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Orszag: Medicare should pay for patients, not treatments

The recent deceleration in U.S. health care costs appears to be at least partially structural, and not entirely because of a lackluster economy. That offers some hope that the slowdown will continue. Still, more needs to be done to encourage the trend.

Two new bipartisan proposals for the next round of health care reform may point the way. Last month, the Bipartisan Policy Center released a set of ideas for improving value in health care. And this week, the Engelberg Center for Health Care Reform at the Brookings Institution put forward its own set of initiatives.

The Engelberg proposals – spearheaded by Mark McClellan, who ran the Medicare program under President George W. Bush – have been embraced by health care leaders, including former Health and Human Services Department Secretaries Michael Leavitt and Donna Shalala, as well as former Congressional Budget Office Directors Dan Crippen and Alice Rivlin. (I am also part of the Engelberg group.)

The proposals from the Engelberg group have four general aims. First, the initiatives would expand the country’s electronic infrastructure, promoting data exchange and more evidence gathering on the costs and quality of various treatments. Second, they would create incentives for providers, partly by making an important change to Medicare and reforming medical-malpractice rules. Third, they would redesign health coverage to increase the value for consumers. And finally, they would change the tax treatment of employer-provided insurance.

I would like to focus on the reforms to Medicare since I view them as the most important. And the key change proposed within Medicare is the Medicare Comprehensive Care payment reform. Under the Engelberg strategy, health care providers would receive a fixed payment for each Medicare beneficiary, rather than being paid piecemeal for every test and procedure. This comprehensive payment would be adjusted according to the beneficiary’s health status and the quality of care provided, giving doctors the incentive to avoid unnecessary treatment.

Under the proposal, no later than 2023, the vast majority of Medicare payments would be made this way. Each year after that, Congress would consider how the payment benchmark should be updated – rather than set payments for specific procedures, as happens today.

The Medicare Comprehensive Care concept represents a plausible path forward between two competing views of health reform. It provides a mechanism for capping payments per beneficiary, something many Republicans want. Yet unlike premium-support proposals, which would direct federal money to insurance companies, the payments would go to health care providers. That should be a crucial difference for Democrats.

Indeed, comprehensive-care payments can be seen as building upon mechanisms encouraged by the 2010 health-reform law such as bundling and accountable-care organizations. Importantly, though, they are explicitly intended to become the dominant form of Medicare reimbursement over the next decade, giving some precision and certainty to the shift away from fee-for-service reimbursement.

The Engelberg proposals for reforming Medicare payments include much more, but if I had to pick one change, it would be this one.

Given the partisan divide in Congress, I don’t hold out too much hope that the comprehensive-payment strategy will become law anytime soon, just because it makes sense and has support from thought leaders from both parties. Given the central role of health costs in our fiscal future, however, we would be smart to get rid of sequestration, which hurts short-term economic growth but does little to reduce America’s long-term budget deficit. Instead, we should enact this type of Medicare payment reform.

• Peter Orszag is vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup and a former director of the Office of Management and Budget in the Obama administration.

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