June 6, 2011

Where Wisdom Lives By DAVID BROOKS

Sometimes life presents you with a basic philosophical choice. Americans are going to have to confront a giant one over the next several years.

It starts in the wonky world of Medicare. As presently constructed, Medicare is based on an open-ended fee-for-service system. The government pays providers each time they deliver a service. The more services they provide, the more money they get.

The fee-for-service system is incredibly popular. Recipients don’t have to think about the costs of their treatment, and they get lots of free money. The average 56-year-old couple pays about $140,000 into the Medicare system over a lifetime and receives about $430,000 in benefits back. The program is also completely unaffordable. Medicare has unfinanced liabilities of more than $30 trillion. The Medicare trustees say the program is about a decade from insolvency.

Some Democrats simply want to do nothing as Medicare careens toward bankruptcy. Last Sunday on “Face the Nation,” for example, Nancy Pelosi said, “I could never support any arrangement that reduced benefits for Medicare.”

Fortunately, more responsible Democrats are looking for ways to save the system. This is where the philosophical issues come in. They involve questions like: Who should make the crucial decisions? Where does wisdom reside?

Democrats tend to be skeptical that dispersed consumers can get enough information to make smart decisions. Health care is phenomenally complicated. Providers have much more information than consumers. Insurance companies are rapacious and are not in the business of optimizing care.

Given these limitations, Democrats generally seek to concentrate decision-making and cost-control power in the hands of centralized experts. Under the Obama health care law, a team of 15 officials will be created to discover best practices and come up with cost-cutting measures. There will also be a Center for Medicare and Medicaid Innovation in Washington to organize medical innovation. Centralized officials will decide how to set national reimbursement rates.

Republicans at their best are skeptical about top-down decision-making. They are skeptical that centralized experts can accurately predict costs. In 1967, the House Ways and Means Committee projected that Medicare would cost $12 billion by 1990. It actually cost $110 billion. They are skeptical that centralized experts can predict human behavior accurately enough to socially engineer new programs. Medicare’s chief actuary predicted that 400,000 people would sign up for the new health care law’s high-risk pools. In fact, only 18,000 have.

They are skeptical that political authorities can, in the long run, resist pressure to hand out free goodies. They are also skeptical that planners can control the unintended effects of their decisions.

Republicans point out that Medicare has tried to control costs centrally for decades with terrible results. They argue that a decentralized process of trial and error will work better, as long as the underlying incentives are right. They suggest replacing the fee-for-service with a premium support system. Seniors would select from a menu of insurance plans. Their consumer choices would drive a continual, bottom-up process of innovation. Providers could use local knowledge to meet specific circumstances.

Representative Paul Ryan’s Republican plan is controversial because of the amount of public money he would dedicate to his premium support plan, but the basic architecture of the plan has been around for decades. In less rigidly ideological times, many Democrats supported variations of this basic approach.

Advocates, like Alain Enthoven of Stanford, point out that competition-based plans have improved outcomes in many places. Such plans cover employees of the University of California and state employees in California, Wisconsin and Minnesota. They also note that the Medicare prescription drug benefit also uses a competition model. Consumers have been adept at negotiating a complex marketplace, and costs are 41 percent below expectations.

The fact is, there is no dispositive empirical proof about which method is best — the centralized technocratic one or the decentralized market-based one. Politicians wave studies, but they’re really just reflecting their overall worldviews. Democrats have much greater faith in centralized expertise. Republicans (at least the most honest among them) believe that the world is too complicated, knowledge is too imperfect. They have much greater faith in the decentralized discovery process of the market.

I’d only add two things. This basic debate will define the identities of the two parties for decades. In the age of the Internet and open-source technology, the Democrats are mad to define themselves as the party of top-down centralized planning. Moreover, if 15 Washington-based experts really can save a system as vast as Medicare through a process of top-down control, then this will be the only realm of human endeavor where that sort of engineering actually works.