How to defang the health-care cost monster
By Matthew Miller

(FORTUNE Magazine) – Washington is aflutter over charges that the White House may have covered up the true cost of the prescription drug bill. But whoever may have told Medicare's actuary not to share what with whom, the dust-up is best seen as a policy challenge. The drug bill may cost $400 billion or $550 billion over ten years, but that doesn't alter two facts: Huge medical costs will be there, and someone will have to pay. The real issue that underlies state Medicaid woes, corporate-benefits angst, West Coast grocery strikes, and fresh concerns over Medicare's solvency is the alarming upward trajectory of health costs as baby-boomers age.

All sides say they want to control health costs. What that generally means is that they want to shift their costs to somebody else. Business rightly says its health bills are out of control, which helps explain why corporate America championed the new drug benefit. When Washington pays, firms get off the hook for billions they'd otherwise have to spend on retirees. To workers, meanwhile, cost control means employers' picking up more of the rising tab. To state governments, cost control means getting the feds to foot more of the bill. To Washington, cost control means such ideas as converting Medicare to a defined-contribution plan, in which citizens would use their Medicare payments to buy private health insurance.

All those impulses are understandable. But all involve cost shifts. And in the end, cost shifts aren't about solving the problem; they're about making health costs somebody else's problem, a situation that will always favor those with political power and beggar the little guy.

Real cost-effectiveness in health care requires a new kind of national conversation. Health costs are expected to soar from today's 15% of GDP toward 20% by around 2020. Finding ways to slow that growth without hurting quality is a national imperative, if government and business are to have money available for anything else. There's every reason to think it is doable. Consider that 15% of GDP: Other advanced nations spend only 9% to 10% of their GDP on health care, yet America leaves 44 million people uninsured and doesn't have better public-health outcomes. Meanwhile, huge regional variations exist in the use and reimbursement of medical services, from caesarian deliveries to heart treatments--again with no coherent link between spending and outcomes.

This radical inefficiency led Paul O'Neill, when he ran Alcoa, to convene the Pittsburgh Regional Healthcare Initiative (PRHI), an ambitious effort by health stakeholders to devise systems and techniques for delivering cost-effective care. "One reason I was reluctant to come back to government," O'Neill told me while he was Treasury Secretary, "was that I thought what I was doing [in the PRHI] was maybe more important." He may have been right. While it's too soon to judge its progress, the PRHI could become a model for a national effort on health costs and quality.

Imagine it as a health-care Manhattan Project. A primary goal would be to create a much deeper factual analysis of costs than exists today. We'd put the industry under systematic scrutiny--from its $700,000-a-year drug-sales reps to the supply-drives-demand mania for MRIs. This kind of comprehensive unpacking of health-sector costs is a prerequisite for developing intelligent ways to reengineer them.

But the first thing that has to change is the national mindset. We can't keep pushing costs to the other guy; we need to reorganize health delivery in ways that cut costs while improving quality. That won't be easy, because every dollar of health-care "waste" is somebody's dollar of income. Still, until we start thinking clearly about our goals, we're just playing make-believe.

MATTHEW MILLER ( is a Senior Fellow at the Center for American Progress and author of The Two Percent Solution: Fixing America's Problems in Ways Liberals and Conservatives Can Love.