Medicare


After Obamacare

With my colleague Yuval Levin, I have cowritten a piece in the latest Weekly Standard examining the political landscape for health care reform in the wake of the election of Scott Brown to the United States Senate. After discussing how the Democrats’ ambitious plans have screeched to a halt, we suggest some ideas for health reform that conservatives should take up:

First, they should seek to address the problem of insuring Americans with preexisting conditions through state-based high-risk pools, not cumbersome insurance regulations that try to outlaw basic economics. Risk pools, backed with federal money but nowhere near the scale of Obamacare’s costs, would give those with preexisting conditions more options in the individual market and make a significant dent in the number of uninsured, but without overturning our health care system.

Second, they should propose to help doctors and patients limit some of the burden of rising costs with medical malpractice reform. Sensible caps on punitive damages would not only save money but also help address shortages of medical providers in key specialties, and allow more Americans to afford and access care.

Third, they should argue that the states be given the lead role in developing more detailed reforms of how and where people get their insurance—to cover more people and slow the rise of costs. The overall goal should be to build well-functioning marketplaces in which insurers and providers compete to deliver the best value to cost-conscious consumers. The federal government should remove bureaucratic obstacles to state experimentation on this front, and offer support where possible, but not design one mammoth new program. The regulation of both the practice of medicine and of insurance is done in the states, and their improvement should be too....

Meanwhile, for the longer term, conservatives should make a case for changes in the tax law that level the playing field between employer-provided and individually purchased health insurance, with a gradual transformation of the tax exclusion for employer-based coverage into a credit available to all. A consumer-controlled tax credit would also enhance the benefits of risk-pools, tort reform, and state-based reform efforts.

And they should press the case for real Medicare reform, not to use the program as a pot of cash, as the Democrats tried to do over the past year, but to put it on a sound footing by empowering enrollees rather than bureaucrats to make decisions....

These ideas would not yield a sudden transformation of American health care, but a gradual improvement in the areas that matter most—cost-control, greater access for the uninsured, and greater fairness for those with preexisting conditions—while sustaining the quality and innovation that characterize American health care.

The piece is available in its entirety here.

posted by James C. Capretta | 9:28 pm
Tags: Obamacare, Yuval Levin, tort reform, risk pools, Medicare
File As: Health Care

Not As Advertised

Now that health care bills have passed in both the House and the Senate, Democrats just can’t seem to stop themselves from rhetorical excess. Just before Christmas, as the bill sponsored by Majority Leader Harry Reid was clearing its final hurdles in the Senate, Democrats took to the chamber floor and cable television shows to trumpet the “historic” nature of the legislation they were about to vote on — legislation that would, at long last, move toward their long-sought goals of “universality” and a government-guaranteed right to health care.

But is it so?

Yes, both the House and Senate would provide essentially free health insurance, through the Medicaid program, to many millions of low-income people. But, even so, enrollment in Medicaid is a far cry from getting good care when it’s needed. For starters, about 40 percent of the nation’s physicians don’t see Medicaid patients because the payment rates are too low, which also means certain hospitals have very low rates of Medicaid admissions. The truth is that current Medicaid enrollees already have trouble getting access to high-quality care when they need it because the network of providers willing and able to see them is constrained and over-burdened. The House and Senate bills would add 15 million or more people to this program’s rolls without any guarantee whatsoever that there will be doctors and hospitals that can see them.

Ironically, the very Democrats who most frequently tout “universality” as the goal are also the ones who ensure it will never actually come about by insisting that America’s lower-income families enroll in government-run insurance — with no other options.

Beyond the Medicaid expansion, Obamacare is really an obligation, not a right. Every citizen would be required to sign up with a government-approved health-insurance plan or pay a tax penalty for going without coverage. According to the Lewin Group, households with at least one uninsured member and an income between $50,000 and $75,000 per year would see their costs rise for health care by $2,133 under the Senate bill. “A new tax on the uninsured” isn’t exactly a catchy slogan for Obamacare — but that’s essentially what it is. There would be a lavish new entitlement program to offset some of the premium for some households, but the vast majority of working Americans would get no additional help. They would just get the unfunded mandate, and that’s it.

Meanwhile, despite all of the talk of painlessly slowing the pace of rising costs with more efficient care, the Democrats’ bills would cut costs mainly by imposing arbitrary rate reductions in the Medicare program — pushing it more and more toward the Medicaid model. In fact, at the end of December, the Mayo Clinic announced that it would no longer see Medicare patients at one of its clinics in Arizona because the program’s payment rates are simply too low to cover its costs. A small glimpse into our Obamacare future.

In the coming days and weeks, we will hear a great deal more about how close the nation is to making history. Readily available health care for all, without limit — that’s what the overheated rhetoric will imply. But the public figured out months ago that the reality under Obamacare would be very different. There would be higher costs, higher taxes, and more regulation. Worst of all, clumsy governmental “cost-control” efforts would put the quality of American medicine at risk for everyone. Which is why public sentiment has hardened in opposition, and why the debate is not over yet.

posted by James C. Capretta | 7:51 pm
Tags: Obamacare, Medicaid, Medicare, Harry Reid
File As: Health Care

The Heart of the Cost Problem

Over at the Mirror of Justice website, Robert Hockett posted a thoughtful reply to my previous defense of Charles Krauthammer’s critique of the health-care legislation wending its way through Congress. Here (and cross-posted at Mirror of Justice) I offer a short reaction to some of the points he made.

First, there seems to be some confusion over what exactly is in these congressional health-care bills. Yes, they do contain many provisions related to reworking the nation’s approach to health insurance coverage and regulation. But that is far from all that they would do. The bills are called “health care reform” for a reason. A central argument of their proponents is that rising costs is a problem — a crisis, even — that must be addressed, and the presumption of most Democrats is that the federal government can, and must, help orchestrate a “cost-control” effort. Consequently, both the House and Senate versions of the legislation are filled to the brim with provisions that are aimed at the changing how medicine is practiced in this country. For instance, the bills would penalize primary-care physicians who are outliers in terms of specialist referrals. The bills would also try, through various disincentives, to discourage physicians from practicing in small groups. And the bills would create a new structure for hospital-physician affiliation, called Accountable Care Organizations. The ambition of the sponsors goes well beyond just “health insurance reform.”

Second, the most important question in the health-care debate is this: what process has the best chance to deliver continuous improvement in the productivity and quality of patient care? That’s the only way to slow the pace of rising costs without harming patients. The Obama administration and its allies in Congress believe a governmental process is the answer. That’s why the bills are so unwieldy and complex. If the government is the answer to rising costs, then the government is going to need to get involved in nearly every aspect of resource allocation in the health sector. This is what I mean by “central planning.”

There is an alternative to central planning. Mr. Hockett indicates that he would support converting today’s open-ended tax preference for employer-paid health insurance into refundable tax credits controlled by individuals, as proposed in 2008 by presidential candidate John McCain. The McCain proposal was not just a way to expand insurance coverage, although it would do that. It would also dramatically change the cost equation, creating millions of cost-conscious consumers who are today passive enrollees in job-based plans. The government can and should provide oversight of the health insurance marketplace. But the way to drive more efficiency in health care arrangements is with a functioning marketplace in which doctors and hospitals have strong financial incentives to reorganize how they do business. Getting there would require reform of federal tax laws and the Medicare and Medicaid programs so that beneficiaries have more control over the use of their entitlement resources.

Third, Medicare is not the solution to American health care. Indeed, it is really at the heart of the cost problem. Yes, the program provides valuable insurance coverage to seniors. But the program’s design is also a primary reason for widespread inefficiency in how care is delivered to patients. Medicare’s dominant fee-for-service insurance model encourages provider fragmentation instead of integration, and organizational autonomy instead of cooperation. Medicare’s per-service payment rates are low, but providers earn more by providing more services, and the Medicare program has no effective check on volume.

Even the Obama administration admits that Medicare is more problem than solution. That’s why they argue that changes in the way Medicare buys services can lead to cost reductions system-wide.

But that’s a lot of wishful thinking. Medicare’s administrators have been trying for forty years to move the program away from unmanaged fee-for-service, with no success whatsoever. The reason is politics: Politicians don’t want to pick winners and losers among the hospitals and physician groups in their states and districts, which would be necessary in building a high-quality network. In a budget crunch, they would rather have Medicare pay all licensed providers the same exact rate, even if it is low, than to leave someone out of a government plan. So that’s exactly what is happening in the current health care bills. Despite all of the talk of painless efforts to bend the cost curve, the real “savings” in the Democratic bills come from arbitrary price cutting in the Medicare program. All hospitals and other institutions would see cuts in their reimbursement levels, without regard to any metric of quality. In fact, Medicare’s fee-for-service design would be even more entrenched than it is today.

Fourth, Mr. Hockett argues that any deficiencies found in the current bills should be brought to the attention of the sponsors, not waved around as justification for scrapping the whole enterprise. For starters, the critiques I noted are on the public record, in prominent places. A conference was held at the American Enterprise Institute highlighting the disparate subsidies that would be created by the Senate bill, and opinion pieces have been published in, among other outlets, the Wall Street Journal and Boston Globe highlighting the problem. Is that not prominent enough?

The truth is that the Democratic sponsors don’t want to fix this problem because it would blow a hole in their budget constraint. The bills provide generous subsidies to a relatively small segment of the population who would get their coverage in the exchanges, but nothing to those who would be forced to remain in job-based plans. Providing equitable treatment would drive the cost of the bills much higher, jeopardizing passage. Which is why you won’t find any Democrat mentioning it — or being able to deny that the problem exists.

Our country does need to reform our health care arrangements. But there are far better ways to do so than with the approach now emerging in Congress. A different bill, based on a different reform philosophy, would be more straightforward, less unwieldy, and less subject to influence by interested parties. Oh, and by the way, it would be more effective too.

posted by James C. Capretta | 7:38 pm
Tags: Robert Hockett, central planning, Obamacare, Medicare
File As: Health Care

For Nelson, It Shouldn’t Be a Close Call

Nebraska Senator Ben Nelson announced yesterday in an interview with a home-state radio station that new language regarding abortion coverage in subsidized insurance plans was not acceptable to him, dealing yet another blow to Senate Majority Leader Harry Reid’s mad-dash rush to pass a bill before Christmas.

Of course, it’s crucial that Senator Nelson stick to his guns on abortion. He has always been a self-described pro-life Democrat, and attracted votes accordingly in his election campaigns. So far, he shows every indication of sticking to his guns and insisting on language that is at least as stringent as that offered by Representative Bart Stupak and passed in the House last month. This is no time to go wobbly, or to listen to those who are transparently trying to divide the Senator from his pro-life supporters. If abortion language offered by Senator Reid doesn’t meet the test of the Catholic bishops — and it doesn’t — Senator Nelson owes it to those pro-life voters who have stood with him over many years to stand with them at this critical time.

But, just as importantly, Senator Nelson made it clear in the same radio interview that his concerns with the Reid bill go well beyond protecting taxpayers from financing elective abortions — as they should. Senator Nelson considers himself to be a fiscal conservative too. The Reid bill provides a ready opportunity to prove that he actually is.

Even before a new health-care entitlement program is stood up, the nation’s budgetary outlook is very grim, and has been made more so by the policies of the Obama administration. CBO projects that the Obama 2010 budget plan will drive federal debt up from $5.8 trillion at the end of 2008 to more than $17 trillion by 2019. And it will only get worse from there. Federal spending on Social Security, Medicare, and Medicaid is expected to increase from 11.1% of GDP this year to 17.1% in 2030, a jump in spending of 6% of GDP in just two decades. To put that in perspective, that’s like adding another Social Security program to the federal budget without any new revenue to pay for it.

The Obama administration and its allies in the Senate keep arguing that the Reid bill will begin to fix the entitlement problem. It won’t. It will make the nation’s entitlement problem much worse.

If passed, here’s what’s certain. Medicaid will be expanded to at least another 15 million people. This is the same Medicaid program that is entirely unreformed in the Reid bill and has been growing, on a per capita basis, nearly 2 percentage points faster than per capita GDP growth for three decades. In addition, Senator Reid’s proposal would create a new health entitlement by subsidizing the premiums for households with incomes between 100 and 400 percent of the federal poverty line. In all, CBO says these “coverage expansion” provisions (including tax credits for small businesses) will cost nearly $200 billion by 2019, and that cost will grow 8 percent annually every year thereafter.

And that’s a lowball estimate. The new insurance premium subsidy program is available only to households getting their insurance through the new “exchanges,” not employees who have no choice but to take the plan offered at work. But, as Gene Steuerle of the Urban Institute and I have pointed out elsewhere (see here and here), this kind of two-tiered system of subsidies creates large disparities in the treatment of households with identical financial resources. As matters stand, CBO says only 18 million people would get the premium subsidies in 2015, even though, in 2008, there were already 127 million people under the age of 65 living in households that would be eligible for subsidization. If enacted, it would only be a matter of time before tens of millions of additional people ended up in the subsidy program.

And what does the Reid bill do to slow the pace of rising costs? The President’s Council of Economic Advisers touts the slowdown in Medicare and Medicaid costs, as scored by CBO. But these spending reductions don’t come from more efficient health-care delivery. The savings are from arbitrary, across-the-board payment-rate cuts for hospitals, nursing homes, home health agencies, and others. These cuts do nothing to improve the efficiency of medical practice. Indeed, in the past, they have led to cost-shifting, and Congress has shown no stomach to sustain such cuts in the face of warnings of reduced access to care, such as was provided by the Medicare program’s chief actuary last week.

The administration also believes the new Medicare commission will work wonders. But, as the Concord Coalition has noted, the commission’s mandate is incredibly limited. It can’t propose any changes to hospital or physician reimbursement arrangements. It can’t restructure the Medicare entitlement. And its targets after 2019 wouldn’t save anything. That means, for a few years, the commission might get to cut home health and other ancillary service payment rates. That’s it. Medicare won’t look any different as a result. Never has so much been made about so little. Moreover, the commission itself represents an incredible admission of failure. At the beginning of the year, the Obama administration was promising to come forward with new whiz-bang ideas to painlessly root out inefficient health care without harming quality. They never did. Now they are saying a new independent commission will do it for them. Don’t hold your breath.

Senator Nelson is clearly uncomfortable with the bill as written. Any fiscal conservative would be. It’s not a close call. As the senator said yesterday, the country would be far better off with a more scaled-back bill. He’s right about that. And it’s in his power to deliver just such a bill. Pushing the discussions into 2010 would not end the health-care debate. It would only make it more likely the Senate voted in the end for something the public — and Nebraskans — would find acceptable.

posted by James C. Capretta | 5:28 pm
Tags: Ben Nelson, Medicare, abortion, Harry Reid, Senate bill
File As: Health Care

From Awful to Worse

In the new Weekly Standard, I have a piece co-written with my New Atlantis and EPPC colleague Yuval Levin. We discuss how Harry Reid's latest proposal is even worse than his original one. An excerpt:

Apparently, in exchange for dropping the "public option," moderate Senate Democrats have tentatively agreed to open up Medicare to people age 55 to 64 (retirees can currently sign up for it at age 65). In other words, rather than build on the failed cost-control model of Medicare, they now want to actually further burden Medicare itself. Why take a roundabout path to failure when a direct one is available? The irrationality of this solution is staggering. But, of course, it's a solution to Reid's political problem, not to the nation's health care financing crisis. Moderate Senate Democrats don't want to vote for anything called a "public option," but some of Reid's more liberal colleagues won't give up the dream of marching toward a single payer health care system. So he has offered up an even more direct path to such a system, but given it a different name and frame than the "public option."...

According to the Census Bureau, only 4.3 million people age 55 to 64 were uninsured in 2008. But the total population in this age range was 34.3 million--so the Medicare buy-in is not a means to help the uninsured but a means to socialize the health insurance of a vast swath of the public.

Initially, a voluntary Medicare program might attract only a small number of enrollees, especially because those who opt in would be required to pay the full premium. But over time, employers would likely find it convenient to put their early retirees into Medicare to shed some of their costs, providing only wraparound coverage as they do for retirees over 65. Once the opt-in is established, moreover, pressure would build for Congress to ensure "premiums" are affordable. Directly or indirectly, the government would find ways to subsidize enrollment. If established, a Medicare option for the 55- to 64-year-old population would quickly become the default option for the entire age group, and a case for further lowering the age of eligibility would emerge.

And when that happens, those who have fought all year against a new government-run insurance plan will have lost the battle, and those seeking means of actually cutting the growth of health care costs will pretty much have lost the war. The Reid bill already assumes a 15 million-person jump in enrollment in Medicaid, bringing the total enrollment to 60 million Americans. If 20 to 30 million new people end up on Medicare, on top of Medicare's current 45 million enrollees, then more than one-in-three Americans would be covered by government-funded health insurance. A single-payer health care system would be all but inevitable.

The entire piece is here.

Meanwhile, I recently discussed the unfolding Senate process in an interview with The New Ledger; you can hear the podcast here.

posted by James C. Capretta | 11:09 am
Tags: Medicare, Harry Reid, Senate, Yuval Levin
File As: Health Care

A $4.9 Trillion Spending Increase

“Bracket Creep” and the Return of Tax-and-Spend

The health-care plan unveiled yesterday by Senate Majority Leader Harry Reid has some in the mainstream media gushing because, on paper at least, the Congressional Budget Office (CBO) says it will reduce the federal budget deficit by about $130 billion over ten years, and more in the second decade.

But the supposed fiscal prudence of the Reid plan is a complete mirage, for a number of reasons.

For starters, the Reid plan assumes that Medicare physician fees will get cut by about 20 percent beginning in 2011 and then remain very restrained indefinitely. Virtually no one in Congress believes that will happen, nor do they want it to. Indeed, just a couple of weeks ago, Senator Reid himself tried to overturn the planned cuts in physician fees, at a cost of nearly $250 billion over a decade. It does not matter to taxpayers if Senate Democrats try to pass their health-care agenda in one or two bills. The total cost will be the same. With the so-called “doc fix” included in the tally, the Reid plan would increase the federal budget deficit by about $100 billion over ten years, not reduce it.

Then there are the tax increases. CBO gives Senator Reid credit for cutting the budget deficit in a second decade, but that’s not because the plan would do anything to slow the pace of rising health-care costs. It wouldn’t do much of anything in that regard. What it would do is impose massive tax increases, in part by resorting to the same kind of discredited “bracket creep” so despised by the public in the 1970s. At that time, the thresholds separating the various income-tax brackets were not indexed for inflation, which meant that every year many people paid taxes at a higher rate simply because inflation had boosted their wages. Of course, many in Congress liked it that way because it meant a tax increase without the nuisance of a politically unpopular vote. Senator Reid and his Democratic colleagues are trying to pull off the same trick now. They are proposing two tax increases which would hit America’s middle class increasingly hard over time because the dollar thresholds used to assess the tax are not indexed to full inflation. The first, the 40 percent excise tax on high-cost insurance plans, would apply initially only to family policies exceeding $23,500 in annual premiums and individual plans with premiums exceeding $8,500. Those thresholds would increase by general inflation plus one percentage point each year, but that would be still below the rate of expected medical inflation. Consequently, more and more middle class families would find themselves bumping into the premium thresholds as time passed.

Similarly, Senator Reid wants to raise the Medicare payroll tax, now 2.9 percent, on workers with incomes exceeding $200,000 per year, to 3.4 percent. But, again, that income threshold would not be indexed for inflation, which means many millions of families would be paying it in ten years who wouldn’t be paying it initially.

The end result would be a massive overall tax increase. In the first ten years, CBO says it would total nearly $500 billion, which is bad enough. But in the second decade, the tax increase would balloon to about $1.7 trillion in large part because of the hidden tax hikes associated with bracket creep. Over twenty years, Senate Democrats are thus planning to raise taxes on the American people by about $2.2 trillion.

Even so, this massive tax hike still would not fully cover all of the spending in the Reid plan. According to CBO, the cost of the so-called “coverage provisions” would be about $850 billion over a decade, but that’s only because they wouldn’t kick in until 2014. CBO expects the annual cost of these provisions to grow about 8 percent every year. In the second ten years, the cost would therefore soar to $3.1 trillion.

Senator Reid’s bill also includes numerous other spending provisions which the press dutifully excludes from the reported total. These are mainly relatively small demonstration programs or tweaks to existing programs buried in Medicare and Medicaid. But because there are so many of them, their cost adds up. Overall, CBO expects these non-coverage spending items to total about $90 billion over the period 2010 to 2019, which pushes the total cost of the Reid plan to $940 billion over ten years — above the $900 billion limit the president said he would impose. Throw in the “doc fix,” and Senate Democrats are planning to spend nearly $1.2 trillion on their health-care agenda.

Finally, there are the Medicare cuts. Despite all of the talk of “delivery system reform,” the Senate Democratic plan would not transform American medicine to make it more efficient. No, they would simply cut payment rates for providers of services. On paper, the cuts are massive. CBO says they would total nearly $450 billion in Medicare over the first ten years, but then grow to about $1.9 trillion in the next decade. Just like physician fees, virtually no one believes Congress will sustain arbitrary payment rate cuts of this magnitude. And without them, the Reid plan is a clear budget buster.

So, here’s the bottom line. On paper, the Reid plan plus the “doc fix” would increase total federal spending by about $4.9 trillion over twenty years. Senate Democrats would resort to bracket creep and other tax hikes to raise $2.2 trillion over the same period. The balance would be made up with spending reductions, mainly in Medicare, that no one believes can be sustained, and in any event do not constitute “health reform.” In other words, it’s a tax-and-spend bill of the highest order. And only the spending is certain to happen.

posted by James C. Capretta | 5:53 pm
Tags: Harry Reid, Medicare, tax and spend, bracket creep, CBO
File As: Health Care

The Central-Planning Conceit

This weekend, House Democrats are planning to pass two health-care bills. One is a sweeping plan that would shift nearly all power over the organization of American health care to Washington, D.C. The other — a full repeal of the “sustainable growth rate” (SGR) formula governing Medicare physician fee payments — is proof positive that the first bill’s strategy of centralized planning is ill-conceived and dangerous to the quality of U.S. medical care.

To understand why, it is worth reviewing how the SGR came to be. In the late 1980s and 1990s, the Medicare bureaucracy set out to reform the way physicians are reimbursed for providing services to the program’s enrollees. The idea was to shift more resources toward generalists, who were then thought to be undercompensated for spending time with patients, and to control overall costs by limiting the growth of aggregate payments to growth in the size of the U.S. economy. After several years of study, lengthy payment regulations were issued, including a predecessor to the SGR formula, which had immediate and profound financial consequences for nearly every practicing physician in the United States.

And so what happened? The exact opposite of what was intended. Instead of encouraging more physicians to enter into primary care, the Medicare physician-fee schedule has rewarded more specialization. The fee schedule only controls prices, not volume. As Medicare’s administrators have tried to hold down costs with fee cuts, specialists increased their share of the pie with more tests and procedures, at the expense of primary-care reimbursement rates. Not surprisingly, the trend of physicians entering specialist practices has accelerated dramatically in the last twenty years. Moreover, overall costs have never been brought under control. With volume soaring, the SGR formula governing annual fee updates has gone completely off the rails. In 2010, fees are supposed to get cut by 21 percent unless Congress overrides it yet again. To secure the AMA’s endorsement of their health-care bill, House leaders are planning to scrap the SGR component of the physician fee system altogether, at a cost of more than $200 billion over a decade.

The irony of the situation seems to be lost on House Democrats: Congress is moving to repeal a prime example of health-care central planning run amok while simultaneously extending federal control to every corner of American health care.

For its part, the Obama administration has been promising for months that it would deliver new and improved central planning to “bend the cost-curve.” The White House Budget Director, Peter Orszag, in a February interview with Politico, suggested that the incoming Obama team was working on groundbreaking ideas that would use the levers of government payment policy to painlessly eliminate inefficiency in American health care. As Orszag put it, “Medicare and Medicaid are big enough to change the way medicine is practiced.”

Now, nine months later, it turns out the Obama administration doesn’t actually have any new ideas of what to do. It is instead proposing to empower an unelected, unaccountable commission to come up with the whiz-bang ideas, which would go into effect automatically without further congressional action. But House Democrats found the commission approach unacceptable, as it would take too much of the central planning power away from them. And so they have instead filled their bill with assorted pilot projects and tests of new Medicare payment approaches. Orszag touts these as good ideas with potential, too. But these ideas would have virtually no impact on federal spending, according to the Congressional Budget Office, and they certainly are not up to the task of offsetting the costs of the massive increase in entitlement spending contemplated in the House leadership bill.

Instead of clever new ideas that painlessly root out waste and inefficiency, the House bill finds savings the same way all central planners ultimately do: with deep and arbitrary across-the-board payment rate cuts. Despite all of the talk of delivery system reform, there’s no real effort to make distinctions based on the quality of patient care. Everyone gets cut the same.

And that’s the real danger of the House bill. There’s no prospect that the federal government will become more nimble overnight at managing the vast and complex health sector in the United States. To control costs in health care, the federal government will do what it always does — it will set prices. In time, that will have the predictable result of driving out willing suppliers of services, leading to queues and access problems. Call it centrally-planned rationing of care.

posted by James C. Capretta | 9:29 am
Tags: central planning, House vote, Medicare, Peter Orszag
File As: Health Care

The Insanity of the House Bill

At the beginning of this year, there was great hope in some circles that Congress would enact significant health-care reform that would address the central, vexing problem of today’s arrangements, which is rapidly escalating costs. That hope has waned considerably as the Democrats controlling the process have made a series of decisions revealing that their only real ambition is to get to a signing ceremony for something called “universal coverage.”

Still, there have been some true believers in the business, health, and policy communities who have thought it better to keep their powder dry and not criticize the emerging legislation based on the hope that some level of constructive engagement might improve matters. Fat chance. The bill unveiled today by House Speaker Nancy Pelosi should put to rest for good the thought that this year’s legislative process will produce anything other than a total fiscal and health policy disaster.

To sum it up, the House bill is nothing but a massive, uncontrolled federal entitlement expansion — at a time when the central, looming threat to the nation’s long-term prosperity is the unaffordable health-care entitlements already on the federal books. To create the impression of fiscal responsibility, the bill is jury-rigged with budget gimmicks, implausible eligibility rules, and arbitrary, government-dictated price controls — that have been tried repeatedly without success — to make it look like it costs “only” $900 billion over a decade.

Let’s start with the much ballyhooed effort to bring the costs of the bill down from the $1.5 trillion budget-buster which was introduced by House leaders in July. There are two significant changes from that earlier version. First, the bill simply drops altogether the repeal of the so-called “sustainable growth rate,” or SGR, formula. The SGR, ironically, is a product of just the kind of central planning that is at the heart of Obamacare. It was designed by the Medicare bureaucracy to control costs, but all it has done is cut doctors’ fees while volume soars. The scheduled cut in 2010 is for more than 20 percent. Everyone knows it must be fixed, but the full, ten-year costs of repeal approaches $250 billion. The Democratic solution? Repeal it separately from Obamacare — and borrow more. Presto. The House bill now “costs less.” The Congressional Budget Office (CBO) projects that the Obama budget will push the nation’s debt to more than $17 trillion in 2019, up from $5.8 trillion at the end of 2008. It’s only a matter of time before that level of borrowing precipitates a crisis. The last thing our country needs is more unfinanced Medicare spending.

The second major change is a massive expansion of Medicaid, raising the upper income cutoff from 133 percent of the federal poverty line in the July bill to 150 percent in today’s version. According to CBO’s estimate of the plan released today, the total, ten-year cost of the higher Medicaid enrollment will be $425 billion. By 2019, some 50 million Americans will be enrolled in the program (and its companion program for children’s coverage), compared to 35 million under current law. Even before this massive expansion, CBO projected that the combined costs for Medicare and Medicaid would increase from 5.3 percent of GDP in 2009 to 9.7 percent in 2035. Adding more enrollment to Medicaid will only make matters much worse. Indeed, CBO acknowledges that the additional spending on Medicaid in the House bill is likely to increase at an annual rate of about 8 percent indefinitely. That’s not surprising. Medicaid spending has been escalating rapidly for nearly half a century, and the House bill does nothing to change the trajectory. It is true that Medicaid expansions appear to cost less than private insurance coverage, but that’s only because Medicaid shifts costs to private payers by underpaying doctors and hospitals.

Still, CBO’s cost estimate shows neutrality, at least on paper. How? There’s a new, nearly $500 billion income-tax increase, aimed at high-income households. Of course, many of these households own businesses, and so the Democrats are planning a heavy new tax on just the individuals who may be in a position to do some hiring in a recession.

Then there are the payment-rate reductions in Medicare and Medicaid, totaling more than $400 billion over a decade. The president and many other Democrats have claimed for months that they were going to make health-care delivery more efficient, thus painlessly finding new money to pay for more coverage. Nothing of the kind is in the House bill. Instead, there are scores of provisions that are essentially more of the same price-setting payment regulations that have failed so miserably in the past. They get scored by CBO, but that doesn’t mean they will happen. In fact, they have been tried countless times over the past quarter century, and have never worked to permanently slow the pace of rising costs. All they ever really do is shift more costs onto middle-class enrollees in private insurance.

There’s much else in this bill that would do great damage to the health sector and the American economy. Heavy payroll taxes that will reduce low-wage employment. Mandates on employers that will drive up costs and reduce wages. Intrusive federal bureaucracies that will come between patients and doctors. They can do a lot of damage in nearly 2,000 pages.

Fortunately, there remains one very powerful opponent to what House and Senate Democrats are considering — the public. Most Americans want no part of this massive liberal overreach. And there’s still time to put a halt to the madness. But the window is closing.

posted by James C. Capretta | 6:28 pm
Tags: Obamacare, Nancy Pelosi, House bill, Medicare, Medicaid, tax increase, small businesses
File As: Health Care

The House Bill: A $10 Trillion Unfunded Liability

Amid all the flurry of news in the hectic last days before the House recessed for the August break, something important went largely unnoticed — a development that should be the knockout blow to the kind of sweeping health-care bill the Obama administration is pushing, at least as it has been cobbled together in the House.

In a July 26 letter to the Ranking Republicans on four key committees (Ways and Means, Energy and Commerce, Education and Labor, and Budget), the Director of the Congressional Budget Office (CBO), Doug Elmendorf, made it clearer than he ever had before that the bill, in its original July 14 form, would dramatically widen the already large gap between long-term government revenue and spending. Here’s the key paragraph:

Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time. The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.

In other words, CBO expects the spending in the bill would grow at a rate of least 8 percent annually into the indefinite future, while the revenue to pay for it will only grow at about 5 per cent per year. Hence the “substantial increases” in federal budget deficits beyond 2019.

Although CBO declined to specify any actual deficit numbers beyond 2019, they can be easily calculated, in rough terms, from the information provided in Elmendorf’s letter.

By 2030, if the spending associated with the coverage provisions rises 8 percent per year after 2019 and the revenue rises by 5 percent, the bill would add more than $200 billion per year to currently projected budget deficits. By 2048, the annual deficit increase would top $1 trillion — and only go up from there.

Of course, the federal government is already in a deep hole due to the projected rapid cost increases in Social Security and Medicare. The trustees for those programs reported earlier this year (see here and here) that Social Security’s seventy-five year unfunded liability stands at $5 trillion, while Medicare’s has reached at an astounding $36 trillion.

It is possible to do a similar “unfunded liability” calculation for the new entitlement spending in the House bill. Assuming a discount rate of 5.7 percent per year, the bill would add more than $10 trillion over seventy-five years in new unfunded government obligations.

Of course, some amendments were adopted to assuage the Blue Dogs in the Energy and Commerce Committee. The fate of those amendments is uncertain at best, however, as Speaker Pelosi has indicated the contents of the yet-to-be-written merged bill from the three committees will be decided later (to attract votes of course). But even if the Blue Dog amendments survive, they would do very little to change the basic direction of the bill’s long-term costs.

CBO recently projected that the federal budget deficit is already on track to reach nearly 15 percent of GDP in 2035, well above the historical average of about 2 to 2.5 percent. The last thing Congress should be doing is making the problem worse with new runaway costs. Indeed, the president himself has said he won’t accept a bill that makes our long-term budget problem worse. How he squares that with full support for the emerging House bill is anybody’s guess.

posted by James C. Capretta | 5:44 pm
Tags: House bill, projected costs, Doug Elmendorf, CBO, spending, deficit, Medicare, social security, Blue Dogs, Nancy Pelosi
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ObamaCare: Worse Than You Think

Tevi Troy and I co-authored a piece for the current edition of National Review on the emerging health care plans in Congress. Although much has already been written about the structural flaws of these plans — their immense costs and excessive reliance on governmental control — their details are just as worrisome. Indeed, the more the public learns about what these plans would actually do if passed, the less they will like them. That article is available here.

Also this week, Yuval Levin and I have a piece in the Weekly Standard. In it, we point out that the costs of the bills now being considered in Congress are much higher than advertised because tens of millions of low- and middle-income Americans would be forced to sign up for costly job-based insurance, with no additional financial support from the government. That will create tremendous pressure on Congress to extend premium subsidies to even more families, which will drive costs well above current projections. Moreover, the Obama administration's main cost-control idea — a new commission for setting Medicare payment policy — is not really a new idea at all. The current system for paying physicians under Medicare was designed by just such an expert panel twenty years ago and it has been a disaster. It was supposed to encourage and reward general practitioners, but it actually drove many new doctors to become specialists instead of primary care physicians. You can read the full article here.

posted by James C. Capretta | 4:50 pm
Tags: Tevi Troy, ObamaCare, Yuval Levin, cost control, Medicare
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