The Cost of ObamaCare

In the latest issue of the Weekly Standard, I have a new piece on ObamaCare, coauthored with my New Atlantis and EPPC colleague Yuval Levin. We first point out the general failings of the president's plan:

But the Obama plan, whatever its tactical cleverness, will suffer from the key drawbacks of all government-financed and managed health insurance. It would make the government the gatekeeper—the controller of prices and the provider of coverage. Health care decisions would increasingly be made in Washington and subject to political pressures that take into account neither patient needs nor economic realities. The cost of the program would be such that the effort to pay for it would become the central concern of American politics—rendering essentially untenable any effort to roll back government spending or reform federal tax law. As we see around the world, health care is the key to public enmeshment in ballooning welfare states, and passage of ObamaCare would deal a heavy blow to the conservative enterprise in American politics.

We then discuss aspects of the plan in a little more detail, including how it will displace many millions of Americans who are currently happy with their health insurance arrangements, as well as the immense costs for the government. And speaking of the price tag, Yuval has a Corner post today pointing out that the administration's announcement that it has found a way, working with interest groups, to save trillions is not to be taken seriously, to say the least.

UPDATE: Another very good post on today's news can be found here, this one by Keith Hennessy.

posted by James C. Capretta | 4:46 pm
File As: Health Care

Senator Baucus Works the Budget Refs

At a hearing last week, Senate Finance Committee chairman Max Baucus tried to turn up the heat on the Congressional Budget Office (CBO) when he said the whole health care reform effort might be in jeopardy if CBO remains skeptical about his cost-cutting efforts.

It’s telling that Senator Baucus has taken to working the budgetary referee so early in the game, so to speak. All along, the biggest challenge Democrats were going to face in the health care debate was how to pay for their ambitious plans. It’s pretty easy to promise “universal coverage” with affordable premiums for every household. It’s another matter entirely to put together a credible and politically viable way to pay for the expensive new government subsidies such a plan implies.

Senator Baucus is hoping CBO will make his job easier by giving him credit for “bending the cost curve” with a series of reforms he released last week in a white paper. That would be a huge stretch.

Some of the ideas on Senator Baucus’s list have merit. Most have been pushed for years by various health care analysts, although the names of the initiatives have changed. Overall, they amount to a call for better bureaucratic engineering of Medicare’s payment systems, but there’s no real reason to expect such an effort to turn out any better in the future than it has in the past.

And even if it did, it wouldn’t change the fundamental financial incentives which CBO has already said, in a report and testimony, are the real keys to making progress on cost escalation. Of course, the kinds of changes that would make a real difference are also the ones that would that would ignite the most political controversy too.

Which is why Senator Baucus is starting to sound a little desperate. He knows that if CBO holds firm, his only option is to go back to his Democratic colleagues and ask them to support real spending cuts and tax increases to pay for his health care bill. And, despite all of the talk that now is the time to pass sweeping legislation, there’s no evidence that rank-and-file Democrats have agreed, or are ready, to walk that particular plank.

In the end, CBO is very likely to deliver the same message to Senator Baucus that they have delivered to many others at various times over the years: There’s no politically easy way to “bend the cost curve.” If there were, it would have been done already.

(For full disclosure, I am working on a project which is looking at how to improve cost-estimating for diabetes treatment. However, my recommendations in that project would not substantially alter the overall cost-estimates for a health care reform bill, nor do I believe CBO should do anything differently with regard to the vast majority of provisions under review in such measures.)

[Cross-posted at the Corner]

posted by James C. Capretta | 11:36 am
File As: Health Care

Can the Government Engineer Better Health Care?

Here’s the good news: Powerful Democrats, led by Senate Finance Committee Chairman Max Baucus, have essentially admitted that Medicare’s current structure is a big part of the health care problem. That’s a genuine breakthrough, with important consequences.

For years, many Democrats have argued that the way to fix health care in America is to make the whole system look more like Medicare. That’s the thinking behind the so-called “Medicare-for-all” plans and the effort to create a new government-run insurance plan for the working age population this year.

But, now, Senator Baucus has joined a growing number of analysts who say it’s really the other way around. The Medicare model is not the solution but the problem, or at least a big part of it.

Baucus held a public forum last week on the subject — which he calls “delivery-system reform.” At the forum, numerous health policy analysts argued that Medicare’s payment systems are creating all kinds of distortions in hospital and physician practice patterns — distortions that erode the quality of care provided for everyone, and are costly too. This week, Baucus released a white paper detailing the reforms he thinks are necessary to address the problem. Most would involve changing how Medicare buys services.

There are certainly some meritorious ideas on the Baucus list. Most are aimed at encouraging more care coordination among doctors, hospitals, nursing homes, and clinics. Hard to argue with that.

But the basic premise of the Baucus list is flawed.

Like Peter Orszag, the director of the Office of Management and Budget, Senator Baucus believes the federal government has the capacity to engineer more efficient health care practices, from Washington. All that’s needed is better analysis and smarter payment systems designed by the bureaucracy.

That’s a very questionable assumption.

Medicare looks and operates as it does for a reason — politics. Medicare can’t play favorites. All licensed health care providers get paid exactly the same. There’s no government-run PPO because that would mean steering patients to certain physicians and hospitals and not others. Moreover, politicians want to insulate their retired constituents from the financial consequences of their health care decisions. Put it all together and you have an insurance plan that can’t control volume. The only cost-cutting mechanisms available are price controls, which make matters worse.

Senator Baucus is right that fixing health care means fixing Medicare. But nothing on the Baucus list would get the government out of the business of micro-managing health insurance, which is the source of the problem. What’s really needed is a reform that shifts financial control from the government to Medicare's beneficiaries.

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

Reconciliation and a Partisan Health Care Plan

The New York Times has a piece today on the growing sense among Democrats that they might be better off trying to pass their massive health-care plan on a partisan basis — without even making a show of seeking Republican support.

We should know very soon if that’s their game plan. House and Senate conferees are in the midst of negotiating a conference agreement on the budget resolution. The House version of the resolution included a provision which would allow Congress to pass a health care bill using the so-called reconciliation process. Reconciliation is a special procedure by which budgetary bills can be considered on an expedited basis. The Senate did not include such a provision in its version of the budget resolution.

The House is pushing to keep reconciliation as an option for health care in the conference agreement, but they are doing so really to make it easier to pass a partisan bill in the Senate. Reconciliation bills cannot be filibustered. That means that if Congress decides to make the health care bill a reconciliation measure, it could pass in the Senate with a simple majority instead of 60 votes (in fact, it could pass with just 50 votes, with the vice president breaking the tie — which is what happened with the Clinton tax increase in 1993). As matters stand, 58 Senators caucus with the Democrats, and that’s likely to be 59 before too long.

If Democratic leaders go down this path,Senate Republicans have already signaled that it would mean the end of bipartisan negotiations on health care.

Passing a partisan health care bill may not be as easy as some Democrats now think. The health care bill can’t be all giveaways, like the so-called stimulus bill. The Democrats want to create massive new health care entitlement, costing perhaps $1.5 trillion over the next decade. The options they are looking at to pay for it would all generate substantial political heat: costly and job-killing taxes and mandates on employers, in a recession at that; requirements that individuals pay premiums for coverage they don’t want; the taxation of employer-sponsored health benefits; more tax hikes on the successful; and Medicare cuts that will reduce benefits for retirees.

They may be able to pass such a bill on highly partisan basis. But maybe not.

President Obama has more or less told the public that all budgetary and economic problems can be solved by taxing the rich, and that his health care plan would reduce costs for households with insurance by $2,500 per year. The electorate might be more than a little surprised, and alarmed, when they find out the Democratic Congress is working on a health care plan which will stick them with a massive new bill instead.

[Cross-posted at the Corner]

posted by James C. Capretta | 6:35 pm
File As: Health Care

The Implications for Employer-Sponsored Health Insurance

I was glad to accept an invitation to make a presentation last week to the Cleveland Chapter of the Worldwide Employee Benefit Network (the folks who help make employer-sponsored health insurance work). The group was interested in learning more about the state of the health-care debate in Washington — understandable, since some of the ideas under consideration in Congress could profoundly change their business operations. The slides I used for my presentation are available here (in PowerPoint format).

posted by James C. Capretta | 10:48 am
File As: Health Care

Choosing Secretary Sebelius

President Obama certainly has the right to nominate whom he wants for political appointments in his administration. In general and within reason, some deference by the Senate to those selections is appropriate.

But Kathleen Sebelius is so clearly the wrong person to lead HHS that even the president should be able to see it. Indeed, if confirmed, she is sure to make it more difficult for him to achieve his primary objectives.

Sebelius’s record on abortion can only be described as radical. In fact, that record and her longtime associations with the abortion industry are more than enough to convince a large segment of the population that she does not share their values and cannot be trusted with overseeing anything important — much less matters that touch on life and death.

But President Obama also wants to expand the government’s reach into how medicine is practiced through a health-care reform bill. His nomination of Sebelius will complicate that effort considerably. The mere presence of Sebelius at the top of HHS will be enough to push millions of pro-life Americans into adamant opposition to the whole health-care reform enterprise. The president and his team may think it won’t matter — that they can pass their bill anyway. But passing a massive and expensive health-care bill was going to be complicated enough without a fight with social conservatives. The president didn’t need to alienate a sizeable portion of the electorate with a controversial selection for HHS — but he did. He has made his choice, and I think he will come to regret it.

[Cross-posted at the Corner]

posted by James C. Capretta | 5:37 pm
File As: Health Care

Whos Credible on Health Care?

Yesterday, White House Chief of Staff Rahm Emanuel said on This Week that Republicans have become the party of “no,” “never,” and “no new ideas.” And he challenged GOP leaders in Congress to come to the table with proposals and be constructive in negotiations.

Emanuel seems to be under the impression that the Obama administration has met the credibility test by offering serious plans of their own, full of new ideas and fresh thinking.

They haven’t — at least not in health care.

The president has stated repeatedly that both health care and entitlement reform are dependent on finding ways to “bend the curve” and slow the rapid escalation of health care costs.

In fact, the White House has already held two full-day summits, filled with talk, to demonstrate how serious they are about the issue of rising costs.

But they have offered no plan to actually do anything about it, and there is no prospect of one emerging in Congress either.

When the topic is raised, administration officials, including Emanuel, always fall back on their efforts to promote more health information technology and so-called “comparative effectiveness research.”

First, these aren’t new ideas. Second, they won’t come close to “bending the cost curve.” But that doesn’t stop the New York Times from dutifully reporting on the “president’s plans to make health care affordable” for more Americans.

What is clear is that Congress and the president would like to stand up an expensive new health care entitlement program. Credible estimates put the cost at $150 billion per year. How will the president pay for it? After a lot of bobbing and weaving, Mr. Emanuel’s answer yesterday was, essentially, “We’ll work with Congress on that.” Not exactly “The buck stops here.” It will be interesting to see if Democrats in Congress are willing to take on tax increases and spending cuts that the president himself was unwilling to embrace in his budget. Don’t bet on it.

Meanwhile, today in Politico, several Republican strategists worry that party leaders are late in coalescing around a plan for countering whatever plan emerges in Congress.

There is certainly reason to be concerned. Democrats have long enjoyed a substantial advantage with voters on the issue. Republicans cannot close the gap without a more coherent message that they are willing to repeat as often as necessary.

But Republicans should not despair. The gap can be narrowed — with a lot of effort.

Fundamentally, the health care debate is about how to allocate resources in the health sector. And there are only two choices: It’s either the government, or consumers and suppliers of services in a marketplace.

The Democrats want the federal government in charge (although they won’t admit so this year). Always and everywhere, that leads to government-driven rationing of care, which the public rightly fears. To compete more effectively on this issue, Republicans must first hammer the message home to voters that the Democratic plan would give the government too much power over who gets care, and when.

When enough people become concerned about a government takeover, there will be a short window of opportunity to present an alternative vision. Republicans will need to be ready with a compelling vision of their own.

It won’t be easy building a consensus position, though. Many voters are skeptical about the virtues of a health care marketplace. A GOP plan will need to include effective government oversight to give the public confidence that they will have good options to choose from in a reformed marketplace. But it can be done. And it’s not too late to pull such a plan together — not yet anyway.

[Cross-posted at the Corner]

posted by James C. Capretta | 3:18 pm
File As: Health Care

Whos for Irrational Rationing?

Ramesh Ponnuru’s piece in the New York Times last week generated a fair amount of commentary from critics, and able responses from Ramesh himself, of course, as well as Michael Cannon over at Cato.

There’s no real need to go over the substance of those exchanges again here.

But one issue that did come up in the back and forth that would seem to warrant some additional comment is rationing. More specifically, who in this debate can rightly be accused of supporting irrational rationing of medical care?

Ezra Klein thinks it’s the conservatives. He asserts that easing up on state benefit mandate laws would lead to scary, profit-driven rationing by insurance companies. For instance, he says, a carrier might exclude bone marrow transplants for cancer victims.

Klein’s right, of course—at least in theory. If there is no regulatory requirement enforcing inclusion of a covered benefit, insurers could try to exclude it.

But this is really a straw man argument. It assumes that consumers would not be able to rationally select products that provide the financial protection they would really need.

More importantly, providing more benefit flexibility does not mean the government would provide no mechanism for socializing the costs of pre-existing conditions. It is well within our reach to have a competitive market for insurance which provides strong incentives for insurance carriers to cover the sick as well as the healthy without overly onerous governmental regulation (notice I am not saying no regulation). Many conservatives are perfectly willing to accept backroom risk adjustment among participating insurers as a protection against excessive market segmentation by health risk. With risk adjustment, funds would move among insurers based on the relative-risk profiles of their covered populations using pre-arranged data collection methods and formulae (it works best if it is handled entirely by the insurers, not the government). Alternatively, the government could establish an enlarged program for high-risk insurance enrollees, which would mean socializing their added costs through taxes and transfers, not premiums. Either way, the risk of large numbers of Americans going without coverage for mainstream cancer treatment would be virtually non-existent.

Unfortunately, the same cannot be said for the reform program many Democrats want to push through Congress this year.

Ramesh did not stress this in his piece, but the great virtue of moving toward a fixed, refundable tax credit for health insurance is that it would create millions of cost-conscious consumers. They would want to get the most for their money because if they bought expensive insurance the balance would come out of their own pocket (today, in job-based plans, much of the additional cost for expensive insurance is implicitly financed by the federal treasury). That desire to keep costs down would create pressure on insurers, and the networks of hospitals and doctors they pay for services, to provide better coverage and better health care for the premiums they charge to enrollees. The dismal science is all about the allocation of scarce resources—rationing, in a sense—but this kind of market-based rationing is rational, with consumers and suppliers finding the best ways to improve productivity and provide the highest value possible for the prices people are willing to pay.

The only alternative to building such a marketplace is centralized governmental control. Instead of consumers, insurers, and service suppliers figuring out the best way to stretch the health-care dollar, the government would try to do it. The Democratic majority in Congress won’t admit it, but that’s their plan. For now, they say they want to improve the efficiency of health care with information technology and research into what works and doesn’t in medical practice. But these steps won’t come close to “bending the cost curve,” as the president says he wants to do. In time, the Obama administration and their allies in Congress will be forced to put on the table the kinds of arbitrary cost-control mechanisms used by other countries—price setting, premium limits, and fixed capital budgets for facilities.

And that’s a sure-fire recipe to get exactly what Klein says he does not want—irrational rationing of care. Whenever a distant national government imposes cost constraints, it leads to a reduction in the number of willing suppliers of services, waiting lists, and government-driven rationing of care. Indeed, quite frequently, it is cancer victims who have the hardest time getting access to the services they need on a timely basis.

Klein is absolutely right that the public should be fearful of opening the door to arbitrary rationing of health care in the United States. That’s why they should reject the kind of reform program Klein and others advocate.

[Cross-posted at the Corner]

posted by James C. Capretta | 3:27 pm
File As: Health Care

The Universal Mistake

Ramesh Ponnuru’s op-ed in today’s New York Times on the flawed arguments for universal coverage is well worth reading. It’s a piece that needed to be written. Making universal coverage the goal of a health-care bill distorts scores of decisions, and it’s not necessary.

Many Democrats adhere to the big bang theory of health-care legislation—it’s either a big bill, with universal coverage as the goal, or nothing. And, in fact, they often argue that if universal coverage is not in the offing, then no real progress can be made at all.

That’s nonsense. As Ramesh noted, a reform built on converting today’s tax preference for job-based coverage into a credit for private insurance owned by individuals would solve the portability problem overnight and reduce the number of uninsured Americans by nearly half.

In fact, that’s probably a very pessimistic estimate of the expanded coverage that would ensue. It seems more likely a universal, refundable tax credit would very nearly cover all Americans with insurance, even as it remained voluntary. The simulation models which show some remaining uninsured households assume that these households would prefer to leave $5,000 on the table (that’s the amount of the credit suggested by Senator McCain last year) than sign up with what some might call thin coverage.

Is that a realistic assumption? Wouldn’t most households want to spend the $5,000 on something, even if it were a very high deductible plan that left them with a lot of up-front costs?

I suspect the plan Ramesh outlines would go a long way toward providing coverage for everyone who wants insurance without making that the goal or building a heavy-handed government apparatus that would damage the quality of American health care over time.

[Cross-posted at the Corner]

posted by James C. Capretta | 11:57 pm

Obamacare: Its Not Inevitable

The drumbeat is getting louder.

Last week, the New York Times reported that the broad outline of a health-care reform bill is starting to come into focus in Congress. Yesterday, E. J. Dionne Jr. argued in his Washington Post column that the political stars are lined up for a successful health-care push this year.

Expect more of the same in coming days and weeks. The train is leaving the station, we will hear. Get on board or be left behind, interested parties will be warned.

It’s a smart tactic. If passage of an Obama-style bill is all but inevitable, then those in a position to contest it are more likely to get out of the way. Why make what’s going to happen anyway more painful and costly than necessary?

But, of course, Obamacare is not at all inevitable. Indeed, at this point, it’s hard to see how Democrats, on their own, can pass what they have promised.

Health-care policy isn’t hard if the only concern is handing out new subsidies for coverage. The Congressional majority certainly could coalesce around creation of some kind of plan to provide premium discounts for tens of millions of additional households. That’s the easy part.

What’s not so easy is paying for the added cost to the government—which is likely to be about $150 billion per year initially, and much more as the years go by.

Where will the Congressional majority find the money to pay for such an expensive program? The Obama budget plan targeted upper-income households, private health insurers, and drug companies, and suggested some modest Medicare payment reforms as well. But those offsets only totaled $634 billion over ten years, and Congress has already signaled that the suggested limit on the deductibility of home-mortgage interest and charitable contributions for upper-income households, a $300+ billion tax hike, is all but dead. The Medicare payment reforms seem likely to undergo a downsizing too when they are put under the political microscope.

Senate Finance Committee Chairman Max Baucus has signaled an interest in taxing employer-paid premiums, but that is no slam dunk either. It’s hard to see rank-and-file Democrats taking on the political risk of taxing job-based health benefits “for the first time in history” in the face of vehement union opposition.

Fundamentally, the health-care bill the Congressional majority would like to pass would redistribute wealth from one segment of the population to another. The amount in question is likely to be $1.5 trillion or more over the coming decade. Presidential candidate Obama promised Americans with insurance his health-care plan would cut their costs by $2,500 per year. That’s what they are expecting still, as the president hasn’t told them otherwise since taking office. It does not seem inevitable that the public will readily go along with paying a hefty bill instead.

[Cross-posted at the Corner]

posted by James C. Capretta | 4:46 pm
File As: Health Care

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