It's the wages, stupid

"I'm no economist," to paraphrase Republican presidential hopefuls. But even a casual reader knows that for 35-odd years the lion's share of economic growth has gone to the wealthiest, and that the trend has accelerated in the last decade.

We're told, e.g. by David Leonhardt, that arresting the trend and creating wage growth is a gigantic mystery, and that Democrats, ostensibly the party of the less-than-wealthy, can only nibble around the edges, as with middle class tax cuts. That is, get GDP growth out of near-neutral and wage pressure will rise.

Now cometh billionaire Nick Hanauer, this generation's class traitor extraordinaire, to call bullshit and place the spotlight squarely on labor law and deliberate policy choices that have eroded workers' leverage vs. owners.  His focus is on wages -- specifically, in the piece below, on overtime pay. You can extrapolate and imagine a party that focuses relentlessly on the rules governing pay and workplace rules. I'm quoting an extended chunk here because I want to add my drops to the ocean, i.e. get a few more people to read this:

Is the tax code the best route to attacking wage stagnation?

David Leonhardt identifies stagnant wages as the political issue of our time and the prime mover of Democrats' current woes, as they've been left holding the bag during a period in which median income has fallen. He runs through a list of measures that in part address the problem, of which some (infrastructure) have been blocked by Republicans, others (investment in education) work slowly (if at all), and still others (health reform) have made some headway -- but without much direct or immediate impact on most middle class voters. He then segues to a short-term solution that he suggests might provide at least political relief:

Truly new ideas don’t come along very often in any field, including economics.

So it goes with lifting middle-class incomes. The best hope for doing so, in the immediate future, is probably the oldest and most obvious play in the book: a tax cut.

A few years ago, a middle-class tax cut would have seemed a silly idea. Both Mr. Bush and Mr. Obama had already cut taxes, and the federal budget deficit was enormous. But the deficit has since fallen sharply, thanks in part to lower health costs. Meanwhile, middle- and lower-income families are reaping a disproportionately small share of economic growth. Having the government try to rectify the situation doesn’t sound so silly now — and probably won’t in the 2016 presidential campaign.

Leonhardt admits that the country as a whole is under-taxed, short of revenue for other economy-building action. Hence he suggests pairing a middle class tax cut with a further hike on the wealthy, which of course Republicans will never allow. It's not entirely clear whether he's touting the tax cut because it helps plug the income gap a bit, or because it may stimulate the economy and thus tighten the labor market enough to generate upward pressure on wages. Most likely both.

I'm in Mitt Romney's tax bracket...

not really, but in 2011 my wife and I paid the same 14% (roughly) in federal taxes on our income as he did. Which seems not right, since his household income is over 100 times ours.  In any case, the Romneys and the Galeota-Sprungs are among the two thirds of American households that, according to David Leonhardt, pay less than 15% of their income in federal taxes.

Our tax return is an interesting cross-section of the current federal tax system -- in one way quite typical (net result) and in another not so typical (how we got there). While my wife is a salaried worker, I am self employed, and that introduces somewhat self-canceling distortions. The two salient features are the self-employment tax, which doubles Social Security and Medicare taxes on income up to $106,800, and  the individual 401k, created in I think 2005 for solo self-employed taxpayers, which allows solo self-employed people over 50 to contribute up to $54,000 yearly to their retirement plans, deducting that contribution from their taxable income.

Elitism in college admissions, and well before

David Leonhardt, noting the rooted economic elitism governing admissions at America's top colleges and universities, spotlights several excellent policies implemented by outgoing Amherst president Anthony Marx  to bring more students of modest means to campus. these include devoting a higher percentage of the budget to aid, devoting more aid to grants as opposed to loans, and, most interestingly, focusing transfer recruitment on community colleges -- which, with their terrible completion records, act as a kind of natural selector of able students. 

Leonhardt frames the problem well, noting that a) only 15% of students at the nation's elite colleges come from the lower half of the nation's income distribution, while two thirds come from the top quartile, b) if you screen out race as an admission factor, colleges are no likelier to admit a lower income student with a given SAT score than a higher income student with the same score, and c) only 44 percent of low-income high school seniors with high standardized test scores enroll in a four-year college.

Beyond the scope of his article, however, is the really shocking extent of educational inequality that winnows the field well before students reach college age.

Obama's baby: the Independent Payment Advisory Board for Medicare

In two recent posts, here and here, I noted that Obama's long-range budget thinking tends more toward tax hikes than radical budget cuts -- or more accurately, more toward tax hikes than short-term cuts.

The key to Obama's thinking on the structural deficit, again, is bending the health care cost curve. Two stories in today's Times point toward how that may be done over time -- and why Obama fought so hard to retain a strong Independent Payment Advisory Board (IPAB) for Medicare in the PPACA, along with a host of pilot programs to test new payment systems.

First, David Leonhardt spotlights a not-so-modest proposal:

In the new issue of the journal Health Affairs, two doctors [Dr. Bach and Dr. Pearson], both former Medicare officials, have laid out a plan to do so. It would give expensive new treatments three years to prove that they worked better than cheaper treatments, or their reimbursement rates would be cut to that of the cheaper treatments.

To illustrate the need and possible workings of such a plan, Leonhardt returns to a topic he covered in depth during the health care debate (cited by Bach and Pearson): treatment for prostate cancer. Briefly, three forms of radiation are now available, costing, respectively, $10,000, $42,000, and $50,000 on average (naturally, the oldest is the cheapest; the newest, the most expensive, requiring massive new equipment investments from practitioners). There is no evidence that any of these treatments is more effective than the others. Medicare pays for all three without distinction. Providers' profit margins, needless to say, are much higher on the more expensive treatment.  Under the Bach-Pearson proposal, if the newer treatments were not proved more effective within the three years, Medicare would only reimburse $10,000 for each treatment.

Such proposals might ultimately prove to be within the power of IPAB to implement, though there are severe constraints. James C. Capretta of the Ethics and Public Policy Center explains how IPAB works:

To hit its budgetary targets, the IPAB is strictly limited in what it can recommend and implement.  It can’t change cost-sharing for covered Medicare services.  Indeed, it can’t change the nature of the Medicare entitlement at all, or any aspect of the beneficiary’s relationship to the program.  The only thing it can do is cut Medicare payment rates for those providing services to the beneficiaries. 

This wasn’t an accident.  It reflects the cost-control vision of those who wrote the bill. They believe the way to cut health care costs is with stronger federal payment controls.  They envision the IPAB coming up with new payment models which will push hospitals and physicians to emulate today’s most efficient delivery models.   Call it “government-driven managed care.”

Bracketing up: HCR, income redistribution and tax reform

David Leonhardt  points out today that the health care bill represents a significant check to the growth of income inequality over the past generation. This point about its tax impact triggered a memory:

A big chunk of the money to pay for the bill comes from lifting payroll taxes on households making more than $250,000. On average, the annual tax bill for households making more than $1 million a year will rise by $46,000 in 2013, according to the Tax Policy Center, a Washington research group. Another major piece of financing would cut Medicare subsidies for private insurers, ultimately affecting their executives and shareholders.

The memory was this: lefty blogger speculation at the dawn of the Obama presidency as to whether Obama would seek to reengineer tax brackets. Nate Silver:

What the discussion over the top marginal tax rate ignores, however (and what Ygelsias picks up upon) is that this rate has been assessed at very different thresholds of income. In 1940, for example, the top marginal tax rate was 81.1 percent -- but this rate only kicked in once you made $5,000,000 or more in income, which is equivalent to about $75,000,000 in today's dollars.

But today, the threshold where the top tax bracket kicks in isn't $75 million, or $5 million, or even $1 million ... it's a mere $357,700. The progressivity of the tax code stops there....

David Leonhardt tries to do Obama's job for him, part II

David Leonhardt continues to do yeoman's work explaining the stakes and outlining the means of health care cost control. Today he compares cost control measures in the House bill, which he finds wanting, with those in the Senate Finance Committee bill, which are stronger. His main theme: that the true test of the Obama Administration's leadership comes now, in the endgame, in the skill and force with which they push for the most promising cost control measures.

Perhaps the single most telling flashpoint, according to Leonhardt, will be the fate of the so-called "MedPAC on Steroids," a commission empowered to make a yearly package of Medicare cost control recommendations to Congress, which Congress would have to vote up or down as a package. Leonhardt calls a commission thus empowered a "Fed for Health" to emphasize the need for political insulation. "Whether one ends up in the final bill," he writes, "will be a good test of Mr. Obama's endgame leadership."

Obama would seem to agree with Leonhardt. Back in July, he highlighted the commission as a a potential guiding light for cost control over the course of years and decades, telling Fred Hiatt:

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.

As for the second "lever":

Now, the second idea, which is the one that got more attention, even though Elmendorf, I think, has emphasized the benefits of a MedPAC board, as well, was the elimination of the tax exclusion [on employer-provided health insurance]. And I've been very clear on my position that I think to add additional costs to families right now when they're already seeing their premiums doubled is not the kind of health reform that I'd like to see, but I believe that there may be ways of getting at the same principle.

For example, you could conceivably set up an index of some sort that makes sure that health care inflation -- or to make sure that the exclusion only accommodates a certain amount of health care inflation -- as opposed to 8 percent or 9 percent, or what have you -- without burdening current plans, but over time assuming -- if we're assuming that health care inflation is going to continue to be a problem, that you could get at the problem in that way.

Hiatt: A kind of cap, but one that doesn't hurt anybody --

Obama: Currently.

Hiatt: -- at the current level?

Obama: Exactly. You're also seeing, I think, some interesting discussions in the Senate Finance Committee about a variation that goes after the insurance companies, as opposed to directly taxing the benefits.

That "variation that goes after insurance companies" is in the Senate Finance Committee bill, in the form of a surtax on plans that cost more than $21k per family and $8k per individual. "Along with the Medicare commission," according to Leonhardt, "this tax is the biggest single difference between the Senate and House versions. "

So Leonhardt has highlighted the degree to which the White House is in sync with Senate Finance on cost control, and the key cost control omissions in the House bill.

On the other side of the ledger, the House bill provides more generous coverage than the Senate Finance bill. Many who embrace the basic architecture of the Democrats' health reform efforts dream of a bill that combines House coverage with Senate cost control. Deep pessimism about the way Congress works in this era leads many to supsect that we'll get the opposite. I would bet on a mixed scorecard - maybe 1-for-2 on the excise tax and MedPAC, or both surviving in weakened form, and somewhat more generous subsidies with a stiffer coverage mandate than the Finance bill provides.

If a bill passess at all. The abortion pound of flesh extracted in the House, the weak majority with which the bill passed, Lieberman's grandstanding on the public option...all have made me wonder.

See also: David Leonhardt tries to do Obama's job for him (Part I)

Scat, CAT scan: Obama on U.S. health waste

In a long interview with Obama on healthcare, Time's Karen Tumulty pressed the President on an example of a tough cost/benefit decision on treatment he had raised in an April interview with David Leonhardt -- a hip replacement Obama's grandmother received at the very end of life, when she was terminally ill with cancer. Should Kaiser Permanente have paid for the operation? They did - and Tumulty asked whether that was a good use of healthcare dollars. Obama's answer was evasive - and properly so, I think:

I guess my point is, is that you don't even get to those really tough decisions, you don't even have to get to those really tough decisions before you've already saved a huge amount of money and made people healthier and made sure that Medicare was solvent and bent the cost curve. I mean, there's 20, 25% of the cost — of the system that is wasteful right now, even before you get to tough decisions about end-of-life care...

Let's just take one example, and that is testing. It turns out that we pay 10 times what Japan pays, for example, for CAT scans and MRIs. Well, why is that? And it turns out, by the way, that we are having those tests five, six, eight times as often as folks in other countries who have just as good outcomes.

Now, some of that may have to do with reimbursement models. There may be differences that have to do with the approach that hospitals here take in recovering costs for expensive equipment. There are a whole range of reasons why that might be true, but the point is, is that it's not like people out there are — would automatically be prevented from getting CAT scans if we just tried to think when is a CAT scan or an MRI working and appropriate in improving care and when it's not.

And what we've said is that if doctors and patients had that information, and you start changing some of these delivery systems, you will see significant changes in the cost of health care and you will see improved outcomes and improved convenience, because if people are going through a battery of tests when one test would be sufficient, every time they're going to the doctor, that's gas, babysitting, sitting around for two hours, a day off work. We're not even factoring in those costs.

Obama is right that the U.S. should be able to save huge amounts by eliminating patently unnecessary care, regardless of how public and private insurers resolve the really tough cost/benefit decisions. What he did not make clear in this interview, however -- and I wish Tumulty had pushed him on this as she did on his grandmother's operation -- was how currently proposed legislation would signifcantly change those skewed incentives he keeps citing. He gave a kind of answer to Fred Hiatt on this question -- "MedPAC on steroids." But we need to hear way more about this.

The Times points another arrow at fee-for-service medicine

Fee-for-service, fee-for-service, fee-for-service. Gradually the healthcare debate is centering on this major driver of runaway healthcare inflation. Atul Gawande and David Leonhardt have helped shine the spotlight on doctors' incentives to provide unnecessary care; Peter Orzag and Barack Obama (see "p.s." at link) have seized on their examples and language.

Today, the New York Times is front-paging a new poster child for putting doctors on salary. Gardener Harris profiles Bassett Healthcare, "a modest hospital of 180 beds" in Cooperstown, NY, to demonstrate that you don't have to be the Mayo Clinic to improve outcomes by realigning incentives, a.k.a. putting doctors on salary:

Bassett — like the Cleveland Clinic and a small number of other health systems in this country — pays salaries to all of its doctors. No matter how many tests or procedures are performed, they take home the same amount of money. Medical costs at Bassett are lower than those at 90 percent of the hospitals in New York, while the quality of care ranks among the top 10 percent in the nation, surveys show.

As at the Mayo Clinic and other treatment centers that have eschewed fee-for-service, the payment structure goes hand-in-hand with coordinated, integrated patient care:

Michelle Griffiths, 41, of Edmeston found a lump on her breast six years ago. During cancer care at Bassett, Ms. Griffiths’s appointments to see her oncologist and primary care doctor are often scheduled on the same day. One doctor will sometimes accompany her during a procedure performed by another, and each has her complete medical history.

“The communication amongst all of my doctors is impressive,” said Ms. Griffiths, who works as a database administrator for the insurance company New York Central Mutual. “They always call each other or shoot each other e-mails.”

Such coordinated care is a hallmark of integrated health systems with salaried doctors, like Kaiser Permanente, the Mayo Clinic, the Veterans Administration and the Cleveland Clinic.

Harris also highlights the political conundrum: everyone seriously engaged in healthcare reform knows that fee-for-service is a major inflation culprit. But as in the Aesop's fable in which a group of mice agree that they should hang a bell around the cat that's been gobbling them up, no one knows how to "bell the cat":

“Everyone knows that the Bassett model is the right model,” said Senator Charles E. Schumer, a New York Democrat involved in negotiations over health care legislation. “The question is, How do you get from here to there?"

In response, I wonder why the unanamious recommendations of the Massachusetts Special Commission on the Health Care Payment System are not getting more attetention. The Commission's central proposal takes direct aim at fee-for-service, proposing a five-year transition to "global payment systems" that pay doctors and hospitals per patient, with performance incentives, and adjustments for region, income, clinical risk and other factors. The recommendations appear to have broad, if cautious and equivocal support. The Times' Kevin Sack reports:

Top state legislators said that they recognized the political challenge in enacting such a plan but that Massachusetts’ circumstances demanded it. Senator Richard T. Moore, co-chairman of a joint legislative committee on health care financing, said he expected to hold hearings on the recommendations this fall. The committee’s other leader, Representative Harriett L. Stanley, said, “It’s going to be a very long haul, but it’s a trip worth taking.” [snip]

Interest groups with heavy stakes embraced the proposal, but warily.

“Hospitals want to be part of this historic endeavor,” said Lynn B. Nicholas, president of the Massachusetts Hospital Association. But Ms. Nicholas added that “the success of moving to a global payment system is not a foregone conclusion” and expressed concerns about how risks would be adjusted and how start-up costs would be covered.

The president of the state medical society, Dr. Mario E. Motta, also urged caution. “A big transition like this has never been done on such a broad scale,” Dr. Motta said, “so it must be done very carefully, deliberately and
thoughtfully.”

In Massachusetts, turning the battleship toward global payment systems appears to be recognized as a necessity if the 2006 reform plan that's already achieved near-universal coverage is not to bankrupt the state, as it's beginning to do. (Of course, the state has only taken a baby step toward reforming the payment system.) Will federal legislation have to follow the same road - extend coverage first, deal with the resulting financial emergency as it takes hold?

I took Obama's "blue pill" -- and got maybe 90% of "red pill" benefit....

In his health care press conference tonight, Obama stressed repeatedly that most "sacrifice" required from health care cost reduction should come from "sacrificing" unnecessary and ineffective treatments -- which makes sense when you consider that Americans spend in the neighborhood of 70% more per capita on health care than citizens of other wealthy countries without gaining any better outcomes. He went so far as to spell out that doctors in the U.S. too often have financial incentives to prescribe unnecessary treatment.

Personal experience leads me to quibble, though, with one of his examples of wasteful care, which made cost-benefit decisions seem cost-free. He said, “If there’s a blue pill and a red pill, and the blue pill is half the price of the red pill and works just as well, why not pay half price for the thing that’s going to make you well?”

As it turns out, my own highly competent and socially responsible primary care physician some time ago prescribed generic Simvastatin to bring down my cholesterol. It didn't work well, though later conversation revealed that occasional 1-2 week gaps that I let slip between prescription refills may have been responsible. When a checkup revealed that my cholesterol levels had not improved, I asked her if I wouldn't do better with Lipitor. She said that Lipitor, which is not available generically, would cost me much more (and she might have added, cost the insurer much more), and "only" deliver perhaps a 5-10% advantage. (While writing this, I checked that estimate out, and found a Pfizer report touting a study result purporting to show a 14% advantage for Lipitor over competitors, including Simvastatin. This was a "report" that read awfully like a Pfizer press release on a site of dubious provenance, with no "about" section.)

Assuming that my doctor was roughly right about the 5-10% Lipitor advantage , this was exactly the situation that Obama sketched -- except that there was a genuine cost-benefit choice to be made. Would a modest improvement in drug performance be worth an additional $20/month to me - and God knows how much to the insurer? That's a very complex calculation; variables include my age, the extent to which my cholesterol numbers were worrisome, and my overall cardiovascular profile (e.g., a C-reactive protein test that yielded a good result); whether my insurer should have paid for that test is a whole other question). I am currently trying again with Simvastatin.

Were I on Medicare, would an empowered MedPac oversight panel making decisions about what treatments to fund approve prescribing Lipitor to me? Would the doctor have any incentive to say, 'first try taking your Simvastatin regularly'? And it would be nice if someone wouldmandate that my insurer allow me to buy a three-month's supply at a time, so I'd be likelier to refill on time.

Obama himself has pointed out in other contexts that bringing medical costs under control will ultimately entail more agonizing choices. Here is an April 28 exchange with David Leonhardt, foreshadowing the MedPac proposal:

Now, I actually think that the tougher issue around medical care — it’s a related one — is what you do around things like end-of-life care —

LEONHARDT: Yes, where it’s $20,000 for an extra week of life.

THE PRESIDENT: Exactly. And I just recently went through this. I mean, I’ve told this story, maybe not publicly, but when my grandmother got very ill during the campaign, she got cancer; it was determined to be terminal. And about two or three weeks after her diagnosis she fell, broke her hip. It was determined that she might have had a mild stroke, which is what had precipitated the fall.

So now she’s in the hospital, and the doctor says, Look, you’ve got about — maybe you have three months, maybe you have six months, maybe you have nine months to live. Because of the weakness of your heart, if you have an operation on your hip there are certain risks that — you know, your heart can’t take it. On the other hand, if you just sit there with your hip like this, you’re just going to waste away and your quality of life will be terrible.

And she elected to get the hip replacement and was fine for about two weeks after the hip replacement, and then suddenly just — you know, things fell apart.

I don’t know how much that hip replacement cost. I would have paid out of pocket for that hip replacement just because she’s my grandmother. Whether, sort of in the aggregate, society making those decisions to give my grandmother, or everybody else’s aging grandparents or parents, a hip replacement when they’re terminally ill is a sustainable model, is a very difficult question. If somebody told me that my grandmother couldn’t have a hip replacement and she had to lie there in misery in the waning days of her life — that would be pretty upsetting.

And it’s going to be hard for people who don’t have the option of paying for it.

THE PRESIDENT: So that’s where I think you just get into some very difficult moral issues. But that’s also a huge driver of cost, right?

I mean, the chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here.

So how do you — how do we deal with it?

THE PRESIDENT: Well, I think that there is going to have to be a conversation that is guided by doctors, scientists, ethicists. And then there is going to have to be a very difficult democratic conversation that takes place. It is very difficult to imagine the country making those decisions just through the normal political channels. And that’s part of why you have to have some independent group that can give you guidance. It’s not determinative, but I think has to be able to give you some guidance. And that’s part of what I suspect you’ll see emerging out of the various health care conversations that are taking place on the Hill right now.

Difficult choices notwithstanding, American health care practice is rife with overprescription of scores of tests, operations, drugs and other treatments of dubious value, or of value only a fraction of the times they are prescribed. Don't get my wife, a nurse midwife, started about amniocentesis, a procedure usually about as valuable as a trip to the Oracle at Delphi. Not to mention Caesarian sections, which at her hospital are performed on something approaching 40% of births.

P.S. Leonhardt must have crowed tonight to hear the President adopt the lede from Leonhardt's 7/22 front page article, which framed the President's communication challenge as explaining to the American people re health care reform, what's in it for me? In his prepared remarks, Obama used the very words:

I realize that with all the charges and criticisms being thrown around in Washington, many Americans may be wondering, "What's in this for me? How does my family stand to benefit from health insurance reform?"

See also:
Massachusetts Commission cuts the Gordian Knot on healthcare costs
Leonhardt seconds Gawande: put doctors on salary
Orzag hones in on doctors' incentives

David Leonhardt tries to do Obama's job for him

The New York Times' David Leonhardt seems to have taken it upon himself to drive home to Americans that the nub of healthcare cost containment is removing doctors' and hospitals' incentives to prescribe unnecessary care. From today's front page article:

On Thursday, Mr. Obama will visit another example he likes to cite, the Cleveland Clinic. Its successes capture what real reform would look like. Like Mayo, the Cleveland Clinic pays its doctors a salary, rather than piecemeal, and delivers excellent results for relatively little money.

“I came here 30-some years ago,” Delos Cosgrove, a heart surgeon who is the clinic’s chief executive, told me. “And I have never received any additional pay for anything I did. It never made a difference if I did five heart operations or four — I got paid the same amount of money. So I had no incentive to do any extra tests or anything.”

This is the crux of the issue, economists say: the current fee-for-service system needs to be remade.

In shining the spotlight on pay structures, Leonhardt seems to be trying to do the work he thinks Obama should be doing. He frames Obama's core task as teaching Americans that we're all overpaying in hiddden ways for healthcare to the tune of $6,500 per year per family, if you compare U.S. healthcare costs to those of typical wealthy countries. He complains that Obama has so far failed to invest his political capital, either to educate Americans or to fight for cost containment provisions with teeth:

Mr. Obama says many of the right things. Yet the White House has not yet shown that it’s willing to fight the necessary fights. Remember: the $6,500 tax benefits someone. And that someone has a lobbyist. The lobbyist even has an argument about how he is acting in your interest.

These lobbyists, who include big names like Dick Armey and Richard Gephardt, have succeeded in persuading Congress to write bills with a rather clever feature. They include some of the ideas that would cut costs — but defang them.

Interestingly, Leonhardt then dismisses one element of proposed House leglislation that would address the incentives problem as thus "defanged":

One proposal would pay doctors based on the quality of care, rather than quantity, but it’s a pilot project. Doctors who already provide good care may well opt in; doctors providing wasteful but lucrative care surely will not.

Perhaps. But to change the incentive structure for doctors, hospitals and other caregivers is to move an enormous battleship. The radical, unanimous proposal of a blue-ribbon helathcare commission in Massachusetts to replace fee-for-service with global payment systems proposes a five-year phase-in, noting the complexities: ""global payment rates will include adjustments for clinical risk, socio-economic status, geography (if appropriate), core access and quality incentive measures, and other factors." Perhaps a pilot program is not a bad place to start on the Federal level, in concert with other cost containment measures like a Medicare oversight commission to set rates and determine reimbursable procedures.

See also:
Massachusetts Commission cuts the Gordian Knot on healthcare costs
Leonhardt seconds Gawande: put doctors on salary
Orzag hones in on doctors' incentives

Leonhardt seconds Gawande: put doctors on salary

David Leonhardt has joined Atul Gawande in pointing toward what should be the central front in the war on health care costs:

put doctors on salary.

Leonhardt prices four ways of treating prostate cancer: watchful waiting ("a few thousand dollars"), prostate removal ($23,000), I.M.R.T. radiation ($50,000), and the latest, proton radiation (often over $100,000).

Which one works best? “No therapy has been shown superior to another,” an analysis by the RAND Corporation found. Which treatments are growing fastest? "Use of I.M.R.T. rose tenfold from 2002 to 2006, according to unpublished RAND data." Proton radiation is newer, but treatment centers, which require "a proton accelerator that can be as big as a football field," are springing up left and right.

Why do the most expensive treatments always gain traction, whether or not there's any evidence that they're effective, or more effective than cheaper treatments? Insurers -- all insurers, including Medicare -- pay per procedure. At the center of the skewed incentive system, as Gawande showed, are doctors -- who are not only paid by the procedure, but in too many cases own all or part of the treatment facilities such as medical imaging centers.

OMB Director Peter Orzag, in his drive to shape health care reform, has tried on a couple of mantras since taking office. The first was "healthcare reform is entitlement reform" -- because problems with the social security trust fund are miniscule compared with the problem of runaway health care costs. Another was "the Mayos, not the McAllens" -- framing Gawande's contrast of a county where the doctors have "gone entrepreneurial" with the Mayo Clinic, where doctors are on salary. And when ticking off the administration's proposed reforms, Orzag generally tucks in "changes in provider incentives."

The nub of incentive reform is pretty simple: put doctors on salary. Good salaries. High salaries. Sweeten the pill with tort reform, reducing the defensive medicine imperative. But remove the incentive for prescribing the most expensive care.

Over the meadow and through the woods with Obama

In an interview with the Times' David Leonhardt, Obama told a story about his grandmother to frame a problem in our education system:

My grandmother never got a college degree. She went to high school. Unlike my grandfather, she didn’t benefit from the G.I. Bill, even though she worked on a bomber assembly line. She went to work as a secretary. But she was able to become a vice president at a bank partly because her high-school education was rigorous enough that she could communicate and analyze information in a way that, frankly, a bunch of college kids in many parts of the country can’t. She could write —

LEONHARDT: Today, you mean?

THE PRESIDENT: Today. She could write a better letter than many of my — I won’t say “many,” but a number of my former students at the University of Chicago Law School. So part of the function of a high-school degree or a community-college degree is credentialing, right? It allows employers in a quick way to sort through who’s got the skills and who doesn’t. But part of the problem that we’ve got right now is that what it means to have graduated from high school, what it means to have graduated from a two-year college or a four-year college is not always as clear as it was several years ago.

And that means that we’ve got to — in our education-reform agenda — we’ve got to focus not just on increasing graduation rates, but we’ve also got to make what’s learned in the high-school and college experience more robust and more effective.

Reading this made me recall my astonishment when I read in Doris Kearns Goodwin's biography of Eleanor and Franklin Roosevelt, No Ordinary Time, that on the eve of World War II only about 25% of American adults had graduated from high school. That's approximately the percentage that graduates from college today. Is the average U.S. college grad today better educated than the average high school grad in 1940? I'm sure that by meany measures the answer is 'yes,' and that by a few, it's probably no. And compelling as Obama's example is, we need to keep in mind that based on the genetic evidence before us, his grandmother probably had a bit of a brain in her head. She may have written like a mature adult when she was twelve.

In the same interview, Obama told a second, far more remarkable, story about his grandmother:

Now, I actually think that the tougher issue around medical care — it’s a related one — is what you do around things like end-of-life care —

LEONHARDT: Yes, where it’s $20,000 for an extra week of life.

THE PRESIDENT: Exactly. And I just recently went through this. I mean, I’ve told this story, maybe not publicly, but when my grandmother got very ill during the campaign, she got cancer; it was determined to be terminal. And about two or three weeks after her diagnosis she fell, broke her hip. It was determined that she might have had a mild stroke, which is what had precipitated the fall.

So now she’s in the hospital, and the doctor says, Look, you’ve got about — maybe you have three months, maybe you have six months, maybe you have nine months to live. Because of the weakness of your heart, if you have an operation on your hip there are certain risks that — you know, your heart can’t take it. On the other hand, if you just sit there with your hip like this, you’re just going to waste away and your quality of life will be terrible.

And she elected to get the hip replacement and was fine for about two weeks after the hip replacement, and then suddenly just — you know, things fell apart.

I don’t know how much that hip replacement cost. I would have paid out of pocket for that hip replacement just because she’s my grandmother. Whether, sort of in the aggregate, society making those decisions to give my grandmother, or everybody else’s aging grandparents or parents, a hip replacement when they’re terminally ill is a sustainable model, is a very difficult question. If somebody told me that my grandmother couldn’t have a hip replacement and she had to lie there in misery in the waning days of her life — that would be pretty upsetting.

And it’s going to be hard for people who don’t have the option of paying for it.

THE PRESIDENT: So that’s where I think you just get into some very difficult moral issues. But that’s also a huge driver of cost, right?

I mean, the chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here.

So how do you — how do we deal with it?

THE PRESIDENT: Well, I think that there is going to have to be a conversation that is guided by doctors, scientists, ethicists. And then there is going to have to be a very difficult democratic conversation that takes place. It is very difficult to imagine the country making those decisions just through the normal political channels. And that’s part of why you have to have some independent group that can give you guidance. It’s not determinative, but I think has to be able to give you some guidance. And that’s part of what I suspect you’ll see emerging out of the various health care conversations that are taking place on the Hill right now.

Twenty second gush timeout: I still cannot believe that we have as President a man capable of telling such a story without drawing any pat conclusions or scoring any cheap political points. That said, what exactly does he mean by "some independent group that give you guidance"? Just how could such a group have "guided" a funding decision about that hip replacement without being "determinative"?

P.S. Is it typical that about six months after the death of a loved one, that person starts to come back into focus?

P.P.S. As newspapers die on the vine, I can't quite shake the feeling that there's no reason I should be getting and freely sharing this remarkable article for free, even though I'm a Times subscriber.