Bush's Turn to Health Care

By Sebastian Mallaby
Monday, January 16, 2006

This time last year, President Bush was preaching Social Security reform; that got nowhere. This time six months ago, his team was thinking tax reform; it soon got cold feet. Now the new theme is health reform. "This is a big priority for the president," Al Hubbard, the White House national economic adviser, told me Friday. "The system has got to be reformed."

He's right, of course. The U.S. economy as a whole is extraordinarily efficient: Since 1995 productivity has grown twice as fast as in the 1980s and 50 percent faster than in euro land. But U.S. health care is the opposite. It's notoriously inequitable, it generates tens of thousands of fatal errors annually, and it's unbelievably wasteful. It achieves shorter life expectancy than the British, French, German, Canadian or Japanese systems, but it eats up 16 percent of the resources in the economy, compared with between 8 and 11 percent in those other countries. The difference -- 6 percent or so of economic output -- suggests that the waste in the American system comes to $700 billion a year.

Back before Bush was elected, Hubbard convened a private-sector group to wrestle with this challenge. He recruited three academics -- R. Glenn Hubbard of Columbia University and John F. Cogan and Daniel P. Kessler of the Hoover Institution -- who continue to influence Hubbard as he ponders what Bush should say about health care in the forthcoming State of the Union address. Conveniently, the trio's thoughts are not a secret. Their five fixes for health care have just been published as a short book.

Some look at the U.S. health mess and see a failure of the market, but the authors insist that government clumsiness prevents the market from working. Modest tort reform would free doctors from practicing expensive defensive medicine. Tougher antitrust policies would prevent price-raising alliances among hospitals. Pruning mandates on health insurers -- which often reflect lobbying by doctors' groups -- might free insurers to cover only the most cost-effective procedures.

So far, so plausible: Nonpartisan health experts agree that these ideas push in the right direction. But they don't push to the goal line, nor anywhere near it. By the authors' own estimates, the proposals eliminate only a fraction of the waste in the American system.

Enter the authors' really big idea -- the one on which the White House is likely to build a story about its grand health-reform vision. To make the health market work, the trick is to create and then empower consumers. You create them by making individuals pay more out of pocket. And you empower them by forcing hospitals and doctors to publish information on quality and price.

The idea appeals to Al Hubbard, a bluff, no-nonsense business type with a genial, uncomplicated style. Hubbard invited me to imagine a world in which companies paid for their staffs' groceries: Employees would load up with more food than they needed; supermarkets would seize the chance to mark up groceries; pretty soon, they wouldn't even bother posting their prices. So it is today with medicine. You don't know the cost of your hospital visit until a few days later, when the bill arrives.

There's a weakness in this thinking. The country has moved far enough already toward out-of-pocket payments, which promise hardship for low-income people without much reduction in waste. Health is simply too complex for people to make smart, waste-reducing decisions; when you go to the hospital with screaming stomach pains, you have no idea how many tests you need -- and you're not in a fit state to embark on comparative shopping. A celebrated study by the Rand Corp. showed that out-of-pocket payments deter needed health consumption as much as wasteful consumption, confirming the point that ordinary people aren't going to become savvy health shoppers.

But the White House is right to press hospitals and doctors for better information on price and quality. Limited state-level experiments suggest that public ratings shame the poorest performers into rethinking their procedures; doctors want to help their patients, and if they are confronted with evidence that they are failing to do so they are willing to shake themselves up. A few health plans have begun paying bonuses to hospitals and doctors that score well on quality and price measures. A recent study led by Harvard's Meredith B. Rosenthal found that these incentives work.

So the White House is half right. If it sticks to the good bits of its program, it could help bring down health care inflation -- which in turn would create more space for wage gains and would also stem the growth in the ranks of the uninsured. But this still raises a nagging question.

Beyond the imperative of restraining prices, the biggest challenges in health care are to get insurance to everyone and to create incentives for preventive treatment -- even though prevention may pay off 30 years later, by which time the patient will have gone through multiple switches in health plans. The most plausible subsidizer of universal insurance is government, and the only entity with a stake in lifelong wellness is the government. Is the administration ready to see that?


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