Gas on the Entitlement Fire

President Obama has argued all year that a primary reason to enact a version of his health-care plan is to “bend the cost-curve” that has been burdening government and household budgets for years. Of course, the president has not shown that he has a credible plan to address rising health-care costs. But that hasn’t stopped him or his aides from talking as if they did.

Robert Samuelson has been a skeptic of Obamacare’s supposed cost-control potential from the beginning, but his column in today’s Washington Post summarizes his case with particularly effective force. It doesn’t hurt that all the evidence is on Samuelson’s side in this debate.

Samuelson’s critique is particularly important because the nation’s long-term prosperity is already threatened by rising entitlement costs. For starters, we are on the cusp of an unprecedented demographic shift. Over the course of the next quarter century, the population age 65 and older will increase from 39 million to 76 million people. This flood of new enrollees in Social Security and Medicare will push the costs of these programs up very dramatically. And runaway per capita health-care costs will exacerbate the problem substantially. According to the Congressional Budget Office (CBO), between 1975 and 2007, per capita Medicare spending rose, on average, 2.3 percentage points faster than per capita GDP growth. Medicaid’s per capita spending growth rate was not far behind. CBO expects both programs to continue growing at an accelerated pace for the foreseeable future. With an aging population and rising health costs, the long-term budget outlook is already challenging, to put it mildly. CBO projects that federal spending on Social Security, Medicare and Medicaid will rise from 10.1 percent of GDP in 2009 to 15.7 percent in 2035. That jump — 5.6 percent of GDP in twenty-five years — would be equivalent to adding another Social Security program or Defense Department to the federal budget without any additional revenue to pay for it.

And so, faced with a mountain of unfunded entitlement obligations, what would Obamacare do? Pile on more. According to the Census Bureau, in 2008, there were 127 million Americans under the age of 65 living in households with incomes between 100 and 400 percent of the federal poverty line. The House and Senate health-care bills would essentially promise all of them either free insurance through Medicaid or caps on their insurance premiums based on their incomes. This would constitute the single largest entitlement spending expansion since the Great Society programs of the 1960s. CBO expects the federal spending associated with these new open-ended health entitlement commitments to reach about $200 billion annually by 2019 and escalate at about 8 percent annually thereafter.

Meanwhile, the measures being touted as potential health-care cost-control steps are, by and large, nothing more than minor adjustments to existing provider payment arrangements in Medicare, and sometimes only tests of new payment approaches. For instance, the administration has been pushing a provision that would limit payments to hospitals that have high rates of preventable readmissions. The House-passed bill includes this change, but at a savings of only $1.6 billion in 2019. And even this level of savings is highly questionable, given the tendency of Congress to water down “payment reforms” over time. Indeed, it’s easy to imagine Congress rolling this payment change back at the first word that some hospitals are keeping the sickest patients out of their beds to avoid risking readmission payment “adjustments.” But even if it and other tweaks in the bills survive, they wouldn’t amount to much and certainly wouldn’t offset the cost pressures unleashed by extending new entitlement promises to a vast portion of America’s middle class.

And that’s not just the conclusion of critics like Samuelson. That’s also what the Chief Actuary for the Centers for Medicare and Medicaid Services (CMS) found in his review of the House-passed bill, released on Friday. As he put it, the provisions aimed at slowing the pace of rising costs would, by and large, have a “relatively small savings impact.” Consequently, instead of “bending the curve,” overall national health expenditures would rise by nearly $300 billion over a decade.

The only cost-cutting items in the House bill that the Chief Actuary said would really pinch costs are the across-the-board Medicare payment rate cuts applied to hospitals, nursing homes, and others. Of course, these kinds of arbitrary payment changes have been tried many times before and have never worked to really ease cost pressures. But, on paper at least, they appear to reduce federal spending. However, the Chief Actuary made it clear in his review that even though he listed the savings on his tables, he doesn’t think things will work out that way in the real world. As he put it, the cuts would push payment rates so low over time that some institutions wouldn’t be able to survive if they continued to serve Medicare patients. The threat of reduced access to care would be reason enough for Congress to reverse course and increase the payment rates at a later date. (Of course, that’s exactly what Congress is planning to do this year with physician fees, now scheduled to get cut 21 percent in January based on a previous congressional payment-rate policy that has now run amok.)

For a while, some Democrats liked to deflect calls for entitlement reform by suggesting that what the country really needs is a health-care plan that slows the pace of rising costs. Indeed, it has become almost a mantra among some Obama apologists to say “health reform is entitlement reform.”

But the bills moving through Congress thoroughly discredit that contention. There’s no reform in these bills. They are entitlement expansions, plain and simple.

Indeed, the Obama administration likes to suggest it has a plan to painlessly root out unnecessary health spending without harming patient care. In truth, there is no such plan, and there never will be. The federal government has no capacity to drive greater efficiency in the diverse and complex health sector. When cost pressures mount, as they surely would if Obamacare passes, the federal response will be what it has always been in the past: price controls and arbitrary caps. All Americans will pay the cost with inferior quality of care and access restrictions. The proponents of the current bills are betting that, by the time this reality has sunk in, it will be too late to wean the public off of another vast and irreversible entitlement.

posted by James C. Capretta | 5:45 pm
Tags: CBO, entitlements, cost, Obamacare, Robert Samuelson, CMS
File As: Health Care