By MAGGIE MAHAR

Thanks the unbridled rise in health care prices, Medicare is going broke. As I mentioned in a recent post, four years ago the Medicare trust fund that pays for hospital stays started to run out of money. In 2004 the fund began paying out more than it takes in through payroll taxes.

Since then, the balance in the fund, combined with interest income on that balance, has kept the fund solvent. But in just 11 years, it will be exhausted,” the Medicare Payment Commission reported in its March. “Revenues from payroll taxes collected in that year will cover only 79 percent of projected benefit expenditures.” And each year after 2019, the shortfall will grow larger.

Make no mistake: this is not an example of an inefficient government program spending hand-over-fist without caring whether it is getting a bang for the taxpayer’s buck.  As I discussed in that earlier post, health care prices have been climbing—without a concomitant improvement in patient outcomes or patient satisfaction—in the private sector as well.

Medicare Reform Could Pave the Way for National Reform

Before trying to roll out national health insurance, the next administration needs to address the structural problems that undermine the laissez-faire chaos that we euphemistically refer to as our health care “system.” Otherwise, we run the risk of winding up with a larger version of the dysfunctional, unsustainable system that we have today. Ideally, the administration should make Medicare reform a demonstration project for high quality, affordable universal coverage.

Let me be clear: Medicare reform does not preclude national health reform. To the contrary, by starting with Medicare, and showing what can be done, reformers enhance their chances of winning the larger war.

Nor does focusing on Medicare first mean that the suffering of uninsured and underinsured Americans must be ignored. As part of Medicare reform, Medicaid and SCHIP should be folded into Medicare, turning these “poor programs for the poor” into federal programs, expanding coverage, and raising the fees for doctors who treat Medicaid patients.

Medicare presents reformers with a promising starting point. Politically, Medicare reform will be easier than a nationwide overhaul, simply because Congress recognizes that when it comes to Medicare, it has no choice.  Legislators know that Medicare has reached a tipping point: they must do something.

This is why, earlier this month, the Senate flirted with political suicide by considering letting a scheduled cut in the fees Medicare pays physicians go into effect. On July 1, Medicare was supposed to slash physicians’ fees, across the board, by an average of 10.6 percent. Physicians threatened that they would close their doors to Medicare patients. At the eleventh hour, legislators stepped back from the edge of the cliff.

But Congress knows that the problem has not been solved.  Legislators will have to revisit the problem of Medicare spending early in 2009. Physicians’ fees are scheduled for another across-the-board cut on January 1, 2009.  Everyone knows that this is a crude solution. Medicare pays primary care physicians too little, which is why, MedPac explains, 30 percent of Medicare patients looking for a new primary care doctor report difficulty finding one. Meanwhile, Medicare overpays other physicians for certain services. Dollars need to be redistributed; the net result could easily be a wash.

How Medicare Can Save Dollars and Lift the Quality of Care

But Medicare cannot contain runaway inflation simply by looking at how much it pays doctors.  The program overpays drug-makers; it overpays device-makers; it overpays private insurers who offer Medicare Advantage. In some cases, it overpays hospitals—or squanders dollars on services that don’t benefit patients, without giving hospitals the right financial incentives to provide more effective, safer care.

In its March and June reports, the Medicare Payment Commission has made a number of shrewd and imaginative suggestions for cutting waste in the system. First, Medicare should eliminate the windfall bonuses that Medicare now pays MedPac insurers (see “The Problems with Medicare Advantage”).

Secondly, MedPac details ways that Medicare can begin to pay doctors and hospitals for the quality of the care they provide rather than the quantity. I’ll be writing more about this in future posts.

MedPac also calls for an independent, unbiased, “comparative effectiveness institute” that would compare new, cutting-edge drugs, devices, and procedures to the less expensive products and treatments that they are trying to replace. Medicare would then make coverage decisions based, not on the cost of these treatments, but on their effectiveness, paying for the treatments that are most effective for a particular set of patients. (This would not be one-size-fits-all medicine).

The U.K. offers a model: The National Institute for Health and Clinical Excellence (NICE) reviews medical research, decides which treatments to cover, and issues guidelines to doctors. (Note: since the U.K. has a much, much smaller health care budget, NICE must look at the cost-effectiveness of treatments:  i.e., it must find out if a product which is likely to give the patient only another six months of life is worth the price-tag. But as I have written, because we have so much long-hanging fruit in our bloated system, we can save billions just by concentrating on clinical effectiveness, without worrying about cost-effectiveness.

In the U.K., NICE uses its research to issue guidelines for “best practice” to physicians. Note that there are not “rules,” but guidelines. Everyone understands that in individual cases, physicians might want to deviate from the recommendations. But in the U.K. physicians now follow the guidelines 89 percent of the time.

Medicare also could reap huge savings by repealing that part of the Medicare bill negotiated behind closed doors at the end of 2003 which specifically prohibits Medicare from negotiating with drug-makers for the bulk discounts that the Veterans Administration wins. As a result, Medicare now forks over at least 50 percent more than the VA pays for half of the top 20 brand-name prescription drugs sold to seniors.

Won’t Industry Lobbyists Fight Tooth and Nail?

Absolutely. The for-profit health care industry reaps a handsome profit from sky-high spending.

Yet, despite the opposition, when it comes to Medicare reform, legislators have a compelling argument: Neither the elderly nor the taxpayers who support Medicare can afford to continue to be gouged by drug-makers, device-makers, and others in the health care industry who are the “price-makers” while patients and taxpayers have become what Wall Street calls the “price-takers.”

Today, the health care industry says: “we will charge whatever the market will bear.”  That sounds fair enough. But when “the market” is comprised of seriously ill patients (and roughly 80 percent of our healthcare dollars are spent on those who are seriously ill), it turns out that there is almost no limit to what “the market” will bear.  This is why free market competition in health care doesn’t work the way it does in other sectors of the economy:  when it comes to health care, the customer has too little leverage.

Meanwhile, in the unregulated Wild West that we call a health care system, no one pushes back to protect the patient.  Virtually every other developed country in the world negotiates for bulk discounts on drugs. We don’t.  Other countries insist on unbiased evidence that a new, more expensive product or procedures is, in fact, more effective than less expensive treatments already available.  We don’t. (The FDA only requires that a sponsor provides evidence that the new entry is more effective than a placebo—in other words, better than nothing.)

Most Americans would agree: the government needs to defend both the elderly and taxpayers.  We simply cannot afford to keep the pharmaceutical industry’s shareholders in the style to which they have become accustomed. (Until recently, drug-makers have been far more profitable than virtually any other Fortune 500 businesses.  From 1995 to 2002 they took first prize, reporting earnings that ranged from 13 percent to 18.6 percent of sales each and every year. Over the same span, the average Fortune 500 firm posted earnings that averaged just 3.1 percent to 5 percent of revenues. Granted, in 2004, drug-makers fell to third place, trailing mining, crude oil production and commercial banks, but even then, earnings equaled 16 percent of sales.)

Medicare Reform Is a More Manageable Project

A final reason to begin Medicare reform before tackling national health reform is that, when compared to a fragmented national health care system that involves a kaleidoscopic cast of payers and insurers, Medicare is a single and fairly coherent program.  This is a more manageable project.  It will give reformers a chance to show that they can, in fact, trim spending while lifting quality.  This should provide a blueprint for tackling the larger, messier job of overhauling care nationwide.

If done right, national health reform will take time. Those fighting for universal coverage should not delude themselves:  reform will be extraordinarily difficult, not only because the system is so fragmented, but because conservatives and progressives are so polarized on this issue. The political climate is even more fraught than it was when the Clintons attempted reform in 1993.

In 1993, compromise seemed possible. Keep in mind, 23 Republicans, including then-Minority Leader Robert Dole, co-sponsored a bill introduced by Republican Senator John Chafee that sought to achieve universal coverage through a mandate that would require that all individuals buy insurance.

Today, where would you find 23 Republicans willing to support progressive reform that doesn’t simply hand the keys to the kingdom to the private insurance industry?

In 2008, progressives and conservatives are so polarized on this issue that anyone who talks about “bipartisan compromise” is talking about health care “reform” in name only.   Conservatives believe that free market competition can solve our health care problems. Progressives understand that this is a sector where market competition doesn’t work to ensure high quality and reasonable costs. Government oversight is needed to ensure that insurers do not discriminate against those who are sick, and that everyone receives an equally comprehensive package of benefits at price they can afford.

Conceivably, if Congress is in a hurry, it could cobble together compromise  legislation that gives every American access to a piece of paper called “health insurance.” But this would not mean that middle-class Americans would have access to health care. If the insurance industry is not regulated, insurers will continue to sell health care policies that are filled with holes, while shifting costs to the sickest patients.

Finally, the most important reason why the next administration should put Medicare first on its health care list is this: if Washington tackles Medicare reform in 2009, it can show Americans that it is possible to reduce costs and improve care. In fact, lower costs and higher quality go hand-in–hand.

This is counter-intuitive. The notion that more care—and more expensive care—is not better goes against some of our most deeply-held assumptions about medicine and medical technology. But as I have explained here, decades of medical research shows that less aggressive, less intensive care leads to better outcomes.

Until most Americans understand this, it will be supremely difficult to create an efficient, affordable, and sustainable system that offers high quality care to all. This is why starting with Medicare reform could lead to the health care reform that Americans need.

Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of  “Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much,” an examination of the economic forces driving the health care system. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.