Mike Leavittís Warning

Mike LeavittAs Secretary Mike Leavitt prepares to leave office after four years at the helm of the Department of Health and Human Services, it is worth noting what he is worried about given his experience and perspective. In his column in today’s Washington Post, George Will gives us the answer: surging costs for Medicare and Medicaid.

Leavitt notes that the three most common hospital surgical procedures financed by Medicare today — hip and knee replacements and heart surgery to implant a stent — were not yet part of the medical arsenal when Medicare was established in 1965. The advances in medical care of the elderly have been impressive indeed, but the program’s structure is oriented toward ever increasing use of services over time, with weak incentives for commonsense steps toward improvements in the efficiency of how care is delivered.

Leavitt knows whereof he speaks. During his term, he tried to implement a small program to buy certain products for Medicare beneficiaries using competitive bidding based on price and service. The idea had already been tested and debated endlessly (for about a decade) and was going live when the product suppliers, especially those who were about to lose the competition, successfully lobbied Congress to stop the program. Medicare is now using an outdated price control regulation to pay for these services, with little prospect that competitive bidding will be revived by the incoming Obama administration.

It is a cautionary tale. The Obama health care vision rests on the ability of government to engineer a more productive and efficient health sector. That’s the only way they can afford to promise lavish new entitlements for coverage. But our political and regulatory processes have shown no competency to take on this immense task. If the federal government takes full control of health care resource allocation, the experience with Medicare shows the likely result would be arbitrary price controls and inefficient care arrangements, driven by the political power of incumbents who are able to manipulate payment policies to their advantage.

posted by James C. Capretta | 12:26 pm
File As: Health Care

Health Care Entitlements: Piling On

Last week, the Congressional Budget Office (CBO) issued two highly anticipated reports.

The first, Key Issues in Analyzing Major Health Insurance Proposals, provides something of a roadmap for how CBO thinks about far-reaching health reform proposals (available in PDF format here).

The second report, Budget Options Volume I: Health Care, provides a lengthy menu of health-related budgetary options (presumably, another budget options volume dedicated to non-health matters will be released soon). (The health-related budget options volume is available in PDF format here.)

Both reports are full of useful insights and could serve as primary texts for a graduate level economics course on U.S. health care arrangements.

CBO is a sober analytical institution, grounded in data rather than wishful thinking. Those characteristics will be more important than ever this year, as passions around health care can sometimes lead participants in the reform debate to come unhinged from reality.

An important theme of CBO’s new reports is that slowing the pace of rising health care costs will not easy. Some reform measures can help modestly to ease cost pressures, like more widespread adoption of health information technology and more intensive research scrutiny around what constitutes effective medical care (“comparative effectiveness research”).

But no steps will change the trajectory of health care spending without a fundamental reorientation of financial incentives. In effect, rapidly rising costs are the predictable result of existing, heavily subsidized third party insurance payments. Slowing the pace of rising costs will require reworking those arrangements, which means disrupting existing employer-based insurance or Medicare.  Such measures would not be politically popular, to say the least.

CBO is also one of the few agencies in government that regularly reminds audiences that existing health care entitlements—namely Medicare and Medicaid—are on track to push the federal budget deficit to unsustainable levels in coming decades. Ironically, the health care agenda of the incoming administration would pile new entitlement spending (in the form of premium subsidies for low to middle income households) on top of the existing pile, with little prospect that any of it will be affordable in the future.

What’s needed most right now is a serious effort to improve the efficiency of how health care is delivered by doctors and hospitals. That would ease cost pressures and make insurance more affordable for everyone. 

Unfortunately, the Obama team and their allies in Congress seem to think the federal government can engineer a more productive health care sector. It can’t. Political pressures inevitably tilt regulatory efforts toward protecting incumbents and the status quo. 

But a well-structured marketplace can work and force real change. Cost-conscious consumers buying services in a competitive market, with transparent price and quality information, will provide strong incentives for innovation and patient-centered care. That’s the way to get more value for our money, and ensure resources are available to provide ready access for everyone as well.

posted by James C. Capretta | 4:37 pm
File As: Health Care

Obamacare: What We Know So Far

Earlier this month, the president-elect’s selection for Secretary of Health and Human Services, former Senator Tom Daschle, announced that the transition team was planning a series of “health care reform parties” during which the general public would have the opportunity to offer input on the shape and content of the reform plan.

Of course, holding these sessions now will also allow the Obama team to later say they solicited public input before moving to push a reform plan through Congress.

It should be obvious from this and other signals that the president-elect plans to move fast and hard to pass health care legislation as early as possible in 2009. In a certain sense, he and his team are doing their “listening” now so they won’t have to later.

It is also clear that a major battle will be fought over the so-called “public insurance option” in the Obama campaign plan. Many Democrats, including Senate Finance Committee Chairman Max Baucus, want to give workers the option to enroll in a public insurance plan modeled on Medicare. Proponents of this idea say they only want a fair competition with private insurance offerings, but the reality is that a public insurance plan would open a backdoor to a single-payer system. Public insurance plans always set fees for services well below market rates and thus shift costs to other payers who must negotiate, not dictate, rates with doctors and hospitals.

Recent news stories indicate that major insurers are now beginning to voice serious concerns about the idea, as they should.

Some more moderate advocates of Democratic-leaning reform try to downplay the significance of the public insurance option, suggesting it might be discarded to get a deal. Perhaps.

But the Obama framework really doesn’t work without it either because the Democratic approach to reform is entirely dependent on governmental price controls to hold spending in down. Jettisoning the public insurance option, absent a real marketplace, would drive the costs of Obamacare even higher.

posted by James C. Capretta | 3:38 pm
File As: Health Care

The Big Three Have a Retiree Health-Care Problem -- of Their Own Making

[Cross-posted from The Corner.] 

Car company executives and UAW leaders are fond of blaming the U.S. health–care system for their financial woes. If only the federal government would adopt Japanese- or German-style socialized medicine, they contend, all would be well. But this is just one more myth sidetracking Detroit from doing what really needs to be done to bring the companies back to profitability.

It’s absolutely true that the Big Three are buckling under the weight of massive health-care obligations, but this is because the companies over-promised benefits to their retirees — a mistake their competitors with U.S. manufacturing plants are not making.

As Shikha Dalmia explained in this piece from more than a year ago, before concessions were made in 2005, the typical UAW retiree got all of his health care, for life, virtually for free — and most blue-collar workers were retiring well before age 65. Today, after concessions, the typical UAW retiree still has to pay only about $750 out-of-pocket for his health care per year, which is far below what most other Americans, including retirees, pay. Consequently, GM alone is facing an estimated $80 billion in unfunded health care expenses.

Some car company executives and union leaders think socialized medicine is the answer, but the U.S. already provides a socialized system of care for retirees — it’s called Medicare. The problem is that, when the car companies were profitable, they saw Medicare coverage as inadequate by industry standards. Hence, they promised workers zero-premium insurance during early retirement and coverage of all expenses not paid for by Medicare when they hit age 65 until death. Certainly, other Americans industries have taken similar steps, but none to the extent and scale that Detroit did.

Socialized systems of health care are mainly about equality and income redistribution. That is, all citizens are supposed to have equal access to care, which is enforced with standardized benefits and uniform taxpayer subsidization. If the U.S. were to adopt some version of socialized medicine, retired auto workers would be among those with the most to lose because they have it so good today. Their retirement incomes are relatively high, and they have prototypical, Cadillac-style (had to!) health insurance. They would almost certainly pay more and get less to level the playing field with others who today are either uninsured or are enrolled in much less expansive insurance arrangements.

Bill McGurn of the Wall Street Journal pointed out in this piece earlier this month that what Detroit should do now is admit that their health-care promises are unaffordable in their current form and begin to convert them to fixed contributions into worker-owned Health Savings Accounts. The costs would be known and controllable, and the workers would no longer have to rely on the financial viability of their companies — which may never be well-run again — for their future health-care coverage.

posted by James C. Capretta | 3:42 pm

Obama's Health Care Czar

It's official: former Democratic Senator Tom Daschle is President-elect Barack Obama's pick to be the next Secretary of Health and Human Services.

In an unusual step, Obama also said Sen. Daschle would head a new White House Office of Health Reform, with Jeanne Lambrew, the co-author of his recent book on health care, serving as Sen. Daschle's deputy. Presumably, the new White House office will spearhead the drive to get Obama's health care plan through Congress.

These days, discussions in Washington about health care have a surreal quality about them. There seems to be a sense that 2009 is different and might be the year when something really big does indeed pass Congress.

That could very well be the case.

But, before such a plan passes, there will necessarily be a return to reality.

Right now, some of the optimism about reform is due to a lack of understanding about financial reality. The public seems to think President-elect Obama can provide more health care for more people without anyone else paying anything more or getting anything less. 

He can't.

The Obama campaign plan was built around the notion that the federal government could find ways to engineer a more cost-effective health system, thus providing the savings which could be used to subsidize coverage for millions of households.

There is simply no evidence that the government has the capacity to do this. Quite the contrary. What the government can do is impose artificial cost constraints, as other countries do today. But such artificial restraints come at the expense of quality and lead to rationing, not more efficiency.

At some point, reality will set in. The Obama plan cannot deliver all things to all people. The Obama team will, by necessity, have to turn to unpopular taxes or price controls to finance their program. When they do so, the debate will return to planet earth and become more interesting.

posted by James C. Capretta | 5:56 pm
File As: Health Care

A Cost-Free Medicare Buy-In? Donít Count On It

The idea of letting early retirees buy into Medicare has been around for a long time. The last time it was seriously considered was in the late 1990s when it was proposed by President Bill Clinton. It didn’t pass then, in part, because it was impossible to structure such a program in a way that wasn’t prohibitively expensive to the federal government. Hence it was surprising to see Senate Finance Committee Chairman Max Baucus suggest in his recently released white paper on health care reform that a “budget neutral” buy-in, financed entirely from enrollee premiums, was possible.

There is no data offered in Sen. Baucus’ white paper which supports the contention that such an outcome is achievable, whereas common sense and plenty of independent research indicate that it is not. The problem with the buy-in option is that, because it is voluntary, it is vulnerable to serious adverse selection. If the premiums are set to cover full costs, the only people who will want to sign up are those with chronic and expensive health problems who can’t get affordable coverage anywhere else. Covering costs for a high-risk population would require very high premiums. The relatively healthy would find it less expensive to get coverage elsewhere and so would not jump in.

If, on the other hand, the buy-in were subsidized to make it less expensive for those who have expensive health needs, there would be a stampede of people leaving private coverage to take advantage of a new public insurance subsidy. The Census Bureau reports that there were 33 million people age 55 to 64 in 2007. Providing subsidized coverage for this pre-Medicare population would be very expensive indeed. The difficulty of designing a workable, inexpensive buy-in has been well documented by others, including Urban Institute researchers in this analysis from 2002.

Of course, it may be that Sen. Baucus wants to start with the proposition that such an option will be budget-neutral and then get dragged by interest group pressure toward the more expensive alternative. Certainly, there are many businesses which would like nothing more than to dump their early retiree health care obligations onto the federal government. A Medicare buy-in, if subsidized and therefore attractive to the healthy as well as the sick, would provide them with the opportunity to do so.

Taxpayers beware.

posted by James C. Capretta | 5:42 pm
File As: Health Care

The States, Gov. Bobby Jindal, and Surviving the Obama Years

Where should conservatives turn for new leadership on health care issues during the Obama years?

Certainly one place should be the executive mansions in the states. Gov. Bobby Jindal of Louisiana and other like-minded reformers in the states are working to implement practical reform programs based on markets and consumer choice. That’s the subject matter for this piece, posted yesterday at National Review Online:

[Jindal] recently released an ambitious plan to reshape his state’s Medicaid program and expand coverage to a large segment of the state’s uninsured. The details of Jindal’s plan reveal a rare understanding of a central failing of today’s arrangements: Government-run fee-for-service-style insurance, as practiced in current Medicare and Medicaid, is the primary cause of low quality, fragmented, and inefficient care — in Louisiana and everywhere else.

Jindal wants to tackle this problem head-on. He would restructure Medicaid by moving toward fixed-dollar entitlement and consumer choice. Medicaid recipients in Louisiana would be given the power to select from among a number of competing networks of doctors and hospitals. The state would pay these networks a monthly fee intended to cover the costs of all necessary care, instead of a fee every time a beneficiary used a service. The expectation is that health-care practitioners would be forced to rethink how they do business to find innovative ways to keep people healthy and well — and out of the hospital. Physicians and hospital administrators who believe they can provide better care at less cost would have a strong financial incentive to jump into the reformed Medicaid program, because they would share in the savings from improved productivity.


posted by James C. Capretta | 2:43 pm
File As: Health Care

Obamaís Chief Budgeteer

President-elect Barack Obama announced yesterday that Peter Orszag, currently the director of the Congressional Budget Office (CBO), will be nominated to become the next director of the Office of Management and Budget (OMB).

CBO and OMB obviously have much in common, and budget professionals have often worked for the two agencies at various points in their careers. But there are important differences between them — among the most important of which is that OMB is a consumer, not a producer, of complex health care cost projections. By contrast, CBO has on staff a number of experts who actually build the models and make the projections regarding health care costs for Congress.

Consequently, at CBO, Orszag essentially had the final say on how much a bill or amendment would be projected to cost in terms of federal spending. But that will not be the case in his new role at OMB.

In the executive branch, health care estimates are mainly purview of the Office of the Actuary (OACT) in the Centers for Medicare and Medicaid Services (CMS). It is there that the annual report on Medicare’s financial outlook is produced.

The actuaries’ office is well-known throughout government for vigorously defending its independence from outside influence. OMB staff work closely with OACT, but it would be more than a stretch to suggest that OMB has the power to direct OACT regarding professional judgment on cost estimates.

Orszag no doubt has developed many concrete ideas about what he thinks will be needed in an effective health care reform plan. And he may have great influence on the policy direction taken by the incoming administration with respect to health care. But his influence on how health care reform plans are “scored” for purposes of budgetary estimates has just weakened considerably.

posted by James C. Capretta | 9:33 pm

Senator Daschle Gets HHS

What does the selection mean for health care reform?

"Doc Daschle"Officials from the Obama transition team have let it be known that former Senate Democratic Leader Tom Daschle is the pick to be the next Secretary of Health and Human Services.

This does not come as a great surprise; Senator Daschle has been signaling for months now that he wanted HHS, as I pointed out back in August. Why did Daschle want the HHS job? As I write in a new article over at National Review Online:

Daschle is apparently eager to take the assignment not so much because he relishes the challenge of managing the vast HHS enterprise but because, like many of his former colleagues in Congress, he wants to cap his career by being closely associated with passage of a nationalized-health-care plan. And he senses, as others do, that the moment may have arrived.

And it very well may have. With 58 Democratic votes in the Senate (and counting), there will be a strong push from Democrats to seize the political momentum and pass something very big next year.

Just what kind of reforms are Daschle and his former Senate colleagues now contemplating? I lay out some details in the NRO piece.

posted by James C. Capretta | 11:30 am
File As: Health Care

Immigration and the Uninsured

With the election of Senator Barack Obama as the next president, a renewed and serious debate about covering the uninsured in the coming years seems certain.

There will be much to discuss, course: The merits of “pay or play.” Enforcement of individual mandates. Insurance market reforms. And much, much more.

But perhaps no issue is as potentially volatile as what to do about uninsured immigrants. It’s no small matter, as a recent analysis [PDF format] from the Employee Benefit Research Institute (EBRI) makes clear.

According EBRI, the number of uninsured residents in the United States under the age of 65 increased from 36.5 million in 1994 to 46.5 million in 2006, an increase of 10 million people. Of this increase, 55 percent, or about 5.4 million people, were immigrants -- that is, foreign-born persons (citizens and non-citizens) residing in the United States. An indeterminate number of the non-citizen uninsured are here illegally.

In 1994, there were 6.9 million people in the United States who were immigrants and uninsured. In 2006, the number of immigrants without health insurance had grown to 12.3 million people, an increase of 80 percent in a dozen years. By contrast, the number of native-born uninsured in the U.S. was 34.1 million in 2006 -- just 15 percent more than in 1994 (see the chart below).

The Uninsured by Immigration Status

Uninsured immigrants are highly concentrated in a handful of states. On average, there were about 11.7 million uninsured immigrants in the United States over the three-year period 2004 to 2006. Of that total, 60 percent lived in just four states: California, Texas, Florida, and New York.

The 1996 welfare reform law has had a major impact on the number of uninsured immigrants. The 1996 law placed new restrictions on enrollment in Medicaid by non-citizens. New immigrants are now required to wait five years before they can apply for public insurance coverage, and even then they may not qualify as easily as before because new rules assume an immigrant is getting income support from their sponsor. This change is reflected in the statistics: Between 1994 and 1998, immigrants accounted for 43 percent of the increase in the uninsured; between 1998 and 2003, they accounted for over 90 percent of the increase in the number of uninsured.

EBRI’s analysis shows that the probability that an immigrant will remain uninsured drops precipitously with time. For foreign-born non-citizens, the probability of being uninsured is nearly 50 percent if they arrived in the United States after 1999, but only 27 percent if they arrived before 1970.

Immigrants who become U.S. citizens are only slightly more likely to be uninsured than citizens. EBRI estimates that the uninsured rate among foreign-born citizens is about 20 percent for the under-65 population, compared to 15 percent for native citizens under age 65.

Health care reform -- already complex politically and substantively -- will become even more so when more Americans become aware (as they surely will) of the potential implications of some reform plans for immigration policy. When that time arrives, proponents of reform will need to be ready with a politically-defensible position -- or the entire effort could be in jeopardy.

The full EBRI analysis is available in their August 2008 edition of Notes, available here.

posted by James C. Capretta | 0:50 am
File As: Health Care

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