- The Washington Times - Friday, August 6, 2010

After a three-month delay, the trustees of the Social Security and Medicare trust funds have finally published their annual report. Now we have an explanation for the wait. Thanks to program changes made by the Affordable Care Act (aka Obamacare), the report summary says, “The outlook for Medicare has improved substantially.”

The Hospital Insurance Trust Fund, expected only last year to run out of money in 2017, is now expected to remain solvent until 2029, says the report. What is responsible for this 12-year lease on life? Another document, released by the Center for Medicare and Medicaid Services earlier this week, fills in the details: Reforms to the health care delivery system will shave government spending by $575 billion over the next 10 years, and trillions of dollars more in the following decades. To use the jargon of the health care wonks, Obamacare will “bend the cost curve down” - from 6.8 percent annual increases in Medicare spending, as projected previously, to a more fiscally sustainable 5.3 percent.

In Obamaworld, those gains will not come from health care rationing, as Republicans fear, but by transforming the health care system from a fee-for-service model that encourages wasteful spending into a system that rewards hospitals and doctors for economic efficiency and improved quality.

Alas, the Obama administration is living in never-never land. The positive components of Obamacare - and there are several - may have a beneficial effect, but they will be swamped by the bureaucratic nature of the legislation. The Medicare budget deficit will turn out far worse than the Obama team imagines.


What is the basis for thinking Obamacare will save so much money? It helps to understand what the authors of the reform say is wrong with the U.S. health care system.

In a May paper, “Where Are the Health Care Entrepreneurs?” David M. Cutler, a Harvard economics professor and key adviser to the Obama administration, notes that the health care sector lags behind the rest of the American economy in productivity growth. While productivity surged roughly 2.4 percent annually between 1995 and 2005, health care declined slightly during the same period.

Mr. Cutler points to three reasons for stagnant productivity: (1) The low share of medical costs paid by the patient, which gives the patient little incentive to be frugal; (2) inadequate coordination of care, which results in unnecessary complications and hospital readmissions, and (3) poorly designed production processes, which runs up costs needlessly. In theory, these inefficiencies should create profit-making opportunities for entrepreneurs to introduce better business models and grab market share from dominant industry players.

But the entrepreneurs are nowhere to be found. Mr. Cutler argues that the health care sector shows little “organizational innovation.” He identifies two core problems.

First, there is little good information by which to measure the productivity and quality of health care providers. Second, fee-for-service reimbursements reward hospitals and doctors for inefficiency and punish them - by paying them less - for making patients better faster.

President Obama’s health reforms endeavor to address these concerns by requiring providers to report quality data, disseminating best practices and introducing alternatives to fee-for-service reimbursement. Drawing on cutting-edge thinking in the health care sector, Medicare will conduct pilot tests such as bundled payments, accountable care organizations, pay-for-performance and coordinated care.

It all sounds great in the abstract. But will it work in practice? Transforming the culture of gargantuan organizations such as multibillion-dollar integrated health systems will prove exceedingly difficult. Hospitals may try to restructure operations in response to new incentives, but change will come slowly. That’s because the health care system will become more bureaucratic, not more streamlined.

Newt Gingrich’s Center for Health Transformation estimated that the law creates as many as 159 new federal offices, agencies and directives. It’s a basic rule of management: When everyone is in charge, nobody is in charge. Inevitably, the involvement of so many players will bog down decision-making. Some of these new entities will work at cross purposes, breeding confusion among insurers, hospitals and physicians.

Obamacare contains some good ideas. But they are offset by one really bad idea: that it makes sense to empower bureaucrats. Thinking you can reduce spending that way is a dangerous delusion.

James A. Bacon is author of the forthcoming book “Boomergeddon” (Oaklea Press, 2010) and publisher of the blog by the same name.