I have an op-ed in USA Today on the effect of health care reform on costs:

A big reason the new law is ineffective in constraining costs is that it doesn’t fundamentally reform Medicare, particularly the program’s dominant “fee-for-service” reimbursement option.

That model covers over 75% of Medicare enrollees, or about 35 million people. It works exactly how it sounds: Medicare pays health care providers a pre-set amount for each service. Patients are largely shielded from costs of additional services because nearly 90% have extra insurance that covers costs Medicare doesn’t.

This setup creates perverse incentives. Physicians, hospitals and clinics can make more money by providing extra treatments even if they don’t improve patient health. Enrollees have little reason to refuse extra care because they pay no additional costs.

Not surprisingly, that’s exactly what has happened. According to the CBO, the average Medicare beneficiary used 40% more physician services in 2005 than in 1997. Similarly, physician use of medical tests increased 40% from 2002 to 2007, according to the Medicare Payment Advisory Commission. Needless to say, Medicare spending has exploded.

The full piece is available here.