Health Care

Klein’s F on Part D

June 21, 2011

At the time of its enactment in 2003, the Medicare drug benefit — known as Medicare Part D — had many critics. Some said the program, which is built on consumer choice and vigorous competition among private plans, wouldn’t work, because the private plans would decline to participate without a guaranteed share of the market. Others said the beneficiaries wouldn’t sign up for the voluntary benefit, because the competitive structure would be too complex to navigate. Still others said the program would explode in costs without government-imposed price controls.

All these predictions were dead wrong. The program is now in its sixth year of operation, and it has exceeded all expectations. Some 90 percent of Medicare participants are now in secure drug coverage of some sort, and public-opinion surveys continue to show that seniors are very satisfied with the new program. Most important, the drug benefit’s costs for the first decade are coming in 42 percent below what was predicted at the time of enactment.

As this evidence of success has piled up, the critics largely and wisely went silent, realizing they had little ground to stand on.

But that began to change when Rep. Paul Ryan proposed a broader reform of Medicare that is modeled on the Part D success story. Now the critics have little choice but to try to discredit Part D lest they lose the battle over the future of Medicare. And so the attacks have resumed.

The only problem is that the critics’ arguments still have no basis in fact.

Take the latest attack from Washington Post blogger Ezra Klein. He recently argued: (a) that spending on prescription drugs throughout the health-care system (that is, not just in Medicare) is also far below previous expectations, which proves that Part D’s market-based design had nothing to do with costs’ coming in under budget; (b) that, regardless of what has happened to date, future Part D spending is expected to rise rapidly, thus undermining claims of cost discipline; and (c) that Part D premiums are 57 percent higher in 2011 than in 2006.

Unfortunately for Klein, each of these criticisms is easily dismissed.

Let’s start with the drop in projected drug spending systemwide. In early 2004, the actuaries at the Centers for Medicare & Medicaid Services (CMS) issued national health-expenditure projections indicating that total retail prescription-drug spending for the ensuing decade would reach about $3.5 trillion. In early 2010, the actuaries released new projections estimating drug spending for the same ten-year period at about $2.4 trillion, or 31 percent below the previous projection. But these projections include prescription-drug spending for both the elderly and the non-elderly. What would the numbers look like if the drop in drug spending for the elderly (about one-third of all spending) were removed from the estimates? When that is done, the drop in projected spending for everyone else is shown to be less pronounced — just about 27 percent. So, despite the impression that Klein tries to leave, the fall in projected spending for the elderly exceeds the fall in spending for the rest of the population.

Moreover, there’s a real question about what precipitated the fall in projected spending systemwide in the first place. Obamacare apologists are constantly arguing that changes in Medicare have the potential to influence the entire health-care market. Well, if that’s the case, it would apply to Part D as well. For instance, Part D plans have aggressively pushed generic substitution as a way to lower premiums — and they have had considerable success. Isn’t it likely that this trend among the elderly has influenced how physicians and pharmacists behave with all their patients?

In sum, the drop in drug spending systemwide is not evidence of Part D’s irrelevance. Indeed, it reinforces the point that Part D has been effective.

Next, Klein cites estimates from the CMS actuaries to argue that, even if Part D cost escalation has been moderate in the past, it is set to rise sharply in the future. But he fails to mention that a main reason for projected cost growth going forward is that Obamacare expanded the drug benefit by closing the so-called “doughnut hole.” Moreover, the actuaries have noted that these projections come with great uncertainty. What we do know with certainty is that costs in the program’s first five years have come in remarkably low.

Finally, Klein argues that Medicare beneficiaries are paying premiums in 2011 that are 57 percent higher than they were in 2006. This is demonstrably false. The data Klein cites are based on a subset of the program — the stand-alone drug plans — which means Medicare Advantage enrollees and those with employer-sponsored drug coverage are excluded from the calculation. Moreover, it assumes that seniors in 2011 will remain in the same plans they were in in 2010. But the whole point of Part D’s consumer-choice structure is that it allows enrollees to migrate out of plans with high costs to those with lower costs. And, not surprisingly, that has happened every year of the program’s operation. The actual premiums paid by enrollees in 2011 are expected to be well below those cited by Klein.

The truth that Klein and others seem unwilling to face is that, on an “all in” basis, Part D has been a phenomenal success story, as shown in the graph below. From 2006 to 2010, per capita Part D costs across all settings have risen by an average of just 1.2 percent annually, which is well below the per capita rise in costs for the rest of Medicare.

Medicare Part D Drug Benefit

The key to the drug benefit’s early success is engaged consumers. Seniors want to get the best value for their Part D premium, and that means looking for low-premium plans with good coverage for the drugs they need. The result has been a record of cost control that has never been matched by government micromanagement — and never will be.

posted by James C. Capretta | 11:47 am
Tags: Ezra Klein, Medicare Part D
File As: Health Care

On Political Expediency and Health Care Reform

June 13, 2011 • In a new column for Kaiser Health News, I point out a strange turn that our debates over health care have taken:

Once upon a time, President Barack Obama and many others who championed his health care plan actually professed faith in the power of a functioning health care marketplace. That now seems like a distant memory, given the demonization campaign that the president and his allies have launched against House Budget Committee Chairman Paul Ryan's plan to inject consumer choice and competition into Medicare. But there's no doubt that while the health law was under consideration in Congress, the president and his team wanted to leave the impression with voters that the plan they were pushing would rely mainly on market signals, not heavy-handed government control....

Meanwhile, now that their plan is law, the tune has changed. The enthusiasm for premium credits, consumer choice of private health plans and decoupling of credits from health costs seems to have waned. Indeed, it's waned to such an extent that these are now not just bad ideas but ideas that would destroy America as we know it! ... Those who previously stressed that the new health law would have a strong component of consumer choice and competition are now saying that a functioning marketplace will never work.
You can read the whole thing here.

posted by James C. Capretta | 10:59 am
Tags: Obamacare, Ryan plan, Peter Orszag
File As: Health Care

How Should Washington Control Medicare Spending?

June 2, 2011

On May 19, I participated in a public forum in Washington, D.C., sponsored by the Heritage Foundation, called “How Should Washington Control Medicare Spending?” My remarks focused on why a market-based reform of Medicare would be far superior to government-imposed cost controls. The event was moderated by Bob Moffit of the Heritage Foundation, and I was joined on the panel by Gail Wilensky, a former administrator of the Health Care Financing Administration and now a Senior Fellow at Project Hope. Full details on the event are available here, and my slides are available here.

posted by James C. Capretta | 11:48 am
Tags: Medicare
File As: Health Care

The Demographics of Social Security

May 31, 2011

I have a new article up in The Family in America on one crucial element of the looming fiscal crisis — Social Security: 

The Social Security program has been the subject of a nearly continual political and policy debate for the better part of fifteen years—although no significant changes to the program have been enacted since 1983. It is now almost forgotten that President Bill Clinton took initial steps toward a Social Security overhaul in the late 1990s, engaging in a series of nationwide "open forums" on the future of the program before abandoning the effort in favor of the more rhetorical—and politically safe—"Save Social Security First!" slogan. While notionally aimed at "saving" the Social Security surpluses, in the end, the Clinton Social Security effort meant little more than "Don't Cut Taxes!"

In 2005, President George W. Bush, having campaigned on Social Security reform in the 2000 and 2004 presidential elections, attempted to put the issue on the national agenda. His proposal to introduce voluntary personal accounts set off a heated debate among reformers and program advocates, with scores of experts queuing up to advocate a politically diverse range of recommendations, with a number of these recommendations taking form as competing bills before Congress. Despite the intense level of activity, the president was never able to get traction for his ideas, as there was little momentum or consensus for reform.

With so much discussion and political debate in recent years, one might think that every possible diagnosis of and remedy for Social Security's long-term financial challenges has been offered and debated. Yet there has been very little mention of the central issue in financing Social Security—namely, the long-term fertility rate. Indeed, if the U.S. fertility rate were expected to return to the levels seen in the 1950s and through the mid-1960s, the subject of Social Security reform would likely never come up at all. With higher birthrates, there would be no financing crisis, as the projected workforce in the decades ahead could support the growing numbers of elderly Americans. With no financing shortfall, politicians would gladly leave the program alone.

Unfortunately, fertility is not projected to rise to the levels seen in earlier eras, and, consequently, Social Security does indeed face a substantial long-term financial shortfall. As Social Security again takes center stage in the national debate, policymakers need to take time to understand the critical relationship between fertility and Social Security financing, as well as the potential implications of different reform options for indirectly improving or worsening the American fertility problem over time.

Read the full article here.

posted by James C. Capretta | 8:22 pm
Tags: Social Security, fertility rate
File As: Health Care

The $6,400 Question

The ongoing delusion of the price-control solution
May 19, 2011

When President Obama decided to take the political low road and demonize House Budget Committee Chairman Paul Ryan’s Medicare reform plan in his budget speech last month, it wasn’t really surprising. President Obama demonstrated in the 2008 campaign that he is a world-class practitioner of shamelessly dishonest political attacks when he went after Senator John McCain for proposing a change in the tax treatment of health insurance, and then pushed for a change himself once he was elected. Given this track record, there was every reason to believe he would jump on the chance to demagogue on health care again if the opportunity presented itself. And boy has he. It’s now clear based on four weeks of a relentless barrage that his reelection effort will be based heavily on creating fear in the electorate, and specifically among seniors, about the supposed negative consequences of the Ryan Medicare plan. So much for an administration devoted to hope and change.

But what exactly is the substantive basis for the president’s attack on Ryan’s proposal? Here’s the key paragraph from the speech:

[The Ryan plan is] a vision that says America can’t afford to keep the promise we’ve made to care for our seniors. It says that 10 years from now, if you’re a 65-year-old who’s eligible for Medicare, you should have to pay nearly $6,400 more than you would today.

Where did the $6,400 figure come from?

Best as anyone can tell (the president didn’t cite a source), it seems to have been derived from the Congressional Budget Office’s April 5 analysis of the Ryan budget. On page 22 of that report, CBO (always so helpful!) provided its assessment of what it would cost an average 65-year-old to enroll in a private health plan compared to what it would cost that same average 65-year-old to stay in traditional Medicare. It’s an illuminating piece of work on the part of CBO, but perhaps not for the reasons CBO intended.

The mechanics appear to be as follows: CBO says the Ryan plan would provide an $8,000 “premium support credit” for average-health 65-year-olds in 2022, which would only cover 39 percent of the total cost of providing a standard Medicare package of services to such beneficiaries. That puts the total cost of the private plan at $20,500, of which the beneficiaries would be required to cover $12,500 out of their own pockets.

By contrast, CBO says the traditional Medicare program could provide the same standard package of services for just $14,800 in 2022 (in what’s called the “alternative fiscal scenario”). Under current law, the government would cover about $8,600 of the total cost, leaving a little under $6,200 for the beneficiaries to cover themselves. With rounding, the difference between what it would cost the average 65-year-old under the Ryan plan compared to what it would cost under current law is “nearly $6,400” in 2022, or so it would seem from CBO’s numbers.

Ironically, this analysis from CBO actually tells us much more about CBO than it does about what the Ryan plan will mean for seniors in 2022.

There are two key assumptions underlying the numbers that are highly implausible and reveal a systematic tilt toward government-run health care.

First, CBO says that in 2022 government-run Medicare could provide the standard package of health coverage for just 72 percent of what it would cost a private plan to do so. How could that possibly be? Simple: Price controls, and especially the deep cuts in Medicare’s fixed prices imposed under Obamacare. If one assumes that there are no consequences whatsoever to paying ever-lower rates of reimbursement for medical services, then, sure, government-run Medicare, and for that matter government-run health care more generally, would look cheaper on paper than private health insurance.

And, in fact, this is not a new development. Health care price controls have always looked good on CBO tables, which is a huge problem in the policymaking process. But they never look quite so good in the real world. Consider Medicaid. State governments have imposed extremely low rates for most medical services, and the program’s participants often have a difficult time securing access to needed care. Far too often, it’s insurance on paper and not in practice. Moreover, because the rates are so low, the quality of care provided to the Medicaid population is well below what most Americans would find acceptable.

CBO’s analysis makes none of these quality distinctions. Price-controlled Medicare, with payment rates as low as Medicaid’s today relative to private insurance, is assumed to provide the same quality care as private coverage. It’s absurd.

Incidentally, it should be noted that in Medicare Advantage, private-sector HMOs were able in 2010 to provide the standard package of Medicare services for less than what government-run Medicare costs (according to MedPAC data). And that’s in spite of the price controls imposed by government-run Medicare. The reason is that government-run Medicare is a massively inefficient operation. Yes, it pays very little per service, but the volume of services provided has been soaring on an annual basis for years and years.

The other crucial assumption is that competition in Medicare has no effect whatsoever on the efficiency or cost of the options offered to Medicare participants. The whole point of the Ryan plan is to build a functioning marketplace, in which plans have to compete for the business of cost-conscious consumers. Ryan rightly believes that this is the key to genuine “delivery-system reform,” by which those delivering the services to patients find new, better, and more efficient ways of providing needed services at less cost. But CBO’s assessment assumes nothing will change at all.

Those who have been pushing for a market-based solution for health care have long complained that CBO’s analyses inevitably favor a command-and-control approach. This latest analysis only confirms that point of view. Unfortunately, it’s a sad reality that genuine reform of the nation’s health entitlements and broader health system are likely to be enacted in spite of analyses from CBO, not because of them.

posted by James C. Capretta | 10:13 am
Tags: Ryan Plan, CBO, Medicare
File As: Health Care

The Real Medicare Trustees’ Report

May 13, 2011

The headline news from today’s release of the 2011 Medicare Trustees’ report is that the Hospital Insurance trust fund is scheduled to be depleted in 2024, five years earlier than projected in last year’s report. The primary reason for the erosion in the condition of the trust fund is, apparently, the anemic economic recovery. It’s even worse than what was projected just a few months ago.

But important as this information appears to be, it’s really not the most important information found in the report. To get that, one needs to skip past all the mind-numbing tables and graphs to the final few pages, specifically page 265. There you will find a “Statement of Actuarial Opinion,” signed by the Chief Actuary of the program, Richard Foster. And in that statement, Mr. Foster once again warns the public not to rely on the information provided in the preceding 264 pages.

Why? Because Obamacare’s arbitrary, across-the-board cuts in what Medicare pays for services will force a large portion of health care providers to stop seeing Medicare patients. When that occurs, Medicare would be insurance in name only, as the enrollees would have a terrible time actually getting the care they need.

Here’s how Foster puts it:

By the end of the long-range projection period, Medicare prices for hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services would be less than half of their level under the prior law. Medicare prices would be considerably below the current relative level of Medicaid prices, which have already led to access problems for Medicaid enrollees, and far below the levels paid by private health insurance. Well before that point, Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result....

For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable). I encourage readers to review the “illustrative alternative” projections that are based on more sustainable assumptions for physician and other Medicare price updates. These projections are available at

Unfortunately, the alternative scenario referenced by Foster in his statement does not yet appear to be available on the CMS website. When it is available, it will almost certainly resemble the alternative projection released at the time of last year’s trustees’ report, which effectively showed that, using realistic assumptions, Medicare’s finances are no better off now than they were before Obamacare was enacted.

Indeed, the program is actually far worse off now because of the shameless double-counting in Obamacare. The Medicare cuts — unrealistic as they are — were used to partially “pay for” massive new entitlement promises to 32 million more Americans. When the Medicare cuts inevitably melt away, the entitlement promises made to millions of other Americans will not. The result will be that the federal government will go even deeper into debt, making it that much harder to find a way meet future Medicare obligations.

Even before Obamacare was enacted, the nation’s most difficult long-term economic challenge was runaway entitlement spending. Obamacare is more gasoline on what’s already a raging fire. The law included no real reform of Medicare or Medicaid. It simply doubled down on the failed model of command-and-control payment rate reductions. Those have never worked before to make the programs sustainable, and they won’t work this time either.

[Cross-posted on Critical Condition]

posted by James C. Capretta | 5:41 pm
Tags: Medicare Trustees, Richard Foster, payment rate reductions
File As: Health Care

The Pro-Life Legal Case Against the Individual Mandate

May 13, 2011 • The Bioethics Defense Fund has file an amicus brief in the the Eleventh Circuit Obamacare case, arguing that the imposition of the individual mandate has the effect of forcing some Americans to pay, against their wishes, premiums out of their own pockets for abortion provision for others. This requirement, the brief argues, exceeds the boundaries of permissable obligations imposed by government, and is thus unconstitutional. A press release appears here, and the whole brief, well worth reading, is here.

posted by James C. Capretta | 1:30 pm
Tags: Bioethics Defense Fund, Obamacare, abortion
File As: Health Care

Defending the Ryan Medicare Plan

May 3, 2011 • I have a new column up at Kaiser Health News on efforts to discredit the Ryan Medicare plan:

Ryan's critics have focused particular attention on his plan's indexation of the Medicare "premium support credits" to the CPI in the years after 2022, suggesting that this idea is somehow beyond the pale. But this is sheer hypocrisy on their part because the indexing of government-financed premium credits below cost growth is in the president’' plan too, and yet not a complaint has been heard about that from its advocates. That's right. After 2018, if the aggregate governmental cost of premium credits and cost-sharing subsidies provided in the state-run exchanges exceeds about 0.5 percent of GDP (a condition that the Congressional Budget Office says will be met), the recently-enacted health law requires the government's per capita contribution to health plan premiums in the exchanges to rise more slowly than premiums. The administration actuaries interpret the law to mean that the government's contributions toward coverage will rise with GDP growth after 2018. CBO appears to have a different interpretation. Still, under all interpretations and projections, it's clear that the exchange credits in the new law will not keep pace with expectations of rising health costs. And that's exactly what the president is now saying is so wrong with Ryan's Medicare plan.

Critics contend that the Ryan plan would shift huge new costs onto Medicare beneficiaries for reasons beyond the indexing of the credits, and they cite CBO's analysis of the Ryan budget as proof. But this analysis is based on two flawed assumptions. First, it assumes that traditional Medicare can keep cutting what it pays to hospitals and doctors with no consequences whatsoever for the beneficiaries. CBO's assessment is that in 2022 traditional Medicare could provide the insurance benefit for just 66 percent of what a private insurance plan would cost. This is sheer folly based entirely on deep payment reductions for services. If those cuts really were to go into effect as scheduled, Medicare rates would be well below those of Medicaid, and seniors would have very restricted access to care. CBO's analysis also assumes no savings from establishing rigorous competition in the Medicare program. But the cost-cutting in the prescription drug program demonstrates that the potential is there for massive savings from a functioning marketplace.

The full column is available here.

posted by James C. Capretta | 2:13 pm
Tags: Obamacare, CPI, Paul Ryan, Medicare
File As: Health Care

Medicare’s Actuaries Say Obamacare Vouchers Could Be Tied to the CPI

April 26, 2011

Yesterday, I posted a detailed explanation of how Obamacare would index vouchers provided through the state exchanges. This was a follow-up to my original column on this and other subjects from last week.

But, detailed though yesterday’s post was, there’s still more to this story.

To recap from the beginning: The president and his allies have been attacking House Budget Committee chairman Paul Ryan’s Medicare reform plan for indexing, on an annual basis, the “premium support credits” provided to future program entrants to the consumer price index (CPI).

These attacks seemed more than a little hypocritical to me. After all, didn’t Obamacare do exactly the same thing? Section 1401 of the law requires the “premium credits,” or vouchers, provided through the state exchanges to be adjusted in the years after 2018 “to reflect the excess (if any) of the rate of premium growth … over the rate of growth in the consumer price index.” That would seem to mean that beneficiaries getting insurance through the exchanges would pay for cost growth above the CPI, and the government’s contribution toward the premium would grow with the CPI. Further, this adjustment is only to occur in years when the aggregate cost of the premium credits and cost-sharing subsidies in the exchanges exceed 0.504 percent of GDP.

It turns out, however, that the law is written so poorly and ambiguously that other conclusions might be reached about what the words of the law actually mean. That seems to be the case with the Congressional Budget Office, as its cost projections for premium credits in the exchanges grow at a rate above the CPI in the years after 2018, even though CBO believes that aggregate spending will exceed that threshold of 0.504 percent of GDP.

So, as I explained yesterday, it would appear that CBO is assuming a different adjustment is applied, which would have the effect of scaling back the government’s contribution below health-cost growth — and for some people, even below CPI growth — but on average somewhat above it.

But what about the actuaries who run the numbers for the administration? How do they see things?

First, they expect that the aggregate-spending condition won’t be met. In other words, the CPI-based adjustment to the premium credits doesn’t become operative in their projections because they see spending on the credits and cost-sharing subsidies coming in below 0.504 percent of GDP. After 2018, they assume the effect of this threshold will be to index the government’s contributions toward premiums to GDP growth.

But what would happen if their cost projections are wrong and aggregate spending did exceed 0.504 percent of GDP?

If that were to occur, they believe the law would require indexation of the vouchers provided by the government in the exchanges to the CPI — the exact same policy that is under so much attack in the Ryan plan. And, let’s be clear, it wouldn’t take much of an adjustment in cost projections for the actuaries to assume this indexing provision will go into effect in 2019 and future years. 

So, yes, those who are attacking the Ryan Medicare plan have a serious problem. They, starting with the president, have made a huge political issue of how that plan indexes the government’s contribution for Medicare coverage. But their own experts believe Obamacare, under certain conditions, does exactly the same thing. 

[Cross-posted on Critical Condition]

posted by James C. Capretta | 6:43 pm
Tags: Obamacare, CPI, Paul Ryan, Medicare, vouchers
File As: Health Care

A Clarification on the Indexation of Obamacare’s Vouchers

April 25, 2011

In my post last week, I asserted that the premium subsidies provided in Obamacare’s state exchanges would be tied over the longer run to consumer inflation.

The story is actually much more complicated than that, and requires additional explanation. (Fair warning: What follows is very technical.)

The way the law (see page 111) works is that it sets a limit on the percentage of income a household must pay for premiums when it is getting insurance through the state-based exchanges. In 2014, the government’s contribution is determined by subtracting the maximum contribution required from a household from the total premium required for the second-lowest-cost “silver plan.” The percentages of income used to set limits on household premium payments are to be adjusted in the years after 2014 based on factors specified in the law.

What are those factors? From 2015 to 2018, the law says that the percentages “shall be adjusted to reflect the excess of the rate of premium growth for the preceding calendar year over the rate of income growth for the preceding calendar year.” This provision is written poorly and imprecisely. What does it mean to “reflect” the excess of premium growth over income growth? How exactly are the percentages to be adjusted? The law does not specify a mathematical formula. It just says that an adjustment shall be made.

Common sense would indicate that this adjustment is intended to prevent household contributions from becoming an ever smaller share of the total premium. Income is expected to grow less rapidly than health costs. If the percentages of income required for premium payment by households were held constant, the share of the premium paid by households would fall over time (and, conversely, the government’s share would rise). This adjustment is clearly intended to keep the proportion required from households and the government roughly constant over time and prevent the government’s contribution from rising even faster than health costs.

After 2018, the law says that, in addition to the adjustment made to reflect premium growth in excess of income, the percentages shall also be adjusted

to reflect the excess (if any) of the rate of premium growth estimated under subclause (I) for the preceding calendar year over the rate of growth in the consumer price index for the preceding calendar year.

Again, the law doesn’t say how the percentages are to be adjusted, or on what basis. Nor does it define what it means to “reflect” premium growth over the CPI.

One reasonable interpretation is that this second adjustment is intended not to maintain proportionality between the government and households over time but to require households to pay for premium growth in excess of consumer inflation. That would mean limiting the government’s contribution to growth in the CPI, and adjusting the household percentages accordingly to ensure full payment of the balance. This approach would have the virtue of some underlying logic. Household premiums would be adjusted to “reflect” the excess of premium growth over the CPI, which looks to be the objective of the provision.

But, apparently, that is not how the provision is being interpreted by congressional scorekeepers. The Congressional Budget Office’s cost projections show the exchange subsidies growing, on a per capita basis, at a rate that is just below 5 percent annually from 2019 to 2021 — which is above its long-term annual inflation assumption of 2.3 percent, but certainly well below historical health-cost growth rates.

What other way of making this second adjustment is possible? It might be that CBO is assuming an entirely different way of “reflecting” the excess of premium growth over the CPI on household premiums (although CBO has not issued any kind of official explanation of how it is interpreting this provision). An example can help illustrate what might be going on. Suppose premium inflation is 7 percent, and CPI growth is 2.3 percent. CBO could be assuming that the initial adjustment (premium over income growth) requires household premiums in the exchanges to rise by 7 percent. In addition, the second adjustment then requires premiums to rise by the excess of 7 percent over 2.3 percent (or 4.7 percent). Thus, household premiums would be required to rise by a total of 11.7 percent under this example. The percentages of household income used to set premiums would be adjusted accordingly to hit these new premium requirements.

Note that this method doesn’t make a lot of policy sense. It effectively double-counts health inflation in the beneficiaries’ premium payments. Premium growth rates already include health inflation above the CPI; adding the excess of premium growth over the CPI to premium growth simply counts health inflation twice.

Note also that doing the calculation this way means the government’s contribution will grow at widely varying rates, by income. In all cases, the government’s contribution will grow at a rate below health-cost inflation. And, in some cases, the government’s contribution will actually fall below CPI growth. For instance, if the total premium for coverage in an exchange is $18,000 in 2018, and if health inflation is 7 percent and the CPI is 2.3 percent, the government’s contribution would fall below the CPI for any household that was paying at least $9,000 toward the total premium in 2018.

There’s an additional complication. The law states — in a provision called “the failsafe” — that this additional adjustment to reflect premium growth over the CPI will only apply in years (after 2018) in which “the aggregate amount of premium tax credits under this section and cost-sharing reductions under section 1402 of the Patient Protection and Affordable Care Act for the preceding calendar year exceeds an amount equal to 0.504 percent of the gross domestic product for the preceding calendar year.

CBO assumes that spending on the subsidies and cost-sharing credits will (“probably”) exceed the threshold, and therefore the additional adjustment is operative (see p. 35 of The Long-Term Budget Outlook).

The chief actuary of the Medicare program, however, has stated (see p. 5 of this analysis) that his office estimates the aggregate spending on the credits will be just barely above the 0.504 percent of GDP threshold in 2018. Consequently, according to the actuaries’ projections, the government’s vouchers in 2019 and beyond would rise roughly in concert with GDP, not the CPI.

To sum up: My column asserted that Obamacare’s exchange vouchers would be tied to consumer inflation. That is apparently not CBO’s interpretation of what the law requires (based on a review of CBO’s current cost projections), although the law is so vague and imprecise that alternative interpretations are certainly possible. The larger point of the column remains valid regardless. Critics of Rep. Paul Ryan’s Medicare plan are on the warpath about vouchers for private insurance falling below baseline expectations of cost growth. The same accusation can be leveled against Obamacare’s vouchers. Indeed, some Obamacare participants would get vouchers that grow at less than the rate of the CPI. And even assuming this apparent interpretation of what the law requires, it is easy to see how allhouseholds in Obamacare’s exchanges would be facing double-digit premium increases each and every year after 2018 if health costs continue to rise as rapidly in the future as they have in the past.

[Cross-posted on Critical Condition]

posted by James C. Capretta | 5:25 pm
Tags: Obamacare, inflation, premiums, Medicare, Paul Ryan
File As: Health Care

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