by David Frum

James Capretta explains why Obamacare won't bend the cost curve:

American health care has many virtues, but it is highly inefficient because it is so fragmented. Physicians, hospitals, clinics, labs, and pharmacies are all financially independent of one another. They all send separate bills when they render services; what’s worse, there’s very little coordination among them when they are taking care of patients, which leads to a disastrous level of duplicative services and low-quality care.

At the heart of this dysfunction is Medicare and, more precisely, Medicare’s dominant fee-for-service (FFS) insurance structure.

For FFS insurance to make economic sense, the patients must pay some of the cost when they receive care. In the vast majority of cases, though, FFS enrollees face no additional cost when they use more services and health-care providers earn more by providing more services and billing the program. Not surprisingly, Medicare has suffered for years from an explosion in the volume of services used by FFS participants.


FFS compounds this by stifling much-needed service-delivery innovation through its use of outdated and inefficient payment rules. The result is that today’s fragmented and dysfunctional system is virtually frozen in place for everyone, not just Medicare beneficiaries.

The new health law attempts to address these problems through a top-down payment-reform program, with the federal government using the leverage of Medicare reimbursements to essentially build new, provider-run, managed-care entities.

But the federal government has never shown any capacity to build such a network, despite many attempts in the past. Politicians and regulators have found it impossible to withstand the political pressure that comes when they try to make distinctions among hospitals and physician groups based on quality measures that are themselves subject to dispute.

Instead, Congress and Medicare’s regulators have cut costs in the past with payment-rate reductions that apply to every licensed provider, without regard to any measures of quality or efficient performance. Tellingly, that’s exactly how the recent health law achieves most of its Medicare budget cuts.

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