Spending Our Way to Health Care Reform

With the recent publication of his $3.55-trillion budget, President Obama is set to advance "a fundamental reform of our health care system that will bring down costs and expand coverage." Unfortunately, he's kicked off his reforms with an unprecedented shopping spree that will drive health care costs up, not down.

In his first month in office, President Obama OK'd $227 billion in new health care spending. That includes $21 billion for electronic medical records, $1.1 billion for research into the relative merits of competing medical treatments, $74 billion for children's health insurance and about $90 billion in new funding for Medicaid.

On top of that, the president has asked Congress for a $634 billion health care "reserve fund" to expand coverage to the uninsured. But that's only a down payment. Universal coverage could cost $1.5 trillion over the next decade.

By reducing Medicare payments to providers, the government can cut program spending through price controls.

So how does Obama plan to "bring down costs?" He doesn't really, at least not in the foreseeable future.

Most of the president's health expansion is funded by increasing taxes. Children's health insurance is paid for by raising the cigarette tax. The $153 billion for health in the stimulus bill is not offset by spending cuts, so taxpayers will eventually foot the bill. About half the cost of the health care reserve fund comes from limiting a tax loophole for high-income Americans.

The rest of the money--some $316 billion--comes from payment cuts to doctors and hospitals that treat Medicare patients, including lower payments to private Medicare Advantage plans. But that won't be enough to cover our rising health care tab. After all, the long-term deficit for Medicare alone amounts to tens of trillions of dollars.

The Obama budget proposes a few ideas to control costs--such as promoting the use of health information technology and assessing the effectiveness of medical treatments--but their promise doesn't match reality.

Health IT requires ongoing investments in infrastructure. It might promote more efficient medicine--but only if doctors change the way they practice and hospitals re-engineer the way they deliver care.

Comparing the effectiveness of alternative treatments is equally challenging because patients are not all alike and do not necessarily respond to specific treatments in the same way.

Advocates for such policies claim that hundreds of billions could be saved. But according to the Congressional Budget Office, neither health IT nor comparative effectiveness would save more than a few billion dollars over the next decade.

The Obama budget also includes some other ideas that would reduce federal health spending but may have undesirable consequences. By reducing Medicare payments to providers, the government can cut program spending--at least temporarily--through price controls. However, severe cuts make it more difficult for seniors to access the care they need, as physicians close their doors to new Medicare patients.

Another ripe target for budget cutting is Medicare Advantage, which gives seniors a choice of private plans that compete for their business. Critics of the program point out that MA plans cost about 13 percent more than conventional fee-for-service Medicare. But according to CBO, that extra cash doesn't just go into the pockets of insurers. Seniors get additional benefits, such as dental and vision coverage or lower out-of-pocket costs--often lower than those of traditional Medicare.

It's no wonder the program has proved popular. Since 2003, the number of enrollees in Medicare Advantage has nearly doubled. And as of 2008, 10.1 million people--almost a quarter of all Medicare beneficiaries--are opting for Medicare Advantage.

Medicare Advantage plans cost more because Congress rigged the bids. That way all seniors have a choice of plans, even if they live in isolated, rural places. Higher subsidies are required to cajole insurers to offer health plans in sparsely populated areas that would otherwise be unprofitable.

Should taxpayers pay more than necessary to cover basic Medicare benefits, even if the extra cost helps disadvantaged seniors? That's a debate we should have. But we should not leap to the conclusion that competition cannot bring lower costs and better value to Medicare and to our health care system. One-size-fits-all insurance can be dangerous to our health.

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI.

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