ObamaCare


Creating a Stable and Accessible Health Care System for Future Generations

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

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

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

Rising Federal Health Entitlement Obligations

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

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

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

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

The Role of Existing Government Policy

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

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

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

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

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

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

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

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

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

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

The Key Question

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

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

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

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

Transforming Health Care Delivery with Cost-Conscious Consumer Choice

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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



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

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

The CLASS Act Fraud

Those who conducted the campaign to force Obamacare through Congress in 2009 and 2010 made a whole series of fraudulent arguments. “You can keep the plan you have today if you like it.” “Premiums will go down, not up — by $2,500 per year for those with existing coverage.” “We can cover 32 million people with heavily subsidized and expansive third-party insurance, and it won’t cost the American people anything.” “The only people who will pay the $800 billion of Obamacare’s new taxes over the next decade are the rich.”

All of that is plainly false, of course, and most Americans know it, which is one reason the November 2010 election turned out the way it did.

But of all the deceptive arguments and tactics Obamacare’s apologists employed to jam their government takeover of health care through Congress, none was more egregious than the CLASS Act fraud.

CLASS — for Community Living Assistance Services and Supports Act — was one of the late Senator Ted Kennedy’s pet projects. It was sold as a miraculous twofer: the new program would provide both a self-financing, voluntary long-term care insurance program for those needing continuous assistance with daily living, and it would reduce the deficit to boot! What’s not to like?

Indeed, of the supposed $210 billion in deficit reduction over ten years that the Congressional Budget Office assigns to Obamacare, $86 billion is expected to come from CLASS Act operations.

But it’s all a dangerous and cynical game. CLASS is expected by CBO to produce deficit reduction over the next ten years only because the program’s rules require participants to pay premiums for five years before they become eligible for benefits. So, at start up, there is the illusion of a “surplus” as participants begin paying premiums but very few of them qualify for any benefits. But, very quickly, those “excess” premiums will be needed to liquidate the entitlement obligations that participants will be earning. It’s another example of Obamacare’s shameless double-counting.

What’s worse, the CLASS Act is a ticking entitlement time-bomb. Every expert who has looked at it — see here — reaches the same conclusion: it’s a poorly designed and ill-advised program that will suffer from severe adverse selection. Because it is voluntary, it will mainly attract enrollees who are at a higher risk of actually needing the benefit. Consequently, the premiums will need to be set very high, which will only make it even less attractive to healthy workers who generally aren’t that interested in long-term care insurance anyway.

Very quickly after the first decade, CLASS’s finances will become untenable. The premiums, though very high, will still be insufficient to cover all of the entitlement benefits earned and expected by participants. As the program rushes toward insolvency, the only options will be to cut promised benefits, raise premiums even more, or — surprise! — bail the program out with taxpayer subsidies. So, far from being a program that eases budgetary pressure, CLASS is actually a perfect example of all that is wrong in federal budgeting. It was sold under false pretenses as short-term deficit reduction when, in reality, it puts American taxpayers at great risk of another expensive bailout.

Stunningly, the Obama administration, after spending months defending CLASS’s virtues, now says it agrees with the program’s critics. How convenient. Now that it has served its main purpose, which was to create the false impression of deficit reduction from Obamacare, the administration is willing to “pivot” — in that all-too-familiar Washington way — and pretend that they have just now discovered the program’s flaws.

This is absurd. The Obama administration and its congressional allies knew all along that CLASS was an ill-advised risk to taxpayers. But they defended it every step of the way during legislative consideration in Congress because of the convenient and deceptive “score” it produced from CBO.

Now, Health and Human Services Secretary Kathleen Sebelius says she has the administrative flexibility to essentially rewrite the program herself from scratch, with no input or changes necessary from lawmakers. This too is absurd. Her lawyers no doubt have an expansive view of her discretion. But they are between a rock and hard place here. The only way CLASS works is if millions of healthy workers sign up for a program (though it will almost surely be a bad deal for them) even as sick workers who are likely to benefit are screened and kept out.

In one more sign of their shamelessness, the administration wants funding to conduct an “education campaign” to browbeat reluctant workers into signing up for a voluntary program that should never get off the ground.

The most serious threat to the nation’s long-term prosperity is runaway federal entitlement spending, and the CLASS Act is the perfect example of how not to go about starting and running a federal entitlement program. And yet the Obama administration is doing whatever it can to salvage it. It’s yet another example of the president’s complete detachment from budgetary reality.

posted by James C. Capretta | 4:30 pm
Tags: CLASS Act, Obamacare, CBO, Kathleen Sebelius
File As: Health Care

The Darkening Skies over Obamacare

In the last several days, every single Republican member of Congress, in both the House and Senate, voted to repeal Obamacare. And a federal judge has ruled that the law is unconstitutional. I have a short piece up on NRO today looking at the new political and legal realities that the legislation's supporters now face. Here's a snippet:

The Senate vote is also an indication of how close Congress is to passing a full repeal bill. Yes, it would have taken 60 votes to repeal it today in the Senate because of the point of order, and a likely Democratic filibuster if no point of order was applicable. But that need not be the case if Republicans regain control of the chamber in 2013. Recall that, in the aftermath of Scott Brown’s election to the Senate, congressional Democrats made an end run around the Senate filibuster by employing the “reconciliation” process to hammer out the final agreement between the House and the Senate. That allowed the Democrats to pass the original Senate version of Obamacare (passed when there were 60 Democratic votes in the Senate) through the House, and to pass changes to that previously approved Senate bill through both the House and the Senate with a simple majority vote. In other words, the only reason Obamacare is law today is that the Democrats used “reconciliation” to pass it through the Senate without the need for 60 votes.

The same could be done for repeal. As Keith Hennessey has pointed out, if Republicans regain control of the Senate in 2012 (which seems plausible, given the number of seats in play that are currently held by Democrats), and the House remains under Republican control, Republicans could dismantle Obamacare on a reconciliation bill, and they could do so without the need for any Democratic votes. Repeal would need only a simple majority to clear the Senate. There are now 47 solid votes for repeal. With a pickup of just four repeal votes, Republicans could send a full repeal bill to the president in 2013. And if the president is someone other than Barack Obama... Live by reconciliation, die by reconciliation.

You can read the entire piece on NRO here.

posted by James C. Capretta | 1:46 pm
Tags: Obamacare, Judge Vinson, repeal
File As: Health Care

“Fiscal Consequences of the Health Care Law”

[NOTE: Last week, on January 26, 2011, I testified before the U.S. House Committee on the Budget in a hearing on the new health care law. Anyone interested in watching the hearing can find video here courtesy of C-SPAN; my testimony starts around 56 minutes in. The complete text of my testimony as prepared appears below.]

Mr. Chairman, Mr. Van Hollen, and members of the Committee, thank you for the opportunity to participate in this very important hearing on the fiscal consequences of the health care law.

The most serious threat to the nation’s long-term prosperity is projected large fiscal deficits over the years and decades ahead. And the main reason the nation’s budget deficits are expected to remain at dangerously high levels for the foreseeable future is because of the rapid growth of entitlement spending.

Importantly, entitlement spending was a problem even before the enactment of the Patient Protection and Affordable Care Act (PPACA). In 1975, the combined cost of Social Security, Medicare, and Medicaid was 5.4 percent of GDP. In 2009, these entitlement programs cost 10.1 percent of GDP.

That jump in spending — 4.7 percent of GDP — is the main reason it is so difficult to bring the nation’s budget closer to sustainable fiscal balance. Every year, we are spending more and more to fulfill entitlement promises made years and decades ago, leaving less and less to finance other priorities, even as the growing levels of entitlement spending puts enormous pressure on taxpayers.

And we haven’t even hit the really rough patch yet. Over the coming two decades, the United States will undergo an unprecedented demographic transformation, as the baby boom generation moves from its working years into retirement. The number of Americans age 65 and older will rise from 41 million in 2010 to 71 million in 2030. As these baby boomers enroll in Social Security and Medicare, costs will soar.

We were therefore already racing toward a budget and entitlement crisis before the health care law was considered and passed. Indeed, for the proponents of the legislation, that became a primary argument for its enactment. The president argued that his health care plan would begin to address the entitlement problem, at least from the perspective of the health programs. “Health reform is entitlement reform” was the catch-phrase.

But is that really the case? Did the new health care law ease the entitlement and budget crisis, or did it make matters even worse? That is the crucial question, and this Committee should be commended for taking it up as one of the first items for discussion in this new Congress. I believe the evidence is overwhelming that the new law will make matters not better, but far worse.

The most noteworthy characteristic of the new law is that it is the largest entitlement expansion since the 1960s. So, at a time when the federal budget is already buckling under the weight of existing entitlement programs, the new law stands up three new ones which will enroll tens of millions of Americans into taxpayer-financed programs promising permanent access to uncapped benefits. Moreover, spending on these new entitlements is expected to grow at rates that are above the level of growth of the economy or general inflation.

How then does a new law which increases spending by nearly $1 trillion over the period 2010 to 2019 reduce the federal deficit (by about $130 billion over ten years according to the Congressional Budget Office and by a modest amount in the decade after that)? The only way is by raising taxes and cutting spending by amounts in excess of the new spending commitments. According CBO’s estimate of the final legislation, spending reductions will bring the net increase in spending down to about $430 billion over the next decade. The tax hike to pay for this spending will total about $560 billion over the same period.

Thus, although the legislation has often been described by proponents as a deficit reduction measure, it might be more accurate to say that it is a very large spending bill, offset, at least on paper, by even larger tax increases.

But even these numbers do not tell the whole story. It is also important to look carefully at the assumptions underlying these estimates to determine if the promised deficit reduction will occur in reality, or just on paper. There are a number of reasons to be very skeptical in this regard.

The CLASS Act

The argument that the new law reduces the federal budget deficit over the coming decade rests in large part on the supposed deficit reduction from the creation of the Community Living Assistance Services and Supports Act, or CLASS Act, which is a new long-term care insurance entitlement program. CBO’s estimate assumes that $70 billion in supposed deficit reduction through 2019 is to come from the CLASS Act.

But, in truth, the CLASS Act is another budgetary time-bomb waiting to explode, not a solution that produces deficit reduction. In the short term, because the program is brand new and no one is eligible for benefits until they have paid in for five years, premiums are collected and no benefits are paid — producing what appears to be a temporary surplus. But beyond the visible ten-year window, those premiums are needed to pay long-term care insurance claims.

Moreover, every actuarial analysis done on the program indicates it will suffer from severe adverse selection. That is, it will attract mainly enrollees who expect to need the benefit. The result is that individual premiums are likely to be quite high because too few healthy workers will enroll. Overall premiums will fall well short of what is needed to cover the implicit benefit promises. Pressure will then build for a future taxpayer bailout to avoid imposing cuts on the vulnerable citizens who elected to enroll and pay premiums. In short, this program is not going to solve our entitlement crisis. Indeed, it is a perfect illustration of why federal entitlement spending is our central budgetary problem.

Disequilibrium in Federal Insurance Subsidies 

The new law promises members of households with incomes between 135 and 400 percent of the federal poverty line new premium subsidies if they get their coverage through the new state-run “exchanges.” Census data show that today there are about 111 million Americans under the age of 65 who are living in households with incomes in that range. But CBO estimates that only 19 million people will be getting the new premium assistance in 2019. They assume the other 90 million Americans will stay in job-based plans.

If that were really to happen, it would be terribly unfair. As Stephanie Rennane and Eugene Steuerle of the Urban Institute have documented, the new premium subsidies in the exchanges are worth far more to low- and moderate-wage workers than today’s federal tax preference for employer-paid premiums (see Chart 1). For instance, a household of four with compensation of $60,000 in 2016 would get $3,500 more in government assistance if they moved from employer coverage to an exchange. The extra subsidies would be even more for lower wage workers.

The new law thus sets up a situation where two families with identical compensation totals from their employers can get very different levels of federal support depending on where they get their insurance.

In my judgment, that’s not likely to be a politically stable situation. Pressure will build on elected leaders to treat every American equally. That is likely to lead to regulatory and legislative decisions making it easier for workers now in job-based plans to migrate to the exchanges.

Over time, what is likely to happen is that those who would be better off in the exchanges will end up there, one way or another, even as higher wage workers retain the tax advantage for job-based coverage. As the labor market segregates, costs will soar well above the $1 trillion in new spending over ten years currently projected for the law.

AMT-Like Bracket Creep

The new law relies heavily on tax increases to cover the new entitlement spending. According to CBO’s latest long-term budget projections, by 2035, the tax increases in the new law will collect revenue equal to 1.2 percent of GDP, which is very substantial. In today’s terms, that’s a $180 billion tax increase, every year.

How can that be, given that the tax hikes do not go nearly that high in the first decade? The answer is AMT-like bracket creep. The new tax on high-cost insurance plans, sometimes called the “Cadillac” tax, applies to policies with premiums for families above $27,500 in 2018. That threshold will only grow with general consumer inflation in 2020 and beyond, not growth of health costs. Thus, by 2030, the tax will be binding on many millions of Americans’ insurance plans.

Similarly, the new Medicare taxes on wages and other sources of income apply only to individuals with incomes above $200,000 per year beginning in 2013 ($250,000 for couples). But those income thresholds are fixed; they won’t rise with inflation at all. In very short order, that means these taxes will begin hitting middle-class Americans with massive tax hikes. By 2030, inflation will have eroded the $200,000 threshold so that it is the equivalent of $130,000 today (assuming 2.5 percent annual inflation).

The Medicare Payment Rate Reductions

The largest spending reduction in Medicare comes from automatic reductions in the inflation updates for hospitals and other institutional providers of care. The notional rationale is that these cuts represent productivity improvement in the various institutions getting Medicare payments. The reductions, amounting to a 0.4-0.5 percentage point reduction off the normal inflation update for Medicare payments, will occur every year, in perpetuity. The compounding effect of doing this on a permanent basis would be massive savings in Medicare — if they really were implemented. CBO says the cuts will generate $156 billion over the first decade alone.

But there are strong reasons to suspect these cuts will not be sustained. Medicare’s actuarial team, led by Richard Foster, has warned repeatedly that these cuts are not viable over the medium and long-term because they would jeopardize access to care for seniors. The cuts would push average Medicare payments to levels that are below what Medicaid is expected to pay, and the network of providers willing to take care of Medicaid patients is notoriously constrained. It is hard to imagine political leaders allowing Medicare to become less attractive to those providing services than Medicaid is today.

It’s worth noting here that these cuts in payment rates do not constitute “delivery system reform,” which the administration has often stated is what it is trying to achieve with the Medicare changes in the new law. These cuts in inflation updates will hit every institution equally, without regard to whether or not the institution is treating its patients well or badly. The savings that are expected from other reforms, such as Accountable Care Organizations, are minor by comparison.

The Budgetary Effect of Tax Hikes and Medicare Cuts in a Second Decade 

The administration and others have noted frequently that CBO’s cost estimate indicates the possibility of modest deficit reduction in the second decade after 2019 (although CBO notes that such an estimate carries more uncertainty than its ten-year projections). But the expectation of long-term deficit reduction is entirely dependent on huge spending reductions from the Medicare inflation cuts and from more and more middle-class Americans paying higher taxes under the new law’s tax provisions.

As shown in Chart 2, the tax hikes from the new law plus the savings from the “productivity adjustment” in Medicare would generate about $180 billion in “offsets” in 2020. By 2030, the spending cuts and tax hikes from these provisions will have more than tripled, to over $600 billion. If these taxes and spending cuts do not materialize, the new law will be a budget-buster of significant proportions.



Debt Subject to Limit

Both CBO and the Medicare actuaries have both noted that the Medicare cuts and payroll tax hikes which are supposed to improve the solvency of the Medicare hospital trust fund in the new law can only be counted once, not twice. Here is how CBO put it in a Director’s blog post from December 2009:

“To describe the full amount of HI trust fund savings as both improving the government’s ability to pay future Medicare benefits and financing new spending outside of Medicare would essentially double-count a large share of those savings and thus overstate the improvement in the government’s fiscal position.”

In other words, these taxes and cuts in Medicare either improve the government’s ability to pay future Medicare claims, or they pay for a new entitlement program — but not both.

One way to see that clearly is by looking at the impact of the health care law on debt subject to limit. According to CBO, the new law will increase that debt, by about $230 billion over the coming decade, because the Medicare tax hikes and spending cuts are double-counted instead of devoted to deficit reduction.

Conclusion

Mr. Chairman, you and your colleagues on this committee face a daunting challenge. The nation is rushing rapidly toward a fiscal crisis, driven by excessive borrowing and debt. Even before the health law was enacted, it was necessary to reform the nation’s entitlement programs to bring spending commitments more in line with what the country can afford. Now, with enactment of the health law, the climb to a balanced budget got much steeper.

The solution is to start by unwinding what was just passed and replacing it with a program that constitutes genuine entitlement reform.

posted by James C. Capretta | 1:44 pm
Tags: Paul Ryan, House Budget Committee, Obamacare, CLASS Act, payment-rate reductions, CBO
File As: Health Care

Resetting the ‘Obamacare’ Baseline

The analyses and cost estimates provided by the Congressional Budget Office have had an enormous effect on the public debate about health care reform over the last two years. But, as Douglas Holtz-Eakin and I point out in an op-ed today in Politico, CBO, a professional and respected institution, in this instance based its analyses on unrealistic assumptions, which can harm the policy debate and the public understanding of the new health care law:

The core promise of the new law is that low- and moderate-income households getting insurance through new state-run “exchanges” will have their premiums capped as a percentage of income.... The population potentially eligible for this new federal entitlement is large. The Census Bureau says there are about 111 million Americans under the age of 65 in households with incomes between 135 percent and 400 percent of the poverty line.

But the Congressional Budget Office forecasts that only 19 million people will be getting the new federal premium subsidies in 2019. That’s because the law stipulates than any person offered qualified insurance coverage by an employer is ineligible for premium assistance offered by the exchanges, and the CBO expects most employers to continue sponsoring insurance plans. This would sharply limit the migration to the heavily subsidized exchanges.

But is that a reasonable assumption?... [A more realistic estimate] is that an additional 35 million workers and their families with incomes below 250 percent of the poverty line — who would clearly be better off in the exchanges as opposed to on job-based coverage — could end up there over time, one way or another.

And when they do, costs will soar. The CBO projects that the premium-assistance program will cost about $450 billion from 2014 to 2019, but that cost would rise to $1.4 trillion if workers and their family members with incomes between 133 percent and 250 percent of the poverty line were to migrate out of their current job-based plans and into the exchanges on Day One. That’s nearly $1 trillion more than the amount advertised by the law’s supporters.

You can read the entire piece here.

posted by James C. Capretta | 12:58 pm
Tags: Obamacare, baseline, CBO, Douglas Holtz-Eakin
File As: Health Care

Defined Contribution Health Care

Yesterday, I had the privilege of participating in the inaugural event for the American Enterprise Institute’s new “Beyond ‘Repeal and Replace’” initiative, the purpose of which is to explore policies that could take the place of the recently passed health care law. During the panel discussion, moderated by AEI’s Tom Miller, I provided an overview of the paper I coauthored with Tom called “The Defined Contribution Route to Health Care Choice and Competition.” The defined contribution approach to reform would convert today’s open-ended federal subsidies into fixed levels of support, and thus convert millions of passive insurance enrollees into cost-conscious consumers. A short summary of our paper can be accessed here, and the full paper is available here.

The panel also included Scott Harrington of the University of Pennsylvania, who presented an overview of his paper on “Regime Change for Health Insurance Regulation: Rethinking Rate Review, Medical Loss Ratios, and Informed Competition,” and Steve Parente of the University of Minnesota, who discussed his paper entitled “Harnessing Health Information in Real Time: Back to The Future for a More Practical and Effective Infrastructure.”

Video of the entire AEI event is available below:

posted by James C. Capretta | 10:26 am
Tags: defined contributions, AEI, Thomas P. Miller, Scott Harrington, Steve Parente, repeal and replace, Obamacare

Repeal, Replace, Reform

I will be participating in a discussion at the American Enterprise Institute tomorrow called "Beyond 'Repeal and Replace,'" focusing on suggestions for reforming health care. Details can be found here.

Meanwhile, I participated in another AEI forum (cosponsored by the National Review Institute) a few weeks ago on what the new Congress should be doing about health care. Quite naturally, the conversation centered on what should be done to undo the Obama health care law. I focused my comments on why "repeal and replace" is a necessary condition for just about everything else the new House majority wants to achieve. Kate O'Beirne of National Review Institute moderated the panel, and I was joined in offering comments by Ramesh Ponnuru of National Review and Dr. Scott Gottlieb of AEI. Details and video are available here. The event was also broadcast on C-SPAN, which posted its video here.

posted by James C. Capretta | 5:44 pm
Tags: repeal and reform, Obamacare
File As: Health Care

Pro-Lifers and “Repeal and Replace”

Federal subsidization of insurance coverage for abortion services was among the most contentious issues in the healthcare debate. Pro-life groups stood firm in their opposition to such funding, to the point of opposing the entire legislative package unless it was fully and definitely removed from the bill. Moreover, they worked tirelessly as the legislation was under consideration to advance language that would have made it absolutely clear that direct federal funding of elective abortions would not be a part of the reformed system.

In the end, those efforts came up short because the pro-lifers’ supposed congressional allies on the Democratic side abandoned them when it mattered most. The result is that the new law does provide taxpayer funding of elective abortions, for the first time in many years.

But passage of the new law did not end the debate, on abortion coverage or health care more generally. As was evident in the 2010 midterm election, a plurality of Americans remains strongly opposed to the bill that passed. Scores of the new law’s most ardent supporters were swept out of office by the voters. Now, a strong movement is building to repeal what was passed and replace it with a reform program more consistent with American values. The push for “repeal and replace” will almost certainly be among the most prominent themes of the new Republican House come January.

However, Richard Stith, a pro-life law professor at Valparaiso University, is urging his fellow pro-lifers to stay off the “repeal and replace” bandwagon. In an article for First Things online, he has suggested that a more promising approach for pro-lifers is amending the new law with clear pro-life language.

His logic goes something like this. In the healthcare marketplace of today (before the new law’s provisions take effect), private insurance, including plans organized by employers, more often than not covers elective abortions. Under the new law, the government will start running a larger share of the insurance marketplace in 2014, and subsidize it explicitly with tax dollars. That means more Americans who are now in today’s private insurance market will get their coverage in the future through a system organized by the government. Because taxpayer money will be involved, pro-lifers sought to extend the prohibition against funding of elective abortions—a prohibition that now applies to other tax-financed health care like Medicaid—to the new government-managed marketplace too. Had they not been defeated in that effort, they would have successfully removed elective abortions from insurance coverage for millions of people who are in plans that pay for such abortions today. So, Stith argues, the solution here is not to revert to the anti-life status quo of today’s private insurance market, but to extend the pro-life protections which apply to taxpayer-funded health care to the entire government-managed marketplace that will emerge in 2014.

Stith has a point. It’s true that many Americans are unknowingly subsidizing elective abortions through their private health insurance premiums today. They often have no choice in the matter, as their employers are making the decisions about what’s covered and what’s not in employment-based plans. Stith’s perspective is certainly a legitimate position for a pro-lifer to take, given where things stand.

But is it the only legitimate position for pro-lifers? The answer is most definitely “no.”

The issue of how a healthcare system addresses abortion provision is of course of paramount concern. Indeed, it is a necessary condition of an acceptable program that it not force Americans to subsidize the elective abortions of others. That is a non-negotiable first principle that pro-lifers have rightly made their top priority.

But for many Americans, including many pro-lifers, that is a necessary but not sufficient criterion for determining the acceptability of a reform program. There’s much, much more to consider. For many pro-lifers, even if the new healthcare law were amended to include the Hyde Amendment (against funding abortion) and Weldon Amendment (conscience protections), the amended law would still be so flawed, because of what it would do to the American economy as well as American health care, that the only remedy is its full repeal and replacement with economically sound reform that is also pro-life. Of course, pro-lifers are under no obligation to share this point of view.It is not a precondition for pro-life sentiments.But neither are pro-lifers under any obligation to accept at face value the supposed benefits of the new law when reason tells them otherwise.

The basic premise of the new healthcare law is that the federal government has the capacity to allocate resources in the health sector to promote equity and efficiency. There is abundant evidence that demonstrates this to be a very dubious assumption. Instead of promoting quality and efficient health care, the government pursues budget cutting with arbitrary, across-the-board payment-rate reductions for those providing medical services. There’s no effort to distinguish based on how well or badly they treat their patients. Everyone gets cut at the same rate, and the predictable result is that willing suppliers of services leave the marketplace. The only way to then reconcile supply and demand is with queues and waiting lists, which are commonplace in Canada and the United Kingdom. Putting the government in the cost-control driver’s seat is a recipe for a long-term decline in the quality of American medicine.

Further, the new law is based on deceptive budgetary and economic assumptions that mask the true costs of what was passed. The official cost projections are alarming enough—$1 trillion in spending over the next decade, financed by $500 billion in Medicare cuts (mainly in the form of lower payments for services) and another $700 billion in tax hikes. But the reality will be far worse than that. The centerpiece of the new law is a very generous new subsidy program for health insurance, available to families with incomes between 133 and 400 percent of the federal poverty line. Census data shows there are 111 million people in that income range, but official estimates assume only 20 million or so will get the new subsidies. The assumption is that many millions of otherwise qualified people will stay in job-based coverage, and thus lose out on thousands of dollars in federal support. That’s never happened before with an entitlement program, and not likely to happen this time. One way or another, the vast majority of those eligible for financial support will end up getting it, and the cost of the new law will soar, by another $1 trillion over ten years according to one estimate.

There are many other important reasons to have deep reservations about the new law. It will discourage hiring by employers, especially among low-wage workers, because employers will get penalized with fines if those workers end up in government-subsidized insurance. It creates new penalties for marriage, by handing out more subsidies to unmarried couples than to married ones with similar incomes. And it hands over to the government vast new power to insert itself into medical decisions.

Proponents of the new law will argue that its main achievement is covering about 30 million people with insurance who do not have it today. The truth is that many of those people who would gain coverage would do so only because they were forced to sign up or else pay a new fine to the federal government. Many of them are younger and far healthier than the average American, which is why they hadn’t signed up previously. The number of very sick Americans who would gain new coverage under the proposal is far, far less than 30 million.

There are much better ways to address the genuine needs of the uninsured than what was passed. The fundamental problem in American health care is insufficient productivity by the health sector. The solution is not top-down micromanagement from Washington, D.C., but a functioning marketplace in which the government provides oversight but consumers and patients direct the allocation of resources. That can be done by converting today’s federal support for insurance into support that the beneficiaries themselves direct and control. Indeed, a crucial reform would be to give all American households a fixed tax credit—about $6,000 per family—that must be used for the purchase of an insurance plan. This would take the place of today’s tax preference for job-based plans and would guarantee insurance coverage to the entire U.S. population. It would do so in a way that then engendered the kind of dynamic response in the marketplace that could transform American medicine for the better. And it could be an absolutely pro-life step by inclusion of a clear prohibition against coverage of elective abortions in any plan purchased by the credit.

No one suggests that all pro-lifers must adhere to this kind of thinking and support “repeal and replace.” But, at the same time, it should not be expected that all pro-lifers will be satisfied with adding a Hyde-like amendment to what has already been passed. Pro-lifers in Congress would certainly support that step. But there’s a genuine debate still underway in this country about the best way to fix American health care, and many pro-lifers believe firmly that a sensible “repeal and replace” program is the most prudent and principled course.

[Cross-posted at The Public Discourse]

posted by James C. Capretta | 4:19 pm
Tags: Obamacare, abortion, Richard Stith
File As: Health Care

The Debt Commission, Health Care, and Obama’s Budgetary Game Plan

In another Web Memo for the Heritage Foundation this week, I wrote a bit more about the debt commission and the budgetary and political problems that Obamacare creates for the nation's finances. Here's an excerpt from the beginning:

Unfortunately, the timeline for the United States to take corrective action may have already been shortened in just the past few weeks. What began as a slow-motion crumble of Greece’s economic house of cards has now quite clearly become the triggering point for full-fledged examination of the risks posed by massive increases in governmental debt combined with aging populations around the developed world. No country is exempt from the scrutiny of the bond markets, including the U.S. Moreover, if Europe’s economy slides back again into a deep recession as the debt crisis spreads, no part of the global economy will be completely spared from the fallout, including the U.S. The new health care law will only worsen the nation’s fiscal situation, and despite President Obama’s claim that “everything is on the table,” it is clear that the Administration wants to lock in Obamacare and force the commission to look elsewhere.

You can read the entire memo here.

posted by James C. Capretta | 11:36 am
Tags: Debt Commission, Obamacare, debt
File As: Health Care

The Independent Payment Advisory Board and Health Care Price Controls

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

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

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

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

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

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

Read the full column here.

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

Previous  Next