Medicare cuts


President Obamaís $700 Billion Medicare Problem

I have a new article at National Review Online on how the Romney campaign can and should go on the offensive against Obama for his cuts to Medicare.

The selection of Ryan has also been a revealing moment for the mainstream media. In these first days after the announcement, the media have largely played along with the Democratic story line that the selection of Ryan will put the Republicans on the defensive over Medicare in the run-up to November. They have told this story by repeating over and over completely inaccurate descriptions of the policy positions of the candidates.

A fair reading of the facts shows that the Romney-Ryan campaign has every reason to believe that they can put the Obama-Biden ticket on the defensive over Medicare. The most salient fact is that, to pass Obamacare, the president cut Medicare by more than $700 billion over the coming decade, according to the Congressional Budget Office (CBO). And these cuts are of the worst kind. They are arbitrary and across the board. They reduce reimbursement rates for all who provide services to Medicare patients, regardless of how well or badly they treat their patients. Among the cuts is a $156 billion reduction in payments to Medicare Advantage plans over ten years. These cuts will force seniors to pay $3,700 more for their health care by 2017, according to a study I co-authored with Robert Book (for those who might be interested, the cuts are distributed by congressional district here). The Medicare trustees project that the cuts will drive some 4 million seniors out of Medicare Advantage plans between 2012 and 2018.

You can read the rest of the article here.

posted by James C. Capretta | 10:19 am
Tags: Medicare cuts
File As: Health Care

Reid 2.0: Itís Still a Budget Buster

The Obama White House and its congressional allies have tried all year to push their various bills through to passage by truncating the time between introduction and a decisive vote to the bare minimum. They figure the only way to get something passed is to minimize public review and scrutiny of whatever their latest idea is to engineer American health care from Washington, D.C.

To date, that tactic hasn’t worked out so well. In July, House Democrats tried to unveil a bill on the 14th for a planned vote on the 31st. A firestorm erupted, however, pushing back the vote into November. In the Senate, meanwhile, a series of self-imposed deadlines have been missed as Democratic pronouncements of inevitability have bumped up against the reality of steadfast and growing public opposition.

Nonetheless, Senate Majority Leader Harry Reid is running the same play again today, and very possibly with different results. He unveiled the latest version of his reform legislation this morning, filled to the brim with outrageous payoffs to buy the votes of holdout Senators. Virtually no one else has seen the bill before today, much less had a chance to give it the scrutiny it deserves. And certainly the public has not had a chance to weigh in. No matter. Senator Reid has simultaneously set in motion the procedures necessary to force a vote on his new health-care plan in a matter of hours, not weeks.

And yet, despite the unprecedented effort to short-circuit public review and input, it is likely that this latest version of the Reid plan will be just as unpopular as the previous one, and for many of the same basic reasons.

According to the Congressional Budget Office (CBO), the amended Reid plan would reduce the federal budget deficit by $132 billion over the period 2010 to 2019, but that is a mirage.

For starters, as CBO notes, the bill presumes that Medicare fees for physician services will get cut by more than 20 percent in 2011, and then stay at the reduced level indefinitely. There is strong bipartisan opposition to such cuts. Fixing that problem alone will cost more than $200 billion over a decade, pushing the Reid plan from the black and into a deep red.

Then there are the numerous budget gimmicks and implausible spending reductions. The plan’s taxes and spending cuts kick in right away, while the entitlement expansion doesn’t start in earnest until 2014, and even then the real spending doesn’t begin until 2015. According to CBO, from 2010 to 2014, the bill would cut the federal budget deficit by $124 billion. From that point on, it’s essentially deficit neutral — but that’s only because of unrealistic assumptions about tax and Medicare savings provisions. By 2019, the entitlement expansions to cover more people with insurance will cost nearly $200 billion per year, and grow every year thereafter at a rate of 8 percent. CBO says that, on paper, the tax increases and Medicare cuts will more than keep up, but, in reality, they won’t. The so-called tax on high cost insurance plans applies to policies with premiums exceeding certain thresholds (for instance, $23,000 for family coverage). But those thresholds would be indexed at rates that are less than health-care inflation — forever. And so, over time, more and more plans, and their enrollees, would bump up against it until virtually the entire U.S. population is enrolled in insurance that is considered “high cost.”

Similarly, the Medicare cuts assume that hospitals, nursing homes, home health agencies and others can survive with a permanent annual cut in their payment rates for presumed productivity gains. Medicare’s chief actuary has already signaled that this reduction could push one in five hospitals into insolvency, thus forcing them out of the Medicare program.

What’s more, the benefit promises are sure to expand well beyond what CBO has assumed. There are 127 million people living in households with incomes between 100 and 400 percent of the federal poverty line, but CBO assumes that only 18 million of them will get the new subsidized insurance under the Reid plan by 2015 because of rules that make most workers ineligible for assistance. But, if enacted, employers would find ways to push more workers into subsidized arrangements, and Congress would loosen the rules to make more people eligible. Costs would grow much faster than CBO currently projects. In addition, the Reid plan continues to include a new entitlement program for long-term care that every actuary who has looked at it says is a financial disaster waiting to happen. If passed, it would only be a matter of time before another federal bailout would be necessary.

It is now plain as day that the Reid plan has evolved into nothing more than a massive entitlement expansion, which subsidizes more people into an unreformed system with soaring costs. Several Senate Democrats claim to be strong fiscal conservatives. Their votes on the Reid legislation will provide conclusive evidence whether that’s true or not.

posted by James C. Capretta | 6:42 pm
Tags: Senate bill, Harry Reid, CBO, Medicare cuts
File As: Health Care

CBO and a Firewall That Will Never Hold

The Congressional Budget Office (CBO) has issued a preliminary cost estimate (available here) for the Senate Finance Committee bill, as amended during committee consideration.

The cost over ten years will be advertised as only $829 billion. But after all that spending, there would still be 25 million uninsured Americans in 2019.

Even so, CBO’s estimate of the Baucus plan substantially understates its true cost because it is based on key assumptions that will never hold up over time.

First, there is the new tax on so-called “high-cost” health-insurance plans. The Democrats are trying to sell this as a tax on insurers. But no one is buying that, especially not the unions. It’s the insurance enrollees who will pay it, in the form of higher deductibles and cost-sharing to keep premiums below the thresholds. The tax would hit all coverage that costs more $8,000 for single people or $21,000 for families in 2013. Those thresholds would be indexed to general consumer inflation (the CPI) plus one percentage point every year, even as health-care costs are expected to increase at a much more rapid rate. So by 2019 and beyond, this tax would hit pretty much the entire middle class of America very hard. The Baucus plan is counting on $46 billion in revenue from it in 2019, with annual increases in the revenue generated of 10 to 15 percent thereafter. With each passing day, this revenue source will lose political support.

Second, there are the Medicare and Medicaid cuts. By 2019, CBO expects them to reach nearly $100 billion annually, including more than $20 billion from Medicare Advantage plans. That’s a direct hit on benefits for seniors, many of whom signed up with Medicare Advantage because they can’t afford Medigap premiums. The last time Congress went down this road of arbitrary, across-the-board cuts, it was only a matter of months before they were scrambling to restore the cuts.

Third, the Baucus plan assumes deep and continuous cuts in physician fees that no one supports or believes will occur. Restoring those cuts would add more than $200 billion to the plan’s bottom line.

Finally, there is the so-called “firewall,” which is really central to how the whole bill works. CBO’s assessment of the Baucus bill is built on the dubious assumption that Congress can hand out a lucrative new entitlement to a limited number of low- and moderate-income voters while denying it to tens of millions of others.

The centerpiece of the Baucus plan is a promise to all households with incomes between 100 and 400 percent of the federal poverty line that the premiums they owe for health insurance will be limited to a fixed percentage of their income. At the low end of this income range, families would pay no more than 3 percent of their income — initially — toward health insurance. The premium cap would be gradually raised as incomes rise until it reaches a little more than 13 percent for families with incomes between 300 and 400 percent of the poverty line.

CBO estimates the average cost of subsidized family coverage at $14,400 in 2016. Under the Baucus plan, a household with an income at 200 percent of the federal poverty line — or about $48,000 for a family of four in 2016 — would pay about $5,300 toward this insurance, so long as they were getting it through one of the insurance “exchanges” established in the bill. The rest of the premium — over $9,000 in this example — would be paid by the federal government.

If that sounds too good to be true, it’s because it would be, for the vast majority of workers — at least as the Baucus plan is currently written. All but the smallest employers would be required to offer qualifying coverage to their full-time workers to avoid hefty taxes, and the employees would have no choice but to take what is offered to avoid paying a penalty tax themselves. The “firewall” thus prevents workers from exiting employer-based plans for the exchanges.

The Baucus plan would appear to establish a limit on premiums for these employees too, at 10 percent of their income. For a breadwinner with a spouse and two children and an income at twice the poverty rate, that would mean paying no more than $4,800 as the employee share of the premium for an employer-sponsored plan. But where would the rest come from? Not the federal government. The employer would be required to pay the other $9,600. But as CBO — and most every economist — notes, employer-paid premiums are paid by workers, too, in the form of reduced cash wages.

Of course, employer-paid premiums do come with a federal tax preference, but it is worth much less for most low- and moderate-wage workers than what Senator Baucus is offering to those getting insurance in the exchanges. At 200 percent of the federal poverty line, the forgone tax liability on an average employer-sponsored plan is about $4,300 (including payroll taxes), or nearly $5,000 less than what is being promised to households with the same income in the insurance exchange.

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. But CBO assumes that, in 2015, only 17 million people would get subsidized premiums in the Baucus plan. The vast majority of American workers would get no additional federal assistance due to the “firewall,” even as the government pushed the cost of compulsory health insurance much higher with regulations, taxes, and fees. This is how Senator Baucus shoehorns a $1.5 to $2.0 trillion “universal coverage” scheme into an $830 billion sack.

But will it last? Congressional Democrats are already racing ahead with amendments to demonstrate their commitment to insurance “affordability” for the middle class. It would be only a matter of time before Congress responded to the inevitable political pressure and expanded the entitlement, perhaps in steps, to larger and larger numbers of Americans.

The history of federal entitlement programs is one of growth and expansion. The new entitlement in the Baucus plan will be no exception. Indeed, it is likely to become the fastest-growing one ever enacted, with costs far in excess of what CBO has assigned to the bill as currently written.

posted by James C. Capretta | 8:10 pm
Tags: Max Baucus, CBO, Medicare cuts, gold-plated plans, firewall
File As: Health Care