Time for Some Hard Choices on Health Reform

In the 1980s, if you had a heart attack and went to the hospital, you had about a 60 percent chance of living a year; today, it is more than 90 percent. The rapid development of new medicines and technologies has transformed the health of the American public—but such innovations come at a cost. They are responsible for as much as two thirds of the annual spending increases in healthcare.

We might like to get back to the costs of 1980, but nobody is willing to go back to 1980 medicine. Americans want the most advanced diagnostic tests, drugs, and surgeries, and doctors want the freedom to prescribe them.

There is much to learn in the legislative history of healthcare, notably in the formation of Medicare and Medicaid under President Johnson. One authority on this is Johnson's former senior domestic policy aide and later secretary of health, education, and welfare, Joseph Califano, who wrote about the failure then to anticipate the costs associated with medical discoveries and changes in longevity. "No one had discovered MRIs, PETs, CAT scans, organ transplants, and exotic and expensive cancer chemotherapy," he said. "None of us anticipated the extraordinary leap in the life expectancy that would lead Medicare to spend a third of its budget during the last year of a beneficiary's life and Medicaid to pump an even larger proportion of its dollars into nursing homes. Now we are in the early days of a revolution in neurology, genetics, molecular biology, stem cell research, mechanical hearts and lungs, and domino transplants that promise all sorts of (costly) cures that don't exist today."

In other words, it is impossible to imagine healthcare during the next decade without taking into account the potential expense of medical discoveries. And that is something beyond the clairvoyant powers of members of Congress. We should be extremely skeptical about government projections of healthcare costs 10 years into the future—much less beyond that. They are guesses, maybe wild guesses.

Cost is the central dilemma facing the ambitious plan of President Obama to introduce a universal, new system of healthcare that will extend coverage to millions of people of limited means. Quite simply, it threatens to break an already fractured bank. Given the pace of medical discoveries, we are certainly facing big increases in the costs of applying them, which conceivably could reach $1 trillion in the next decade and even more after that. Yet Obama, in his recent speech to Congress, said he won't add "one dime to our deficits."

So how will he do it? It is not enough for the president to say that the bill on an incremental basis would be revenue neutral. That will lead us down the same path to insolvency that Obama and others warn is unsustainable. No eloquence can get around the fact that we have to find a way to cut back the exploding costs of healthcare that are bankrupting us and pricing people out of care and yet do it without sacrificing quality. Paying for it all by income taxes is not in the cards, tempting as it must be to conventional Democrats. But those potential revenues must be kept available to close the gigantic structural budget deficits threatening the entire economy. These days, millions of Americans have learned the hard way that excessive debts really have consequences.

Where else could the money come from? Here are some possibilities:

1. Collecting tax on the benefits from employer-provided health insurance. The president has ruled this out—it is resisted by organized labor—though it could raise more than $3 trillion over 10 years. But even a modest tax-exemption ceiling for employer healthcare benefits at the current average of $13,000 annually would raise more than $1 trillion over the next decade—not to speak of discouraging gold-plated insurance plans for top executives that promote excessive consumption of health services and benefit the wealthy over the average worker. Such a cap would produce significant revenue and would also create incentives for firms and insurance companies to redesign their policies to keep costs below the caps.

2. Focus on individual behavior. The president seeks to tax insurance companies rather than the individuals who receive a higher level of benefits, although he did not offer details of the threshold to which this would apply. In fact, the insurance companies would find a way to pass it back to the consumer. He didn't say how that would be averted.

The president talks about saving $635 billion in Medicare and Medicaid by eliminating waste, fraud, and abuse. Beyond reducing hospital subsidies and cutting payments to Medicare Advantage plans (which receive higher payments than regular medical providers), his economics again remain vague. With the essential details still missing, it is almost impossible to imagine that these cuts will take place.

There is a better way to link individual behavior and medical costs.

3. Tackling costs directly. Some drivers of healthcare costs, such as demographic changes and the impact of medical technologies, cannot be controlled. Others, such as unhealthful lifestyles, are legitimate targets. Surely, it might have been possible to increase taxes on alcohol and tobacco, when almost 30 percent of healthcare spending is caused by smoking and excessive drinking.

Increased individual responsibility for medical decisions is another key component of containing costs. If people are not exposed to the true cost of their care, they simply consume more. Cost sharing would be a useful discipline. Today, with 84 cents out of every medical dollar spent by someone other than the patient, the insured have little incentive to make cost-conscious decisions.

The notion of rewarding and punishing individuals according to whether they take care of themselves—the incentives approach—could be applied to encouraging preventive medicine. Here, too, the Obama healthcare program has failed on this vital standard.

Why not require insurers to pay for preventive measures such as regular physical exams and vaccinations for flu and pneumonia or, alternatively, to impose costs on patients who fail to take preventive steps? Why not seek to modify the open-ended fee for services offered by private insurance, Medicare, and Medicaid? It encourages everyone involved, consumers and providers, to use more resources than necessary. The doctor gets paid for everything he does, and so he, too, has an incentive to perform costly and sometimes unnecessary procedures, especially when a doctor who omits tests is at risk of being sued for damages. Unnecessary care is believed to be responsible for as much as $800 billion annually. This is not the way a high-quality healthcare system should work.

There are various ways to constrain physicians' incentives that increase the volume of services: capping the amounts that may be charged, global payments, asking payments for excessive care, and intensive monitoring of physicians' services.

Finally, there is malpractice insurance. We have an out-of-control system that increases the cost of care, given the arbitrary awards in malpractice suits. The president is basically taking a pass on this, despite the fact that it is widely known that doctors order tests or procedures for no other reason than to defend themselves from lawsuits, raising the cost of healthcare by at least $100 billion a year.

Serious observers recommend the creation of special health courts to resolve legal uncertainties that drive doctors into defensive medicine. Judges advised by neutral experts could create a system of rulings consistent from case to case, with the added benefit of providing a feedback system so that doctors and hospitals learn from their mistakes. In time, we might substantially eliminate the need for defensive medicine. Such a system would compensate more patients at a dramatically lower cost, compared with the nearly 60 cents on the dollar that today goes to legal fees and administrative costs, with resolution taking an average of five years.

The president's proposals sound better than they are. Saying he won't add "one dime to our deficits" is an arresting phrase, but it fails to reassure taxpayers about how he would pay for a $1 trillion increase in costs or cap skyrocketing medical payments. He offers no scheme to cut costs if they are greater than anticipated or if projected savings don't materialize.

Just because a president asserts that his reforms will insure the uninsured, control runaway health spending, subdue further budget deficits, preserve choice, and improve the quality of healthcare, that does not mean these things will happen. The speech was well delivered but lacked most of the essential details, which left it lacking in credibility.

The danger now is that with the impetus of the speech, Congress will pass a bill that isn't fully paid for and make the fiscal hole we are in even deeper, leaving the country with a hugely expensive entitlement program whose costs will burden the nation for generations. We know the limits of legislators when it comes to making difficult decisions that involve asking the voters to sacrifice anything by way of taxes or to cut entitlements or services.

The hope now is that the centrists in Congress can accomplish what the president has failed to do—and the Republicans must move beyond anger and opposition and participate in this critical effort. Congress must resist its natural tendency not to ask Americans for any sacrifice, however small, to serve any national purpose, however large. If we expect little from our leadership, we will get even less.

Doctors used to lament that "consumption" (tuberculosis) of the kind affecting the poet John Keats was hard to spot early on but easy to cure. In the later stage, a diagnosis was easy, the cure much harder. This is the looming challenge on healthcare reform.

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