Politics & Policy

A Roadmap to Better Health Care

Government "engineering" is no match for a functioning marketplace.

It’s not often that a single member of Congress generates as much media interest and debate as Wisconsin representative Paul Ryan has with “A Roadmap for America’s Future.” But, given the document’s focus and the political moment, the attention is entirely understandable. This is truly a case of a man with a plan in the right place at the right time.

The most serious medium- and long-term economic challenge our nation faces is that the federal government has committed itself to spending far more than it can collect in taxes. Most of this excessive commitment is in the area of entitlements. Social Security, Medicare, and Medicaid are already expensive — their combined cost to the federal government is expected to hit 9.8 percent of GDP in 2010. But they are set to become simply unaffordable in coming years with the retirement of the baby-boom generation and the continued rapid escalation of health-care costs. By 2030, federal spending on the Big Three is expected to reach 14.4 percent of GDP, according to the Congressional Budget Office.

When this explosion in entitlement spending occurs, the federal budget will already be badly out of balance. The Obama administration is planning to run budget deficits of $1.6 trillion this year and $1.3 trillion next year. (From 1789 through 2008, the federal government borrowed $5.8 trillion total.) Much of this spending is in response to the fiscal crisis, but if it continues, federal borrowing will exceed $18 trillion by 2020, with $1 trillion–plus budget deficits piling more debt on top every year thereafter.

Enter Paul Ryan. “Roadmap” is a comprehensive plan to head off such a crisis. Ryan’s goals couldn’t be more ambitious. He wants to restructure the nation’s middle-class entitlement programs to eliminate their unfunded liabilities, ensure a secure retirement for future generations, and make world-class health care a reality for one and all. Further, he wants to pay for a reformed and affordable welfare state with a tax system that promotes, rather than punishes, entrepreneurship and growth.

Bold as Ryan’s ideas are, they aren’t new. In fact, he released his first “Roadmap” in 2008. It got some attention then, but nothing compared to the wall-to-wall coverage version 2.0 has enjoyed since its release in January.

What’s different this time around is that the last two years have seen such explosive growth in federal spending and government activism that it looks as if the window for restoring some semblance of restraint might soon close. That’s why George Will, Robert Samuelson, and Michael Gerson have all devoted full columns to the Ryan plan and its implications, and have rightly lauded the congressman for taking on a challenge that is plainly central to the continued economic vitality of the nation.

Elected Democrats and their allies have also taken note of Ryan’s proposal. Their main interest seems to be, as usual, in scaring seniors about supposed Republican “privatization” plots. In particular, liberals are focusing their anti-“Roadmap” fire on the proposal to convert the Medicare entitlement for those currently under age 55 into a system of fixed contributions toward the purchase of insurance.

Ryan’s opponents are right to highlight this reform. It is a dramatic shift from current law. But they’re wrong to argue that it would do nothing to control health-care costs.

These critics claim that Ryan’s plan would simply shift the burden and risk onto individuals, because the government’s financial support for health-insurance enrollment would no longer keep pace with premiums. But that’s the wrong way to look at it. Our goal shouldn’t be to keep pace with premiums, but to bring premiums under control by eliminating the widespread inefficiency that exists in the health-care sector today. That’s the only way to slow the growth of health-care costs without harming the quality of care.

Forget one-off ideas for trimming this or that. What is needed is a continuous, long-term, dynamic process that will lead those who deliver services to want to provide better care at less cost. What can bring that about? Ryan’s emphatic answer is that a functioning marketplace can, and an essential feature of such a marketplace is cost-conscious consumers. Under current law, when costs rise, the federal government pays a sizable portion of the extra costs, thus undermining the incentive to find better and cheaper ways to go about things.

Ryan’s reforms would provide substantial federal support to encourage broad-based insurance coverage and enrollment, but the support would not be open-ended as it is today. A person who buys economical health care would get to keep all of the savings. Conversely, a person who selects expensive health care would have to pay more out of his own pocket. That’s the way the new Medicare drug benefit works, and costs have come in 40 percent below original expectations. To root out inefficiency, improve productivity, and provide powerful incentives for cost-cutting innovation, the entire health-care sector must be transformed into a vibrant, competitive marketplace. And that’s exactly what the “Roadmap” would deliver over time.

How much more productive would the health-care sector become under the “Roadmap”? No one knows, including the Congressional Budget Office. But uncertain cost projections are no reason not to enact this kind of reform. It makes far more sense to put in place a sustainable, market-based program that a future Congress could make more generous if necessary than to leave on the books unfunded liabilities that everyone knows will be ruinous for the American economy.

The Obama administration and its allies believe there is another way, and it is nicely summed up in a recent post by Jonathan Cohn on The New Republic’s website. What’s needed, Cohn and others claim, is not a functioning marketplace but better “government engineering” of the health-care sector, especially through Medicare. They argue that the government has the know-how and the will to tweak reimbursement policies in ways that can prompt hospitals, doctors, and other providers to become more efficient. To bolster their case, they point to investments in comparative-effectiveness research (which, however, is new and unproven) and rather modest provisions in the health-care plans passed by the House and the Senate that try to reward or punish providers based on how well they perform.

But the truth is that the federal government has been trying to make Medicare work more efficiently for at least 30 years now, with very little to show for it. The House and Senate health-care bills do in fact cut Medicare spending, but the lion’s share of the savings is from across-the-board cuts in payment rates, not painless weeding of inefficient spending. The big cuts are applied to hospitals and other providers without regard to any metric of quality. In fact, the cuts are so arbitrary that the chief actuary of the Medicare program believes they would push about one in five hospitals and other institutional providers into serious financial distress. These hospitals might stop participating in the program altogether.

Arbitrary payment cuts in Medicare are nothing new. This is the way Congress has always tried to hit budgetary targets in health care. Politicians don’t want to pick winners and losers among hospitals and physician groups by calling some out for poor care. So, to cut spending, they vote instead for across-the-board payment reductions. Over time, using payment reductions to cut costs has the very predictable result of driving out willing suppliers of services. Witness today’s severely constrained network of physicians willing to see Medicaid patients.

No, better federal management of the health-care sector is not the answer, and we have more than four decades of experience with government-run health insurance to prove it. The government can and should play an important oversight role in a reformed marketplace, but the only way to drive out wasteful spending, reward productivity, and find creative new ways to do more with less is with a competitive marketplace. It’s the key to fixing health care and to restoring sanity to the federal budget. And Congressman Ryan’s “Roadmap” points the way.

– James C. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director of the Office of Management and Budget from 2001 to 2004.

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