The current cry to reduce Federal deficits and debt growth by reducing Medicare and Medicaid entitlements is totally missing the key issue: the need to moderate all health care inflation. This should be the time for a national debate on how to best tackle the underlying cost problem, for the sake of our future, the economy, and access to health care.

The June 13-19, 2009 Economist editorialized: “America has the most wasteful [health] system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasized control of costs as much as the expansion of coverage that Barack Obama rightly wants.”

Health reform failed to get an adequate handle on all health care costs. Now there are constant calls by various expert commissions and many in Congress for entitlement spending reductions.  Such cuts will create enormous new problems by failing to address the underlying, real problem of health costs and inflation.

Cutting just Medicare and Medicaid without addressing the whole problem is like squeezing a balloon—the balloon starts looking very strange very fast. While it is difficult to tell how much cost-shifting may occur and it will vary from market-to-market, some Medicare and Medicaid cuts probably get passed through in higher costs to the private sector—hardly a helpful action. (Congressional Budget Office, December 2008, Key Issues in Analyzing Major Health Insurance Proposals, p. 116) Cuts that are too deep in Medicare will also end up causing providers to be reluctant to see seniors and people with disabilities—as happens all too often today in Medicaid. In time, quality may be threatened.

And Medicare and Medicaid are not particularly driving the problem of soaring health care costs. As various studies have shown, over the long haul, Medicare has probably inflated slightly less rapidly for a comparable package of services than the private sector has. Recent reports by the Medicare Payment Advisory Commission (MedPAC) show that high quality, efficient hospitals have made a little money on Medicare, while private insurers have often failed to control costs, and have paid less effective hospitals 132 percent of the costs of running an efficient hospital. (See, for example, MedPAC’s March 2009 Report to Congress, Section 2A.)

A Comprehensive Approach To Health Care Cost Containment

It is past time for a comprehensive solution to ensure the affordability of a fundamental need: access to health care. We should say that access to reasonably affordable health care is a basic national need, like access to clean water and air, and treat it like a regulated utility—like your water–where cost growth is kept within a reasonable range and where a reasonable quality service is widely available (but if you want to go buy Perrier, you can).

Instead of squeezing one part of the health care cost balloon (Medicare and Medicaid), we need an “all saver” system. Under this system, any provider in the health care sector which inflates its billings faster than the growth in the CPI plus, say, one percent (adjusted for changes in population, new technologies, increased productivity, and changes in the severity of the cases that provider treats) would owe a rebate of the excess amount to its customers—both private and public. If the rebate were not provided, that excess income would face a 100 percent tax. The Federal government could do this under the Commerce clause, or, to enable providers and patients to opt out, could require participation by those accepting payment from Medicare, Medicaid, and payers claiming tax-deductible medical expenses.

How would the plan work? Complicated? Yes, but soon very doable with today’s health information technology systems and the coding systems developed by Medicare and others. It would take several years to set the system up, but it would work like this. Let’s say a hospital in a base year of 2013 had $100 million worth of billings. If consumer inflation were 4 percent and if the system allowed another 1 percent (just because we do highly value health care and some extra growth is a reasonable choice), then in 2014, the hospital could bill $105 million. (Let’s assume that an expensive new technology is available that costs an extra $1 million, but let’s also assume that increase is coincidentally offset by a national increase in productivity of 1 percent that saves about $1 million.)

If the hospital bills its customers $110 million in 2014, yet those customers are no sicker or more complicated to treat than in 2013 (as proven by the audited billing codes or adjusted for coding creep), the hospital will owe its customers $5 million in rebates. If Medicare paid 40 percent of the bills ($44 million), it would receive back 40 percent of the $5 million excessive inflation ($2 million). If a large employer’s health plan paid 20 percent of the provider’s bills, it would get $1 million back, and so forth.

If a provider did not want to participate, they could insist on only after-tax cash customers, and individuals would be free to use such doctors and hospitals.

Changing The Debate

Instead of focusing on Medicare/Medicaid cuts, Congress should be debating ideas of how to moderate all health care spending while minimizing interference in the practice of medicine. The plan I’ve described is just one option, and of course it would have to be adjusted to deal with many complexities. For example:

  • How could the plan be made fair to new doctors and facilities with one-time extra start-up costs and no history of billings?
  • How could the plan use quarterly payments or rolling averages to avoid many providers shutting down in December?
  • How could society encourage further innovation, perhaps by offering more inflation for drugs certified as breakthroughs by the Food and Drug Administration?
  • What cosmetic-type services could or should be exempt?
  • What MedPAC-like advice and constitutional governance would be best?

Of course, if over the next decade reforms such as electronic medical records, comparative effectiveness research, and new bundling of the way we pay for services sufficiently ‘bends’ the spending curve downward, this system could be suspended. But it is doubtful those changes will do enough, and it is time to act on a comprehensive solution.

Incidentally, slowing all health care inflation would not only save enormous amounts in Medicare and Medicaid; over time it should achieve huge extra CBO/Joint Tax scorable savings, because the private sector and individuals will claim less in tax-deductible expenses for health care.

Budget reform that gets a handle on all health care inflation will solve most—or at least the toughest–of the ‘entitlement and future debt problems facing the nation. The entitlement problem is overwhelmingly a Medicare problem, driven not so much by more seniors or an aging population as by constantly soaring per capita costs of care. If we try to solve the entitlement problem just by cutting Medicare and Medicaid, we will destroy those programs. We need a total solution, because soaring health care costs are distorting the economy and our future as a successful nation.

Now is the time for this debate.