The Elmendorf in the Room

Comments this week by Congressional Budget Office Director Douglas Elmendorf--that the health care overhauls released to date would increase, not reduce, the government's long-term health costs--reveal a basic if not ultimately fatal flaw of President Obama's current healthcare plan.

In short, it does little to nothing to change the wasteful way government agencies deliver and pay for health care. For all the talk about Medicare's so-called efficiency, most in Washington (President Obama included) acknowledge that the outdated way Medicare pays providers leads to a lot of wasteful over-utilization. There's near unanimous agreement on Capitol Hill that Medicare needs to change its formula for purchasing services to align reimbursement with improved outcomes. It needs to pay for quality rather than just paying for the volume of services that doctors deliver.

Yet the current legislative proposals out of the House and the Senate HELP Committee pay lip service to these concepts. There's reason for that. Medicare doesn't know how to get these changes done. Where the government program has piloted some promising ideas (mostly by copying things underway in the private sector) to align payment with performance and better coordinate care, Medicare has struggled to consolidate enough internal expertise as well as political capital to make these efforts more enduring and pervasive.

As the 800-pound gorilla in the marketplace, our health care problems exist not in spite of the inefficient and often decerebrate way that Medicare buys health care services, but precisely because of it.

The chairman of the Senate Finance Committee, Democrat Max Baucus of Montana, has been honest about this problem. He has put forward some his own ideas for directly addressing the long-term cost problem. But he has also said that the White House is making the task difficult with opposition to one cost-cutting approach Elmendorf cited (and most agree) would ratchet down cost growth across the public and private sector - and that is limiting or even ending the tax exclusion for employer-provided health benefits.

What has the White House offered instead? They have dressed up the current legislative proposals with ideas for a new "comparative effectiveness" agency, better information technology, and a tax on junk food. These ideas may have individual merit. But when it comes to long-term and structural changes that will lower growth in healthcare spending, there's little reason to believe that these proposals are more than eye candy. They won't fundamentally change the expensive way health care is delivered and reimbursed. There is a reason why the CBO doesn't ascribe meaningful cost savings to these sorts of ideas.

So where does that leave us? As the 800-pound gorilla in the marketplace, our health care problems exist not in spite of the inefficient and often decerebrate way that Medicare buys health care services, but precisely because of it. Distilled down, President Obama's plan is to expand Medicare's reach still further by applying the same model to a "public" government run insurance option that will slowly entrap the presently privately insured, under 65 crowd. How can that make sense?

There could be only one logic behind this kind of plan. The Machiavellian idea that once the government controls most of the market, it will be able to control costs the only way it knows how--by directly regulating prices and access. That is how Medicaid manages to deliver a cheap product, paying providers literally pennies on the dollar of regular health plans. For Medicaid, the end result has been a third rate insurance product that unfairly relegates many of the poor to some of the worst providers and delivery settings in America. It's becoming a national shame in some parts of the country.

In the long run, many of the critics of President Obama's health care ambitions fear that this is what's in store for everyone as the government expands its reach over healthcare. Federal programs only know one formula for controlling their costs. Comments by the CBO director this week bravely expose some of these uncomfortable truths.

Scott Gottlieb, M.D., is a resident fellow at AEI.

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