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Magazine / Political Connections

Competing Cures

How best to control health care costs? By eliminating perverse incentives for patients? Or by nudging providers?

Former OMB director Peter Orszag(Richard A. Bloom)

The war between the parties over health care is not only deepening but also widening. As the conflict intensifies, it is spreading to new battlefields. The outcome of these emerging skirmishes could reshape the health care system as profoundly as the sweeping reform legislation that President Obama signed last spring.

The central front in the health care clash remains the struggle over the law’s provisions to expand coverage by requiring almost all Americans to purchase health insurance and to provide subsidies to help them pay for it. This week’s decision from a Republican-appointed U.S. District judge in Virginia to overturn that individual mandate virtually ensures that this battle will rage until  the Supreme Court settles it, probably years from now. Along the way, Washington can expect regular blowups over the issue between Obama and congressional Republicans.

But while the conflict over expanding access seems likely to rule the headlines, the flurry of proposals for taming Washington’s long-term debt is crystallizing an equally momentous argument over controlling costs, the nation’s other major health care priority. Without restraining health care spending, Washington simply has no chance of balancing its books. Even repealing the new law wouldn’t solve the problem: The vast majority of the huge projected increase in federal health spending is driven by existing programs (such as Medicare), and this year’s law pays for itself with offsetting budget cuts and revenue increases, according to the Congressional Budget Office.


As the debate over the long-term debt heats up, it is clarifying the parties’ contrasting visions for controlling health care spending. The core difference is that Republicans hope to control costs primarily by changing the financial incentives for patients, while Democrats place the most chips on changing incentives for providers (such as doctors and hospitals).

The essence of the Republican strategy is that Americans will spend less on health care if they must pay for more of it themselves. GOP proposals inherently argue that Americans use too much health care because overly inclusive insurance has excessively insulated them from the cost. “These are attempts to … say, ‘There are limits somehow, some-where,’ ” says former CBO Director Douglas Holtz-Eakin, president of the American Action Forum, a center-right think tank.


PULLQUOTE: “High-cost cases account for such a high share of total costs that that’s where all the action is.” —Former OMB Director Peter Orszag


That conviction drives the Republican support for eliminating the tax subsidy for employer-provided health care. It also inspires the proposal from a leading GOP thinker, Rep. Paul Ryan of Wisconsin, to convert Medicare into a voucher system that seniors would use to purchase private insurance. Over time, each of those approaches would likely drive more Americans to buy insurance that covers catastrophic expenses only, while encouraging them to pay out of pocket for routine health costs (through tax-favored health savings accounts that Republicans have long promoted).

Democrats don’t completely dismiss those demand-side proposals. The health reform law, for instance, imposes a “Cadillac tax” on gold-plated insurance plans. But, mostly, they argue that relying primarily on patients to control costs is unfair and ineffective. Unfair because it shifts the financial risk from the government to individuals and widens the gap in access to health care between the rich and the poor. Ineffective because the biggest factor driving health costs isn’t unnecessary doctor visits but unavoidable, and very expensive, care for chronic conditions that catastrophic insurance would still cover. “High-cost cases account for such a high share of total costs that that’s where all the action is,” says Peter Orszag, Obama’s former Office of Management and Budget director.

The way to control those costs, Democrats argue, is through supply-side policies that financially nudge doctors, hospitals, and other providers to better coordinate treatment of the chronically ill and that generally link their compensation less to the volume of care than to its quality. The health care bill is crowded with initiatives to encourage that shift, though many of them are pilot projects that start small. “Getting at the provider incentives is crucial,” Orszag insists.

The two big deficit-reduction commissions that recently dropped tomes on Washington reflect this divide. The Obama-appointed group chaired by Republican Alan Simpson and Democrat Erskine Bowles focused mostly on providers by accelerating the health law’s payment- and delivery-system reforms. The panel chaired by GOP former Sen. Pete Domenici and Democratic former OMB Director Alice Rivlin tilted mostly toward patients by proposing to convert Medicare into a voucher program and to eliminate the tax break for employer-provided health insurance. (Disclosure: My wife works for the Bipartisan Policy Center, which sponsored the Domenici-Rivlin commission.)

Simpson and Bowles didn’t embrace any of those ideas but didn’t rule them out either, especially if the rise in health care costs doesn’t slow. Domenici and Rivlin praised the health reform bill’s provider reforms. In effect, both groups acknowledged that neither the patient nor the provider lever alone can control surging health care costs; Orszag and Holtz-Eakin say the same. Yet the overlap extends only so far. As the health care debate smolders, nothing will separate the parties more importantly than whether they ask patients or providers to shoulder the principal burden of breaking the feverish rise in health care spending.

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