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Triage on the economic front is Job One for the incoming Obama administration and the 111th Congress. Maybe it is Job Two and Job Three as well.

[IMGCAP(1)]The situation is precarious enough — with the threat of deflation and a continuing lack of confidence in all elements of the financial system — that coming up with a solid and bold stimulus plan, much larger than any would have contemplated even a month ago, is key. Doing it quickly is also critical.

An expeditious move will be positive on two fronts: restoring some confidence in the system, thus encouraging lending and consumer spending, and providing some adrenaline for a sagging economy. The third component of our crisis, the foreclosure mess, needs separate and bold action of its own, ideally via a new version of former President Franklin D. Roosevelt’s Home Owners’ Loan Corp.

But there are other priorities as well for the president and the country, which should not wait until we have settled, or even simply stabilized, the financial system. At the top of the list is health reform. It is particularly encouraging for the prospects of real change that Obama has chosen former Senate Majority Leader Tom Daschle (D-S.D.) both to head the Department of Health and Human Services and to be the single acknowledged administration leader in this area of policy.

No doubt, some elements of change in health policy will come in the initial stimulus package, or in discrete bills, including steps to extend coverage to the unemployed, perhaps including access to Medicare for those between ages 55 and 64, expanding the State Children’s Health Insurance Program (and perhaps for some of their parents) and finally enacting a health information-technology/electronic medical records bill.

Then comes the hard part. Many key Members are eager to move on major health reform, nobody more prominent or more passionate than Sen. Edward Kennedy (D-Mass.). His ideas, which will soon emerge, will likely be quite consonant with Obama. In addition, of course, Daschle is an expert in this area, also passionate about it, and has his own ideas, including the fascinating one of creating the equivalent of a Federal Reserve Board to regulate the health world.

This year, reforming health policy will be an interactive process, with real input from the White House, HHS, the House and the Senate, and with serious bipartisanship a major priority. Whether it can work, despite these major differences from 1994, remains to be seen. But right now I want to lay out a key area that needs to be front and center in the debate and in the solution — an area that does not require turning the health system upside down to implement and make a big difference.

A few months back, I had a conversation with a health professional working for a dialysis company who relayed a story about one of her colleagues, a woman whose son had kidney failure. She donated a kidney to him, an operation that went smoothly for both of them, vastly improving his life. The operation and subsequent care for him, which includes a regimen of drugs, was paid for by Medicare. But after three years of treatment, Medicare cut off the funding. Without insurance of his own, the son faced a cruel choice. He took the only real option available to him — he let his mom’s kidney fail and and went on dialysis, which Medicare pays for over a lifetime.

Of course, the quality of his life declined — he now has to go through demanding and debilitating treatment tethered to a machine. But it also meant a trade of a treatment regimen for a transplant patient that costs around $15,000 a year (often less, if there are no complicating factors) for a dialysis regimen that costs roughly $72,000 a year.

I could not believe this when I heard it. But when I checked with medical professionals, they confirmed it. There is a word for this Medicare regulation: crazy.

In 2006, Medicare spent almost $23 billion to treat the more than half-million people with kidney failure; less than 10 percent of that money went to the roughly 30 percent of those with functioning kidney transplants. I am not sure how many dialysis patients are on the machines because they can’t afford to pay for the treatment costs after transplants. But it is clear that many of the patients say they cannot even consider going off dialysis if a transplant became available because they would lose their Medicare.

The pros also tell me that there are many such regulations in Medicare, implemented for bureaucratic reasons or because of specialists and subspecialists with blinders on, that may bring short-term savings but involve huge long-term costs. Many, of course, surround the handful of chronic diseases, from kidneys to diabetes, that eat up an astonishing portion of Medicare and our overall health costs.

This might be a job for a new Federal Reserve equivalent. Or it could be a job for the existing Centers for Medicare and Medicaid Services. If it is the latter, I would advise Daschle to divide the job of CMS director in two, with one person primarily responsible for running the agency, including its huge Medicare Part D prescription drug program, and another whose task is to go through every Medicare and Medicaid regulation in the same way that Peter Orszag, the next director of the Office of Management and Budget, is going to go through the budget — line by line — and change the stupid or counter-productive ones.

Some of the changes might require legislative action; undoubtedly, many regulations are in place because of Congressional mandates. Maybe a panel could come up with a package that could generate an up-or-down vote in Congress. And here is a revolutionary thought: Maybe some of the work looking at the regs could come from Congressional oversight! One other salutary and cost-saving change would be to use creative means to expand the supply of kidneys available for transplant, as Sen. Arlen Specter (R-Pa.) has proposed.

I have always been skeptical of magical savings in the health care system; one person’s savings is another person’s lost income, which he or she will fight to the death to keep (or find other seams in the system to make up for it). And savings from technological advances usually get erased by the expanded usage of them, including much unnecessary use. But a focus on misguided and counterproductive regulations might actually produce real savings while improving people’s lives.

Norman Ornstein is a resident scholar at the American Enterprise Institute.

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