Obama and the Practice of Medicine

On the defensive because of an increasingly skeptical public, President Barack Obama has recently spoken extemporaneously about his health plan. In doing so, he has revealed his lack of understanding about aspects of medical practice and the reasons for rising health-care costs.

One theme the president has focused on is doctors' motives. During a prime-time press conference on July 22, the president referred to a doctor who muses that she makes "a lot more money if I take this kid's tonsils out"--even if the child might not need surgery. Responding to a woman whose spry 100-year-old mother was given a needed pacemaker despite her age, the president said a few weeks earlier (at an ABC News town-hall event at the White House) that doctors should let patients know that sometimes "you're better off not having the surgery, but taking the painkiller."

Mr. Obama's clinical scenarios represent an excessive--if not erroneous--take on how doctors are influenced by financial incentives. This jaundiced view on medical decision-making may explain why programs the White House is proposing to lower health-care costs rely on the direct regulation of medical decisions. If Mr. Obama is serious about lowering costs, he'll need to reform the economic structures in medicine--especially programs like Medicare.

Cost consideration must be internalized at the point of care by patients and doctors with a stake in the price, as well as the outcome.

Medicare data shows that for the most part, major surgeries aren't the source of waste in health care. These kinds of procedures are typically guided by clear clinical criteria and are closely scrutinized by doctors and patients alike. Rather it is in routine procedures and treatments that economic incentives factor heavily into doctors' decisions.

The use of branded over cheaper generic drugs until recently fell into this category. Doctors would regularly prescribe the more expensive option. Today this is far less prevalent, since patients with private plans realized that they were being saddled with higher co-pays when they opted for the brand-name drugs over generic alternatives.

Other areas where doctors have been accused of excessive utilization include radiology scans and home medical equipment. In the absence of financial incentives to restrain excess use, relatively safe diagnostic procedures can often be justified--even if their benefits are slim.

Instead of addressing the distorted financial incentives that influence these kinds of routine tests and treatments, Mr. Obama's policies seek to directly regulate doctors and their decisions.

The Obama administration has proposed establishing an "Independent Medicare Advisory Committee" to set binding rules on Medicare reimbursement policies. Mr. Obama has also called for the creation of a new federal entity that would conduct "comparative" research on the cost-effectiveness of various treatments in order to establish federal "guidelines." The House health reform bill calls for "health information tools" that would enable Medicare to deny payment for a particular treatment right in the doctor's office.

Regulating medical decisions should not be the responsibility of a remote Washington bureaucracy. The only way to instill more reflection at the point of medical decision making is to give doctors and patients reasons to consider the cost of various options.

For doctors whom Medicare pays per intervention, the problem isn't the fee-for-service model, but the way that the government program sets the fees. Fees are set according to a fixed price schedule with no tie to the physician's quality, experience level, or the outcome of the service.

A more rational system would pay doctors for entire "episodes of care," rather than individual procedures. Private health systems like the Geisinger Clinic and some Blue Cross plans have adopted this model and pay doctors for taking care of an entire illness.

Medicare doesn't have the ability to track episodes of care. It has struggled to adopt even modest payment reforms such as restricted panels of providers, value-based insurance, and account-based coverage, where consumers control their own spending--all techniques used by private insurers to improve efficiency.

Medicare's size demands that it keep payment systems simple. Thus it relies on fixed prices for checklists of services tied to discrete billing codes. These uniform payment rules reward low and high quality care the same. What's troubling is that the heart of the president's plan--a government-run "public" insurance program--is modeled directly on Medicare.

Medicare compounds its shortcomings by insulating patients from costs. This causes a total lack of financial restraint at the point of care. Cost-sharing in Medicare has actually declined over time as a percent of patients' total health bill.

My colleague at the American Enterprise Institute, Tom Miller, estimates that U.S. patients have the lowest out-of-pocket costs as a percent of total national health spending of any developed country except France, Luxembourg, the Czech Republic and Ireland. They're even lower than the single-payer health system in Canada. Mr. Miller calculates that out-of-pocket spending on physician and clinical services in the U.S. was about 60% of total real per capita spending on health care in 1960. By 2002 it had fallen to 10%.

Unsurprisingly, Medicare data show that over the past two decades Medicare's costs for care have sharply outpaced spending in private plans, where co-pays and cost sharing are standard. While these estimates are confounded by factors such as the age of Medicare's population, Medicare certainly hasn't been austere.

Mr. Obama says as much as one-third of medical spending is wasted on services that provide little or no benefit. But closer scrutiny of these kinds of marginal medical decisions can't be imposed by government regulation. Cost consideration must be internalized at the point of care by patients and doctors with a stake in the price, as well as the outcome.

Scott Gottlieb, M.D., is a resident fellow at AEI.
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