President Obama’s budget allocates $634 billion towards health care reform but only half of that amount will come from new sources of revenue (namely, reducing itemized deduction rates for families with incomes over $250,000). The other half is already in the health care system, but we’re wasting it.

Up to $700 billion a year is wasted on unnecessary or ineffective care and the Obama administration believes that it can re-orient some of those dollars to fund health care reform.

Part of that waste comes from unnecessary care. In fact, according to the most recent Dartmouth study which looked at “variations in spending growth and spending patterns among U.S. regions,” certain areas of the United States were spending more on care than others because physicians in higher spending regions “were much more likely than those in lower spending regions to recommend discretionary services.”

More care, however, does not always translate into better health outcomes. In fact, evidence suggests “that the quality of care and health outcomes are better in lower-spending regions.” Here is the Medicare data:

Part of the problem is that current payment methods — which reimburse doctors for the number of treatments they prescribe — encourage “hospitals and doctors to try to expand their services”; doctors also often don’t know if certain treatments work better than others.

So to eliminate over-spending, Obama’s budget bundles payments for post-hospital providers and links a portion of Medicare payments for acute in-patient hospital services to hospital performance. The stimulus bill smartly invested in comparative effectiveness research.

The Dartmouth study argues that “to slow spending growth, we need policies that encourage high-growth (or high cost) regions to behave more like low-growth.” Some providers (like academic health centers or providers in high spending regions) may oppose restructuring the payment system, but insurance companies (who now reimburse for every procedure) and patients (who’ll be able to avoid unnecessary surgeries) would likely embrace the change. Overall it’s smart policy: it will reduce health spending and improve the qualify and efficiency of care.

Fortunately, the Obama budget adopts some of these cost-saving measures and reinvests the savings into health reform. But as the Dartmouth study suggests, there is more that can be done.

Previewing the Republican attack on the budget, Sen. Kay Bailey Hutchison (R-TX) appeared on CNBC this morning to spew-off the kind of neo-Hooverism that confuses ‘principles’ and ‘ideology’ for economic reality:

ANCHOR: Senator, do you believe it’s necessary to postpone our nations answers to health care because it costs too much?

BAILEY HUTCHISON: I do. I certainly do, and I think that again going into this nationalized health care, universal health care, takes it out of the private sector, and again that’s jobs…You start taking that out of the private sector and put it into government, more government spending and less private sector jobs that — what is happening to our free enterprise system?

Watch it:

As Peter Orszag suggested this morning during the budget unveiling, getting health care costs under control and expanding access to coverage is the “single most important thing” we can do to solve the economic crisis. Health care costs “are the long-term driving force in federal and state budgets” and health spending consumes “$1 out of every $6 in the economy, dwarfing automobiles and all other economic segments.”

In fact, the health care crisis is best pronounced in Texas. The state leads the nation in “the highest percentage of residents without health insurance,” and ranks last in children’s access to health care.

The current economic recession and growing unemployment numbers are likely exacerbating the problem. A look at December’s unemployment figures (the latest date for which data is available), for instance, reveals that an 11,500 additional Texans lost their jobs every day, and many likely lost their employer-based health insurance coverage.

But while the crisis is real for Texans, Bailey Hutchison, who as a Senator receives government subsidized health insurance, is concerned about “more government spending” on health care. Of course the point of real health reform is to eliminate wasteful expenditures, improve quality, and reduce overall health care spending (now at an unsustainable 16% of the GDP), not increase it. Unfortunately, by postponing reform, health care spending will only increase. By 2017, health care will consume 20 percent of the GDP.

Greg Sargent asks President Clinton about President Obama’s chances of passing comprehensive health reform and the challenges of shepherding a plan through Congress:

It’s gonna be much harder to get the doctors and the business community to come out against reform than it was 14 years ago…The only way they can beat it this time is if they can convince public opinion and enough members of Congress that reforming health care now will cost more jobs than it will save. And I think that’s gonna be a pretty hard sell…The President’s gonna be on strong ground…The last election showed a cultural shift in America which had been building for a decade, and a rejection of the economic and social policies of not just the eight years of President Bush but the 12 years before me. There’s a willingness to take a fresh look at all this. I believe he should try, I’m glad he’s going to, and I think it’s a better than 50-50 chance he’ll succeed.

Indeed, Obama has explained the health care crisis in the context of the economic recession. It’s a connection more and more Americans can personally appreciate, as rising unemployment numbers translate into an increase in the uninsured. In fact, during a time when the automakers are shedding health care benefits to remain competitive and employers are struggling to provide coverage, the nay-sayres are sounding like Hooverites — out of touch with Wall Street and Main Street.

A crisis is a terrible thing to waste and if Obama’s stimulus package and budget are any indication, he plans to take full advantage of it to reform the health care system.