? More price controls in Medicare (which will be gamed by providers and lobbyists). More subsidies for comprehensive insurance for middle-class families, this time outside the employer-based system (which will likely lead to employers dumping middle- and low-income workers into Obamacare’s state insurance exchanges, leaving taxpayers on the hook). And a massive Medicaid expansion, thrusting 16 million people into a “safety net” with gaping holes in it. 

We are (almost literally) doubling down on everything we’re already doing, and doing poorly. 

To be fair, the Affordable Care Act does make some concessions towards improving Medicare through pay-for-performance experiments, and putting pressure on “gold-plated” health plans through a Cadillac Tax starting in 2019. But the sad but predictable truth is that these efforts are likely to be severely curtailed or killed entirely through congressional lobbying, since, as has often been noted, every congressional district has doctors and hospitals in it (and unions love their gold-plated health plans). 

Finally, the new insurance regulations put into effect under Obamacare are being “waived” by the administration left and right, out of the sheepish realization that putting insurers out of business or forcing companies to drop mini-med plans (and presumably send those employees into the state health exchanges) would be a PR disaster.

Can we get the incentives right for Health Care Reform Part II? It’ll be harder this time, because the president squandered enormous political capital ramming a partisan health-care bill through Congress. And the base of his party will fight fiercely to protect the new status quo. But there is at least some hope for improving the system because the federal debt (driven by entitlement spending) will crush the U.S. economy if we remain on our current trajectory. 

Conservatives should wrap their repeal-and-replace efforts into bipartisan discussions about how to fix the budget and improve the U.S. economy through tax reform (the employer deduction should be scrapped and replaced with a tax credit) and by seriously considering the Ryan-Rivlin  plan as a starting point for making Medicaid and Medicare sustainable. Both would go a long way towards improving incentives in health-care markets. And if we can do that, as Hyman points out, “most of the big problems will take care of themselves,” leaving policymakers with a “far smaller and more tractable set of problems.”

We’ll never have a perfect health-care system, because human beings aren’t perfect. But getting the incentives right will produce a health-care system that actually offers better care to more people at lower cost. And that’s enough.