Red Alert! Conservatives in Congress and elsewhere should be warned: The Administration’s latest signal for “compromise” may end up as little more than an expansion of existing bad policy, rather than a serious effort to enact substantive reforms. And only substantive reforms can change the perverse incentives that plague giant entitlement programs and have worsened America’s deepening financial crisis.

Consider some of the latest ideas that have surfaced in the media for finding “savings” in health policy:

Importing Medicaid drug policy into Medicare. In Medicaid, patients do not have the same access to drugs as patients in Medicare. Nonetheless, the latest trial balloon is to import Medicaid’s prescription drug financing into Medicare. In Medicaid, pharmaceutical manufacturers are required to “kick back” part of the drug costs to the states (a rebate) in exchange for getting their drugs on the approved Medicaid list. Effectively, this rebate scheme operates as a form of price regulation. In Medicare, prescription drugs are delivered through private plans in intense competition with each other, and the results have been stunning: a 41 percent decline in projected premium costs over 10 years. It is hard to imagine how any principled congressional conservative would even consider the displacement of such a successful working model of health care delivery, financed through a premium-support system that they champion for the Medicare program itself. Meanwhile, the left would win control over prescription drug pricing for all Americans age 65 and older—the largest share of the nation’s pharmaceutical market.

Provider payment cuts. Line-item cuts to Medicare payments are another rumored Big Idea. There is one little problem: Medicare is governed by price controls. Under current law (Obamacare), hospitals, home health agencies, nursing homes, and even hospice facilities already face record-breaking payment cuts. Altogether, the Medicare Actuary projects savings from these and other Medicare changes to yield $575 billion over 10 years—while jeopardizing seniors’ access to care. Indeed, the President wants to make these cuts even deeper by strengthening the ugly Independent Payment Advisory Board. Doctors, under current law, face a 29.4 percent cut in Medicare payments in January 2012. Whether achieved through a meat cleaver or a scalpel, payment cuts are not a reform of anything. And they won’t last. Conservatives in Congress have no business advancing and endorsing government price controls—the left’s preferred policy solution—to control health care costs.

Tinkering with the Medicaid mess. Another rumored proposal: Creating a unified, blended matching rate for Medicaid. Medicaid, the Children’s Health Insurance Program, and now Obamacare’s massive new Medicaid expansion create a maze of differing reimbursement rates depending on which category an enrollee is assigned by the government. But even streamlining the reimbursement process ignores the underlying problems of the programs. States do not have any new flexibility, and federal spending is not on a real budget. This once again falls far short of real entitlement reform.

An old story. As former Office of Management and Budget official Jim Capretta says:

These kinds of changes in Medicare and Medicaid are nothing new. Various versions of them have been included in every budget deal going back 30 years, and most especially in the bipartisan deals of 1990 and 1997. They do not constitute genuine entitlement reform. They will not fix Medicare and Medicaid. And they will not solve the nation’s budget problem….

The Balanced Budget Act of 1997 did—temporarily—balance the budget. And it imposed disastrous health care policy:

  • Instead of a rational Medicare physician payment system, it created the Sustainable Growth Rate formula (SGR), which could require as much as $300 billion to “fix” over 10 years.
  • It created a highly overregulated Medicare+Choice program that was destined to fail.
  • It created an SCHIP program that has since blossomed into the equivalent of another federal entitlement.
  • It transferred some of the costs of home health care under Medicare Part A to Part B, making cosmetic accounting changes while having taxpayers pick up the tab through general revenues.
  • Medicare payment cuts shut down more than 2,500 home health agencies, and nursing homes cut back on services for the elderly.
  • In an unprecedented assault on the doctor-patient relationship, it imposed a statutory restriction on the right of doctors and Medicare patients to contract privately for medical services.

The warning to Congress simple: Just because the numbers appear to add up, that does not mean that you’ve solved the entitlement crisis. In fact, the deal may be worse than you think.