If Medicare's Beneficiaries Won't Notice Reduced Spending, Then Why Is That Money Being Spent In the First Place?

If there's one thing that everyone in Washington can almost always agree to, it's that when you don't want to do something yourself, the best option is probably to assign a committee to do it for you. So last night's agreement between party leaders to work toward deficit reduction while lifing the limit on total federal debt calls for the creation of a joint Congressional committee tasked with coming up with $1.2 trillion in deficit reduction before Thanksgiving. At that point, a vote on the committee's recommendations will be fast-tracked through both houses of Congress: No amendments or additions, no drawn-out legislative bargaining or rewriting—just a vote on whatever plan the committee comes up with.

Under the terms of yesterday's deal, if the committee fails to identify sufficient cuts, or if Congress fails to vote for the committee-designed plan, then a series of equally large cuts to planned spending will be triggered (and yes, these are "cuts" from the baseline—i.e. the federal government's projected spending, including increases—rather than actual reductions from today's spending levels).

Some reporting on the deal has suggested that these spending reductions will be "across the board," which suggests a universal haircut for all aspects of the government. But that's not quite how it would work. Medicaid, Social Security, and paychecks for veterans would be exempt from the reductions. Half of the triggered cuts, meanwhile, would come out of the Pentagon's budget. 

Unlike Medicaid and Social Security, Medicare spending wouldn't get a pass. President Obama hasn't said much about how he'd like to restrain Medicare spending; in his address last night, he mentioned the program just once, recycling his now familiar line that "we need to make some modest adjustments to programs like Medicare to ensure that they're still around for future generations."

Nevertheless, Obama administration officials are quietely trying to sell those cuts by arguing that beneficiaries won't even notice them: Politico reports that "the White House said the cuts would be limited to providers and beneficiaries would be 'protected.'" Bloomberg is reporting that the cuts "would only affect provider reimbursements, not benefits."

Obviously the administration's argument is designed mostly to make the cuts more politically palatable. But let's assume for a moment that it's true: If so, what does it say about Medicare's efficiency and design that it spends quite a bit of taxpayer money in a way that provides no noticeable benefits to the program's enrollees? And if that's the case, and administration officials know it's the case, then why hasn't that spending been cut already?

Alternatively, it could be that the Obama administration's argument is misleading, and a decision by the federal government to pay Medicare providers less will, in fact, result in poorer service and less access for the the program's beneficiaries. That's one of the reasons that Medicaid, the joint federal-state health program for the poor and disables, functions so poorly. The program pays providers far less than either private insurance or Medicare, and consequently has some of the worst access levels and health-outcome track records of any insurance program. (Indeed, with a handful of maladies, the program's health outcomes are actually worse than having no insurance at all.)

This isn't an argument for artificially boosting federal reimbursements. It's an illustration of the way that complex bureaucratic price controls in medicine (as in other markets) end up failing both patients and taxpayers. There's just no way for wonks in Washington, no matter how clever and well intentioned, to know how to effectively determine how to pay for each and every medical procedure a provider might offer. Distortions and payment games are all but inevitable: Medicare currently has about 7,500 billing codes, for example, and procedures that pay more end up being performed more often. Those distortions bleed into the rest of the medical system too: Because the government is responsible for so much medical spending (right now, it purchases a little less than half of all medical care in the U.S.), its various Rube Goldberg payment mechanisms end up exerting a substantial influence on the medical market as a whole.

The way to fix this isn't for federal health wonks and budget geeks to arbitrarily decide to pay medical providers more or less. It's for the federal government to stop thinking that it can set prices without overpaying, and thereby wasting taxpayer dollars, or underpaying, and creating shortages—or, in many cases, both. Skimping on provider payments may or may not save Medicare money (the cuts have to stick in order to work, which they often don't). But either way, they perpetuate a system of dysfunctional price controls that deserves to go.