The Case for a Cost Containment Commission

3063022330_92d16c066e.jpgThe big story of the health reform debate is not what the bills provide, but what they don't provide--no liability overhaul and no serious effort at cost-containment.  American healthcare may bankrupt the country unless the waste and inefficiency--an estimated 30% to 40% of total costs--is wrung out of the system.  The waste is $700 billion to $1 trillion every year.  There can be no greater domestic priority.


Building a coherent new framework, however, is almost impossible in our political system. Devising a new healthcare system through hundreds of separate negotiations, with 535 members of Congress each trying to do the bidding of different constituents, is like constructing a building without any ability to make sure the walls and other elements fit together.


Containing costs requires changing the rules for all participants. Underlying incentive structures conspire to drive doctors and hospitals to do what they will be reimbursed for, not what is needed. Providers spend their days in a bureaucratic maze, focused on compliance and avoiding legal risks. Patients have no incentive to be prudent in their demands on healthcare providers, or in their personal habits.

Studies indicate that the largest drivers of waste, with rough percentages each contributing to unnecessary costs, are these: fee-for-service incentives for unnecessary care (50%), the lack of consumer responsibility (40%; see here and here also), defensive medicine (20%; see here also), excess bureaucracy (20%), and fraud (10%).  The numbers total more than 100% because the skewed incentives overlap--a doctor orders expensive tests because it is profitable, provides a potential defense in a lawsuit, and the patient has no financial incentive to question the decision.  Fraud thrives in a dense bureaucratic thicket with no patient incentive to check the false invoice.


A Circle of Waste


A Circle of Waste -- 11.11.09.GIF


Because the skewed incentives reinforce each other, no reform is likely to be effective without overhauling the entire structure.  A new structure should be better for most participants, liberating providers and patients alike from suffocating bureaucracy and legal fears.  But the grinding gears of political deal-making in Congress make it impossible to create a coherent new structure.  Piecemeal negotiations will always fail because special interests cling to their entitlements, fearful of letting go lest they find themselves in an even worse position.


The American Medical Association, for example, recently made a pact with Democratic leadership that it would stop advocating liability reform if Congress would not reduce Medicare reimbursement rates for doctors.  The AMA then contacted other physician groups, urging them to stop agitating for malpractice reform, at least for the time being.   


This political deal would have the effect of maintaining wasteful habits.  The AMA is correct that costs can't be contained by simply reducing reimbursement rates--that's like trying to fix an inefficient machine by giving it less fuel.  But retaining the current system is also not an option--we can't afford to pay doctors for unneeded services.  And trading away liability reform, as doctors know better than anyone, just guarantees wasting billions in defensive medicine.    


The AMA's logic was that it was engaged in an exercise of realpolitik.  Senate leadership had informed them that there were not 60 votes for liability reform--mainly due to the influence of trial lawyers.  But that just further illustrates the dysfunction of special interest politics.  Whom do the trial lawyers represent?  Liability overhaul is supported by every legitimate constituency, including consumer and patient safety groups, as well as by an overwhelming 83% of voters, according to a recent national survey by Common Good and the Committee for Economic Development.   

Presented by

Philip K. Howard is a lawyer and author, and the chair of Common Good. He most recent book is The Rule of Nobody.

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