Massachusetts' medical meltdown?

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Massachusetts is facing a health care crisis. Despite landmark legislation that has brought the state close to its goal of universal coverage, spiraling costs have continued to spiral, and there is a growing consensus that tax increases aren't a long-term solution. According to Kevin Sack of the indispensable New York Times, the favored emerging solution is a pay-for-performance arrangement.

They want a new payment method that rewards prevention and the effective control of chronic disease, instead of the current system, which pays according to the quantity of care provided. By late spring, the commission is expected to recommend such a system to the legislature.

This closely resembles an approach long advocated by Harvard economist David Cutler, an Obama advisor and the author of Your Money or Your Life. But in Your Money or Your Life, Cutler made clear that his approach was no silver bullet.

For one thing, it would inevitably raise administrative costs. Moreover, one of Cutler's core arguments is that it is entirely natural that an affluent society would spend a large and growing proportion of its wealth on medical care, which is why he contemplates, among other things, an increase in the payroll tax to fund growing health expenditures. That is, Cutler is frank enough to acknowledge that while pay-for-performance might improve medical care, it is unlikely to restrain costs enough to forestall tax increases.

Massachusetts is not an island. So perhaps a Massachusetts-style reform for the country as a whole would prove more effective. The Wyden-Bennett plan for universal coverage closely tracks the Massachusetts approach, and the same is true of Max Baucus's health policy roadmap, ably described and dissected by Ezra Klein. My sense is that this isn't in fact the case -- a national plan would solve the tax competition problem for Massachusetts, but it would likely face similar cost overruns.

Given that Massachusetts is serving as a trailblazer for the nation, what should they do next? I tend to favor experimenting with market-oriented approaches, like John Cochrane's ingenious plan for health-status insurance or the approach Arnold Kling, a staunch critic of the Massachusetts plan, advocated in his book Crisis of Abundance. But this is a political nonstarter.

So a better tack might be to get the state more involved, for the reasons Kling sketched out in this post last August. While other states take a more decentralized, market-oriented approach, Massachusetts, which has already gone very far down the road of public management of the health care marketplace, should just go ahead and cut out the middleman and create a single-payer system

For one model of how Massachusetts could experiment with single-payer, check out Phil Longman's 2007 proposal to build on the successes of the Veterans Health Administration.

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Reihan Salam is a policy advisor at Economics 21, a columnist for The Daily, and a blogger for National Review Online.

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