“What a way to cel­e­brate a birth­day!”  – House Minor­i­ty Leader Nan­cy Pelosi (D‑CA) after the House passed bipar­ti­san health care legislation

Sor­ry, Nan­cy.  It’s not about you.

The $141 bil­lion health care bill that cleared the House last month and that is expect­ed to win Sen­ate approval next week is a trib­ute from the GOP-con­trolled Con­gress to for­mer Con­gress­man Hen­ry Wax­man, a man who worked tire­less­ly – and with great suc­cess – to expand health care-relat­ed wel­fare spending.

Because the mea­sure deals pre­dom­i­nant­ly with Medicare, most have over­looked its near­ly $30 bil­lion hike in social wel­fare out­lays.  The bill (H.R. 2)  increas­es Medicare pay­ments to physi­cians, large­ly by replac­ing one com­pli­cat­ed and flawed for­mu­la with anoth­er.  It directs the army of bureau­crats who pop­u­late CMS cube farms to sol­dier on with their futile, half-cen­tu­ry-long quest to imple­ment a work­able sys­tem of admin­is­tered pricing.

Dur­ing its first 27 years, Medicare paid physi­cians “rea­son­able” fees for their ser­vices, as deter­mined by the CMS bureau­cra­cy based on a process that took into account both “cus­tom­ary” and “pre­vail­ing” reim­burse­ment rates.  The sys­tem rest­ed on the mis­guid­ed assump­tion that the gov­ern­ment could mim­ic mar­ket prices with­out dis­tort­ing mar­kets.  Medicare pay­ments to physi­cians grew spec­tac­u­lar­ly and over­all health spend­ing as a per­cent of GDP more than dou­bled.

In 1989, Con­gress con­jured a new pay­ment sys­tem based on the work of a very smart econ­o­mist by the name of William C. Hsaio.  Hsaio taught at Har­vard(!) and used a com­put­er(!) to devise a for­mu­la that pre­cise­ly cal­cu­lat­ed what Medicare should pay a physi­cian for each of the thou­sands of ser­vices he or she might per­form – from throat swabs to heart and lung trans­plants – based on the “rel­a­tive val­ue” of each ser­vice.  Hsaio’s com­put­er had them all (actu­al­ly 1,400 of the even­tu­al 7,500 cat­e­gories of ser­vices) by the time Con­gress passed the law in 1989.

But, alas, Hsaio’s exquis­ite resource-based rel­a­tive val­ue sched­ule (RBRVS) didn’t arrest the rise in Medicare pay­ments to doc­tors.  Physi­cians, many of whom turned out to be almost as smart as Hsaio, acquired com­put­ers of their own that helped them devise cod­ing strate­gies that fat­tened their Medicare reimbursements.

So Con­gress in 1997 came up with the “sus­tain­able growth rate” (SGR) method­ol­o­gy, which served as a cap on Medicare pay­ments to doc­tors.  If aggre­gate Medicare physi­cian pay­ments exceed­ed the SGR cap one year, CMS would make an across-the-board cut in the RBRVS fee sched­ule the fol­low­ing year.  Thus would growth in those pay­ments be ren­dered sustainable.

SGR, how­ev­er, proved polit­i­cal­ly unsus­tain­able.  Con­gress­es and Pres­i­dents of both par­ties refused to let the sched­uled cuts take effect.   Thus devel­oped the Con­gres­sion­al rit­u­al of wait­ing until the last minute (and some­times longer) before adopt­ing a “doc fix” – leg­is­la­tion that would pre­vent cuts from occur­ring, but only on a tem­po­rary basis.  Con­gress has enact­ed 17 such leg­isla­tive patch­es since the ear­ly 2000s.

Mem­bers of both par­ties pro­fessed to detest this rit­u­al and vowed to scut­tle the hat­ed SGR.  The House bill does so, replac­ing the RBRVS/SGR sys­tem with one that is more com­pli­cat­ed, more expen­sive, and equal­ly quixot­ic, mis­guid­ed and unworkable.

The bill’s authors con­tend that the mea­sure would “replace the SGR for­mu­la with a sta­ble pay­ment sys­tem that pro­motes high­er qual­i­ty of care for seniors.”   Actu­al­ly, it would instate two com­plex method­olo­gies — a “mer­it-based pay­ment sys­tem” (MIPS) and an “alter­na­tive pay­ment mod­el” (APM) – which would exist side-by-side, both requir­ing adher­ence to gov­ern­ment-devised “clin­i­cal prac­tice improve­ment activities.”

The new pay­ment for­mu­la will be launched in 2019 and ful­ly phased in begin­ning in 2026.  In the event I’m not around to say “I told you so,” I’ll say it now: this lat­est gov­ern­ment for­ay into admin­is­tered pric­ing will be no more sta­ble, no more cost-effi­cient and no more con­ducive to qual­i­ty than the three that pre­ced­ed it.

No cen­tral­ized price-set­ting sys­tem, despite the genius of its archi­tects and the ele­gance of its algo­rithms, can sub­sti­tute for mar­kets. The only Medicare reform worth doing is one that would get the gov­ern­ment out of the price-set­ting busi­ness.  Medicare should be trans­formed from a defined ben­e­fit pro­gram, in which the gov­ern­ment dic­tates reim­burse­ment rates, to a defined con­tri­bu­tion pro­gram, like Medicare drug cov­er­age.  In that pro­gram, the gov­ern­ment sub­si­dizes pri­vate insur­ance cov­er­age at an estab­lished lev­el, leav­ing insur­ers to nego­ti­ate prices, design poli­cies, estab­lish pre­mi­ums and com­pete for customers.

Nev­er­the­less, the very prospect of physi­cian pay­ment “reform” made law­mak­ers tin­gle with bipar­ti­san ecsta­sy.  The new pay­ment system’s sheer com­plex­i­ty – it’s even more inscrutable than the one devised by the estimable Pro­fes­sor Hsaio – evi­dent­ly con­vinced law­mak­ers that some very smart peo­ple had at last out­smart­ed mar­kets (and doc­tors).  The frac­tious House passed the mea­sure with 392 votes, con­fin­ing oppo­si­tion to just 37 troglodytes.  A sim­i­lar­ly big vote is expect­ed next week in the Senate.

Repub­li­cans jus­ti­fy their sup­port for the mea­sure by not­ing that it would increase Medicare pre­mi­ums paid by seniors with income in excess of $133,500 ($267,000 for cou­ples) and place cer­tain restric­tions on Medi­gap cov­er­age, pri­vate insur­ance that cov­ers some or all of Medicare deductibles and coin­sur­ance.  Begin­ning in 2020, it will be ille­gal for insur­ers to issue new cus­tomers Medi­gap poli­cies that cov­er Medicare deductibles.  (Exist­ing cov­er­age, how­ev­er, can be renewed.)

Mrs. Pelosi spun these two pro­vi­sions as enor­mous con­ces­sions to Repub­li­can sen­si­bil­i­ties.  Demo­c­ra­t­ic class war­riors grieve that Repub­li­cans would require the wealth­i­est seniors to pay more for their Medicare.  They demand­ed some­thing in return for acqui­esc­ing in this GOP soak-the-rich proposal.

Their quid pro quo came in pro­vi­sions that enlarge pro­grams that for­mer Con­gress­man Wax­man cham­pi­oned dur­ing his tenure: expand­ing Med­ic­aid, reau­tho­riz­ing CHIP, show­er­ing com­mu­ni­ty health cen­ters with more mon­ey and dou­bling fund­ing for pro­grams that enroll chil­dren (and their par­ents) in Med­ic­aid, CHIP and Oba­macare.  Togeth­er, these changes will increase fed­er­al wel­fare spend­ing over the next 10 years by near­ly $30 bil­lion, not quite enough to ful­ly off­set the esti­mat­ed $34 bil­lion that wealthy seniors will pay in high­er pre­mi­ums, but enough to win the sup­port of House Democrats.

Of course, that social wel­fare spend­ing, unlike the pre­mi­um increas­es and Medi­gap reform, is front-loaded.  Through 2017, the addi­tion­al spend­ing on CHIP, com­mu­ni­ty health cen­ters and Med­ic­aid expan­sions will total $12.2.  Pre­mi­ums on high­er income seniors won’t take effect until 2018.  Before then, Democ­rats will demand anoth­er increase in social wel­fare spend­ing.  And Repub­li­cans will go along.

They always do. (More on that here.)  But in this case, their con­ces­sions have come in exchange for lit­tle (the illu­sion of Medicare “reform”) and were made with lit­tle reflection.

Con­sid­er CHIP autho­riza­tion.  CHIP was passed in 1997 as a con­so­la­tion prize to Hen­ry Wax­man and Ted Kennedy after Hillary Care had crashed and burned and Pres­i­dent Clin­ton had capit­u­lat­ed to Speak­er Gin­grich by sign­ing wel­fare reform and nego­ti­at­ing enti­tle­ment spend­ing curbs.  Lib­er­als want­ed some­thing they could point to in what became known as the Bal­anced Bud­get Act of 1997, one of the few pieces of leg­is­la­tion that lived up to its name.   (The fed­er­al gov­ern­ment ran four years of sur­plus­es after its enact­ment, in part the result of the law’s restraints on enti­tle­ment spend­ing growth.)

Since CHIP’s enact­ment, we have seen the imple­men­ta­tion of Oba­macare, a glo­ri­fied Med­ic­aid expan­sion that pri­mar­i­ly ben­e­fits house­holds with incomes less than 200 per­cent of FPL.   It is dif­fi­cult to under­stand why the CHIP pro­gram is still need­ed.  Even the heav­i­ly-Demo­c­ra­t­ic Con­gress that cre­at­ed Oba­macare allowed it to expire in Octo­ber of this year, and it is rea­son­able to assume the new law’s imple­men­ta­tion has ren­dered the old one redundant.

As CBO notes in its analy­sis, “most of the peo­ple who would receive cov­er­age through CHIP as a result of enact­ing HR 2 would oth­er­wise have received cov­er­age” through anoth­er source.  CBO lists Med­ic­aid, Oba­macare and employ­er-spon­sored insur­ance as among those oth­er sources.

So the most Repub­li­can Con­gress since the 1920s has approved tens of bil­lions of dol­lars in new spend­ing, not to cov­er more unin­sured chil­dren, but to allow state bureau­crats to enroll already-insured chil­dren in the pro­gram that lever­ages the most fed­er­al dollars.

The pro­grams Wax­man cham­pi­oned have become so warm­ly embraced by Repub­li­cans that they reflex­ive­ly reau­tho­rize them with bare­ly a moment’s thought to their neces­si­ty or cost.

Con­grat­u­la­tions, Hen­ry.  This one’s for you.