Just as it took a Republican to thaw our relationship with China, it will probably take a Democrat to reform our entitlement programs. Again and again, Obama promised to step up to the challenge. Then he left the country at the altar and pursued partisan politics instead.

Bill Clinton was going to be the first Democratic president to tackle entitlement spending. Although the effort has been completely ignored by the establishment media, Clinton was planning historic reforms during his second term. These were to include private accounts under Social Security and vouchers for Medicare.

If that doesn’t knock your socks off, you haven’t been paying attention. When Republicans propose these things, Democrats invariably claim the GOP is trying to destroy the social safety net and leave the elderly to fend for themselves.

You left me
(Just when I needed you most)

Clinton was serious. He had his Treasury Department draw up detailed plans. In fact, when Pat Moynihan, the colorful intellectual senator from New York, was appointed by President George W. Bush to co-chair the Social Security reform commission, the first thing he did was ask the Treasury to send him the Clinton-era planning documents so that the commission could continue where Clinton’s policy team left off.

So what derailed Bill Clinton’s ambitious reform agenda? Monica Lewinsky. Left wing Democrats in Congress threatened to throw him under the bus in the impeachment proceedings unless he completely dropped the reform ideas they regarded as heresy. Unfortunately for the country, he obliged.

The next opportunity came with Barack Obama. During the Democratic presidential primary in 2008, he was the only serious candidate who called for entitlement reform. Social Security, Medicare and Medicaid, he said, cannot continue on the path they are on. Of course, the left didn’t like hearing this any more than they liked what Bill Clinton was going to propose. Obama was excoriated by New York Times columnist Paul Krugman and was attacked in other liberal quarters as well.

But Obama stuck to his guns and didn’t retreat. That’s one reason I was hopeful when he won the presidency. Initially, I wasn’t disappointed. One of his early achievements was the appointment of a debt commission, headed by former Clinton Chief of Staff, Erskine Bowles, and former Republican senator from Wyoming, Alan Simpson. Almost all of Congress was opposed to this commission (even the Republicans!), but Obama held his ground. He told Bowles and Simpson to forge ahead and do the right thing.

“When you come out with your report, I’ll back you,” the president said. Bowles and Simpson actually believed him.

Alas, it was not to be. And I’m not sure I know why. Has there ever been a president who built up so much hope before abandoning his own public policy troops while they are still in the thick of battle?

Bowles and Simpson reported their bipartisan findings in the fall of 2010. As David Brooks wrote in The New York Times, there was excitement in the air at the time. A bipartisan group of 65 senators pledged to work to find a solution to the nation’s budget woes. The New York Times created on online budget calculator that allowed readers to find their own solutions. The Peter G. Peterson Foundation got six think tanks to propose their solutions.

Yet there was silence at the White House. When the president gave his State of the Union speech a few months later, you would think he never heard of Bowles or Simpson. When the president’s budget came out a few weeks later, again there was no mention of Bowles or Simpson.

The president didn’t merely lose interest in entitlement reform; he went over to the other side! When House Budget Committee Chairman, Republican Paul Ryan, made proposals similar to Bowles and Simpson, the president invited him to a nationally televised White House speech in which he accused Ryan of abandoning the elderly and even of being un-American. Tragically, the person the president was insulting on national TV was the very person he must negotiate with if entitlement reform is ever going to be a reality.

The president’s defenders will probably try to blame Congress for inaction on our most serious domestic policy problem. Nothing could be further from the truth. During 2011, Capitol Hill produced a “gang of six” and “gang of twelve” —bipartisan efforts to reform entitlements, but with zero guidance from the White House. In addition, there were a slew of bipartisan proposals to reform Medicare, most recently a proposal by Ryan and Democrat Ron Wyden. Congress has signaled in every possible way a willingness to act. The only thing missing has been a president willing to guarantee that serious reform efforts would not be demagogued in the next election.

Defenders of the president will probably also claim that ObamaCare is entitlement reform. On paper they are right. According to the Medicare actuaries, President Obama cut Medicare’s unfunded liability in half the minute he signed the health reform act. Unfortunately, there is no serious cost-cutting reform in ObamaCare — only a plan to cut provider payments to the bone. If they carry it out, say the actuaries, one out of every seven hospitals will be out of business in the next eight years and senior citizens will be lined up behind welfare mothers trying to find a doctor who will see them at community health centers and at the emergency rooms of safety net hospitals.

That’s why no one in Washington takes these cuts seriously — at least when they are talking in private. Plus, we’ve seen this scenario play out before. Doctor payments under Medicare are supposed to be growing no faster than national income, but Congress has stepped in to prevent reductions in doctor fees on nine separate occasions.

Governor Chris Christie of New Jersey was harsh, but accurate when he summed up the state of affairs on Meet the Press last Sunday. Christie told Dave Gregory that when President Obama refused to endorse the Bowles/Simpson report he “showed political cowardice and an absolute fear of confronting the great issues of the day.”

The promise Barack Obama made to the voters was unmistakable. He would put partisan politics aside, bring the two parties together and solve our most important public policy problems.

That is a promise that has not been kept.

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• “An edict delivered with a sneer,” wrote Michael Gerson in The Washington Post.
• “An attack on Christianity so severe that every single church in Florida had a letter read from the bishops,” said Newt Gingrich.
• “We can’t just lie down and die and let religious freedom go,” said a spokeswoman for the Conference of Catholic Bishops.
• “We do not happen to think pregnancy is a disease,” said the president of the Association of Catholic Colleges and Universities.
• People who postpone conception with “chemicals and latex” are part of the “culture of death,” said Archbishop Timothy Dolan.

What makes this so amazing is that it is déjà vu all over again, as Yogi Berra might say. Do you remember the death knell for HillaryCare? I bet you can’t. Answer below the fold.

We’re having a baby,
My baby and me.

Mammograms and Pap smears. Hard to believe, isn’t it?

[Yes, I know. There were many things that helped derail HillaryCare. The biggest mistake was the White House's failure to throw everything aside and endorse the Senate Republican health plan, which was about as close to HillaryCare as RomneyCare is to ObamaCare. Hillary would have ended up with about 90% of everything she wanted. More about that, perhaps, in a future Alert.]

But what really killed the whole thing in the public’s mind were mammograms and Pap smears. Fifteen years ago the “experts” didn’t agree on how frequently women should have them any more than they agree today. I’m sure that when various women asked various doctors they got various answers. And, by the way, there is nothing wrong with that. Whenever there is risk and uncertainty, opinions will differ. That’s not the end of the world.

What was the end of HillaryCare, however, was the notion that the White House should decide these questions for every woman in America! When you stop to think about it, that takes a certain amount of chutzpah. It also reflects a degree of meddlesomeness that’s really hard for me to understand. But in both the Clinton White House and in the Obama White House there were folks who just could not abide the idea of your having a health plan different from the one they think you should have — down to the tiniest detail!

For Hillary and her advisers it came down to this: They decided that sexually active women should have a cervical cancer test every three years, instead of every two. For women in their fifties, they called for a mammogram every other year, instead of every year. And these decisions, unfortunately for Clinton, were different from what most doctors were recommending.

[The technical folks, by the way had fun with all of this. Cost-effectiveness numbers at the time suggested that Hillary’s cut-off number was about $100,000 for each year of life saved. If the projection comes in below that number, do the test. Above that number avoid it. Interested readers may consult my discussion of this issue here. I don’t think this facet of the problem ever got on anyone’s radar screen outside of the number crunching community; however, and I doubt that Hillary was even aware of it.]

Now the right way to think about all this is very simple. How much does a mammogram cost? $100? If you want one, take the money out of your Health Savings Account and go buy it. How often should you do that? Probably as often as it gives you peace of mind. Is not having the test keeping you awake at night? Then spend $100 and get the test. The same principle applies to contraceptives. You want them? Go buy them.

And what about the tiny, tiny, tiny portion of the population that really can’t afford these services? Go to a community health center or to Planned Parenthood and ask for them for free! This isn’t rocket science.

It is truly amazing how much consternation is caused for no other reason than the desire on the part of some people to tell everybody else how to live their lives.

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The problem: the author is encouraging you to think that the people in the top 1% at the beginning of the decade are the same people who are in the top 1% at the end of the decade. But they aren’t. People move in and out of this category with surprising frequency. Yet if they aren’t the same people, what’s the point of the comparison?

A similar thing happens in health care. I frequently see writers say that a small number of people spend most of the health care dollars. True. But the small number this year are not the same people as the small number last year, or the year before.

As in the case of the income comparisons, readers can be misled into thinking that our health care problems boil down to how to take care of a small number of people. Not so.

“My momma always said life is like a box of chocolates…
You never know what you’re gonna get.”

- Forrest Gump

A new study by the Agency for Healthcare Research and Quality shows how much fluidity there is among the categories of patients that spend the most health care dollars:

• In 2008, 1% of the population accounted for about one-fifth of all health care spending. Yet the following year, 80% of these patients dropped out of the top 1% category.
• The top 5% of the population accounted for nearly half of all health care spending. Yet 62% of these patients dropped out of this category the following year.
• Although the top 10% spent 64% of all health care dollars, the following year fewer than half of these patients were still in this category.
• At the other end of the spectrum, the bottom half of the population spent only 3% of health care dollars. Yet one of every four of these patients moved to the top half the following year.

Here is something else that’s interesting:

• The top 10% are spending almost two-thirds of all health care dollars in any one year.
• Of those who remained in this category for both years, 43% were elderly.
• Another 40% were under 18 years of age.

In other words, the persistently sick tend to be young or old. Among the adult, nonelderly population who were in the top 10% the first year, almost three of every four were in the bottom 75% of spenders the second year.

Why is this important? If a small number of people spent most of the health care money and they were the same people year after year, there would not be much point in having a real market for health insurance.

Consider fire insurance. This makes sense only if fires are largely unpredictable and could happen to any homeowner. But suppose that the small percent of home owners who experience a fire in any one year are the very same people who experience a fire every year. In such a world, fire insurance would not be very practical.

The same thing is true in health care.

Most people in health policy view health insurance as just a way to pay medical bills. In fact, I am probably one of the very few people you interact with who believes in real health insurance and who believes there is a social need for it. I am also one of the very few people you interact with who believes we need a real market for health risks in order to determine what is the best way to insure against them and to determine what is the best way to partition insurance products between self-insurance and third-party insurance.

It’s always nice to have one’s view of the world confirmed by the evidence.

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If nothing works, the fallback weapon in Obama Care is to reduce fees paid to doctors and hospitals. Yet the Medicare actuaries tell us that squeezing the providers in this way will put one in seven hospitals out of business in the next eight years, as Medicare fees fall below Medicaid’s. Under this scenario, senior citizens may be forced to line up behind welfare mothers, seeking care at community health centers and in the emergency rooms of safety net hospitals.

I believe this is the only blog that has confidently predicted that health care costs will never be controlled by running pilot programs and trying to “copy what works.” (Note, however: the Congressional Budget Office has shared our viewpoint from the beginning; see their previous conclusions here and here.) I’ll explain why I predicted failure all along below. First let’s review the latest results.

I Still Haven’t Found What I’m Looking For

Over the past two decades, Medicare’s administrators have conducted two types of demonstration projects.

Disease management and care coordination demonstrations consisted of 34 programs that used nurses as care managers to educate patients about their chronic illnesses, encouraged them to follow self-care regimens, monitored their health, and tracked whether they received recommended tests and treatments. The primary goal was to save money by reducing hospitalization. With respect to these efforts, the Congressional Budget Office (CBO) finds:

• On average, the 34 programs had little or no effect on hospital admissions.
• In nearly every program, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program.

Value-based payment demonstrations consisted of four programs under which Medicare made bundled payments to hospitals and physicians to cover all services connected with heart bypass surgeries. With respect to these, the CBO finds that “only one of the four … yielded significant savings for the Medicare program” and in that one Medicare spending only “declined by about 10 percent.”

As Robert Laszweski put it at The Health Care Blog the other day, “thirty years into managed care, the stark reality is that we aren’t yet smart enough to get things under control.” That’s an understatement.

So why is none of this working? Because it all involves people on the demand side of the market trying to take the place of entrepreneurs who would ordinarily be on the supply side in any other market.

Successful innovations are produced by entrepreneurs, challenging conventional thinking — not by bureaucrats trying to implement conventional thinking. There are lots of examples of successful entrepreneurship in health care. There are very few examples of successful bureaucracy. Can you think of any other market where the buyers of a product are trying to tell the sellers how to efficiently produce it?

On the supply side, we have the islands of excellence (Mayo, Intermountain Healthcare, Cleveland Clinic, etc.). On the demand side, we have a whole slew of experiments with pay-for-performance and other pilot programs designed to see whether demand-side reforms can provoke supply-side behavioral improvements. And never the twain shall meet.

We cannot find a single institution providing high-quality, low-cost care that was created by any demand-side buyer of care. Not the Centers for Medicare and Medicaid Services (CMS), which runs Medicare and Medicaid. Not Medicare. Not BlueCross. Not any employer. Not any payer, anytime, anywhere.

Also, wherever we do find excellence we almost always discover that it cannot be copied. Megan McArdle argues that pilot programs — even when they work — are not scalable in every field.

In health care, scholars associated with the Brookings Institution identified 10 of the best hospital regions in the country and then tried to identify common characteristics that could be replicated. There were almost none. Some regions had doctors on staff. Others paid fee-for-service. Some had electronic medical records. Others did not. A separate study of physicians’ practices found much the same thing. There were simply not enough objective characteristics that the practices had in common to allow an independent party to set up a successful practice by copycat alone.

Bottom line: bureaucracies can’t do what only markets can do.

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Some hospital rooms are like the Four Seasons:

The bed linens were by Frette, Italian purveyors of high-thread-count sheets to popes and princes. The bathroom gleamed with polished marble. Huge windows displayed panoramic East River views. And in the hush of her $2,400 suite, a man in a black vest and tie proffered an elaborate menu and told her, “I’ll be your butler.”

It was Greenberg 14 South, the elite wing on the new penthouse floor of NewYork-Presbyterian/Weill Cornell hospital. Pampering and décor to rival a grand hotel, if not a Downton Abbey, have long been the hallmark of such “amenities units,” often hidden behind closed doors at New York’s premier hospitals. But the phenomenon is escalating here and around the country, health care design specialists say, part of an international competition for wealthy patients willing to pay extra, even as the federal government cuts back…

If I were a rich man.

It’s more common than you think:

Many American hospitals offer a V.I.P. amenities floor with a dedicated chef and lavish services, from Johns Hopkins Hospital in Baltimore to Cedars-Sinai Medical Center in Los Angeles, which promises “the ultimate in pampering” in its $3,784 maternity suites. The rise of medical tourism to glittering hospitals in places like Singapore and Thailand has turned coddling and elegance into marketing necessities, designers say…

But it’s all hush-hush:

NewYork-Presbyterian, which once opposed amenities units, would not answer questions about its shift, and declined a reporter’s request for a tour…

And definitely not for the masses:

In space-starved New York, many regular hospital rooms are still double-occupancy, though singles are now the national standard for infection control and quicker recovery…

The customer (oops) patient is always right:

“We pride ourselves on getting anything the patient wants. If they have a craving for lobster tails and we don’t have them on the menu, we’ll go out and get them,” [said] William Duffy, Mount Sinai Medical Center’s director of hospitality…

Avoiding the interns:

“I’m perfectly at home here — totally private, totally catered,” [Nancy Hemenway, a senior financial services executive] added. “I have a primary-care physician who also acts as ringmaster for all my other doctors. And I see no people in training — only the best of the best.” …

Serving the merely well-off:

Beth Israel Medical Center’s…green-carpeted lobby may be more Radisson than Ritz, but its 12 single rooms starting at $450 feature Bose stereos and flat-screen TVs, and chef-prepared kosher food is served on china…

And hospital administrators are apologetic:

Wayne Keathley, Mount Sinai’s president, minimized the unit’s role… “It is not nearly as large or elaborate as some others,” Mr. Keathley said. He called the money it brought in “a rounding error in my budget,” and said that patients came for the clinical care, not the amenities…

Gail Donovan, the chief operating officer of Continuum Partners, which includes Beth Israel and St. Luke’s-Roosevelt Hospital [said] “Our mission is really to be the safety net hospitals of our communities.” …

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No Telephone. Sometime in the early part of the last century, all the other professionals in our society — lawyers, accountants, architects, engineers, etc. — discovered the telephone. It’s a handy device. Ideal for communicating with clients. Yet even today I find that I can rarely talk to a doctor by phone. Why is that?

The short answer is: Medicare doesn’t pay for telephone consultations. Medicare has a list of about 7,500 tasks it pays physicians to perform. And talking by phone isn’t on the list — at least in a way that makes it practical. Private insurance tends to pay the way Medicare pays. So do most employers.

At a time when doctors feel like they are being squeezed on their fees from every direction by third-party payers, most become very focused on which activities are billable and which are not. And most are going to try to minimize their non-billable time.

And now my life has changed in oh so many ways,
My independence seems to vanish in the haze.

No E-Mail. Sometime toward the end of the last century, all the other professionals discovered e-mail. In some ways it’s even better than the phone. Everybody e-mails everybody these days. Even the corner liquor store e-mails me when they have a bottle of wine they know I will like. Everybody e-mails everybody — except doctors.

Why is that? Again, the short answer is: this is another task that’s not on Medicare’s price list — at least not in any way that makes e-mailing practical. Since Medicare doesn’t pay, all the private insurers who piggyback on Medicare’s payment system follow suit.

The fact that patients cannot conveniently consult with physicians leads to two bad consequences. First, the unnecessary office visitors (say, patients who have a cold) expect at least a prescription in return for their investment of waiting time, and all too often the drug will be an antibiotic that won’t help their cold. Were e-mail or telephone consultations possible, the physician might recommend an over-the-counter remedy, thus avoiding the cost of waiting for the patient and the cost of degrading the effectiveness of antibiotics for society as a whole.

At the same time, rationing by waiting at the doctor’s office imposes disproportionate costs on chronic patients who need more contact with physicians. This might be one reason why so many are not getting what they most need from primary care physicians and what is most likely to prevent more costly problems later on: prescription drugs.

The ability to consult with doctors by phone or e-mail could be a boon to chronic care. Face-to-face meetings with physicians would be less frequent, especially if patients learned how to monitor their own conditions and manage their own care.

Lack of Electronic Medical Records. The computer is ubiquitous in our society and many believe that electronic medical record (EMR) systems have the capacity to improve quality and greatly reduce medical errors. Yet, only about half of physicians have such systems and most of those are not connected to other physicians’ offices and hospitals, do not allow electronic prescribing, etc. The same is true for hospitals. One study concluded that “information systems in more than 90 percent of U.S. hospitals do not even meet the requirement for a basic electronic-records system.” Why are most medical records still stored on paper? Again, the short answer is this: There is no financial incentive to do otherwise.

EMRs may improve quality, but in the third-party-payer system, doctors do not compete for patients based on quality. EMRs may be a boon for patient convenience — especially in transferring information from doctor to doctor, but physicians don’t get paid for increasing patient convenience.

The Kaiser Exception. There is one health plan that does make extensive use of the telephone, e-mail and electronic medical records (EMRs). The insurer is California-based Kaiser Permanente. Unlike most private insurers, Kaiser doesn’t pay for care the way Medicare pays. Instead, it employs most of its doctors in a health maintenance organization (HMO) model. Because the plan is responsible for all the health care costs of its enrollees, it has an incentive to make use of technology that reduces overall cost. Telephone, e-mail and EMRs are among these. HMOs have their own perverse incentives, however, and some of Kaiser’s less attractive outcomes have been chronicled by Harvard Business School Professor Regina Herzlinger.

Ironically, the tax law favors the HMO form of delivery (because all premiums an employer pays to Kaiser are paid with pre-tax dollars) and has traditionally discriminated against individual self-insurance. However, the HMO doctor is no more free than the fee-for-service doctor. Both are trapped — although in different systems.

Inadequate Advice About Drugs and Other Therapies. Why do doctors so often prescribe brand-name drugs and fail to tell patients about generic, therapeutic, and over-the-counter substitutes? Why do they typically not know the price of the drugs they prescribe or the costs of alternatives? Even when they are vaguely aware of cost differences, why does your doctor not know where you can get the best price in your area for the drug she prescribes? Once again, the short answer is: They do not get paid to know these things. Knowing the current best price, knowing where the patient can obtain that price, and knowing the prices and availabilities of all of the alternatives is demanding and time consuming. For the doctor, it is time that is not compensated.

Inadequate Patient Education. Numerous studies have shown that chronic patients can often manage their own care, with lower costs and as good or better health outcomes than with traditional care. Diabetics, for example, can monitor their own glucose levels, alter their medications when needed, and reduce the number of trips to the emergency room (ER). Similarly, asthmatics can monitor their peak airflows, adjust their medications and also reduce ER visits.

To take full advantage of these opportunities, however, patients need training that they rarely receive. ER doctors could save themselves and future doctors the necessity of a lot of future ER work if they took the time to educate the mother of a diabetic or asthmatic child about how to monitor and manage the child’s health care. But time spent on such education is not billable.

Escaping the Trap. What is the common denominator for all of these problems? Unlike other professionals, doctors are not free to repackage and reprice their services in customer pleasing ways. The way their services are packaged is dictated by third-party-payer bureaucracies. The prices they are paid are similarly dictated. Doctors are the least free of any professional we deal with. Yet these un-free actors are directing one-fifth of all consumer spending!

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Almost everyone agrees that without significant entitlement program reform, there is little hope for a solution to the looming decade of out-of-control deficit spending. That said, there is little agreement on how to do so. The inclination on the right is to cut spending; the inclination on the left is to raise taxes.

Critics of proposals to reduce spending claim that younger workers will be short-changed. For example, when Paul Ryan proposed to reform Medicare by making the federal government’s contribution (“premium support”) grow less rapidly than the rate of medical inflation, critics charged that this would shift costs to future retirees.

What the critics missed: If future Medicare benefits are smaller, then the taxes and premiums needed to pay for Medicare will also be smaller. In other words, Medicare benefit cuts produce partly offsetting taxpayer gains. Take the cuts in Medicare spending already enacted as part of ObamaCare. According to a National Center for Policy Analysis report by our colleagues Courtney Collins and Andrew Rettenmaier, lower taxes and premiums will offset about one-fourth of the benefit cuts for today’s 65-year-olds. They will offset almost one-half of the benefit cuts for 45-year-olds.

The same principle applies to Social Security. Most Social Security reform proposals would result in fewer benefits for future retirees. However, if the program pays out less in benefits, the payroll taxes needed from younger workers to support the program will be lower than they otherwise would be. In some cases workers would come out ahead, with the value of the tax reductions exceeding the loss resulting from benefit cuts.

For political reasons, most entitlement reform proposals under consideration would leave current retirees’ benefits untouched and reduce benefits only for future retirees. The question for young people is: Are smaller benefits acceptable in return for lower taxes? In another study, Rettenmaier and Liqun Liu analyze three commonly discussed ways of reducing Social Security benefits:

• Progressive price indexing of benefits: a way of tying the growth of benefits to worker income.
• Changing the benefit formula: a way of reducing the size of monthly benefit checks.
• Raising the retirement age: increasing it to age 70 by 2032 followed by increases of one month every two years.

In each case, the current system is made hypothetically sustainable by raising the Social Security payroll tax enough to make the system solvent, indefinitely into the future. The proposed benefit cuts allow a reduction in this hypothetical payroll tax.

The study found that raising to 70 the retirement age of a 41-year-old with a lifetime average annual income would reduce lifetime benefits by about $60,000. But the taxes required to fund these reduced benefits would be $40,000 less than otherwise. This lower tax burden would offset two-thirds of the benefit loss.

Raising the retirement age for a 41-year-old, poverty-level worker would reduce lifetime benefits by $26,000. But the lower tax burden would offset 40% of the benefit loss. For a very high-income worker (16 times the poverty level), the lower tax burden would offset 90% of the benefit loss.

Changing the benefit formula to make it less generous causes the 41-year-old, average-income worker’s taxes to drop by more than the loss of benefits. Under progressive price indexing, these lower taxes exceed the accompanying benefit loss by $30,000.

For 26-year olds, raising the retirement age would reduce a very high-income earner’s taxes by more than the reduction in benefits.

For an average income earner, the tax reduction would make up for 95% of his benefit loss.

The fall in taxes for a poverty-level worker would offset about half of his lost benefits.

Progressive price indexing would reduce the tax burden for today’s 26-year-olds in every income group by more than their benefit loss when compared with fully funding current law benefits.

Changing the benefit formula would reduce the taxes of a very high-income 26-year-old by more than the reduction in benefits.

The benefit loss of an average wage worker would be almost entirely offset by tax reductions.

The poverty-level worker’s benefit loss would be offset 85% by lower taxes.

What about eliminating the cap on the payroll tax, an idea favored by many on the left?

Raising the taxable maximum would increase the taxes of very high-income workers, but half of the tax increase would be offset by increased benefits the government would have to pay to those same workers.

The biggest problem with raising the maximum taxable wage is that it commits the government to a more expensive program — in contrast to the first three reforms, which make the program smaller. Moreover, if progressivity is the chief concern, progressive price indexing produces similar progressivity, but it is more fiscally responsible in the long run.

In other words, you can achieve a similar fiscal improvement and do so in an equally progressive way by cutting the benefits of high-income people rather than increasing their taxes.

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To see how trapped, let’s look at another profession: the practice of law. Suppose you are accused of a crime and suppose your lawyer is paid the way doctors are paid. That is, suppose some third-party payer bureaucracy pays your lawyer a different fee for each separate task she performs in your defense. Just to make up some numbers that reflect the full degree of arbitrariness we find in medicine, let’s suppose your lawyer is paid $50 per hour for jury selection and $500 per hour for making your final case to the jury.

What would happen? At the end of your trial, your lawyer’s summation would be stirring, compelling, logical and persuasive. In fact, it might well get you off scot free if only it were delivered to the right jury. But you don’t have the right jury. Because of the fee schedule, your lawyer skimped on jury selection way back at the beginning of your trial.

This is why you don’t want to pay a lawyer, or any other professional, by task. You want your lawyer to be able to reallocate her time — in this case, from the summation speech to the voir dire proceeding. If each hour of her time is compensated at the same rate, she will feel free to allocate the last hour spent on your case to its highest valued use rather than to the activity that is paid the highest fee.

Clowns to left of me, jokers to the right
Here I am, stuck in the middle with you

In a previous Health Alert, I noted that Medicare has a list of some 7,500 separate tasks it pays physicians to perform. For each task there is a price that varies according to location and other factors. Of the 800,000 practicing physicians in this country, not all are in Medicare and no doctor is going to perform every task on Medicare’s list.

Yet Medicare is potentially setting about 6 billion prices across the country at any one time.

Is there any chance that Medicare can get all those prices right? Not likely.

What happens when Medicare gets them wrong? One result: doctors will face perverse incentives to provide care that is costlier and less appropriate than the care they should be providing. Another result: the skill set of our nation’s doctors will become misallocated, as medical students and practicing doctors respond to the fact that Medicare is overpaying for some skills and underpaying for others.

The problem in medicine is not merely that all the prices are wrong. A lot of very important things doctors can do for patients are not even on the list of tasks that Medicare pays for. Some readers will remember our Health Alert on Dr. Jeffrey Brennan in Camden, New Jersey. He is saving millions of dollars for Medicare and Medicaid by essentially performing social work services to reduce spending on the most costly patients. Because “social work” is not on Medicare’s list of 7,500 tasks, Brennan gets nothing in return for all the money he is saving the taxpayers.

We have also seen that there are other omissions — including telephone and e-mail consultations and teaching patients how to manage their own care.

In addition, Medicare has strict rules about how tasks can be combined. For example, “special needs” patients typically have five or more comorbidities — a fancy way of saying that a lot of things are going wrong at once. These patients are costing Medicare about $60,000 a year and they consume a large share of Medicare’s entire budget. Ideally, when one of these patients sees a doctor, the doctor will deal with all five problems sequentially. That would economize on the patient’s time and ensure that the treatment regime for each malady is integrated and consistent with all the others.

Under Medicare’s payment system, however, a specialist can only bill Medicare the full fee for treating one of the five conditions during a single visit. If she treats the other four, she can only bill half price for those services. It’s even worse for primary care physicians. They cannot bill anything for treating the additional four conditions.

Since doctors don’t like to work for free or see their income cut in half, most have a one-visit-one-morbidity-treatment policy. Patients with five morbidities are asked to schedule additional visits for the remaining four problems with the same doctor or with other doctors. The type of medicine that would be best for the patient and that would probably save the taxpayers money in the long run is the type of medicine that is penalized under Medicare’s payment system.

Take Dr. Richard Young, a Fort Worth family physician who is an adviser for the federal government’s new medical Innovation Center. As explained by Jim Landers in the Dallas Morning News:

 [When Young] sees Medicare or Medicaid patients at Tarrant County’s JPS Physicians Group, he can only deal with one ailment at a time. Even if a patient has several chronic diseases — diabetes, congestive heart failure, high blood pressure — the government’s payment rules allow him to only charge for one.

“You could spend the extra time and deal with everything, but you are completely giving away your services to do that,” he said. Patients are told to schedule another appointment or see a specialist.

Young calls the payment rules “ridiculously complicated.”

That’s an understatement.

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The Ryan/Wyden proposal would cap the rate of growth of premium support at the real rate of growth of per capita GDP plus 1%, even though health care spending overall has been growing at about GDP plus 2% for the past four decades. In this respect, the proposal is similar to the Ryan/Rivlin proposal, the Dominici/Rivlin proposal, and the Bowles/Simpson (Obama debt commission) proposal.

The Ryan/Wyden proposal has been criticized by some on the left, and there is nothing wrong with criticism. There is something wrong when the critics are known supporters of ObamaCare, however.

Writing in The New York Times, former white House health advisor Zeke Emanuel complained that:

Premium support is classic cost shifting, rather than cost cutting. Unless growth in health care costs is low, Medicare beneficiaries will just have to pick up the difference between the voucher’s value and the cost of the health insurance plan they purchase.

A similar complaint was penned by Laura Tyson, former chairwoman of the Council of Economic Advisors under President Clinton, in another New York Times column. Both have been involved with voucher proposals before.

But sleep won’t come, The whole night through,
Your cheatin’ heart, will tell on you…

Emanuel admits that he has previously advocated a voucher plan for all Americans with Stanford University health economist Victor Fuchs — and he still endorses the idea. His main problem with Ryan/Wyden is that the bill segregates the elderly and puts them on a slower growth path than the rest of the country. Tyson was appointed by President Clinton to serve as a member of the National Bipartisan Commission on the Future of Medicare, chaired by Republican Bill Thomas and Democrat John Breaux — a commission that developed a premium support (voucher) proposal for Medicare. Ultimately, she voted against the proposal, however.

Still, my charge of hypocrisy has nothing to do with the past. My problem is that both Emanuel and Tyson support the Affordable Care Act (ObamaCare).  As all readers of this blog surely know by now, more than  half the costs of insuring young people under ObamaCare is to be paid for by cuts in Medicare spending. As Tom Saving and I explained in The Wall Street Journal, how much Medicare will be cut is a matter of some dispute.  The Congressional Budget Office says the act requires Medicare to grow at GDP plus 1%, exactly the same rate of growth as the premium support proposals referred to above. The Medicare Trustees report, however, says the act requires Medicare to grow at GDP plus 0%. And since the Medicare trustees are appointed by the president, we take the trustees’ report as the Obama administration’s view of its own health plan. [See the chart.]

In truth, none of the plans referred to above have any realistic method of slowing the rate of growth of health care costs. So what happens if health costs for the elderly grow at a faster rate than the limits the plans require? Here is Tyson:

The Ryan-Wyden proposal is ambiguous about what would happen if the cap became binding. The proposal says Congress “would be required” to intervene and “could” implement policies to change provider payments and premiums for beneficiaries.

Congressional intervention to control provider payments would shift the burden of higher-than-anticipated costs to providers from the federal government and would effectively signal the end of managed competition as the mechanism to control costs.

But squeezing payments to providers is exactly what is called for under the Affordable Care Act. In fact, under the Medicare Trustees’ version, the ObamaCare cuts will be more severe than the Ryan/Wyden cuts.

Both Emanuel and Tyson seem to be aware they are vulnerable to the charge of hypocrisy. They both mention the ACA, and both make an inadequate effort to explain why they support cutting physicians’ fees under ACA but not under anyone else’s plan.

Tyson goes so far as to claim that Medicare can use it’s monopsony buying power to suppress provider fees better than private insurers and thus can be more successful in restraining costs. She seems to be unaware that in many parts of the country Medicare Advantage (MA) plans pay less than Medicare. Where MA plans pay more, it is often by choice (e.g., to get better service). Emanuel says the only real way to control costs is to change the way we pay for seniors’ health care. He seems to be unaware that all the changes he is calling for are already being implemented by private MA plans, not by Medicare.

Tyson even presents a chart claiming to show that Medicare costs have been growing more slowly than private sector costs. She seems to be unaware that you cannot compare raw numbers meaningfully without making adjustments for the changing age structure of the two populations, out-out-pocket payments, etc. As Tom Saving and I pointed out at the Health Affairs Blog the other day, the CBO has come closest to making a valid comparison. Here are the results:

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Physicians have a responsibility to practice effective and efficient health care and to use health care resources responsibly. Parsimonious care that utilizes the most efficient means to effectively diagnose a condition and treat a patient respects the need to use resources wisely and to help ensure that resources are equitably available.

On the right, American Enterprise Institute scholar Scott Gottlieb writes “Parsimonious, to me, implies an element of stinginess, and stinginess implies an element of subterfuge.” (Quote of the Day in American Health Line.)

On the left, Aaron Carroll writes:

I would fight tooth and nail to get anything — and I mean anything — to save [his own child]. I’d do it even if it cost a fortune and might not work. That’s why I don’t think you should leave these kinds of decisions up to the individual. Every single person feels the way I do about every single person they love, and no one will ever be able to say no. That’s human.

Similarly, I don’t think that it’s necessarily fair to make it a physician’s responsibility. I also want my child’s doctor to fight tooth and nail to get anything that might save my child. Many times, physicians have long-standing relationships with patients. Asking them to divorce themselves from the very human feelings that compel them to do anything that might help their patients is not something that I think will necessarily improve the practice of medicine. They also should be human.

So whose job is it? Well, mine for instance. That’s what I do as a health services researcher. That’s what policy makers should also do….

That’s a roundabout way of saying that only the government can ration care the right way. Here is Don Taylor’s (Incidental Economist) take on the subject.

My view: people in health care have become so completely immersed in the idea of third-party payment that they have completely lost sight of the whole idea of agency.

This game of life I play
Living and dying with the choices I made

Can you imagine a lawyer discussing the prospects of launching a lawsuit without bringing up the matter of cost? What about an architect submitting plans for a building but completely ignoring what it would cost to build it?  Outside of medicine, can you imagine any professional anywhere discussing any project with a client and pretending that money doesn’t matter? Of course not.

Then what is so special about medicine? Answer: the field has been completely corrupted by the idea that (a) patients should never be in a position to choose between health benefits and monetary cost, (b) doctors shouldn’t have to think about such tradeoffs either, (c) in order to insulate the patient from having to choose between health care and other uses of money, third-party payers should pay all the medical bills and (d) since no one else is going to think about what anything costs, the third-party payer is the only entity left to decide which services are worthwhile and which ones aren’t.

To appreciate how doctors could do the same thing other professionals do in advising patients on how to spend their own money, take a look at the graphic below. These numbers are several years old and there may be more recent studies, but the graphic will serve our heuristic purpose. Armed with this information, what would a responsible doctor tell her patient about Pap smears and how often the patient should get them?

Source: Tammy O. Tengs et al., “Five Hundred Lifesaving Interventions and Their Cost-Effectiveness,” Risk Analysis, June 1995.

Note that getting a Pap smear every four years (versus never getting one) costs $12,000 per year of life saved, when averaged over the whole population. What the responsible doctor should say is, “In the risk avoidance business, this is a really good buy. Based on choices people like you make in other walks of life, this is a good decision. This type of risk reduction is well worth what it costs.”

What about getting the test every three years (versus every four) or every two years (versus every three)? Here the doctor should say, “Now we are moving toward the upper boundary of what most other people are willing to spend to avoid various kinds of risks. So at this point, serious thought needs to be given to whether the test is really worth what it cost.”

How about getting the test done every year (versus every two years)? Here the responsible doctor will say, “This is definitely a bad buy (unless there is some specific indication). The cost of an annual Pap smear in relation to the amount of risk reduction achieved is way outside the range of choices most people make with respect to other risks.”

Notice what is going on here. The responsible doctor, functioning as an agent of a patient who is not familiar with the medical literature and who is not skilled at evaluating risks or trading off risk reduction for other uses of money, advises her patient in these matters. She helps her patient manage both her health and her money — because both are important.

When Dr. Carroll says “I’d do it even if it cost a fortune and might not work,” I am sure he is being sincere. But I am equally sure that is not how he normally makes decisions. It is in fact easy to spend a fortune to avoid small-probability events. The EPA makes the private sector do it every day. But if an ordinary family tried that, they would end up spending their entire income avoiding trivial risks. And that is not what normal people do.

Here is another example of a money-is-no-object-no-matter-how-improbable-the-prospects-if-life-and-death-are-at-sake choice. This is Zeke Emanuel, writing in The New York Times the other day:

Proton beam therapy is a kind of radiation used to treat cancers. The particles are made of atomic nuclei rather than the usual X-rays, and theoretically can be focused more precisely on cancerous tissue, minimizing the danger to healthy tissue surrounding it. But the machines are tremendously expensive, requiring a particle accelerator encased in a football-field-size building with concrete walls. As a result, Medicare will pay around $50,000 for proton beam therapy for a patient with prostate cancer, roughly twice as much as it would if the patient received another type of radiation.

Emanuel claims there is no evidence the treatment works for prostate cancer — so the therapy is a waste of $25,000. Is he right? I don’t know. If you’re paying the extra $25,000 out of your own pocket, listen to what the doctors at Mayo have to say (in favor of its use) and then listen to what Emanuel has to say and make up your own mind.

Bottom line: helping patients manage their health dollars as well as their health care should be what doctoring is all about.

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