The future of America depends upon Congress finding the political will to curtail the growth rate of national health expenditures. Every specific failure by Congress to act responsibly on a specific issue highlights the need for stronger medicine. The National Coalition on Health Care has prescribed adoption of a strategic policy including data collection, price transparency and a "failsafe mechanism" of equitable health system-wide growth rate reductions. In the years ahead, Congress and health industry stake holders must be held accountable for securing the sustainability of America’s health system. We need a “failsafe mechanism" to have a politically viable way to contain national health expenditure growth.

The main cost control device in the health reform law is not new. It has been tried unsuccessfully in this country (e.g., the SGR formula) and in other countries.

The government’s threat: if doctors don’t become more “productive (which means lower the government’s trend line cost) acting as individual agents, then the government will punish all doctors collectively with across-the-board fee cuts.

This doesn’t work because the individual doctor has the same incentives he had before: to maximize against the government’s reimbursement formula. If he shows restraint, he mainly benefits other doctors. Only 1/800,000 of his “productivity” improvement redowns to his own benefit.

Critics of the law’s productivity adjustments argue that we can’t expect America’s $2.3 trillion health sector to tighten its belt. They believe we can’t expect the health care industry to cut even a fraction of the $700 billion a year it wastes on things that have zero impact on patient health.

The ACA is designed on the premise that these naysayers are wrong and that American’s should expect better from the health care industry.

Under the new law, Medicare, the largest single purchaser of medical services, will test dozens of new approaches to delivering lower costs through better care. These programs begin as pilots, to be sure, but between new authorities given HHS and the Independent Payment Advisory process, the tools exist to extend these innovations across Medicare. If opponents don’t derail this process through their ill-considered repeal schemes, it will result in substantial rewards for those providers who deliver the best patient care, not just those who can bill for the most procedures and tests

But as long as the fee-for-service system enables providers which do not adopt these reforms to prosper, the innovations envisioned by the ACA will remain trapped in a few high-quality, low-cost pockets, just as the innovations achieved by Geisinger, Intermountain, and Mayo over the past decades never spread beyond a few regions of the country.

That’s where the productivity adjustments come in. Year in year out, they will exert increasing pressure on all those hospitals and providers that refuse to give up out-dated approaches and take the path toward high-quality, low-cost care. This pressure is designed to drive more providers toward the new rewards for better, less costly care established by the ACA. Given the disastrous trajectory on which current utilization and pricing trends have placed us, that’s far from a bad thing.

Instead of demagoguing these reforms as “Medicare cuts”, reform opponents ought to admit that it’s time we expect something more from America’s health care system than year after year of constantly rising costs.

Congress uses price controls to pay Medicare-participating providers. Those providers invariably complain that Congress sets prices too low, but many are no doubt too high.

Congress chose to pay for ObamaCare's new entitlement spending in part by ratcheting down many of those prices. That suggests supporters either believe that Medicare's controlled prices generally exceed the marginal value of the relevant services, or that those prices will begin to exceed marginal value as providers become more productive (i.e., as they learn to provide those services at a lower cost).

Neither assumption is necessarily wrong. Producers operating under price controls nevertheless have an incentive to improve productivity. When costs fall relative to prices, producers get to keep the difference. Ambulatory surgical centers saw a windfall because Medicare took two decades to update those price controls for productivity gains.

Medicare's chief actuary and many others doubt that providers will realize the productivity gains assumed by Congress. If the assumed productivity gains do not occur, those price reductions would reduce Medicare enrollees' access to care. Medicare providers and enrollees would likely persuade Congress to block the price reductions. Medicare spending and the federal debt would rise.

Yet even if those productivity gains do occur, ObamaCare's price reductions would still reduce access compared to a world without them, therefore enrollees and providers may still persuade Congress to eliminate them. Regardless of what happens with productivity, as Tom Daschle notes, the patient-provider pincer movement usually carries the day.

This is an inherent defect of Medicare not found in markets. Competitive markets automatically translate productivity gains into lower prices for consumers. Medicare protects providers at the expense of enrollees and taxpayers.

(Cross-posted at Cato@Liberty.)

The CMS Actuaries explain that productivity gains for services such as health care tend to be much smaller than is assumed in the productivity adjustments adopted by Congress. But the authors conclude that these cuts are “unsustainable” without accounting for the huge increase in revenues providers will see from reduced uncompensated care and increased utilization of services for newly insured people.

In fact, the CMS Actuaries reported that national health spending actually goes up under the PPACA, despite these payment reductions. So how are these payment cuts unsustainable if the Act actually increases total system payments to providers?

We have estimated that over the 2010 through 2019 period, hospital net income will fall by only about 1.7 percent ($11.3 billion), despite the Medicare cuts. Over the same period, physician net income will actually increase by $76 billion, which will partly offset payment reductions of $228 billion if the SGR cut is enforced. This suggests that a substantial portion of these reductions in reimbursement can be sustained.

Our experience with the BBA suggests that cuts adopted in one year are typically rolled back in following years because providers can not sustain the revenue loss. But this time the Medicare cuts are coupled with huge expansions in coverage that open new revenue streams for providers.

The PPACA really shifts Medicare provider payments to payments for newly insured people through other government programs and policies. I would much prefer to have paid for reform through market incentives and dedicated funding sources. But robbing Peter to pay Paul might work well enough for a while.