entitlements


CBO’s Long-Term Budget Projections

The Outlook Is Even Worse Than It Looks

Last month, the Congressional Budget Office released its annual update to its long-term budget projections, and as I explain in a post on the Health Affairs blog, the unsustainable debt and deficits forecasted by the CBO are due to the familiar causes of growing entitlement spending, especially in health care.

The cause of the soaring deficits and debt is familiar:  rapid increases in entitlement spending (on top of the five decade run-up that has already occurred), driven by the aging of the population, rapidly rising health care costs, and spending associated with expanded health entitlements under the Patient Protection and Affordable Care Act (PPACA).  CBO expects that 54 percent of the federal spending increase on the major entitlements over the next twenty-five years will be attributable to the aging of the U.S. population.

Twenty-eight percent of the increase will be due to “excess cost growth” in health care – meaning cost escalation per capita in excess of GDP growth per capita.  The rest of the spending increase is due to the expansion of Medicaid and the new premium credits enacted in the PPACA.  When looking at just the health care entitlements, 40 percent of the federal spending increase is due to excess cost growth, 35 percent from population aging, and 26 percent from the PPACA program expansions.

You can read the rest of the post here.

posted by James C. Capretta | 12:41 pm
Tags: entitlements, debt, deficit
File As: Health Care

The Nation's Budget Challenges Haven't Changed

This week, the U.S. News “Debate Club” blog posed the question of whether the federal government’s short term deficit has been reduced enough, following the less dismal than usual projections in last month’s Congressional Budget Office report. I weighed in on the debate, arguing that the United States still faces serious fiscal challenges, especially the challenge of controlling the long-term growth of entitlement spending.

But the core fiscal challenge for the country, which remains unaddressed, is the unrelenting growth of entitlement spending -- a problem that will become acute in the next twenty years. Between 1973 and 2012, entitlement spending rose from 7.4 percent of GDP to 13.1 percent of GDP. By 2035, spending on Social Security, Medicare, Medicaid and the health care law's new entitlements is expected to add another 5.4 percent of GDP to the spending side of the federal ledger. Absent serious reform, the budgetary pressures created by this entitlement spending surge will either force massive cuts in the rest of the budget or very large tax increases, or perhaps trigger a debt crisis.

You can read (and vote for!) the rest of my post here.

posted by James C. Capretta | 6:42 pm
Tags: entitlements
File As: Politics, U.S.

Creating a Stable and Accessible Health Care System for Future Generations

[NOTE: Earlier today I testified before the House Budget Committee as part of a hearing on Fulfilling the Mission of Health and Retirement Security. The text of my written testimony appears below. When a link to video becomes available, I'll put that up, too.]

Mr. Chairman, Mr. Van Hollen, and members of the Committee, thank you for the opportunity to participate in this very important hearing on “Fulfilling the Mission of Health and Retirement Security.”

In the time available, I would like to focus my comments on the health care component of today’s hearing.

Rising Federal Health Entitlement Obligations

A primary objective of the Patient Protection and Affordable Care Act (PPACA) was to increase the health security of the American people. But health security, no matter how well intentioned, will be fleeting if the programs upon which that security depends are unaffordable for taxpayers.

Unfortunately, that is exactly the situation in which we find ourselves today. Federal health entitlement spending has been growing rapidly for many years, and is expected to continue doing so even after enactment of the PPACA. Indeed, it is sometimes said that at some distant point in the future, the long-term rise in federal health care costs will catch up with us. But the truth is that rising federal health entitlement spending has already caught up with us. The budget problems we are experiencing today are directly related to the fact that health costs have risen dramatically over the past four decades. In 1975, the federal government spent 1.3 percent of GDP on Medicare and Medicaid. In 2010, spending on just those two program had risen to 5.5 percent of GDP. That’s more than 400 percent growth.

And the Congressional Budget Office’s (CBO) most recent projections show health entitlement spending is poised to rise even more rapidly over the next decade than it has in the past. As shown in Chart 1, CBO expects total health entitlement spending to rise from $810 billion in 2010 to $1,763 billion in 2021. By 2021, health entitlement spending will make up an astonishing 36 percent of all non-interest federal outlays. So more than one in three dollars that the government spends on programs and agency budgets will go to meeting health entitlement obligations.

During the debate over the health care law, it was suggested that a goal of reform was to begin to slow the pace of rising federal health entitlement costs. But the PPACA has almost certainly compounded the problem, not solved it. As shown in Chart 2, in a long-term forecast issued last June, CBO estimated what health entitlement spending would be in the coming decades if the health law had not been enacted at all and if it were implemented in full (called the “extended baseline”). With those assumptions, the lines do in fact cross at some point around 2027 or so — meaning the PPACA will have brought health entitlement obligations below the level they otherwise would be. But the “extended baseline” scenario assumes the new law’s deep payment reductions in the Medicare program can be sustained on a permanent basis. As this committee heard at a hearing in January, the chief actuary of the Medicare program believes that to be a very unlikely scenario. Accordingly, CBO has also done a projection of what federal health entitlement obligations will be in future years under the PPACA if the Medicare cuts are moderated even slightly. With that assumption, the PPACA does not reduce federal health entitlement obligations but increases them, by about 1 percent of GDP by 2035.

The Role of Existing Government Policy

Why are health care costs rising so rapidly? The prevailing view has been that the federal government’s health programs experience rapidly rising costs because they are victims of the runaway cost train that is pulling the entire system down the tracks at too fast a rate. According to this way of thinking, the only way to slow the government’s costs is to slow the whole train. That’s the point of view that informed much of the writing of the new health care law.

But this thinking misses a crucial point. Yes, one aspect of cost escalation is an exogenous factor. Rising wealth and medical discovery are fueling the demand for more and better treatments. That should not be resisted in any event. But there is widespread agreement that costs are also high and rising because of waste and inefficiency — and here the problem is not some force outside of government’s control but existing governmental policy.

At present, the vast majority of Americans get their health insurance through one of three sources: Medicare, for the elderly and disabled; Medicaid, for low-income households; and employers for the working-age population and their families. In each of these instances, the federal Treasury is underwriting rapid cost escalation because there is no limit to what Uncle Sam will pay.

In an important 2006 study, Amy Finkelstein, an economics professor at the Massachusetts Institute of Technology, estimated that about half of the real-cost increase in health care spending in the United States from 1950 to 1990 can be attributed to the spread of federally-subsidized and expansive third-party insurance through the government and employers.[1]

Medicare’s important influence on how health care services are delivered is often overlooked or understated. Medicare is the largest purchaser of services in most markets today. Four out of five enrollees are in the traditional program, which is fee-for-service insurance. That means Medicare pays a pre-set rate to any provider for any service rendered on behalf of a program enrollee, with essentially no questions asked. Nearly all Medicare beneficiaries also have supplemental insurance, from their former employers or purchased in the Medigap market. With this additional coverage, they pay no charges at the point of service because the combined insurance pays 100 percent of the cost. This kind of first-dollar coverage provides a powerful incentive for additional use. Whole segments of the U.S. medical industry have been built around the incentives embedded in these arrangements.

Congress and the program’s administrators have, without interruption, tried to hold down Medicare’s costs by paying less for each service provided. Those providing services to Medicare patients have responded by providing more services, and more intensive treatment, over time for the same conditions that patients present to them. In most cases, there is no reason for them not to provide higher-volume care. The patients generally do not pay any more when more services are rendered. And the bill is just passed on to the Medicare program — and federal taxpayers.

The result of this dynamic is hardly surprising. The volume of services paid for by Medicare has been on a steady and steep upward trajectory for decades. As shown in Chart 3, according to CBO, the real price Medicare paid for physician fees dropped between 1997 and 2005 by nearly 5 percent, but total spending for physician services rose 35 percent because of rising use and more intensive treatment per condition.[2]

Medicaid fuels cost growth because it is financed with a flawed system of federal-state matching payments — with no limit on the amount that can be drawn from the U.S. Treasury each year. For every dollar of Medicaid costs, the federal government pays, on average, 57 percent and the states pick up the rest. In this arrangement, if a governor or state agency wants to cut their state’s Medicaid costs, they have to cut the program by $2.30 to save $1.00 because the other $1.30 belongs to the federal government. Not surprisingly, most state politicians do not find this to be a particularly appealing option. So, instead, they spend most of their energy devising ways to “maximize” how much they get from the federal government for Medicaid services — while looking for creative ways to contribute the required state portion of the funding without really doing so.

The federal tax treatment of employer-sponsored coverage provides a similar incentive for higher costs rather than economizing. Today, employer-paid health insurance premiums do not count as taxable compensation for workers. No matter how expensive the health insurance premium, if the employer is paying, it is tax-free to the worker. Employees thus have a strong incentive to take more and more of their compensation in the form of health coverage instead of cash wages because the health coverage is not taxable. For every dollar spent on health coverage, a worker receives a full dollar of coverage; whereas with every dollar received in other forms of compensation, a portion has to go to the government.

When you put it all together — Medicare’s incentives for rising volume, unlimited federal funding for state-run Medicaid plans, and a tax subsidy for employer plans that grows with the expense of the plan — it is not surprising that health care costs are rising rapidly in the United States. The vast majority of Americans are in insurance arrangements where a large portion of every extra dollar spent on premiums or services is paid for by taxpayers, not them.

The Key Question

So cost escalation is at the center of our fiscal problems, and it is making health care unaffordable for too many people. The key question for health reform is, what can be done about it. Put more precisely, the key question health reformers must answer is this: what process is most likely to succeed in bringing about continual and rapid improvement in the productivity and quality of patient care? Because the only way to slow the pace of rising costs without comprising the quality of American medicine is by making the health sector ever more productive. More health bang for the buck, if you will.

One view holds that the federal government can “engineer” more cost-effective health care delivery. That’s the theory behind the new law’s Accountable Care Organizations, other Medicare pilot projects, the comparative effectiveness research funding, and the new $10 billion Center for Medicare and Medicaid Innovation.

But Medicare’s administrators have been trying for years to change the dynamic in the traditional fee-for-service program and have failed. The problem is that the only way to build a high-quality, low-cost network is to exclude those who are low-value and high-cost. And that’s something Medicare has never been able to do. It’s been much easier, and more tempting, to simply impose across-the-board payment reductions for all providers of services, without picking winners and losers among physicians and hospitals. And so such arbitrary cost-cutting has become the default mechanism for hitting budget targets of various kinds over the years.

And, despite all the talk of “delivery system reform,” that is exactly what was done in the PPACA too. Among other things, Congress enacted a permanent “productivity improvement factor,” which will reduce the inflation increases applied to multiple Medicare payment systems. These reductions will reduce the normal update for the costs of medical practice by about half a percentage point every year in perpetuity for every provider of these services, including hospitals, without regard to how well or badly they treat patients. The compounding effect of such reductions will produce, on paper, enormous savings. But these cuts almost certainly will not be sustained as they will push average Medicare payment rates for services below those of Medicaid by 2019, according to the chief actuary at the Centers for Medicare and Medicaid Services. If that were actually to occur, some 15 percent of Medicare’s hospitals would stop seeing Medicare patients to avoid massive financial losses.[3]

Transforming Health Care Delivery with Cost-Conscious Consumer Choice

There is an alternative to centralized cost-control efforts. It’s a functioning marketplace with cost-conscious consumers.

In 2003, Congress built such a marketplace, for the new prescription-drug benefit in Medicare.

Two features of the program’s design were important to its success. First, there was no incumbent government-run option to distort the marketplace with price controls and cost shifting. All private plans were on a level playing field. They competed with each other based on their ability to get discounts from manufacturers for an array of prescription offerings that are in demand among beneficiaries and their physicians.

Second, the government’s contribution to the cost of drug coverage is fixed and is the same regardless of the specific plan a beneficiary selects. The contribution is calculated based on the enrollment-weighted average of bids by participating plans in a market area. Beneficiaries selecting more expensive plans than the average bid must pay the additional premium out of their own pockets. Those selecting less expensive plans pay a lower premium. With the incentives aligned properly, participating plans know in advance that the only way to win market share is by offering an attractive product at a competitive price because it is the beneficiaries to whom they must ultimately appeal.

This competitive structure, with a defined contribution fixed independently of the plan chosen by the beneficiary, has worked to keep cost growth much below other parts of Medicare and below expectations. At the time of enactment, there were many pronouncements that using competition, private plans, and a defined government contribution would never work because insurers would not participate, beneficiaries would be incapable of making choices, and private insurers would not be able to negotiate deeper discounts than the government could impose by fiat. All of those assumptions were proven wrong. What actually happened is that robust competition took place, scores of insurers entered the program with aggressive cost cutting and low premiums, costs were driven down, and federal spending has come in 40 percent below expectations.

Similar changes — what might be called a defined contribution approach to reform — must be implemented in the non-drug portion of Medicare, as well as in Medicaid (excluding the disabled and elderly) and employer-provided health care.

In Medicare, that would mean using a competitive bidding system – including bids from the traditional fee-for-service (FFS) program — to determine the government’s contribution in a region. Beneficiaries could choose to enroll in any qualified plan, including FFS. In some regions, FFS might be less expensive than the competing private plans. But in some places, it almost certainly would not be, and beneficiary premiums would reflect the cost difference. This kind of reform could be implemented on a prospective basis so that those already on the program or nearly so would remain in the program as currently structured.

In Medicaid, moving toward fixed federal contributions for the acute-care portion of the program would allow for much greater integration between Medicaid and the insurance market available to most workers. Today, when a Medicaid recipient goes back to work, he often loses public insurance but doesn’t get employer coverage. Converting the entitlement into something that can be used in a variety of insurance settings should facilitate portability and more continuous coverage.

For employers, the key is to convert today’s tax preference for employer-paid premiums into a fixed, refundable tax credit that is available to all households (headed by someone under the age of 65), regardless of whether they work or pay taxes. This would provide “universal coverage” of insurance to the entire U.S. population. Any household that didn’t buy coverage would lose the entire value of the credit. The number choosing to do so would likely be very small.

Moving toward a defined-contribution approach to reform would allow for much greater federal budgetary control, which is of course a primary objective and tremendously important for the nation’s economy and long-term prosperity. But this isn’t just a fiscal reform. It’s a crucial step toward better health care too because it would put consumers and patients in the driver’s seat, not the government. With consumer making choices about the kind of coverage they want as well as the type of “delivery system” through which they get care, the health system would orient itself to delivering the kind of care patients want and expect.

Critics argue that this improved fiscal outlook that would flow from moving toward defined contribution health care would come at the expense of the beneficiaries, who would bear the entire risk of costs continuing to rise faster than the government’s newly fixed contribution.

But that would only be the case if building a functioning marketplace had no discernible impact on the productivity of the health sector. It is far more likely that converting millions of passive insurance enrollees into cost conscious consumers will have a transformative effect on health care delivery, and for the better. There would be tremendous competitive pressure on those delivering services to do more with less, and find better ways of giving patients what they truly need. Any health sector player that did not step up and improve its productivity would risk losing substantial market share among seniors, working people, and those on Medicaid. In other areas of our economy that have gone through a consumer revolution, the transformation of the industry has been stunning.

Conclusion

There is obviously much more that needs to be done to ensure a stable and accessible health care system for future generations. Support will need to be limited for those with means so that more can be done for those who need extra help. Special assistance will be necessary to ensure those with pre-existing conditions can secure affordable coverage. And the government will need to do its part, to ensure transparency in prices and quality, and to ensure the rules of the marketplace prevent excessive risk segmentation and inferior care for those with less resources.

But with effective government oversight, cost-conscious consumers have the potential to transform American health care, making it much more productive and of high quality, which is what we desperately need. With such a reform, the system will become more patient-focused, more efficient, and more innovative. The result will be less fiscal stress, a healthier population, and a health care sector that delivers the kind of value the public deserves.



Notes
[1] “The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare,” Amy Finkelstein, Massachusetts Institute of Technology, April 2006 (http://econ-www.mit.edu/files/788).
[2] “Factors Underlying the Growth in Medicare’s Spending for Physicians’ Services,” Congressional Budget Office (CBO), Background Paper, June 2007 (http://www.cbo.gov/ftpdocs/81xx/doc8193/06-06-MedicareSpending.pdf).
[3] “Estimated Financial Effects of the ‛Patient Protection and Affordable Care Act,’ as Amended,” Richard S. Foster, Centers for Medicare and Medicaid Services, Office of the Actuary, April 22, 2010 (https://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf).

posted by James C. Capretta | 7:15 pm
Tags: Paul Ryan, Budget Committee, Obamacare, entitlements
File As: Health Care

The Independent Payment Advisory Board and Health Care Price Controls

I have a column up today at Kaiser Health News on the new Independent Payment Advisory Board created in the recently passed health legislation. Here's an excerpt:

....the [Independent Payment Advisory Board] — a 15 member independent panel, to be appointed by the president and confirmed by the Senate — is now charged with enforcing an upper limit on annual Medicare spending growth. That’s right: Medicare spending is now officially capped. Even most people who follow health policy closely don’t seem to know this. Perhaps it’s just too hard to believe that a Democratic Congress, prodded by a Democratic president, actually voted to cap spending for a cherished entitlement.

But make no mistake: Beginning in 2015, Medicare spending is now supposed to be limited, on a per capita basis, to a fixed growth rate, initially set at a mix of general inflation in the economy and inflation in the health sector. Starting in 2018, the upper limit is set permanently at per capita gross domestic product growth plus one percentage point.

One might be tempted to think this is an area of the legislation which should have gotten some bipartisan support. After all, in the past, it’s the Republicans who have pushed for these kinds of caps on entitlement costs, with Democrats fighting them every step of the way. Conservatives know that if they are to have any hope of fighting off a major tax increase to close the nation’s budget gap, Medicare spending growth has to be slowed, and soon.

But the IPAB provision is actually an indicator of why there is a great divide in American health policy. To hit its budgetary targets, the IPAB is strictly limited in what it can recommend and implement. It can’t change cost-sharing for covered Medicare services. Indeed, it can’t change the nature of the Medicare entitlement at all, or any aspect of the beneficiary’s relationship to the program. The only thing it can do is cut Medicare payment rates for those providing services to the beneficiaries.

This wasn’t an accident. It reflects the cost-control vision of those who wrote the bill. They believe the way to cut health care costs is with stronger federal payment controls. They envision the IPAB coming up with new payment models which will push hospitals and physicians to emulate today’s most efficient delivery models. Call it “government-driven managed care.”

Read the full column here.

posted by James C. Capretta | 4:35 pm
Tags: IPAB, Medicare, entitlements, Obamacare
File As: Health Care

Tax Collecting for Obama’s Welfare State

Now that the health-care bill has been signed into law, President Obama wants to “pivot” to other pressing issues. But, truth be told, the biggest issue the country now faces is still, in large part, about health care.

The federal government is running massive budget deficits and is expected to continue to do so indefinitely. The Congressional Budget Office (CBO) projects the Obama budget plan would produce $10 trillion in deficits over the period 2011 to 2020. At the end of the decade, the government’s debt would top $20 trillion, or 90 percent of the nation’s GDP. By comparison, from 1789 to 2008, the country accumulated only $5.8 trillion of public debt.

The economic risks associated with such massive amounts of governmental borrowing are very real and very high. At some point, current lenders to the U.S. government will have their fill of Treasury securities, which will mean the cost of financing expansive government is sure to increase over time. CBO expects the annual cost of servicing the interest on the nation’s debt will reach $0.9 trillion in 2020 under the Obama budget plan, up from about $0.2 trillion this year. But it could very well go much higher than that, as a recent white paper from analysts at the International Monetary Fund (IMF) demonstrates. According to that projection, U.S. debt could top 100 percent of the GDP by 2020 if, as the IMF analysts expect, the large run-up in governmental debt pushes interest rates up faster than either CBO or the administration now forecasts.

Further, this rise in federal borrowing will be occurring just as the baby boomers are entering their retirement years. Between 2010 and 2030, the population age 65 and older is expected to increase from 41 million to 71 million people. As these boomers sign up for Social Security and Medicare, costs for the programs will soar. Now is the time to get our fiscal house in order, before the entitlement tidal wave hits full force.

So what’s the president’s plan for heading off the wrenching debt crisis he has made more probable with his the expensive new spending programs he has forced through Congress? Instead of addressing it himself, the president has handed the problem off to a “bipartisan” commission.

Conveniently, the debt commission — headed by former Clinton White House chief of staff Erskine Bowles and former Republican Senator Alan Simpson — will make its recommendations after the November congressional elections.

The chutzpah here is something to behold. Having passed the largest entitlement expansion in half a century, in the most partisan manner imaginable, the president now wants Republicans to provide political cover to Democrats as they search for ways to finance the welfare state of their dreams.

Moreover, it is clear that Democrats have no intention of actually tackling the core problem in the federal budget, which is rapidly rising entitlement costs, especially for health care. They say their health-care bill has already addressed the problem. In the words of House Speaker Nancy Pelosi, “health reform is entitlement reform.”

In theory, it’s possible that Democrats could have passed a health bill that actually made durable reforms in the health entitlement programs that would have improved the medium and long-term budget outlook. But that’s not what they passed. No, new law makes the health entitlement much worse by adding tens of millions of people to Medicaid and a new insurance-subsidy program offered to persons getting insurance in the so-called “exchanges.” CBO expects the cost of these entitlement expansions to reach $216 billion in 2019. Further, the cost would escalate every year thereafter at a very rapid rate, just as Medicare and Medicaid have for more than four decades.

The Democrats respond by saying they also slowed the cost growth in Medicare. But, for starters, their cuts in Medicare do not cover the full cost of their entitlement expansions. That’s why they also raised taxes — by more than a half trillion dollars over ten years. Under the legislation President Obama just signed, federal health entitlement spending goes up, not down. Moreover, the cuts they do impose in Medicare do not in any way constitute “reform” of the program. For the most part, the big savings comes from paying less to hospitals, clinics, nursing homes, and others for the services they provide. In other words, it’s a price-control system.

These kinds of cuts have been passed by Congress many times before. They have never worked to permanently slow the pace of rising costs because they don’t do anything to make the delivery of health services any more efficient than it is today. Over time, arbitrary price controls imposed by the government always drive out willing suppliers of services and lead to access problems. That’s not entitlement reform. It’s government-enforced rationing of care.

To slow the pace of rising costs without harming the quality of American medicine will require restructuring the tax code and entitlement programs to promote a vibrant marketplace in the health sector, with strong price competition and consumer choice. That’s the vision Congressman Paul Ryan has laid out. And it’s both genuine health reform and entitlement reform too.

If the president and his allies were truly open to revisiting their “historic” health bill and replacing what has passed with a market-based reform program, that would be one thing. But does anyone really believe that’s a serious possibility at this point? The Democrats think they have scored a strategic victory by writing health-care legislation entirely according to their partisan vision. It is inconceivable they would backtrack willingly now.

But partisanship on health care has consequences too. It means bipartisanship on the budget will be all but impossible. The president has succeeded in enlarging the welfare state. Unless he is willing to roll it back now, it will be entirely his responsibility to collect the taxes to pay for it.

posted by James C. Capretta | 9:13 pm
Tags: CBO, entitlements, debt, deficit, debt commission
File As: Health Care

Entitlements, the Budget, and the State of the Union

In a new post over on NRO's Corner tonight, I comment on the health care and budgetary aspects of President Obama's State of the Union address:

On health care, he offered nothing new. He is sticking with the plan the public has quite plainly rejected. According to a recent CNN poll, a full 70 percent of Americans want Congress either to start over entirely or to drop the subject altogether. That’s because they recognize that the plan the president has been pushing so aggressively for the better part of a year would be a disaster, for the quality of American medicine and for the nation’s budget outlook. The president claims the bill would cut the deficit, but that’s based on completely implausible assumptions. The bill would stand up another runaway entitlement program, paid for with offsets that will never hold up over time and cost-control ideas that are weak and largely meaningless.

Yesterday, I had another post on the Corner, remarking on the administration's proposed budget "freeze." An excerpt:

In reality, the Obama freeze is a purposeful diversion and sideshow. The nation is rushing headlong toward a fiscal crisis because of runaway government spending, and the Obama administration has no serious plan to head it off. Between 1789 and 2008, the federal government ran up $5.8 trillion in debt. In just the first three years of the Obama administration, CBO expects the debt to increase by nearly another $4 trillion. In 2010, CBO projects total federal spending will exceed $3.5 trillion, more than $500 billion over what was spent in 2008. Further, in 2012 and beyond, with realistic assumptions regarding extension of the Bush tax cuts, relief from the Alternative Minimum Tax, funding for the wars in Iraq and Afghanistan, and restoration of planned cuts in Medicare physician fees, the government is headed toward $1 trillion budget deficits every year for as far as the eye can see. 

This massive run-up in debt is set to occur just as the baby boomers head into their retirement years, pushing up costs in Social Security, Medicare, and Medicaid. Between 2010 and 2030, the population that is age 65 and older will rise from about 41 million to 71 million. CBO expects spending on the big three entitlement programs to rise from 9.8 percent of GDP in 2010 to 14.4 percent in 2030 — an increase of about 4.6 percent of GDP in 20 years. That’s like adding another Social Security program to the federal budget with no plan to pay for it.

So far, the president’s primary response to this looming budget and entitlement crisis is to propose to pile another runaway health-care entitlement program on top of the unaffordable ones already on the books. According to CBO, the federal cost of the health-care commitments in both the House- and Senate-passed health-care bills would reach $200 billion in 2019 and would increase about 8 percent every year thereafter. Meanwhile, the offsets to pay for this new spending are completely unrealistic, and the so-called “bend the curve” provisions are far too weak to make a difference.

posted by James C. Capretta | 11:35 pm
Tags: budget, entitlements, President Obama
File As: Health Care

Health Care and the Deficit

The House Budget Committee held a hearing yesterday on "Perspectives on Long-Term Deficits." I was invited to testify. Here is how I concluded my written testimony:

The nation’s long-term budget outlook is bleak in large part because our healthcare entitlement commitments far exceed the revenues available to pay for them. By 2019, the House and Senate-passed health-care bills would add at least another $200 billion per year to those commitments, and unleash pressures for even more spending down the road. Meanwhile, the offsets used to pay this spending would be much less likely to occur, and the cost control provisions are not nearly robust enough to make a difference.

Congress would be well-advised to take a step back and rethink this entire approach. Instead of passing an expensive health-care bill that uses $1 trillion in offsets to pay for more spending, it would be better to craft a sensible, consensus long-term budget plan which has as one of its core elements an affordable, bipartisan health-care program, one that truly does the job on costs and expands coverage as well.

Here's a video of the hearing (my testimony begins at 33:22):

[Video permalink]

posted by James C. Capretta | 5:27 pm
Tags: deficit, debt, entitlements, Obamacare
File As: Health Care

An Entitlement Certain to Grow In Spite Of ‘Firewalls’

From a new piece I have over at Kaiser Health News:

But even if all of the offsets work out as planned, which is not likely, the House and Senate bills would still create substantial budgetary risks because of the pressures for entitlement expansion they would unleash.

Both bills assume the new entitlement spending can be held down with the so-called “firewall” provisions. These are the rules that essentially preclude individuals from gaining access to premium subsidies available in the exchanges. If an employer offers "qualified" insurance coverage to a worker, the employee really has no choice but to take it if he wants to avoid paying the penalty for going uninsured. But these rules would create large disparities in the federal subsidies made available to workers inside and outside the exchanges.

Gene Steuerle of the Urban Institute has calculated that, under the Senate bill, a family of four with an income of $60,000 with employer-sponsored health care would get $4,500 less in federal support outside of the exchange than a similar family inside the exchange would get in 2016. And there would be many tens of millions more families outside the exchange than in it, according to CBO. Today, there are about 127 million Americans under the age of 65 with incomes between 100 and 400 percent of the federal poverty line, but CBO expects only about 18 million people will be getting exchange subsidies in 2016.

If enacted as currently written, it’s entirely predictable what would happen next. Pressure would build to treat all Americans fairly, regardless of where they get their insurance. One way or another, the subsidies provided to those in the exchanges would be made more widely available, driving the costs of reform well above the $900 billion limit the administration has set for the initiative.

You can read the whole thing here.

posted by James C. Capretta | 10:55 am
Tags: entitlements, firewall, spending
File As: Health Care

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