Health Care


The CLASS Act Fraud

February 25, 2011

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

Even the President Seems to Oppose His Budget

February 17, 2011

It’s not unusual for a budget submission from a president to be declared “dead on arrival,” especially from members of the opposition party in Congress. But it is unusual for the president to join his opponents in proclaiming the early demise of his own, months-long handiwork to establish priorities.

But that’s essentially what the president did at his press conference yesterday. Under repeated questioning about the lack of leadership his budget betrays, the president essentially said, “don’t take it too seriously.”

It’s hard to blame him for walking away from what is plainly indefensible. It’s not a serious plan, even as measured by his own numbers. But, as Brian Riedl of the Heritage Foundation has explained, it’s far worse than even those numbers indicate because so much of what is in the budget is phony.

Starting with the bottom line, according to the administration’s own numbers, the 2012 budget would push debt (held by the public, not government trust funds) up to nearly $12 trillion at the end of 2012. That’s up from $5.8 trillion at the end of 2008. So the federal government will have borrowed as much during President Obama’s four-year term in office as it had during the previous two-century-plus history since the Republic was founded in 1789.

And that’s before the entitlement spending explosion associated with the baby boom retirement hits with full force. Over the coming decade, spending on Social Security, Medicare, Medicaid, and Obamacare’s new entitlements will soar, from $1.6 trillion in 2011 to $3.0 trillion in 2021, according to the Congressional Budget Office.

With the costs of entitlements rising rapidly, what does the Obama budget plan to do to head off a crisis? Nothing. As a result, by their own numbers, the budget would run deficits of $7.2 trillion over the next ten years, pushing the nation’s accumulated debt to an astounding $19 trillion in 2021, or nearly 80 percent of GDP.

And that’s the rosy scenario based on the administration’s numerous gimmicks. Among other things, those numbers assume — as noted by the Committee for a Responsible Federal Budget — $315 billion in unspecified “offsets” to pay for higher Medicare physician fees; $1 trillion in “spending cuts” from plugging $50 billion per year in 2013 and beyond for war funding (down from $165 billion in 2011); and $328 billion from unspecified “bipartisan financing” for highway spending the president says is so critical to “winning the future.” Further, the administration’s economic and technical assumptions make the deficit look about $1.5 trillion less than what CBO expects over the coming decade. Take these gimmicks out of the budget, and the cumulative ten-year deficit exceeds $10 trillion, or about $1 trillion each and every year for as far the eye can see.

The president says his budget doesn’t really matter much because he is serious about working with Republicans on entitlement and tax reform. But why should they believe him? Despite what the president said, budgets do matter. They signal priorities and either lay the groundwork for compromise — or don’t — by what they include. If the president really wanted to work toward a bipartisan deal on the budget, his submission to Congress would have looked very different, with the inclusion of pro-growth tax proposals and market-oriented efforts to slow the growth of rising health costs. Instead, what he submitted is a thinly disguised plan to force, by delay and neglect, a massive tax increase to avoid fiscal meltdown.

posted by James C. Capretta | 10:47 am
Tags: federal budget
File As: Health Care

Kicking the Can on Solving the Debt Crisis

February 15, 2011

I have a new column up at Kaiser Health News about the president's failure to seriously address the debt crisis in the newly-released 2012 budget proposal:

It's like the president and his team woke up after the November 2010 mid-term election with a bad case of political amnesia. What deficit? What debt commission?

This isn't what the president promised when he ran in 2008, nor is it what he told voters as recently as one year ago. Over and over, he has promised not to "kick the can" down the road, as he says his predecessors did before him. Instead, he would provide real leadership to tackle the looming threat posed by out-of-control borrowing and debt accumulation. That was supposedly the reason for appointing the Bowles-Simpson National Commission On Fiscal Responsibility and Reform in the first place, to lay the predicate for engaging in a bipartisan effort to narrow medium and long-term budget deficits and reduce the risk of a debt-induced crisis.

But now, all of that kind of thinking is out the window. If the president won't show leadership on the budget, there's zero chance congressional Democrats will. Some moderate Democrats in the Senate may make some noise about going farther than the president. But when push comes to shove, the rank and file Democrats in both chambers are far more likely to take a pass, too. Why would they take on large political risks when the president of their own party won't and is likely to pull the rug out from under them if they do?

So, realistically, the Obama "punt," as House Budget Committee Chairman Rep. Paul Ryan, R-Wis., has aptly described it, means the odds of a serious deficit reduction effort before the next presidential election are now low and falling.

Read the full column here.

posted by James C. Capretta | 1:12 pm
Tags: federal budget, fiscal commission, Congress
File As: Health Care

The Heart of the Matter

February 10, 2011

Slowing the pace of rising health care costs is the holy grail of domestic and economic policy. It’s pretty much the key to everything that’s desirable. For starters, it’s central to heading off the debt-induced economic calamity that is fast approaching. If health care costs in the future were to rise at something close to the rate of growth of wages (instead of a couple of percentage points more, as they have for most of the past half century), trillions in unfunded government liabilities now on the federal books would vanish altogether. The massive deficits now projected for coming decades wouldn’t necessarily go to zero overnight, but they would be in a range that is politically solvable, not hopeless. And if premiums for private health insurance rose moderately, it would be much easier to expand coverage to more people, even as employers could pay workers more with cash instead of health benefits. Our collective future would look far, far brighter under such a scenario.

So, yes, “bending the cost-curve,” as the president famously put it, is the right objective. But what will actually do it?

To answer the question, it’s useful to start with a recent post from the Washington Post’s Ezra Klein, who himself approached the issue in the form of a question. He asks what makes Congressman Paul Ryan so confident that the Ryan plan for Medicare reform (offered with former Clinton administration budget director Alice Rivlin, and so now called the Ryan-Rivlin plan) will work to control cost growth while Obamacare won’t.

From Klein’s perspective, it seems like Ryan is applying a double standard. In Obamacare, Congress cut Medicare payment rates for hospitals and other providers of services quite dramatically — to the tune of about $0.5 trillion over a decade. Ryan and others — yours truly most definitely included — have argued that these cuts are illusory because they are politically unsustainable. Klein wonders why that same argument doesn’t also apply to cuts under Ryan-Rivlin. After all, Ryan-Rivlin would bring Medicare spending well below baseline projections in the future by converting the Medicare entitlement into a defined contribution payment from the government. Isn’t Congress just as likely to get cold feet about those cuts as it would about Obamacare’s payment-rate reductions? In fact, aren’t the Ryan-Rivlin cuts even more vulnerable, as they would seem to more transparently fall on the shoulders of the beneficiaries?

But that’s not how to look at this problem at all. Bending the cost curve is not a matter of simply paying less for a service. What’s needed is real and continuous productivity improvement in the health sector. Doctors, hospitals, nursing homes, labs, clinics and others finding better ways to deliver higher quality care at less cost. Because if productivity in the health sector does not rise, then payment-rate reductions will simply drive willing suppliers of services out of the marketplace.

And that’s exactly what would happen under Obamacare. Providers of medical services aren’t going to take payments for services that don’t cover what it costs to care for patients. As Richard Foster, the chief actuary of the Medicare program has repeatedly warned, Obamacare’s cuts would drive Medicare’s average payment rates so low that they would fall below those of Medicaid by the end of the decade. And Medicaid’s rates are already so low that the network of physicians and hospitals willing to take care of large numbers of Medicaid patients is notoriously constrained.

The Ryan-Rivlin plan is entirely different because it is based on empowering consumers to find the best value possible for their defined contribution payment. This is the way to unleash a productivity revolution in health care. The administration says it wants everyone to have access to low-cost, high-quality models, such as the Geisinger Health Plan. The way to bring that about is with a dynamic consumer marketplace in which those kinds of plans are rewarded financially for being more efficient and higher quality. And the way to bring that about is by giving people the control and financial incentive to become active, cost-conscious consumers both of the insurance they select and the delivery system by which they get their care. And that’s exactly what would happen under Ryan-Rivlin, which is why it would work and Obamacare wouldn’t.

Klein and others continue to tout the supposed cost-cutting potential of the various Medicare demonstrations and pilots created in Obamacare. To assume that these are the answer to the cost problem is really wishful thinking in the extreme. Medicare’s administrators have been trying for years to use the levers of payment to bring about more efficient health care delivery. The problem is that building a high-quality, low-cost network requires making distinctions among physicians and hospitals that Medicare has never been able to do. To cut costs, the government always resorts to blunt, across-the-board payment cuts that actually induce more inefficient behavior, not less.

That’s almost certainly why Foster, recently testifying before the House Budget Committee, quite plainly disagreed with Klein’s premise. Under questioning about what would work to bend the cost curve, he was, as usual, quite cautious. Nonetheless, he made it clear that he had more confidence in Ryan-Rivlin than Obamacare to bend the cost curve, because Ryan-Rivlin has the potential to unlock productivity improvements in a way Obamacare does not. I’m with Foster.

[Cross-posted on NRO.]

posted by James C. Capretta | 10:30 am
Tags: Ezra Klein, Ryan-Rivlin, Richard Foster, Medicare, chief actuary
File As: Health Care

The Darkening Skies over Obamacare

February 3, 2011

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”

February 3, 2011

[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

The Insurance-Benefit Canard

January 26, 2011 • Obamacare didn’t get mentioned until near the end of the president’s State of the Union address, but when the president did get around to talking about it, the content of what he said was predictable. He attempted once again to justify a full government takeover of American health care on the grounds that the new law is already providing vital new insurance protections to Americans. There were the obligatory anecdotes of people who, the president says, have already been protected by these new insurance rules.

Framing what Obamacare does in this way is misleading in the extreme. For starters, despite the impression the president is trying to create, Obamacare hasn’t banned pre-existing condition clauses from insurance plans yet. That doesn’t happen until 2014. So, as of today, there are still millions of Americans with such conditions who are uninsured, and Obamacare is doing nothing for them. The new “bridge” high-risk-pool program that is intended to help those with pre-existing conditions get coverage until the “big bang” reforms of 2014 has been an abysmal failure so far. Enrollment is anemic because the program is poorly designed, with premiums that are too high and unpredictable to attract subscribers. As of last month, there were only 8,000 people signed up with the program. The president and his team have drawn many of their anecdotes of “early beneficiaries” from this incredibly small pool of people, but the truth is that this aspect of the new law is more an indictment of its failings than a proof of its virtues.

The president would like the public to think that Obamacare is mainly about new insurance rules, which is why he now calls it “health-insurance reform.” But, of course, that’s not really an accurate description of Obamacare. It’s a massively expensive government takeover of American health care. It will spend trillions, raise taxes and premiums, and lead to inferior-quality care. It will disrupt insurance coverage for millions of people. The federal government will become the choke point for all major resource-allocation decisions in the health sector.

Based on what he said last night, the president would seem to be willing to jettison just about everything else in Obamacare — the entitlement expansions, the exchanges, the Medicare cuts, the taxes, the new long-term-care insurance program — so long as new insurance rules to remove lifetime caps and allow 26-year-olds to stay on their parents’ plan are retained. Perhaps Republicans should take him up on it.

posted by James C. Capretta | 10:24 am
Tags: State of the union, bridge, high-risk pools
File As: Health Care

Fixing Medicare

Five Steps to Reform
January 19, 2011

Simply repealing Obamacare won’t solve all the nation’s health care woes, which is of course why the rallying cry has been “repeal and replace.” One of the most difficult problems facing policymakers is how to fix Medicare, which has become a crushingly expensive entitlement.

Fortunately, there are some good ideas for reforming Medicare, as explained in a short paper that I recently wrote with Robert Moffit of the Heritage Foundation:

In the 21st century, a renewed Medicare should be firmly based on patient choice and market competition. Such reform could be achieved through the creation of a new system of “premium support,” where the government makes a direct and generous contribution to the health plan of an enrollee’s choice, and health plans and providers compete directly for beneficiaries’ health care dollars. Premium support would give future Medicare patients control over the flow of Medicare dollars and decisions, guarantee personal choice of health plans, and let them secure the best value for the money. This is the kind of consumer choice model that federal workers and retirees in the Federal Employees Health Benefits Program (FEHBP) enjoy. It is a popular and successful approach because it emphasizes personal choice among plans, and government oversight ensures consumer protection and transparency.

The full paper is available in HTML here, or as a PDF here.

posted by James C. Capretta | 2:30 pm
Tags: Congress, Medicare, health savings accounts
File As: Health Care

Reforming Health Care with “Defined Contributions”

January 19, 2011

Over at Kaiser Health News, AEI’s Tom Miller and I have an article describing how Congress enact a health-reform program that deals with the central issue of cost control while also achieving universal coverage without the need for a mandate:

Pro-competition, pro-consumer-choice advocates should press for reforms that would begin to convert existing, federally subsidized arrangements from open-ended benefit guarantees into "defined contribution" programs. The comprehensive and strategic approach we propose would apply defined contribution financing by taxpayers to all three major insurance coverage platforms — Medicare, Medicaid and private health insurance....

The prescription drug benefit, added to Medicare in 2003, provides one partial model for how to move toward a defined contribution approach. The government's payment for a beneficiary's Medicare drug coverage is fixed through competitive bidding each year, and it remains the same regardless of which plan the beneficiary selects. Seniors selecting more expensive plans than the average bid must pay the additional premium out of their own pockets. Those selecting less expensive plans get to keep the savings. Scores of insurers entered the program and competed aggressively with each other. The result is that costs were driven down, and federal spending came in 40 percent below initial expectations....

Read the full article here.

posted by James C. Capretta | 10:30 am
Tags: defined contributions, Medicare, individual mandate
File As: Health Care

The “Doc Fix” and Paul Krugman’s “War on Logic”

January 18, 2011 • During the yearlong debate over Obamacare, the law’s apologists returned over and over again to the supposed fiscal benefits flowing from its provisions as a top selling point. Pass Obamacare, they said, and we’ll have health insurance for everyone, painless cost-cutting to slow rising premiums, and deficit reduction to boot. Its win, win, win!

No one believed them, of course. The claim of deficit reduction may have provided a fig leaf to allow some wavering congressional Democrats to vote yes, but it didn’t convince a skeptical electorate. Most Americans have too much common sense to buy the argument that what the nation needs to get its fiscal house in order is a new trillion-dollar-plus entitlement program, piled on top of the unaffordable ones already on the books.

Sure, on paper the Democrats might be able assemble “offsets” to make it look like the program was “paid for.” But even a casual review of the legislation and associated analyses reveals what most people intuitively know to be the case: that Obamacare combines dead-certain entitlement expansion (for at least 30 million people, and probably many millions more) with budgetary sleight of hand and “pay fors” that are either phony or altogether implausible.

Nonetheless, as the House readies a repeal vote for this week, Obamacare enthusiasts are back at it again, claiming once again that Obamacare supporters are practitioners of fiscal discipline, while those who want to undo the largest expansion of government in nearly half a century are the budget busters.

To be sure, it’s a tough sell, but Paul Krugman of the New York Times is eager to give it a try nonetheless. He claimed in his Sunday column that the Republican contention that Obamacare is a budgetary disaster amounts to a “war on logic.”

But Krugman’s attack is itself illogical, and inaccurate too. He focuses most of his attention on the so-called “doc fix,” which is the periodic legislation passed by Congress to prevent deep and unrealistic cuts in what Medicare pays for physician services. Republicans have argued, accurately, that the accounting for Obamacare omits the “doc fix” spending, and that if it were included, the supposed deficit reduction from Obamacare would vanish altogether, even before the other gimmicks and implausible assumptions were exposed and removed.

Krugman contends that this Republican argument is illogical because, in effect, the real “baseline” of federal spending already includes higher physician fees. With or without Obamacare, Congress is going to spend more on physicians, Krugman suggests, therefore Obamacare shouldn’t get charged for it.

But that’s not what’s really going on here. If Krugman’s analysis were accurate, why does Congress go through the annual agony of a “doc fix” at all? Why haven’t they just passed a permanent solution already and gotten it over with?

The answer is that, while Congress doesn’t want to cut physician fees, it hasn’t wanted to pile the costs onto the national debt either. What has held back a permanent solution is the inability to find $200–$300 billion in acceptable “offsets” to make sure a permanent fix doesn’t add to the deficit.

When President Obama assumed office, he wanted his health bill and a permanent “doc fix” too, but he didn’t have enough flimsy offsets to grease the way for them both. So he came up with a new “solution”: use the offsets to pave the way for Obamacare’s spending, and exempt the “doc fix” from the need for offsets at all. This would create the perception of “deficit reduction” from Obamacare even as an unfinanced “doc fix” ran up the deficit by an even larger amount.

At the end of the day, even some Senate Democrats balked at this shameless sleight of hand and blocked the effort to pass an unfinanced and permanent “doc fix.” But the issue remains very much unresolved, and the administration has yet to disavow their push from last year to pay higher physician fees with borrowed money.

Krugman also seems completely unaware that the Medicare cuts that are supposed to pay for Obamacare’s entitlement spending are of the same type as the physician-fee cuts he now wants to assume away. They are arbitrary and unrealistic too, so much so that the chief actuary for Medicare considers them entirely implausible. He projects that if Obamacare’s Medicare cuts were allowed to remain in effect for long, Medicare’s payment rates would fall below those of Medicaid, which are so low that Medicaid patients often have trouble accessing care. And yet Obamacare’s apologists want us to believe we can safely erect a massive new entitlement based on the assumption of future savings from these cuts.

In truth, the Krugman critique doesn’t lay a glove on the Republican argument. He doesn’t even try to defend the CLASS Act, another new entitlement for long-term care. As a start-up program, CLASS collects $70 billion in front-loaded premiums during its first decade. Krugman and others want to count this money toward Obamacare, even though every analysis available shows CLASS will itself need a bailout when its costs balloon beyond ten years. And then there’s the so-called “Cadillac” tax that starts in 2018. The tax is so unpopular with Democratic constituencies that President Obama was never willing to collect it himself (if reelected, he will leave office no later than January 2017). But Obamacare’s defenders argue this tax can be counted on to produce trillions in new revenue beyond 2020.

If liberals and Democrats want to make the fight over Obamacare about taxes, spending, and the budget deficit, Republicans should allow them to do so. The public has already taken sides in this fight. Taxpaying Americans are never going to be convinced that the government has found a way to give away new benefits to millions of people, with no cost to them or anyone else.

[Cross-posted at Critical Condition]

posted by James C. Capretta | 1:56 pm
Tags: Medicare, doc fix, Paul Krugman, CLASS Act
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