The Global Budget in Your Future

There were two announcements last week that I hope you paid attention to:

  • The American Medical Group Association, representing medical groups that provide care for roughly 1 in 3 Americans, said that 90% of its members would not participate in the new Accountable Care Organization (ACO) model the Obama administration wants to impose on Medicare providers.
  • Secretary of Health and Human Services Kathleen Sebelius, exercising new powers conferred upon her by health reform (ObamaCare), said insurers would have to justify any rate increases greater than 10%.

So what does one announcement have to do with the other? A lot. I’ll connect the dots below the fold.

Here’s the bottom line. The administration uses the rhetoric of choice and competition and some isolated souls within it may actually think competitive pressures can reduce health care costs. But if that doesn’t work out, it’s goodbye to volunteerism and hello to another way of constraining costs: global budgets.


If it don’t work out
Then you can tell me goodbye

The core of Obama administration health reform is managed competition, instituted through a health insurance exchange. In embracing this reform, the administration is following the lead of Mitt Romney in Massachusetts and before that Hillary Clinton’s failed attempt in 1993/94. But the idea really harks back to a book written by Stanford professor Alain Enthoven in the early 1980s. Enthoven argued that the entire health care system should be patterned after the Federal Employees Health Benefits system. (See a brief history and analysis.)

Here’s the difference. Enthoven believed (and still does believe) that competition in health insurance can actually work. Mitt Romney believed that as well. Maybe Hillary Clinton did too. But almost no one in the Obama administration believes that. When is the last time you heard any federal official praising the virtues of a competitive market for any good or service?

For Obama, the purpose of the health insurance exchange is not to bring needed competition to an imperfectly competitive market. The purpose is to exert control over the industry. If you believe in competition, then you want lots of competitors. But the administration is imposing rules and regulations that are driving insurers from the market, as we have previously reported here, here and here. In fact, some careful observers believe that by the time the exchanges become operational (in 2014) there will be only one or two insurers left in most markets.

This same attitude is reflected in the administration’s approach to ACOs. The original idea was that providers of care would be encouraged to compete on value, not just on the quantity of services they provide. Those that succeed in producing higher-quality care for lower costs would be rewarded with higher profits. Or at least that’s what everyone thought until the administration produced its 200-page book of rules that ACOs will be governed by.

Among the organizations balking at the administration’s top-down, regulatory approach are the Mayo Clinic, the Cleveland Clinic, Intermountain Healthcare in Utah, Geisinger Health System in Pennsylvania and others viewed as the vanguard for accountable care. These include organizations President Obama has singled out as exemplary examples of high quality care!

As in the health insurance industry, the Obama administration is taking actions that are forcing consolidation among the providers of care. (See our previous reports here and here.) Again, if competition were good, you would want lots of competitors. But if regulation is the goal, consolidation makes regulation easier. No government entity can effectively regulate the medical practice of 800,000 independent doctors. The regulatory approach almost requires doctors and hospitals to be merged into a few organizations.

So if competition is not the vehicle for controlling costs, what is? Global budgets. ObamaCare will force health plans to provide a nonnegotiable package of benefits, but will hold premiums at a level that will make it impossible to meet the full demand for that care. Instead, costs will be controlled by squeezing provider incomes and delaying access to care — just as it is in other countries.

When I attended a conference on ACOs at the Brookings Institution last fall, I was surprised by how many people took for granted that rationing through global budgets was necessary and inevitable. Everybody there seemed to know something I didn’t know. At least everybody else seemed to take the Obama administration’s rhetoric with a grain of salt.

Comments (13)

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  1. Madeline says:

    My future doesn’t sound good.

  2. Vicki says:

    I like the song pairing.

  3. ralph weber, says:

    “The administration uses the rhetoric of choice and competition”

    John, the administration IS remaining true to this, you’re just being cynical. The administration is exercising choice, in choosing the winners and losers, and competition, in allowing certain entities to compete to see which can come up with the most campaign contributions, at which time they will be chosen.

  4. Devon Herrick says:

    Global budgets are problematic from that standpoint that hospitals would actually have an incentive to avoid patients. Countries where this is common, “bed-blockers” (long-term care patients) often languish in hospital rooms because they cost less to care for than a patient needing more intensive medical intervention.

  5. Virginia says:

    Excellent commentary. There’s something about 200 pages of rules and regs that tends to limit innovation.

  6. Frank Timmins says:

    I wonder how any of us are surprised at the manner in which the Obama administration has developed its policies and agenda. We knew his background and his associates and the agendas of those who supported his candidacy. Geez, now we are surprised to come to the realization that this guy is an anti-capitalist collectivist ideologue??? He is as predictable as the calendar.

    It seems that we were (and are) the victims of the perfect storm – A well spoken black candidate for a population of whites with guilt-ridden social consciences, a liberal media determined to destroy conservative influence, an uniformed public hypnotized by decades of economic success without an understanding of how it came about, and huge stockpiles of very inexpensive Kool-Aid. It was inevitable.

  7. Bruce says:

    John, you are always the bearer of such bad news.

  8. Ingman, Stan says:


    AMGA has 67,000 member or so. AMA has 240,000 or so. 135,000 or so practicing doctors perhaps 15% AMA and AHA backed ACO.

    As Milton Friedman argued some year ago, AMA, AMGA are guilds who try to keep prices of medical care high like any union.

    So, if we lower the medical care budgets do you not expect MDs and Hospital to be uneasy. ? No solution .. Ryan or ACO will need to do this. , or do you see some other way to reduce medical care costs in USA?


  9. Lee Kurisko says:

    I come from the land of global budgets; Canadian health care. It is the reason the MRI and CT scanners are closed after 5 pm and on weekends and holidays despite long waiting lists. Something to look forward to in the US.

  10. Ken says:

    Lee, I understand they stay open after 5:00 PM for pets. This gives a whole new meaning to the phrase “going to the dogs.”

  11. Madhatter15 says:

    I remember when Obama went to Mayo Clinic and the Cleveland clinic, The next thing I knew there were two Cleveland clinics in the middle east. Ob ama alsdo wanted ot pay for medical in all of the depressed countries which seem ot be everywwhere but here.W eare hooked up with so many foreign groups I can’t imagien hwo we are going ot help all of those people , we are ar a few that are getting m,oney form us,including health care, at least it was promised. Mitt Rmney should know better than to introduce a new health care plan, I owuldn’t vote for him. I don’t need anyone to give me health care, we have insurance and medicare, if they get rid of medicare we will buy insurance, the money was taken out of that to put into Obama care, 500billion dollars and its not up and running yet. Plus we take moneuy out of medicare funds ot pay for interpreters, yep we do. Social security, half of that goes into the general fund,the Gov. steals that and then they wonder why they don’t have enough. Our money is b eing spent for everyone but us. They are getting away with it. I don’t are what they do, they ar enot forcing me to do anything. I am not Government issue. Obama is doing all of this and he is not even a legal President, his father wasn’t born here, that sall you need, birth certificates mean nothing, its where your mom and dad were born, this amn is ruining this country singlehandedly, right now he is non vacation , a 200million dollar vacation.

  12. Madhatter15 says:

    When I attended a conference on ACOs at the Brookings Institution last fall, I was surprised by how many people took for granted that rationing through global budgets was necessary and inevitable. Everybody there seemed to know something I didn’t know. At least everybody else seemed to take the Obama administration’s rhetoric with a grain of salt.

    Brooklings institute is as left wing in their thinking as you can get, they all have money , they knwo something you don’t know is right, this is not the health care they will have.
    Obama has seen ot it that anythign American is wiped out, whether it be farm lands ort the Health care ort jus tplain church going , everything has changed and at a fast pace. if its American its got to go, including home ownership. The UN is King now and they are going to see to it that anything we have is shared with the people of the world especailly Africa this way they can funnel money into that country for more health care that they are probably not going to get,they never do, and we pay. I would like to know how this man is still in office, everyone must like being shoved a round by a bunch of communists, progressives , liberals and Maoists, I don’t. Why don’t we have a House on UnAmerican Activities group in place , we need it now more than ever.

  13. Donald Devine says:

    Thanks. This is very nicely done.