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In the Nation's Interest

To Reform Medicare, Reform Incentives and Organization

by Alain C. Enthoven November 07, 2011

For Immediate Release
Contact: Morgan Broman – (202) 469-7814 -

Washington, D.C. November 7, 2011 – To avert a long-term debt crisis, Medicare must bring its expenditures into line with the growth of the GDP.  That is the focus of a new report, To Reform Medicare, Reform Incentives and Organization, from the business-led Committee for Economic Development (CED).  Alain C. Enthoven, the Marriner S. Eccles Professor of Public and Private Management, Emeritus, at the Stanford University Graduate School of Business, wrote the report. 
CED has sent this new report and a summary of all its policy recommendations to the Congressional Joint Select Committee on Deficit Reduction (the “Super Committee”) urging them to use their special legislative powers to direct the Congress to reform Medicare.  Unless healthcare cost growth is curbed, it  will explode both federal finances and business budgets. Employers have struggled with healthcare-cost inflation on a day-to-day basis, and see it as a major threat to future economic growth.  

To Reform Medicare, Reform Incentives and Organization outlines how to bring Medicare’s cost growth in line with growth of the GDP. It applies the principles of managed competition – greater cost-consciousness through choice and competition – to Medicare’s open-ended, fee-for-service system.

Medicare expenditures, about $556 billion in 2011, have grown as much as 2.5 percentage points per year faster than the GDP over the past 25 years.  In the next 10 years, with the retirement of the baby-boomers, the growth rate of the beneficiary population will increase from 2 to 3 percent per year.  Under present policies, annual Medicare expenditures are likely to reach $1 trillion.

Medicare spending has grown so rapidly because of aging of the population; a large increase in the prevalence of costly chronic conditions and in the costs of treating them; advancing technology, which expands what medical care can do to improve and lengthen lives but rarely reduces costs; and our fragmented financing and delivery system that is filled with cost-increasing incentives and cost-unconscious demand. American medicine is dominated by uncoordinated open-ended fee-for-service, which encourages providers to deliver greater volumes of care, not necessarily improved outcomes.

In 2005, a Committee of the National Academy of Sciences reported “an estimated thirty to forty cents of every dollar spent on health care…is spent on costs associated with overuse, underuse, misuse, duplication, system failures, unnecessary repetition, poor communication and inefficiency.” Curing these problems will require a profound change in organization and incentives.

All participants in the healthcare system need information, incentives and resources to work together to do what is best for patients. There are many ways to cut costs while improving quality, including but not limited to: best practices for prevention of infections; stronger primary care for prevention, early detection and treatment of disease; and active management of chronic diseases to reduce need for hospital care. Eventually, these fundamental changes could yield improved quality of care and healthcare expenditures half of what they would be if we stayed with the failed model we have today.  These improvements will not occur by fiat.  We need provider incentives aligned with the need for high-quality, affordable care.  

Reform outside of Medicare is needed as well.  Employment-based insurance breeds cost-unconscious demand that will undermine Medicare reform by competing with Medicare for resources. (See CED’s 2007 report on reform of the employer system.)  The tax exclusion of employer contributions should be abolished and replaced by a refundable tax credit usable only for purchase of health insurance, independent of the employer, to stop the open-ended tax subsidy to more-costly health insurance. Choice should be broadened for to employees by phasing in a requirement that small employers with fewer than 500 employees (about half the work force) buy health insurance through exchanges.  Also, an effective anti-trust policy for health care is essential for true savings from competition.

To Reform Medicare, Reform Incentives and Organization is available here.