Rising federal expenditures are a problem, yet it is important to remember that rising federal health expenditures are the real killer, as Yuval Levin often reminds us. So it ought to be encouraging news that the House GOP leadership is calling for Medicare reform. Specifically, Republican lawmakers are backing a replacement of Medicare’s sustainable growth rate (SGR) with what they’re calling a reformed payment system. We have an editorial pointing to some of the problems with these supposed “reforms,” but I highly recommend James Capretta’s excellent new column on the subject for NRO. Essentially, the Republicans backing this SGR fix believe that while past technocratic attempts to control prices have failed, their new technocratic attempt to control prices will succeed. The SGR fix includes more means-testing. That’s a good thing, right? As Capretta explains, modestly increasing Medicare co-pays for retirees with incomes over $267,000 are a perfectly fine idea. But only 2 percent of retirees fall in this category, so the overall impact of means-testing will be modest. Many health reformers rightly argue that Medigap coverage undermines efforts to get seniors to be more cost-conscious by providing first-dollar coverage, and the SGR fix does alter the rules for Medigap policies starting several years from now. Unfortunately, the Medigap reform in question is extremely modest, and conservatives will never have more leverage over Medigap than they do right now.
Scott Gottlieb’s take over at Forbes, which argues that success if the SGR proposal passes, is also worth reading. According to Gottlieb, passing the SGR fix in its current form “it will represent a profound and enduring triumph of Obamacare’s creeping regulation of the American practice of medicine.” In other words, if you like Obamacare, you’ll love the new GOP SGR fix. Why is this the case? Basically, the SGR proposal supercharges the rise of Accountable Care Organizations (ACOs) and other hospital systems that negotiate directly with Medicare over payment rather than use a set fee-for-service schedule. Obamacare gives ACOs a number of advantages, but if anything the new SGR fix is even more biased in their favor. There are many problems with the fee-for-service approach, which incentivizes medical providers to ramp up the number of procedures. Yet there’s a real danger that stacking the deck in favor of ACOs will accelerate the consolidation of medical providers, and make it even harder for specialized, more efficient providers to compete with them. Many liberals are inclined to accept this outcome, as they don’t believe competition between medical providers is the solution. They believe wholeheartedly in creating newer, better price controls that (somehow) will work where the newer, better price controls of yesteryear failed. (See Peter Suderman’s classic on “Medicare Whac-A-Mole” for more.)
But we don’t need a new system of price controls, and we don’t need a new medical industrial policy that rewards politically-connected incumbent hospitals over entrepreneurs offering new business models. What we need is real reform that moves us away from price controls and towards a more level playing field between Medicare and private insurers. Real Medicare reform will be hard to achieve, but if conservatives are going to give up so much leverage, they ought to do so for reform that will make a lasting difference to federal health spending and that will lead us to a more innovative and market-oriented health system. If I had to guess why the GOP leadership is so enthusiastic about this SGR fix, I’d say that it’s because big, politically-connected hospitals like it because it gives them such a boost over independent physicians and standalone clinics. If it sounds like I’m accusing hospitals and their allies in Congress, Republican and Democratic, of practicing crony capitalism, well, you’re on to something.