MedPAC: Obama's rudder for the healthcare battleship

In an interview focused on healthcare, Washington Post editorial page editor Fred Hiatt asked Obama why he's set against capping businesses' tax exemption for money spent on health benefits.

It's widely assumed that this would be an effective tool for reducing healthcare inflation, since businesses would have an incentive to keep their healthcare spending per employee below the cap. It's also generally assumed that Obama is resisting this measure because it was a central plank in McCain's healthcare "plan" (such as it was), which Obama campaigned against.

But Obama's answer to Hiatt's question is interesting, and compelling:

Now, this is something that I think economists find appealing partly because it's -- although it's a blunter instrument, it's more measurable than some of the delivery system changes -- although I actually think the delivery system changes are more long-lasting. And you could have a situation in which you cap the exclusion or eliminated the exclusion and, yes, that would drive health care inflation down, but it also could drive quality of health care down because you're not doing anything to change a perverse system in which we pay for more medical care as opposed to medical care that actually makes us healthier.

In other words, as long as a healthcare plan is still indiscriminately reimbursing doctors and hospitals on a fee-for-service basis, the only way it can cut costs is to cut coverage -- and Americans' health plans are already riddled with holes, rising copays, uncovered treatments, lifetime benefit caps. Obama is saying that he does not want to mandate private sector benefit cuts until those cuts will be directed at unnecessary care -- MRIs for every muscle strain, Caesarians for every slow birth, unnecessary prostate cancer operations, proton radiation, the whole panoply of wasteful testing, operating, medicating that Americans have been trained to expect -- rather than against necessary preventive and catastrophic care, which so many plans today cover inadequately.

Obama did tell Hiatt that he'd be open to a cap on the healthcare tax exemption set above today's top spending levels. Obama's thinking/political framing of this issue is structurally similar to his approach to corporate taxation: he is open in principle to reducing the corporate tax rate if and when Congress closes the huge array of loopholes that make the effective corporate tax rate so much lower than the nominal rate. In both instances he is seeking to avoid change with unintended consequences -- or perhaps with stealthily intended consequences -- by insisting that structural change precede a reform that will misfire without it.

In the Hiatt interview, after pivoting away from the tax exemption cap, Obama placed his cost curve-bending chips on "MedPac on steroids," a commission empowered to set reimbursement rates and treatment emphases for Medicare and Medicaid. He cast MedPac as perhaps the chief vehicle for tackling the real fundamental task-- moving the healthcare payment system away from fee-for-service and towards some kind of global payment system, where doctors and hospitals are paid per patient, with performance incentives.

At this point, I am confident that both the House and the Senate bills will contain what we've been calling MedPAC on steroids, the idea that you continually present new ideas to change incentives, change the delivery system, understanding that because this is such a complex system we're not always going to get it exactly right the first time, and that there have to be a series of modifications over the course of a series of years, and we have to take that out of politics and make sure that an independent board of medical experts and health economists are providing packages that are continually improving the system. So I think there's general consensus that that is one of two very powerful levers to bend the cost curve.

The role that Obama envisions for MedPAC is a window on the way he conceives of systemic change generally. He's what you might call a radical incrementalist. Recognizing that the fundamental task in tackling healthcare inflation is to change incentives -- end fee-for-service -- he also recognizes that the payment system cannot be changed by fiat, that the task needs to be done in stages, experimentally, on the basis of what is shown to work. To empower MedPAC in Obama's view is to create a "powerful lever" to "move this big battleship a few degrees in a different direction" and set the stage for a long series of subsequent reforms.