Medicare's Gordion Knot

With Republicans talking bravely about "transforming" Medicare, they might as well do it in the name of the right solution if Republicans are going to march into these fixed bayonets.

We therefore recommend an article by Jane Orient on the real "Medicare Crisis." Dr. Orient explains the paradox at the heart of today's Medicare woes, namely, that spending is growing at a ridiculous 10% a year even as more and more doctors refuse to take new Medicare patients. Why are costs exploding even as services are reduced? Dr. Orient breaks the Gordian Knot by focusing on the federal price controls instituted in the 1980's to keep Medicare costs in check.

The roots of Medicare's crisis, of course, go back to its creation in the 1960's as an open-ended federal entitlement. With Uncle Sam paying all the bills, the private market in medical care for the elderly was destroyed. Patients and providers have had no incentive to restrain their use of care, and not surprisingly costs to the taxpayer have risen relentlessly.

This was obvious by the early 1980's. But addressing the problem at its entitlement roots was politically difficult. So, David Stockman proposed the short-term political dodge of price controls on medical providers. This let their budget writers show "savings" on their computer models even as the controls failed miserably in the real world. If Medicare limited its reimbursements per medical procedure, doctors simply found a way to do more procedures.

Dick Darman made things worse in the Bush years by ratcheting the price.