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Is Cost Control a Joke?

For all of the crazy arguments against health care reform, a few of them are entirely sensible--and worth taking seriously. As I write in my latest Kaiser Health News column, which appeared on TNR’s home page yesterday, one of those is the worry that Congress won’t follow through with promises to raise the revenue--or find the savings--necessary to finance expansions of health insurance.

In other words, Congress may pass a law calling for reductions in Medicare expenditures or raising an assortment of new taxes. But the people affected by those changes--be they health care businesses that would lose reimbursements or everyday Americans facing the prospect of higher taxes--will complain. Once they do, Congress is likely to have second thoughts and repeal those measures.

I wrote the article thinking primarily about conservatives and libertarians who have made this case. But, to be clear, you don't have to be a conservative to have these concerns. Just a few days ago, for example, the New Yorker's John Cassidy warned about the likely high costs of health care reform:

The U.S. government is making a costly and open-ended commitment to help provide health coverage for the vast majority of its citizens. I support this commitment, and I think the federal government’s spending priorities should be altered to make it happen. But let’s not pretend that it isn’t a big deal, or that it will be self-financing, or that it will work out exactly as planned. It won’t. ...

The Obama Administration, like the Bush Administration before it (and many other Administrations before that) is creating a new entitlement program, which, once established, will be virtually impossible to rescind. At some point in the future, the fiscal consequences of the reform will have to be dealt with in a more meaningful way, but by then the principle of (near) universal coverage will be well established. Even a twenty-first-century Ronald Reagan will have great difficult overturning it.

That takes me back to where I began. Both in terms of the political calculus of the Democratic Party, and in terms of making the United States a more equitable society, expanding health-care coverage now and worrying later about its long-term consequences is an eminently defensible strategy. Putting on my amateur historian’s cap, I might even claim that some subterfuge is historically necessary to get great reforms enacted. But as an economics reporter and commentator, I feel obliged to put on my green eyeshade and count the dollars.

Like Cassidy, I would support expanding health care coverage--for its own sake--even if it meant (somewhat) higher deficits. But I remain unconvinced that higher deficits is what we'll get.

Consider what's become the primary piece of evidence for the doubters, the Sustainable Growth Rate. SGR is the series of planned cuts to physician payments that, year after year, Congress and the president agree to postpone. But the SGR was part of the 1997 Balanced Budget Act, a piece of legislation that contained many other cuts to Medicare. And while the government has given up on the SGR, it let most of the other cuts stand. And those cuts, by the way, were larger than what's on the table now.

An even better example--one that I didn’t use in the column--are the massive changes to Medicare reimbursements that took place in the Reagan-Bush era.

When Lyndon Johnson and his Democratic Congress created Medicare in 1965, they more or less allowed the program to pay whatever doctors and hospitals charged. Predictably, the program’s cost soared. In the 1980s, Reagan and then Bush teamed up with Democrats in Congress to do something about it. First they created a new system for paying hospitals, based on so-called Diagnostic-Related Groups*; then they implemented a fixed set of prices for doctor fees. The initiatives had their flaws, but they did introduce some fiscal sanity to the program. As Christopher Weaver and Kate Steadman note in another Kaiser Health News article:

By 1985, hospital spending was growing by only 5.7 percent, according to federal officials. Many private insurance companies followed Medicare's lead to get in on the savings.

Of course, the same article talked about myriad other instances in which lawmakers didn't implement cost-cutting steps, even after demonstration projects proved them to be successful. As Weaver and Steadman explain:

Consider the case of a 1990s pilot project that earned the support of a president, several key legislators and successive Medicare leaders—from both parties. A five-year test showed that lumping together payments for doctors and hospitals for some heart surgeries encouraged them to be more efficient and reduced Medicare's cost by 10 percent. But the project ran into relentless opposition from doctors and hospitals. The result: Congress has never approved the change for widespread Medicare use and Medicare continues to study the issue.

Again, this is a totally legitimate point. Nobody should be complacent about cost-cutting--or holding lawmakers to the promises they make in whatever gets through the legislative process. But it seems premature--way premature--to concede that cost-cutting won't work.

*I originally said DRG stands for "Diagnosis Research Group." Actually, it's "Diagnosis Related Group." Like my inexplicable habit of suggeting that Ben Nelson is a senator from Colorado, rather than Nebraska, it's an error I make repeatedly. In any event, thanks to reader "raylward" for pointing it out.