After talking incessantly about cutting waste, fraud and abuse from federal spending, on Wednesday, President Obama finally announced a plan to do so. His method: use financial incentives.
The president has ordered all federal departments and agencies to "expand and intensify their use of payment recapture audits under the authority they currently have." Recapture audits consist of the government paying private sector auditors to discover improper payments that result from error or fraud. The plan is to "offer specialized private auditors financial incentives to root out improper payments." The more money the auditors save the government, the more they make.
The White House says the increased audits could save taxpayers $2 billion over the next three years. That's only a small fraction of the $98 billion worth of improper payments the White House says were made last year alone ($54 billion from Medicare and Medicaid). But it's an improvement over current practice. It's also a fascinating admission from the president.
The move acknowledges that the public sector has failed to properly police itself. Obama, who reflexively opposes "privatization" on principle, has expanded the privatization of an important government function -- auditing the government's own books. Why would he do that? He answers the question himself. Providing financial incentives to private auditors will save the government more money than relying on in-house bureaucrats to self-police.
So the president has acknowledged that people will work harder toward a goal if given strong financial incentives to do so. With that acknowledgement, he has accepted the premise of Rep. Paul Ryan's "A Roadmap for America's Future," the very document the president has tried to dismiss as too extreme.
Ryan proposes transforming America's entitlement programs from defined benefit plans to defined contribution plans. For instance, Medicare currently pays directly for all qualifying medical procedures. So there is no incentive to be careful about how much care you use or how much that care costs. Ryan would have Medicare give beneficiaries a set amount of cash (about $11,000 a year) to buy health insurance from a list of approved insurers (just as federal employees do now). If beneficiaries buy insurance that costs less than their Medicare payment, they can keep the difference in cash and invest it into a Medical Savings Account.
Ryan would similarly change Medicaid. He would replace direct payments to service providers with an $11,000 refundable tax credit the poor could use to buy private health insurance. (Those who receive disability and long-term care under Medicaid would continue to receive the same services they do now.) Again, Ryan would use financial incentives to improve services and outcomes.
These are ideas worth exploring. But the president has shot them down and his party is working hard to discredit them. It's the same thing they did to school vouchers and Social Security reform -- attack incentive-based reforms as "privatization." But the president's announcement yesterday makes it harder for the White House and the Democratic Party to continue to attack the concept of "privatization" as a risky scheme that doesn't work. If it doesn't work, then why is the president using it to save the taxpayers billions of dollars? And if it can save $2 billion just by providing auditors incentives to uncover improper payments, imagine how much could be saved by replacing the current system, which gives recipients strong incentives to over-use care or commit fraud, with one that gives them direct incentives to spend more wisely?
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