Orzag hones in on doctors' incentives

Peter Orzag has a new sound-byte (or stat-byte) to counter those who want to lump social security together with Medicare/Medicaid under the aegis of "entitlement reform."

For some time, Orzag's mantra has been "healthcare reform is entitlement reform." In today's FT, he distills why that is:

Our fiscal future is so dominated by healthcare that if the US can slow the rate of cost growth by just 15 basis points a year (0.15 percentage points), the savings for Medicare and Medicaid would equal the impact from eliminating Social Security’s entire 75-year shortfall.

Having framed the imperative to cut healthcare costs, Orzag continues in the FT piece to channel Atul Gawande, as he has at least three times on his blog. Whether or not Gawande has helped to focus Orzag's thinking, there's no question that his tale of two healthcare markets has helped Orzag focus his rhetoric on changing doctors' incentives to prescribe unnecessary care:

We must also address the forces making the healthcare system unaffordable and inefficient. The system creates incentives for doctors and hospitals to provide more care, not the best care. A lack of information on what works leads to huge variations in the quality of care and its cost. As Atul Gawande has described in the New Yorker, there are cities such as McAllen, Texas, that spend close to twice the national average on healthcare and do not get better results than lower cost, high-quality cities even in their own state or region.

The US must move towards a higher-quality, lower-cost system in which best practices are universal – rather than concentrated only in some parts of the country. The administration has therefore put forward initiatives such as health IT, research into what works, prevention and wellness, and changes in provider incentives (my emphasis).

The focus on eliminating unnecessary care is in turn helping Orzag -- and Obama -- to draw together two parts of their healthcare pitch: reduce costs, extend coverage. Two weeks ago, Jonathan Cohn noted that Obama seems to find it politically helpful to focus rhetoric on the cost-reduction side of the equation. As Orzag makes clear, however, it's runaway costs that have swelled the ranks of the insured and underinsured -- and runaway costs will make universal coverage impossible if they're not reined in.

What Gawande has handed Orzag is a demonstration that unnecessary procedures are a prime driver of healthcare inflation. That makes it possible for Orzag and Obama to suggest that costs can be effectively reduced without compromising quality of care -- thus defanging the bogey of "healthcare rationing."

As the administration trains its sights on removing financial incentives to prescribe unnecessary treatment, it's interesting that Obama has floated tort reform as a counterweight. Easing the constant threat of litigation hanging over doctors would be powerful compensation for reducing the financial incentives that bias some doctors toward prescribing operations, tests etc. that may not be necessary.

See also:
Did Obama read Atul Gawande? I, II, III.