Everyone in the health care debate seems to agree that the biggest problem is costs and that the best way to control costs is to get at the waste in the system. To raise the money needed to cover everyone and to make the system sustainable, goes the argument, we need to convert the upwards of 30% in excess costs now in the system to savings.

I think that’s right.

Many of my friends in the health care debate say the way to do that is with a robust public-plan option. The reasoning goes that a Medicare-like public plan that can drive down reimbursement rates for providers will create strong competition for the traditional insurers and health maintenance organizations (HMOs) so they finally have to tackle the problem of costs and waste.

I agree with their premise that we need to have unambiguous incentives for the stakeholders to get the job done and finally drive the waste out of the system.

But I question whether a Medicare-like public plan option can do it by creating a new competitive landscape based upon provider underpayment: today most private health plans pay doctors about 20% more than Medicare and pay hospitals about 30% more.

The Problem With Paying Providers Less

Provider underpayment schemes never work. Just look at the Sustainable Growth Rate (SGR) formula. The SGR was created many years ago as a means to force Medicare doctors to become more efficient. The idea was, if Medicare physician costs grew at a rate faster than we could afford, the docs would retroactively give the money back the next year in the form of compensating fee reductions. The message was clear: become efficient or we’ll take the money back next year.

But two things happened in response to the SGR: First, Congress never had the political courage to enforce it. Each year, cuts were overridden. And second, to the degree physician fees were constrained — although fees were never cut, they never saw any real increase, either — physicians compensated by either shifting costs to the private sector or just increasing treatment frequency.

Year after year of the SGR now has us to a point where Medicare physicians are facing a 21% fee cut on January 1 even while the overall payments to Medicare physicians have grown dramatically and can’t be sustained.

It’s the old “push it in there and it pops out here” health care phenomenon. If you just try to contain fees, you can expect a corresponding increase in utilization from the health care provider to compensate.

The SGR — the overt attempt at limiting Medicare fees — has not worked to control costs and has only served to distort the payment system while health care utilization has continued to build more and more waste and inefficiency in the overall system.

Why Wouldn’t A Public Plan Work?

Why wouldn’t a Medicare-like public plan with its emphasis on paying deeply discounted Medicare fees have the same effect?

Government-run health care puts its primary cost-containment emphasis on provider fee controls. That is true of our Medicare system, and it’s true of the many Western industrialized societies that use global budgeting to manage their health care systems.

But advocates for a public plan are right about this: a public plan would create a new basis of competition — which payer could screw down provider fees the most?

If a public plan were to pay providers 20% to 30% less, commercial insurers would have no choice but to compete with the public plan — by driving their reimbursement down to similar levels.

Simply, when a business is faced with a competitor that has “raw materials” costs 20% to 30% less, it has only one choice if it wants to survive: beat its “raw materials” suppliers down to the same payment level.

But is that the kind of marketplace for health care services we want to create?

I suggest that the problem is not a problem of fees; it is a problem of wasteful use of health care resources.

A public plan will only focus the system on an “arms race” over who could pay the doctor or hospital the lowest fee — a Sustainable Growth Rate formula on steroids. That, in turn, would only cause more “push it in there and it pops out here” cost shifting on the part of health care providers looking to survive.

Sweat The Waste Out Of The System

If we want to use competition to drive toward a more efficient use of health care resources, then we need to craft a system that provides for unambiguous incentives that begins to sweat the waste out of the system.

I am not suggesting that we trust the recent $2 trillion “fairy dust” promises from providers who failed to add any accountability for those promises into their proposals. The real answer, I suggest, lies in making the players in the American health care system accountable for measurable progress toward an affordable system. That means encouraging those who do the right things and penalizing those who do not.

At current trends, the Centers for Medicare and Medicaid Services has said that we are headed toward expanding our health care system from 17% of gross domestic product (GDP) today to 22% of GDP in ten years. So, understand this, no health care system can be considered reformed if it doesn’t pay out less than it would have — and so much less that it can be considered affordable and sustainable.

We don’t need just another Sustainable Growth Rate formula on steroids.
What we do need is a pay-for-performance system on steroids.