Health Care


Obamacareís Cruel and Inhumane Inflation-Indexed Vouchers

April 21, 2011

Hypocrisy and cynicism come awfully easily to some people.

Recall that in October 2008, then-candidate Barack Obama launched a ferocious political attack on his opponent. In debates, and then in tens of millions of dollars’ worth of advertisements, the Obama-Biden campaign excoriated Senator John McCain for proposing to “tax health benefits for the first time in history.” Never mind that the McCain proposal would have provided a refundable tax credit that would have more than covered the lost tax benefit for the average household — and that the whole point of the McCain reform was to give individuals control over a tax benefit that today is under the total control of employers. Obama saw an opportunity for serious political demagoguery, and facts weren’t going to stand in the way.

And this was no sideshow in the presidential race. It was a top-tier issue, one of a few that ultimately decided the outcome. Indeed, in October 2008, when the race moved from a dead heat to Obama’s advantage, no issue was featured more prominently in TV attack ads than McCain’s supposed plan to “tax health benefits.”

Then, after assuming office, President Obama had a very sudden and inexplicable change of heart. Taxing benefits for the first time in history really didn’t seem like such a bad idea after all. The change of heart was so thorough that Obama went from chief opponent to chief proponent of the idea in a matter of months. As Obamacare wound its way through Congress, the administration gave the concept a new name — the “high-cost-insurance tax,” or “Cadillac tax” — and insisted that it be included in the final version of the legislation, to the great consternation of organized labor. Now that’s shameless.

Fast-forward to April 2011 — the early stages of the next presidential contest. House Republicans — led by Budget Committee chairman Paul Ryan — have drafted a budget plan to put the nation’s fiscal house in order. It includes a proposal to reform Medicare. Everyone who is 55 and older today will remain in the current Medicare structure. Those below age 55 will get their entitlement in the form of “premium-support credits,” which will be applied to private health plans of their choice on an annual basis. The government will oversee this new Medicare marketplace, organize the information and choices for the beneficiaries, and ensure that all of the plans meet minimum standards.

The program will begin in 2022, at which point the premium-support credits will reflect what the traditional Medicare program costs at that time. In the years after 2022, the premium support credits will be increased commensurate with the rise in consumer inflation, as measured by the consumer price index (CPI).

By the Democrats’ reaction, you’d think this idea was the beginning of the end of Western civilization.

“Cruel.” “Inhumane.” “The end of Medicare as we know it.” From the president on down, liberals everywhere have jumped on the Ryan Medicare plan as the worst idea ever conceived. In the president’s budget speech last week, which was really just a partisan attack on the Republican budget plan, the concept was where he focused his most intense fire. According to the president, no proposal like the Ryan Medicare plan will ever meet his approval.

And what is it about the Ryan plan that liberals find so appalling and unacceptable? Well, according to the president’s speech — and columns by Alan BlinderPaul Krugman, and Ezra Klein — it’s the fact that the Medicare “premium-support credits” could be used only for private insurance, and that the credits themselves would be indexed on an annual basis to consumer inflation, not health costs. They argue that, as the years go by, the credits will fall farther behind the actual cost of insurance, and leave seniors with larger and larger premium bills.

But, wait a second, there’s something vaguely familiar about how the Ryan Medicare plan is supposed to work. Inflation-indexed credits. Competing private insurance plans. Government oversight of the marketplace. Oh yeah: That’s the description of Obamacare that advocates have been peddling for months.

Here are the facts. In the new state-based “exchanges” erected by Obamacare, persons with incomes between 133 and 400 percent of the federal poverty line will be eligible for new, federally financed “premium credits” — dare we say “vouchers”? These vouchers can be used only to purchase the private health-insurance plans that are offered in the exchanges. There will be no “public option” to choose from. Initially, the vouchers will be pegged off of the average cost of silver plans in the exchanges, with a limit on the premium owed by the consumer based on their income. In future years, however, growth in the government’s contribution will be limited, first to the rise in average incomes and then the CPI.

That’s right: Obamacare’s new health-entitlement vouchers are indexed to general consumer inflation too. So if Ryan’s Medicare plan is “cruel” and “inhumane” because the credits supposedly fall behind rising costs, then the exact same criticism can be leveled against Obamacare.

But somehow, that’s never acknowledged. Even by Washington standards, the cynicism at work here is stunning. Liberals everywhere are practically giddy at the thought of running against the way the Medicare credits are indexed in the Ryan plan. Only problem is, it’s in their plan too.

The real issue here is what really needs to be done to control health costs. To Congressman Ryan and others, the fundamental problem is how Medicare works and operates today. The dominant Medicare fee-for-service model is the No. 1 reason we have a fragmented and inefficient health sector. That being the case, the key to slowing the pace of rising costs — for everyone — is Medicare reform.

Liberals have essentially conceded this point, but never say so. In Obamacare, all of the “delivery system reforms” that the law’s apologists tout — bundling of payments, Accountable Care Organizations, even the Independent Payment Advisory Board — are aimed at changing how traditional Medicare fee-for-service works today. The idea is that the federal government has the capacity to “reengineer” how health care is delivered by adjusting the levers of Medicare.

Ryan and others have a far more plausible theory. The key to “delivery-system reform” isn’t more government regulation but cost-conscious consumption on the part of Medicare participants. If they can reduce their premiums by signing up with high-quality, low-cost networks of care, they will do so. They just need to be given the opportunity.

The Congressional Budget Office analysis that shows seniors in 2030 paying higher premiums compared to current Medicare assumes two things that are not plausible. First, it assumes that Obamacare’s deep and permanent cuts in what Medicare pays hospitals and other providers of care can be sustained in some form. They can’t. The chief actuary of the Medicare program has stated repeatedly that if these rates were to stay in place, seniors would have very restricted access to care, because nobody would see them.

Second, CBO assumes that the Ryan plan’s Medicare reform will induce no response, or at best a minimal one, from those supplying services to patients. This is absurd. It’s as if the CBO doesn’t believe in economic incentives. The whole point of the Ryan plan is to build a marketplace, and the key is cost-conscious consumers. If seniors are given a fixed level of support from the government, they will immediately seek out the best value they can find. Health plans that can deliver better value at lower cost will be highly attractive, and thus gain market share. The race will be on to find better ways of doing business to cut costs. That’s the way to get genuine “delivery-system reform.”

In fact, there’s already a model in place in Medicare that demonstrates the value of this approach. It’s the much-maligned drug benefit that was enacted in 2003. Costs for the program have come in 41 percent below expectations, in large part because seniors have signed up in droves with low-cost plans that heavily push generic substitution.

The president’s real alternative to Ryan’s plan is rationing. He wants to empower the Independent Payment Advisory Board to ratchet down even further on what hospitals and other providers are paid. This is truly a crazy idea. Obamacare has already pushed Medicare rates below those of Medicaid. Now he wants to double down on irrational price cutting, and thus drive even more providers out of the program.

Talk about cruel.

[Cross posted on NRO

posted by James C. Capretta | 9:53 am
Tags: IPAB, Obamacare, Paul Ryan, Medicare
File As: Health Care

Paul Ryanís Medicare Fix

April 18, 2011

I have a new article as the lead story of the latest print edition of National Review; it’s on the Medicare reform element of the Ryan debt-fix proposal and the unduly negative response to it. Here’s an excerpt:

The Obamacare “solution” for Medicare is nothing of the sort, and nothing new at all. It’s an approach that has never worked to control costs in the past, and it won’t work this time. All price controls ever do is drive out willing suppliers, after which the only way to balance supply and demand is with waiting lists.

The Ryan alternative starts from an entirely different premise. Its solution is not top-down cost-cutting but a more productive and efficient health sector. The only way to slow the rise in costs without compromising the quality of American health care is by getting more bang for the buck: making the provision of services to patients more efficient each year.

That can be achieved in health care the same way it has been achieved in other major sectors of the American economy: with a robust, well-functioning marketplace, filled with cost-conscious consumers. That’s the centerpiece of the Ryan Medicare reform.

Read the full version here (subscription required).

Also, a recent article at Kaiser Health News quotes me in response to President Obama’s remarks delivered with his own debt-fix proposal:

“It was so partisan and so badly received. Clearly he ... just wants to try to position himself better, vis-à-vis the Ryan plan and posture politically for 2012 so he's not going to get a deal.” Giving the Independent Payment Advisory Board more power to reduce Medicare rates, which Capretta says are already too low, will “start jeopardizing access to care for the patients and so it’s just it doesn’t make any sense.”

Finally, be sure not to miss Representative Ryan’s response to President Obama’s speech in a conversation at the invaluable new think tank e21.

posted by James C. Capretta | 3:15 pm
Tags: Paul Ryan, Medicare, Obamacare
File As: Health Care

What Real Leadership Looks Like

April 5, 2011

House Budget Committee Chairman Paul Ryan has laid out a vision for twenty-first century governance that will become the GOP program for 2011, 2012 and beyond.

It is unquestionably the boldest budget plan ever offered (including Reagan’s first budget), focused first and foremost on bringing federal spending commitments into line with the revenue generated from a pro-growth tax system. It reforms entitlement programs, starting with Medicare and Medicaid of course, but not ending there. Farm payments, welfare programs, and corporate subsidies all are reformed and refocused to reduce costs to taxpayers and work as they should. Outdated programs are thrown out. The bureaucracy is cut down to size. No corner of the budget is spared from scrutiny, including defense. The challenge of unlimited government, and runaway spending, deficits, and debt is immense — but the Ryan plan more than meets it.

A lot more can and will be said about the plan’s details in coming days, including by me. But for today, it’s important to focus on what this plan means in the big picture.

For starters, it completely recasts the struggle between the political parties. Everyone knows that what the president and his allies really want to do is raise taxes. They might agree to some tinkering around the margins on entitlements for show. But in their heart of hearts they believe the solution is higher rates of taxation.

The problem is they don’t have the guts to say so in public. They know that’s the surest way to permanent minority status. And so they are hoping for a more indirect route to their goal, using guile to lure gullible Republicans (see here) into agreeing to their approach without ever having to sell it to a tax-averse electorate.

The Ryan plan blows this kind of plotting by Democrats to smithereens. There’s no tax increase in the Ryan plan, and there’s no debt crisis. What’s required is far-reaching entitlement reform and serious spending discipline. By staking out that position, Ryan and his comrades have improved their leverage immensely. There’s no need to agree to tax hikes to solve the budget problem. What’s needed is for Democrats to get serious about spending reform, as Ryan has.

Moreover, with a Republican plan on the table, the media will surely start to ask Democrats, “Hey, where’s your plan?” This will force them to either come clean with their tax-hike vision, or become the party that pushed the country toward a debt-induced economic crisis. Either way, with more clarity about where the parties actually stand, Republicans can win the public fight.

At the heart of the spending problem, of course, is health care, and at the heart of the health-care cost problem is Medicare. The Obamacare “solution” is heavy-handed regulation and government-imposed cost controls. That approach never works, and only erodes the quality of the system. What’s needed is a functioning marketplace, with government oversight and cost-conscious consumers directing the allocation of resources. And that’s exactly what the Ryan plan would deliver.

The country faces serious and daunting challenges in the coming months and years. We need serious political leaders who are ready and capable of rising to the challenge. No one has demonstrated that capacity more than Paul Ryan.

[Cross-posted on the Corner.]

posted by James C. Capretta | 11:39 am
Tags: Ryan Plan, Paul Ryan, Medicare, Obamacare, debt
File As: Health Care

Medicare and the Ryan Plan

April 5, 2011

House Budget Committee chairman Paul Ryan (R.-Wisc.) is minutes away from unveiling his proposed budget for fiscal year 2012. I'll have much more to say in this space about Representative Ryan's important proposal in the days ahead. To start things off, however, here is an excerpt from a post I wrote for the New York Times "Room for Debate" series. I say a bit about the Ryan plan's approach to reforming Medicare — and defend the plan against those who claim that the proposal would unfairly burden Medicare's elderly beneficiaries:

The idea is to move toward a system where the government provides a fixed contribution that the beneficiary controls, not the government. The key is that the government’s contribution is set independently of the choice made by any one beneficiary. If Medicare participants choose a somewhat more expensive option, they will pay higher premiums. If they choose less expensive options, perhaps through a more efficient delivery system, they will pay less. With cost-conscious consumers, the 2003 Medicare prescription drug benefit has held down costs remarkably well — and much better than anyone expected. The new Ryan proposal builds on that model.

Critics say this reform would simply shift costs and risks to the beneficiaries. That critique ignores the enormous risk now placed on beneficiaries by the Affordable Care Act. Payment-rate reductions look like cost control on paper, but they provide no guarantee that patients will be served.

Moreover, as stated previously, what’s needed in the health sector is a large step-up in productivity. What’s more likely to bring that about: Another round of government-led efforts to engineer more efficiency? Or a functioning marketplace that rewards effective cost cutting with market share?

The Ryan plan is the most important step Congress could take to fix what ails American health care — and it does so in a way that heads off a fiscal crisis, too.

You can read the entire post here.

posted by James C. Capretta | 10:00 am
Tags: Paul Ryan, Obamacare, Medicare
File As: Health Care

The Presidentís Health Care Predicament

April 5, 2011

A piece I wrote a few days ago for Kaiser Health News explains why President Obama cannot use the health care law, his signature legislative achievement, as the basis for his reelection campaign. Here's an excerpt:

Having spent so much political capital to secure its passage, one might think that the health law would feature prominently in the president's planned reelection campaign. Certainly other presidents have used early legislative successes, even on controversial measures, to make the case that their policies were working. President Bill Clinton's tax and spending-reduction measure of 1993 was highly controversial and polarizing. It contributed heavily to the loss of Democratic control of Congress in 1994. But Clinton also used it as the foundation of his economic message throughout his presidency, and especially in 1996, when he tied the economic recovery then underway to its passage.

But Obama is not likely to follow that model, because, unlike Clinton's budget program, the health law provides almost nothing that the president can claim he delivered for voters.

The main selling point of the law -- that it will cover everyone, or nearly everyone, with health insurance, at least according to official estimates -- won't be tested until at least 2014, when the "big bang" reforms kick in. That's when the individual mandate, the employer requirements, the Medicaid expansion and exchange subsidies, and the new insurance rules regarding benefit packages and premium-setting all go into effect. Until those changes are actually implemented, they are simply theoretical selling points that may or may not work out as planned. That's not going to cut it with an electorate focused on results in the here and now.

You can read the whole piece here.



posted by James C. Capretta | 9:34 am
Tags: President Obama, Obamacare, 2012 politics
File As: Health Care

Why health care is the essential issue for 2012

March 29, 2011

Over at The Weekly Standard, I have a new article up with National Affairs editor Yuval Levin on the importance of health care reform to the 2012 election:

The outlines of ... reform have been clear for some time. What’s needed is a functioning marketplace in health care, with cost-conscious consumers seeking and finding more value for their money. To get there, the government must stop subsidizing excess in all of the major health care settings ​— ​Medicare, Medicaid, and employer-sponsored plans. Instead, the government should provide fixed levels of financial support toward insurance and care that patients can control. The government would oversee the marketplace, but resources would be allocated based on consumer choices and preferences.

This reform would bring costs under control and head off the impending fiscal crisis. But it’s not simply a fiscal reform. It would also transform American health care for the better. Health care and insurance providers would have to become far more efficient and productive to avoid losing market share to competitors, and they would be forced to focus on the needs and desires of patients, not government payers.

For Republicans committed to maintaining a vibrant and free society, there is no choice but to make genuine health care reform the centerpiece of their domestic agenda. If the health care debate is lost, then the fight for limited government is lost as well.

That means that the effort to repeal and replace Obamacare and to fix our health care entitlements must be well underway by 2013. And that, in turn, means that a Republican president must be elected in 2012 having run on a platform of real health care reform. For those who aspire to be that Republican president, the time to develop that platform is now.

Read the full article here.

posted by James C. Capretta | 12:40 pm
Tags: health care reform, 2012 election
File As: Health Care

The President Canít Run on Obamacare

March 24, 2011

On Obamacare’s first anniversary, let’s give the president his due: It wouldn’t be in law today without his persistent push for its passage.

Not that his policy arguments carried the day or were persuasive. They weren’t. No, in the end, Obamacare was passed because the president had so tied his political fate to it that it became quite literally impossible for most members of his party in Congress to oppose it. And so it passed.

Other presidents have staked their presidencies on early legislative initiatives too, and then used their success in securing their enactment to aid their reelection. President Reagan certainly comes to mind in that regard, with his 1981 tax cut featuring prominently in his 1984 campaign. And Bill Clinton made his tax-hike and deficit-reduction plan of 1993 the centerpiece of his economic message in 1996.

The problem for President Obama, however, is that, unlike the Reagan tax cut, Obamacare will do almost nothing worth running on before 2012. The main selling point for the law — the supposed “universal coverage” proponents erroneously say the law will deliver — doesn’t kick in until at least 2014. That’s when the “big bang” of Obamacare comes into play: the individual and employer mandates; the new entitlement expansions; and the one-size-fits-all insurance plans.

Between now and then, there’s a lot of regulation to be issued, but there won’t be any real action on the ground where Americans get their health care (other than some tax increases and Medicare cuts the administration will never mention anyway). And so the law’s apologists are left with nothing to talk about except the supposed “early benefits” of Obamacare, like coverage of 26-year-olds on their parents’ plans and the new high-risk pools for those with pre-existing conditions.

But these provisions are minor matters in the scheme of things. They certainly did not require a 2,700-page bill to address. And so few Americans have benefited from them that they hardly register at all in the public consciousness. Only about 12,000 people have signed up for the poorly constructed risk pools, and no one expects the other insurance regulations to help more than a tiny percentage of the population. For most Americans, these “early benefits” are simply non-events. If the president were to feature them as large achievements of his presidency in 2012, it would strike most voters as the trumpeting of the trivial.

With so little to work with, and intense opposition among those pushing for repeal, the president is unlikely to feature Obamacare at all in his 2012 campaign, and certainly not in the way Reagan touted his 1981 tax cut in 1984. President Obama will no doubt defend the new health law from every attack, even as he tries to deflate the repeal push with minor concessions. But, having exhausted his first term securing passage of Obamacare, the president will have to find some other rationale to justify requesting a second term.

posted by James C. Capretta | 2:21 pm
Tags: 2012 election, President Obama, Obamcare, risk pools, taxes
File As: Health Care

Fulfilling the Mission of Health and Retirement Security

March 22, 2011

Last week I testified before the House Budget Committee as part of a hearing on "Fulfilling the Mission of Health and Retirement Security." My written testimony was posted last week here. Now the audio and video of the entire hearing are available online, including questions posed by committee members to the panel on which I sat, along with Alice Rivlin, Chuck Blahous, Paul Van de Water. The audio for the hearing is available here, and I have embedded the video below (my testimony begins at 21:15).

posted by James C. Capretta | 3:48 pm
Tags: Paul Ryan, House Budget Committee, Alice Rivlin, Charles Blahous, Paul Van de Water
File As: Health Care

Creating a Stable and Accessible Health Care System for Future Generations

March 17, 2011

[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 Obama Budgetís Hidden Tax Plan

March 7, 2011

I have a new column up on National Review Online today describing Obamacare’s hidden tax hikes and rationing. Here’s how it starts:

President Obama’s 2012 budget has rightly been lambasted as completely detached from fiscal and economic reality. Even under the budget’s own rosy assumptions, the country would accumulate $7.2 trillion in deficits over the coming decade. Under more realistic assumptions, it’s a plan for trillion-dollar deficits every year, with no end in sight. By 2021, government debt would likely approach $21 trillion under this budget, up from $5.8 trillion at the end of 2008.

This might lead one to think there is no Democratic plan for closing the fiscal gap. But actually, the president and his allies do have a plan of sorts. They just don’t want voters to know what it is. Indeed, it is their hope that they can get their plan adopted by stealth — and that voters never fully realize that the government has adopted it.

To Democrats, the solution to our budget problem has two components. First, massive and steady tax hikes, not just over the next few years but every year for the next quarter century to match the explosion in entitlement costs. Second, they want stiff government cost controls on the entire health sector, not just on public insurance programs.

For years, the only thing that stood in the way of Democrats’ securing these changes were unenlightened and intransigent Republicans. But when Democrats secured once-in-a-generation majorities in the 111th Congress, Republicans were no longer in a position to stand in their way. So Democrats took the opportunity not only to pass Obamacare — the largest entitlement expansion in two generations — but also to try to reshape the long-term budget picture according to their big-government vision.

Read the rest here.

posted by James C. Capretta | 3:43 pm
Tags: federal budget
File As: Health Care

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