Can the Obama Administration Reform the Unreformable?

President Barack Obama has vowed to put the United States on a sustainable fiscal path, and Peter Orszag, his director of Management and Budget has an idea of how to do it: Bring health care costs under control.

Medicare and Medicaid expenditures, if left to increase unchecked, could increase from 5% of the Gross Domestic Product today to 20% by 2050, he wrote in a Wall Street Journal op-ed yesterday. "Over the long run, the deficit impact of every other fiscal policy variable is swamped by the impact of health-care costs. ... The good news is that there appear to be significant opportunities to reduce health-care costs over time without impairing the quality of care or outcomes."

Health care costs vary widely across different regions of the country, and even between hospitals and physicians within regions, he argues, following the thinking of Princeton health care economist Uwe Reinhardt. Yet there is little difference in the quality of the outcome. Quoting Reinhardt, he writes: "How can it be that the 'best medical care in the world' costs twice as much as 'the best medical care in the world?'"

By moving the nation toward proven best practices adopted by lower-cost areas and hospitals, suggests Orzsag, it may be possible to reduce health care expenditures by 30% -- or about $700 billion a year -- without compromising quality. Even if those efficiencies are achieved over decades, it should be possible to hold the Medicare/Medicaid share of the GDP to only 10% of the economy.

And how does he propose to tame health care?

There are four key steps: 1) health information technology, because we can't improve what we don't measure; 2) more research into what works and what doesn't, so doctors don't recommend treatments that don't improve health; 3) prevention and wellness, so that people do the things that keep them healthy and avoid costs associated with health risks such as smoking and obesity; and 4) changes in financial incentives for providers so that they are incentivized rather than penalized for delivering high-quality care.

In the abstract, there are all excellent ideas. Indeed, they are so excellent that health care analysts have been talking about them for years. The question we must ask is, why haven't they been implemented already? What is it about the political economy of health care in the United States stymies efforts to rationalize the system?

I don't have a complete answer, and if I did, it would be too long for this blog post. But let me suggest that the U.S. health care system is dysfunctional because of the intrusive reach of government at both the federal and state levels. I will just touch upon some of the highlights:

• De facto price controls. Medicare and Medicaid reimburse hospitals and doctors on the basis of customary and traditional experience, not supply and demand. Moreover, they consistently pay less than the market price. The result is supply shortages in critical areas such as primary care. Primary care physicians are retiring in droves or retreating into lucrative concierge medicine practices, creating acute shortages of the front-line physicians required to provide the "prevention and wellness" that Orszag talks about.


• Certificates of Public Need (COPN). Many if not most states regulate the ability of health care providers to build new facilities, on the grounds that new facilities add to the cost structure that insurers must reimburse. But COPN protects hospitals from competition -- not only from other hospitals but from surgery centers and other providers that specialize in procedures they can perform more productively and with superior patient outcomes.
  
• Health care guilds. Much like a Medieval guild or a 20th century craft union, the health care industry is divided into occupational categories. Each is guarded by professional associations that lobby in state legislatures to set educational standards and protect their prerogatives vis a vis other occupations. The restrictions limit labor flexibility in the health care workplace and is deliterious to productivity.
  
• Mandated benefits. The health care professions also lobby state legislators to require insurance carriers to provide certain types of health benefits. Mandates hamper the ability of carriers to provide affordable, bargain-basement health policies, contributing directly to the increase in the number of uninsured Americans.

The Obama administration has some good ideas for controlling runaway health care costs -- especially investing in Information Technology to bring the industry up to national standards. But color me skeptical. Not only will Orsag run into the usual buzz-saw of entrenched special interests and craven politicians in Congress, the Obamoids will find their ideas far more difficult to implement in the marketplace than they can imagine. If "comprehensive" health care reform is limited to the items that Orszag describes, it won't be very comprehensive at all.