We know that more than half of all medical cost is wasted, adding no value to the patient. We also know that the total costs of medical provider billing, collection, and payment consume as much as 30% of every health care dollar—about ten times the transaction costs in every other industry. If medical care were as efficient as, say, our economy’s food sector, it would provide higher quality for a third of today’s $2.6 trillion cost and free up $1.7 trillion every year for higher wages, lower federal deficits, and a major boost in job-creating private-sector investment.

Moreover, 75% of all medical spending now goes to treat preventable chronic diseases. If we could figure out how to get people to stop eating, drinking, and smoking themselves to death, and cut out the wasteful spending, our total medical bill would plummet to only 10-20% of today’s level.

So what does the President’s newly signed Patient Protection and Affordable Care Act (as amended) do to reduce all this waste and preventable disease?  Let’s take a look at the Administration’s own list of purported cost-saving benefits as spelled out recently by presidential advisor and Harvard economist David Cutler in the Wall Street Journal.

•    Insurance exchanges to reduce underwriting and marketing costs. Health reform’s guaranteed-issue and minimum medical-loss-ratio requirements will eliminate most underwriting and some sales costs, but only in the 9% of the insurance market already served by the individual-insurance companies. Although these costs will be ostensibly lower, a far bigger issue is whether these insurers will actually survive at all. And the law’s generous mandated benefits, limitations on deductibles, and inadequate controls on adverse selection mean that the medical cost portion of premiums (80-85% of the total) will head further skyward. Net, net, total costs will rise.

•    Reduce Medicare Advantage “overpayments.” I can’t figure out why AARP supported health reform, since it promises to gut one of Medicare’s most popular programs. Worse, the reduction in MA payments won’t even be used to delay the impending insolvency of Medicare’s hospital trust fund. Instead, the money will be routed out of Medicare and into an all-new public entitlement program. Maybe that’s why AARP lost 60,000 members in a single month last year.

•    Experiments in Medicare value-based provider payment. Actually Medicare already has a program that allows fixed-price insurance contracts that encourage reduced spending for unnecessary services. It’s called Medicare Advantage (see above).

•    Tax on too-generous insurance plans beginning in 2018. I’m probably missing something here, but how exactly will taxing health insurance lower total spending? In any event, most of those so-called Cadillac plans belong not to CEOs but rank-and-file union members, so I figure organized labor’s well-oiled lobbying machine has plenty of time to make sure this tax never takes effect.

•    Empower an independent Medicare-cost advisory board. This simply won’t work. Like the old Soviet Union’s Gosplan, it can’t.  Medical care delivery is a constantly self-adapting system, the inherent complexity and unpredictability of which make it impossible to measure or manage by a hundred such top-down bureaucracies. Even if it were possible, politicians would never allow it. All previous such attempts by the Office of Technology Assessment, the National Center for Health Care Technology, and the Council on Health Care Technology were disbanded after rendering findings that offended various components of the health care industry. The Medicare advisory board is a perfect example of Albert Einstein’s definition of insanity:  doing the same thing over and over again and expecting different results.

•    Combat Medicare fraud and abuse. The words “fraud and abuse” show up more frequently than almost any others in the new law (although “penalty” beats it by a mile). They should, because Medicare’s financial controls have been so weak for so long that the GAO has listed the program “at high risk for fraud, waste, abuse, and mismanagement” every year since 1990. That’s because Medicare has always relied on SWAT-like audit tactics that harass far too many law-abiding providers while nabbing only a handful of the crooked ones. The new law’s solution: just do more of the same while continuing to ignore the far more effective concurrent operating controls used by private insurers. See above definition of insanity.

•    Malpractice reform. Here’s the relevant passage in the health reform law: “Congress should consider establishing a State demonstration program to evaluate alternatives to the existing civil litigation system with respect to the resolution of medical malpractice claims.” That should have the plaintiff’s bar quaking in its boots.

•    Invest in information technology. Mr. Cutler says that “Many studies suggest savings in the tens of billions of dollars from IT investment.” Yes, but at a cost in the hundreds of billions.  History has amply demonstrated that IT innovations usually take decades to pay off. As Nobel economist Robert Solow put it, “You can see the computer age everywhere but in the productivity statistics.”

•    Prevention. Mr. Cutler says the President’s plan “includes significant public-health investments” and “provides new incentives for physicians to focus on preventive…care.” The public health spending may be a good idea, but physician-provided disease prevention rarely works and, when it does, almost always costs more than it saves.

•    New taxes on medical devices. Mr. Cutler obviously didn’t claim these would lower costs, but also didn’t mention they will certainly raise them.

Despite accelerating costs being the fundamental problem of our health care financing and delivery system, health reform does nothing to fix it. Indeed, it will exacerbate it.

This entry was posted in Health Costs, Health Reform Goals, Prevention and tagged , , , , . Bookmark the permalink.


  1. Gary Mohr MD says:

    I am a board certified family physician who has been in private practice for 28 years. These have to be the darkest days of my career, and it’s only the beginning. Fortunately I am near enough to the end of my career that I can quit almost any time, but I fear for my daughter who is in premed now. And I dread for myself and my family when we need medical attention in the future. Cookbook medicine provided by midlevels under government fiat is not appealing to anyone who is ill. Thanks for your thoughtful and factual analysis; it’s too bad no one in Congress listened to you.

  2. Pingback: What Will Health Reform Do for (or to) Americ's Hospitals? | Stephen S. S. Hyde On Health Care Reform Topics

  3. Dan says:

    There seems to be this illusion that markets can solve our health care cost problem. You seem to be a smart guy, Steve, but talk about “having faith.” In the history of health care, there has NEVER been a successful market-based system. Certainly not ours.

    Give me Canada, the UK, France any day of the week even over Obamacare. This is not Obamacare is too radical, but because it is not radical ENOUGH. The Democrats had to make too many compromises just to get this bill passed. Those of us who are real progressives know, not by faith but by the experience of other nations, that single payer is the only proven way to solve this problem.

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