Health Care: Obama's Budget Skimps on Cost-Cutting

The President's new budget avoids taking on doctors and hospitals to cut costs, but there are hints that bigger reforms are coming

President Barack Obama has been adamant about reining in health-care costs. Yet his budget did not take on the biggest contributor to health-care inflation: doctor and hospital payments. His choice has raised hard questions.

The U.S. health-care system is built around a fee-for-service structure in which doctors and hospitals are reimbursed by insurers based on the number of procedures they perform rather than the quality of care. Policy experts on all sides of the health-care reform debate call this system wasteful and inefficient. If Obama could reform reimbursements under Medicare and other government health programs, they say, the impact would ripple through the system, since these agencies account for almost half the nation's health-care bill. Instead, however, Obama aimed his health-care cuts at private insurers and drug companies. That left experts wondering how the President will come up with the savings to provide coverage for the 46 million uninsured patients.

Obama's overall commitment to health-care reform—some $634 billion over 10 years—did win praise. "Putting that money on that table shows he's serious," says Mayo Clinic CEO Denis Cortese. But half the amount will come from tax hikes, not cost cuts. The combined savings from the spending cuts will shave only 3.5% off federal health-care spending by 2019. "The President punted on the cost," says Robert Laszewski, president of the consultancy Health Policy & Strategy Associates.


Certainly the White House grasps the problems with fee-for-service. The budget document itself describes Medicare as a "high risk" due to "billions of dollars lost to overpayments and fraud each year." But getting rid of wasteful health payments means taking on doctors, hospitals, and the patients who want lots of services. Those groups are all held in high regard by the public, while insurers and drugmakers aren't. And yet government economists note that doctor payments rose 6.2% last year and hospital bills went up 7.2%, to a combined $1.26 trillion. Spending on drugs increased only 3.5%, to $235 billion.

The President did try to nudge medical providers toward a change in business as usual. In an effort to get hospitals and outside doctors to better coordinate their care of each patient, the budget calls for hospitals to bundle all inpatient and outpatient payments. By forcing doctors to work together, the effort could save Medicare $17 billion over 10 years. This one change garnered the most enthusiasm among reform advocates. Obama "is signaling that he wants to move away from fee-for-service," says Len Nichols, health policy director at the New America Foundation.

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