Next Steps

Dear Readers –

This will be the final post on my “Diagnosis” blog. I am grateful to my friends at The New Atlantis for hosting the blog, and for their labors in editing and updating more than 400 posts here over the course of five eventful years. The complete archive of Diagnosis will remain intact here, and I will happily continue my affiliation with The New Atlantis as a contributing editor.

My writing and work on health care and other issues continues. Anyone interested in reading my latest articles and posts can visit this link to the website of the Ethics and Public Policy Center, where I am a Senior Fellow. There you find links to all of my essays, articles, white papers, and studies, as well as some of my public appearances.

You can also sign up for my e-mail list to receive occasional updates on this work directly in your inbox, by entering your e-mail address into the box at the right. [UPDATE in 2016: by writing to clayton.hale@aei.org].

—James C. Capretta

posted by James C. Capretta | 5:28 pm

The White House’s Peculiar Obamacare Delay

On Tuesday, the Obama administration announced that they would be delaying the implementation of the employer mandate provisions of Obamacare from 2014 to 2015. Over at the Weekly Standard, I explain how this strange decision highlights the underlying weaknesses of the entire health care law:

For starters, the delay confirms precisely what the critics have been saying all along: That Obamacare is a huge burden on the economy that will reduce employment and stifle wages. By delaying enforcement of the mandate, and citing complaints from employers as the reason, the Obama administration is essentially conceding this point. How do Democrats defend the law now that the administration has admitted it has the potential to harm business vitality and job growth?

The rest of the post can be read here.

posted by James C. Capretta | 12:08 pm
File As: Health Care

How to Approach the ‘Fiscal Cliff’

Today at National Review Online I have a column on how congressional Republicans should negotiate with the White House over the impending fiscal cliff, and why reforming entitlements, including Obamacare, needs to be high on their agenda.

The hardest part of these negotiations will be the battle over entitlement reform. The bottom line for the GOP should be this: There should be no deal on long-term taxes without far-reaching reforms to health-entitlement programs. And what’s far-reaching? For starters, the entirety of Obamacare should be on the table for revision and retrenchment. The law sets in motion the largest entitlement expansion in a generation. It’s far better to scale the program back now before it gets started than to wait and hope it can be scaled back later.

Republican governors have substantial leverage in these negotiations because they can opt out of the Medicaid expansion in Obamacare, thanks to the Supreme Court. If 25 or so Republican governors refuse to put more people into an unreformed Medicaid program, it will put tremendous pressure on the Obama administration, which is desperate to see the Medicaid expansion occur during the president’s second term.

You can read the rest of the article here.

posted by James C. Capretta | 2:45 pm
File As: Health Care

A Federal-State Framework for Market-Based Reform

I’ve contributed the final chapter to the new book The Great Experiment: The States, the Feds, and Your Healthcare, available on Amazon and published by the Pioneer Institute. Here’s an excerpt:

Despite criticism from some quarters, the health care system in the United States has significant strengths. The hospitals and clinics through which most Americans get their care are staffed by some of the world's most highly trained and accomplished physicians and these institutions have the capacity to deliver the finest and most sophisticated medical care found anywhere in the world. Most Americans have ready access to this care through third-party insurance arrangements provided by their employers, or in the case of seniors, by Medicare. Finally, U.S. health care is open to medical innovation in ways that other systems around the world are not. The resulting rapid pace of innovation that has occurred in recent decades has, in the main, provided a tremendous boost to the quality of patient care.

There are also many problems with American health care. These problems are aggravated by the Patient Protection and Affordable Care Act (PPACA) but they will remain even if the PPACA is repealed. These problems have worsened in the past three decades, to the point where a large percentage of the electorate believes real change is needed.

These problems include:

  • Cost increases that exceed the levels that patients, taxpayers, or other payers are either able or willing to pay
  • Government spending on health care that is rising much more rapidly than the revenue base that pays for it, thus putting tremendous strain not just on governmental finances but also on U.S. economy and credit-worthiness
  • A substantial number of Americans with pre-existing conditions who either cannot afford or cannot find insurance options that provide secure and sufficient coverage for their conditions
  • A considerable number of working Americans who go without insurance for long periods or intermittently because they cannot afford it or it is not offered by their employers
  • A surprisingly low and unpredictable quality of care in many settings

What the American health care sector needs most is the discipline, balance, and accountability that come from a functioning marketplace....

You can read the rest of the chapter here, or in PDF here.

posted by James C. Capretta | 6:43 pm
File As: Health Care

A Look Back at 2011: Congress and White House Edition

I have a new column up at e21, looking back at the major policy struggles of the last year:

2011 began with great uncertainty and anticipation. How would the new House majority, propelled into office with the energy from the emergent Tea Party movement, share power with a Democratic White House and Senate? And what would it all mean for economic and fiscal policy?

Now that 2011 is nearing an end, it’s safe to say that this particular political marriage — arranged to some extent by the voters who pulled the lever both for Barack Obama in 2008 and then for conservative Republican congressional candidates in 2010 — has been a rocky one, to put it mildly. Over the course of the past year, the news has been dominated by a series of high-level budget negotiations that were initiated by both sides with great fanfare and much hope for historic and game-changing breakthroughs, and that ended instead as spectacular, headline-grabbing failures....

You can read the whole column here.

posted by James C. Capretta | 1:11 pm
File As: Health Care

Out and About

Last month, I had the opportunity to speak at several meetings on the subject of the relationship of health care to the nation’s medium and long-term fiscal challenge. Two of those sessions were video recorded and are available for viewing on the Internet for those who might be interested.

The first of the recorded sessions, at the Paul Merage School of Business at the University of California at Irvine on November 4, can be viewed here. The slides I used for my presentation are available here.

The second recorded session, at a meeting of the Association of Washington Business (the Chamber of Commerce for Washington State), in Seattle on November 15, can be viewed here. The slides I used for this session in Seattle (very similar to the ones used at UCI) are available here.

posted by James C. Capretta | 1:27 pm
File As: Health Care

Plugging the Leaks in High-Risk Pools

(with Tom Miller)

This week, the Obama administration finally launches a poorly designed, hastily constructed, and severely underfunded high-risk pool program across the 50 states. It’s a shallow attempt to appear to be doing “something” soon to help Americans without health insurance due to pre-existing health conditions. But apart from its stumbling start, it’s also the initial poster child for the core flaws of ObamaCare. It misrepresents the real problem, promises more than it can deliver, tries to hide the real costs, and gives sensible reforms a bad name — all because the administration is more committed to its long-term vision of central government control than to actually building a sustainable solution. High-risk pools can address pre-existing conditions without the costs and burdens of the heavy-handed federal regulation of insurance planned for 2014. In short, we can do more by doing less, in a transparent, targeted, and adequately funded manner.

The Patient Protection and Affordable Care Act (PaPACA) enacted into law last March included $5 billion in federal taxpayer funds to finance a new version of state-based high-risk pools (HRPs). This provision was inserted into the broader healthcare legislation late last year to address two political needs. It provided a superficial bow toward bipartisanship (Republican presidential candidate John McCain had proposed a more robust version of HRPs in the 2008 campaign, which was promptly derided by Barack Obama’s supporters). It also would offer modest transitional relief in the form of subsidized insurance to at least some Americans with pre-existing health conditions who find individual market health coverage either unavailable or unaffordable (or both).

ObamaCare advocates hoped that this might distract voters from the unpleasant fact that all but a tiny portion of the new law’s provisions to expand health insurance coverage do not go into effect until 2014, even though the higher private insurance premiums, taxes, and regulatory burdens triggered by the new health law kick in much earlier.

Ironically, the Obama team has both overstated the problem and underfunded the solution. For the past year, ObamaCare advocates have led the public to believe that private insurers regularly scheme to refuse coverage to most people with higher-cost conditions. Last summer, the propaganda arm of the administration’s Department of Health and Human Services (HHS) recycled a dubious Commonwealth Fund survey claiming that 36 percent of all people who tried to buy their own insurance plans (12.6 million non-elderly adults!) were discriminated against because of a pre-existing condition. The real dimensions of the problem of the “medically uninsurable” are a good bit smaller (because most insurers need to sell more, not fewer, policies), but it’s nevertheless serious and costly to solve. Most credible estimates, by the Government Accountability Office, the Congressional Budget Office (CBO), and the Agency for Healthcare Research and Quality, place the figure closer to 2 to 4 million Americans, depending on various definitions and assumptions.

CBO’s assessment is that the new law’s funding for HRPs will only cover, on average, 200,000 enrollees a year — or no more than one in ten of the 2 to 4 million people who are likely in need of assistance. CBO acknowledged that the actual number of people who would be eligible for the program if adequately funded could be much greater — and in the millions — and conceded that if more people were allowed to sign up initially, the available funds will probably be exhausted prior to 2013.

Of course, the estimated cost of dealing with this problem is subject to political mood swings. For example, when Senator McCain proposed a somewhat broader high-risk pool program in 2008 and budgeted it at $7 billion to $10 billion a year, then-Georgetown University professor and HRP critic Karen Pollitz guesstimated to the New York Times that “it may cost 7 to 10 billion dollars a week” and criticized state HRPs that “leave the illusion that there’s a safety net without there really being much of one.” By the fall of 2009, an administration-backed HRP proposal pegged at the ultimate $5 billion total was included in a pending Senate health reform bill. Pollitz had revised her estimates, telling the PBS NewsHour that although it probably cannot cover everybody, it’s a good start and can cover “a lot more than you’re covering now.” She was recently appointed director of the office of consumer support at HHS in the Obama administration.

In any case, the actual cost of a more extensive and robust HRP program would depend on where policy makers set such insurance benefits parameters as cost-sharing and supplemental income-based subsidies, as well as the level at which beneficiary premiums are charged. Although the risk characteristics of the population in broader HRPs could be somewhat healthier and less expensive to cover, the average cost of government subsidies (after premiums) in current state HRPs was about $4,341 per enrollee in 2008.

But the ObamaCare/PaPACA version of HRPs is about to operate very differently from those already established in 35 states that are designed to match more limited resources. Under federal rules, the new state pools cannot allow any exclusions or waiting periods for coverage of pre-existing conditions, age-based premium differences must be compressed, enrollees can only be charged standard rates, and cost-sharing is restricted.

Not surprisingly, estimated costs for these more generous and seemingly less restricted health benefits are much higher, and as many as 20 states have balked at participating directly in the new program when it formally commences this week. Many governors and state legislators fear being left holding the bag when federal funds run out ahead of schedule but political expectations of continued coverage remain. They will leave it to Washington to run new HRPs in their states, in some case redundantly parallel to existing state-run ones operating under older rules.

The flawed design of ObamaCare’s shallow and leaky HRPs reflects the overreaching delusion that the HRPs could somehow fast-forward future assumptions of mandated coverage, standardized benefits, and risk-insensitive insurance premiums (envisioned under PaPACA for new health insurance exchanges and eventually the rest of the “private” insurance market) more than three and a half years ahead of schedule. Over-promising the deliverable benefits of HRPs was aimed at briefly allowing the Obama administration to cover itself politically while building its preferred long-term architecture of federal-directed health insurance regulation.

Drafters of the law authorizing the new HRPs tried to leave some budgetary wiggle room, by limiting their enrollment only to those already uninsured for at least six months and authorizing the HHS secretary to close enrollment to comply with funding limitations and make other unspecified “adjustments” as needed to eliminate any annual deficits. Enrollees already “insured” in older versions of state-based HRPs must remain in their higher-priced, less-comprehensive coverage. Other individuals already suffering from high-cost health conditions (but not yet uninsured for a full six months) must simply wait their turn. In other words, the administration would first encourage a new wave of enrollment in HRPs and boost coverage expectations through over-generous promises, but then renege on them when budget funds run short. If private insurers did this, they would be accused of illegal bait-and-switch practices. However, applying the healthcare spending accelerator and brake at the same time, which inevitably leads to violent collisions, looks like it will become standard policy for the Obama administration’s broader vision of healthcare reform.

The lessons to be learned do not include abandoning the concept of HRPs but rather restructuring them more effectively, sustainably, and transparently. Adequately funded HRPs need to be augmented with broader remedies: supplemental income-based subsidies, stronger protection for those maintaining continuous insurance coverage against the risk of new insurance underwriting based on future changes in health status, and more effective incentives and tools for both patients and providers to make higher-value healthcare decisions.

High-risk pools that deliver what they can promise will be more expensive. But compared to the sweeping burdens of ObamaCare, they will cost much less and do less damage to the rest of the private healthcare market that many Americans prefer and from which they still benefit greatly. They can represent the foundation for what it means to “replace,” and not just “repeal,” its flawed prescription for health policy change.

[Cross-posted at American.com]

posted by James C. Capretta | 2:31 pm
File As: Health Care

A 70 Percent Tax on Work

President Obama said Monday that the debate on health care has gone on long enough, and now is the time to pass something.

But does Congress, let alone the public, really understand what these bills would mean for the health sector and the wider U.S. economy? In 1994, the Congressional Budget Office (CBO) issued a lengthy assessment of the Clinton administration’s proposal, covering everything from its distributional consequences to the budgetary treatment of its various moving parts. The public should get the same kind of thorough review of what Obamacare would mean before Congress takes any further steps toward passage.

For instance, there hasn’t yet been a thorough analysis of what the bills moving in the House and Senate would mean for work incentives among low-wage families. A cursory review indicates that Obamacare would impose a massive new implicit tax on low-wage households, effectively penalizing the family that tries to do the right thing by working their way into the middle class.

According to CBO, family coverage in 2016 is likely to cost about $14,400 under the so-called “silver option” in the health-care reform plan sponsored by Senate Finance Committee Chairman Max Baucus. In the Baucus plan, a family of four at the poverty line (about $24,000 in 2016) would have pay to about $1,400 toward coverage, with the federal government paying the other $13,000 on their behalf. In addition, the government would also provide $3,500 to reduce the family’s deductible and co-payment costs for health services. Thus, the new entitlement provided by the Baucus bill would be worth a whopping $16,500 for a family at the poverty line.

As incomes rise, however, the Baucus bill cuts the value of the entitlement. A family with an income at twice the poverty line, or $48,000 in 2016, would get $9,072 in federal assistance for coverage — still a substantial sum. But it’s $7,400 less than the family would get if they earned half as much. The Baucus plan thus imposes an implicit marginal tax rate of about 30 percent ($7,400/$24,000) on wages earned by families in this income range.

And that would come on top of the high implicit taxes already built into current law. Low-wage families with children also get the Earned Income Tax Credit (EITC). The EITC boosts incomes for those with the very lowest wages, but it is also phased-out as incomes rise. Past a certain threshold (about $21,400 in 2016), the EITC is reduced by $0.21 for every additional $1 earned. Throw in the individual income tax rate (15 percent) and payroll taxes (7.65 percent), and the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers.

The more Obamacare is rushed through Congress, the more likely it is to produce highly regrettable unintended consequences. Surely even the Democrats in Congress can see how damaging it would be to send signals to low-wage breadwinners that it no longer makes sense to seek a higher-paying job.

posted by James C. Capretta | 10:13 am
File As: Health Care

The Public Option Contradiction

Perhaps the most fundamental question in the health care debate is this: what process has the best chance of producing continuous improvement in the efficiency and value of patient care? President Obama and many Democrats believe new and improved versions of governmental control can do the job. Yet we have nearly half a century of experience with the government running the Medicare program in a way that increases costs for everyone, not just seniors. That's the subject of an op-ed I wrote, up at Kaiser Health News today and available here.

posted by James C. Capretta | 1:21 pm
File As: Health Care

This “Public Option” Resuscitation Program Won’t Work

House Speaker Nancy Pelosi has stated on numerous occasions that the health-care bill she plans to bring to the House floor will include the so-called “public option” because a bill couldn’t pass in the House if the public option were left out of it. Of course, she said that in June, and in July, and in early September too, and still no bill is heading to the House floor for a vote anytime soon.

So, yes, there would seem to be a vote problem in the House, but solving it is not quite as simple as including a government-run plan in the legislation. The truth is that Speaker Pelosi and her lieutenants are having trouble finding a majority to pass anything because their starting point is far too liberal for many rank-and-file Democrats.

Indeed, it seems the president himself doesn’t much like the House bill anymore. In his prime-time speech to a joint session of Congress earlier this month, he said he wanted a bill that costs no more than $900 billion over ten years, doesn’t increase the federal budget deficit “one dime,” and is paid for with offsets coming from within the health-care system. The House bill, as passed by three committees this summer, fails all of these tests. A back-of-the-envelope estimate indicates the House legislation would add about $10 trillion in unfunded liabilities to the federal books over 75 years.

Moreover, the president didn’t mention the signature “offset” in the House bill — a new surtax on upper-income households — when he explained to Americans how he planned to make the numbers add up. The omission spoke volumes. Are House Democrats really going to support a massive income-tax increase that President Obama himself has walked away from?

For now, it seems the answer is yes, because they have no alternative, which is why House leaders are working overtime to convince the Blue Dogs and others that the bill really isn’t as liberal as it seems.

Hence the flurry late last week around the “cost-saving” potential of a “strong” public option. It seem the Congressional Budget Office (CBO) has produced estimates for House leaders indicating that a government-run plan built on Medicare payment rates would cost $85 billion less than one that had to negotiate fees with willing suppliers of services. This was touted in several blogs as evidence that support of a “strong” public option is actually the fiscally conservative position (see this post by Ezra Klein).

The confusion of government price setting with efficiency really goes to the heart of the entire debate. Yes, Medicare does dictate payment rates to hospitals, physicians, and others. On paper, that can, for a time, look cheaper. But hardly anyone believes that is really the solution to our long-term cost problem. In fact, a consensus is finally forming that Medicare’s current fee-for-service payment systems are really the problem, not the solution. Medicare’s payment rules are arbitrary, shift costs to others, promote fragmentation and autonomy among health-care providers instead of integration, and reward volume instead of quality and efficiency. A growing chorus, including the leaders of the Mayo Clinic, says what’s really needed is a far-reaching reform of how health care is actually delivered to patients. The last thing we need is for more of the health-care system to adopt Medicare’s payment rules.

Of course, then there is the issue of government-driven rationing of care. Sector-wide price controls always lead to a reduction in the number of willing suppliers of services. If proponents of widespread adoption of Medicare’s payment schedules really got their way, it would only be a matter of time before demand far outstripped supply for any number of critical services and procedures. And waiting times would get much longer.

There’s a right way and wrong way to promote more efficiency in American health care. Price controls, from long experience, are clearly the wrong way, which is why an effort to sell a “strong public option” on cost grounds is a dead end.

posted by James C. Capretta | 10:15 am
File As: Health Care

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