Health Care


Reid 2.0: It’s Still a Budget Buster

December 19, 2009

The Obama White House and its congressional allies have tried all year to push their various bills through to passage by truncating the time between introduction and a decisive vote to the bare minimum. They figure the only way to get something passed is to minimize public review and scrutiny of whatever their latest idea is to engineer American health care from Washington, D.C.

To date, that tactic hasn’t worked out so well. In July, House Democrats tried to unveil a bill on the 14th for a planned vote on the 31st. A firestorm erupted, however, pushing back the vote into November. In the Senate, meanwhile, a series of self-imposed deadlines have been missed as Democratic pronouncements of inevitability have bumped up against the reality of steadfast and growing public opposition.

Nonetheless, Senate Majority Leader Harry Reid is running the same play again today, and very possibly with different results. He unveiled the latest version of his reform legislation this morning, filled to the brim with outrageous payoffs to buy the votes of holdout Senators. Virtually no one else has seen the bill before today, much less had a chance to give it the scrutiny it deserves. And certainly the public has not had a chance to weigh in. No matter. Senator Reid has simultaneously set in motion the procedures necessary to force a vote on his new health-care plan in a matter of hours, not weeks.

And yet, despite the unprecedented effort to short-circuit public review and input, it is likely that this latest version of the Reid plan will be just as unpopular as the previous one, and for many of the same basic reasons.

According to the Congressional Budget Office (CBO), the amended Reid plan would reduce the federal budget deficit by $132 billion over the period 2010 to 2019, but that is a mirage.

For starters, as CBO notes, the bill presumes that Medicare fees for physician services will get cut by more than 20 percent in 2011, and then stay at the reduced level indefinitely. There is strong bipartisan opposition to such cuts. Fixing that problem alone will cost more than $200 billion over a decade, pushing the Reid plan from the black and into a deep red.

Then there are the numerous budget gimmicks and implausible spending reductions. The plan’s taxes and spending cuts kick in right away, while the entitlement expansion doesn’t start in earnest until 2014, and even then the real spending doesn’t begin until 2015. According to CBO, from 2010 to 2014, the bill would cut the federal budget deficit by $124 billion. From that point on, it’s essentially deficit neutral — but that’s only because of unrealistic assumptions about tax and Medicare savings provisions. By 2019, the entitlement expansions to cover more people with insurance will cost nearly $200 billion per year, and grow every year thereafter at a rate of 8 percent. CBO says that, on paper, the tax increases and Medicare cuts will more than keep up, but, in reality, they won’t. The so-called tax on high cost insurance plans applies to policies with premiums exceeding certain thresholds (for instance, $23,000 for family coverage). But those thresholds would be indexed at rates that are less than health-care inflation — forever. And so, over time, more and more plans, and their enrollees, would bump up against it until virtually the entire U.S. population is enrolled in insurance that is considered “high cost.”

Similarly, the Medicare cuts assume that hospitals, nursing homes, home health agencies and others can survive with a permanent annual cut in their payment rates for presumed productivity gains. Medicare’s chief actuary has already signaled that this reduction could push one in five hospitals into insolvency, thus forcing them out of the Medicare program.

What’s more, the benefit promises are sure to expand well beyond what CBO has assumed. There are 127 million people living in households with incomes between 100 and 400 percent of the federal poverty line, but CBO assumes that only 18 million of them will get the new subsidized insurance under the Reid plan by 2015 because of rules that make most workers ineligible for assistance. But, if enacted, employers would find ways to push more workers into subsidized arrangements, and Congress would loosen the rules to make more people eligible. Costs would grow much faster than CBO currently projects. In addition, the Reid plan continues to include a new entitlement program for long-term care that every actuary who has looked at it says is a financial disaster waiting to happen. If passed, it would only be a matter of time before another federal bailout would be necessary.

It is now plain as day that the Reid plan has evolved into nothing more than a massive entitlement expansion, which subsidizes more people into an unreformed system with soaring costs. Several Senate Democrats claim to be strong fiscal conservatives. Their votes on the Reid legislation will provide conclusive evidence whether that’s true or not.

posted by James C. Capretta | 6:42 pm
Tags: Senate bill, Harry Reid, CBO, Medicare cuts
File As: Health Care

For Nelson, It Shouldn’t Be a Close Call

December 18, 2009

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

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

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

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

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

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

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

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

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

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

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

The Irony of Mandatory Payments to Profit-Hungry, Private Insurance Companies

December 15, 2009

Senator Joe Lieberman announced today that he is ready to support “health-care reform” now that both a new, government-run insurance option and the ill-fated Medicare “buy in” idea have been stripped from the legislation.

It’s not really surprising that Senator Reid and the White House, desperate to pass anything called “health care reform,” would succumb to Senator Lieberman’s demands to get his vote.

Still, though long in coming, the jettisoning of all flavors of the so-called “public option” — to appease Senator Lieberman, of all people! — must be an awfully bitter pill for the left to swallow. After all, what is the Reid plan now that those provisions are out? In essence, it’s a requirement that all Americans pay health insurance premiums to secure qualified coverage. And if there is no government-run option, the public will have no choice but to pay their premiums to private insurers. Yes, that’s right. The Democratic party is on the verge of enacting a requirement, enforced with federal tax penalties, which would effectively require hard-working Americans to hand over even more of their wages to profit-hungry, private insurance companies.

Yes, the Reid legislation may still include the half-baked idea to offer national, not-for-profit insurance plans out of the Office of Personnel Management. But no such plans currently exist in the marketplace, and it’s hard to see how they could get up and running and stay viable without crossing into the no-fly zone of a government-run option that would push Senator Lieberman out of the yes column. The not-for-profit concept is therefore either non-viable window dressing to make liberals feel better, or a foot in the door that will draw opposition when its details are revealed.

Of course, even without a new government-run insurance plan, the Reid bill is a policy monstrosity. It’s filled to the brim with mandates, fines, and new federal controls which will erode the quality of American medicine and lead to government-driven rationing of care. It’s a governmental takeover by regulation and bureaucracy, not program enrollment.

Still, it’s easy to see why liberal Democrats are screaming over the Lieberman apostasy. There’s really no industry they despise more than private health insurers. And now they are being told they have no choice but to vote for a bill that would hand over to those greedy insurers a captured marketplace of guaranteed insurance purchasers. Ironic indeed.

posted by James C. Capretta | 3:46 pm
Tags: Joe Lieberman, Harry Reid, mandates, Office of Personnel Management
File As: Health Care

Harry Reid's Ticking Entitlement Time-Bomb

December 14, 2009

Senate Majority Leader Harry Reid is scrambling today to pick up the pieces from his collapsing “breakthrough deal” between moderates and liberals. It seems the Senate’s top Democrat rushed out with a compromise plan that none of the critical players had actually agreed to support.

At the center of the storm is Connecticut Senator Joe Lieberman, who is an independent but caucuses with his Democratic colleagues. Because of how he was last reelected — in spite of, not thanks to, the national Democratic party — Senator Lieberman owes the Obama administration nothing.

For months, Senator Lieberman has warned his colleagues of the dangers of pursuing an excessively partisan health-care agenda. In August, he told CNN that it would “a real mistake” to jam through an unpopular health bill with no Republican support and passionate public opposition. And he has been sounding the alarm for months that the emerging Democratic plan is too heavy with entitlement expansions at a time when the nation’s finances are already drowning in unaffordable commitments. In an interview in October, he said that Democrats were “trying to do too much” in the health-care bill and were unnecessarily creating additional risks for an already over-burdened federal budget.

But his warnings have fallen on deaf ears. Ever since the August town-hall meetings, the Obama administration and the Democratic leadership in Congress have been rushing full speed ahead to try to pass a highly partisan and bloated bill that they know is strongly opposed by a majority of voters. Their goal is to pass it as fast as possible so that they can lock in a massive entitlement expansion with time to recover politically before the 2010 midterm election.

Senator Lieberman has done the country a great service by, rather mildly, voicing his concern and disagreement with the prevailing Democratic approach. In recent days, he has said that, to get his support, the health-care bill must drop any and all variations of the public option (including the flawed Medicare “buy-in”), as well as the new long-term care entitlement — the so-called CLASS Act — which would almost certainly lead to unfunded obligations down the road. Senate liberals, not wanting to compromise with Lieberman, are howling at the prospect of having their long-cherished goal of “universal coverage” boil down to forcing tens of millions of Americans to pay premiums to profit-greedy, publicly-traded insurance companies.

But even if Senate Democrats made some concessions to Lieberman, the Reid version of Obamacare would still be a runaway entitlement expansion and budget buster. That’s because the primary entitlement it promises is a ticking budgetary time-bomb certain to go off in a few years time.

The Reid bill promises households with incomes between 100 and 400 percent of the federal poverty level that the premiums they owe for health insurance will be limited to a fixed percentage of their incomes. In 2016, a family at the poverty line would pay no more than 2.1 percent of its income toward health insurance. The premium cap would increase on a sliding scale until it reaches 10.2 percent for families with incomes between 300 and 400 percent of the poverty line. The Congressional Budget Office (CBO) expects this entitlement, plus the Medicaid expansion and tax credits for small businesses, to cost about $200 billion by 2019, and to grow 8 percent annually every year thereafter.

But even that staggering cost doesn’t reveal the true price tag of the Reid bill because, expansive as the entitlement is, Senate Democrats make most workers ineligible for it. Workers who are offered qualified coverage by their employers, with employee premiums below specified “affordability” thresholds, would have no choice but to take their job-based plan with no subsidization. True, the vast majority of the premiums would be paid by their employers — but, of course, when an employer pays for health insurance, it is really the worker who pays in the form of lower cash wages. That is the consensus of credible economists, including those working at CBO. There is a federal tax preference for employer-paid premiums, but it is worth much less for most low- and moderate-wage workers than the subsidies the Reid bill would hand out in the exchanges.

Let’s imagine what this would mean in practice in the year 2016, by which time (according to CBO estimates) the average cost of family coverage will be $14,100. Consider a hypothetical family of four with an income at 200 percent of the federal poverty line (or about $48,000 for a family of four in 2016). Under the Reid plan, that family would pay 6.5 percent of its household income as a premium, or $3,120. Their employer would pay a fee of $750 to cover some of the cost. The rest of the premium — $10,230 in this example — would get paid by the federal government.

By contrast, a worker with the same total compensation from his employer but with job-based insurance would enjoy a tax advantage of about $4,300 from employer-paid premiums. That's nearly $6,000 less in governmental support than the worker who is eligible for direct subsidization in the exchange.

According to the Census Bureau, in 2008 there were 127 million Americans under the age of 65 living in households with incomes between 100 and 400 percent of the federal poverty line. But CBO assumes that in 2015, only 18 million people would get subsidized premiums in the Reid plan.

But of course it will never work. If enacted, employers would find ways to place more low-wage workers into the exchanges, thus driving up the cost of subsidized insurance. Congress would also respond to political pressure and liberalize the eligibility rules. Like almost every other entitlement ever enacted, this one will grow far beyond current projections.

Truth be told, though, that’s what most Democrats want. They just don’t want to face up to the costs at this time, in this bill. Better to get the entitlement in place first, and then let it grow naturally as entitlements always do.

Senator Lieberman has been pushing his colleagues all year to produce a bipartisan and more measured bill that enjoys broad public support. That’s the only sure way to prevent enactment of a runaway entitlement sold on dubious assumptions and gimmickry. It’s now within Senator Lieberman’s power to bring about a major course correction. For the sake of the country, he shouldn’t hesitate to force his Democratic colleagues to do what they would not do voluntarily.

posted by James C. Capretta | 6:04 pm
Tags: Harry Reid, Joe Lieberman, CLASS Act, Senate bill
File As: Health Care

From Awful to Worse

December 14, 2009 • In the new Weekly Standard, I have a piece co-written with my New Atlantis and EPPC colleague Yuval Levin. We discuss how Harry Reid's latest proposal is even worse than his original one. An excerpt:

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

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

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

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

The entire piece is here.

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

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

Unwieldy, Complex, and Arbitrary

December 8, 2009

At the Mirror of Justice website, Robert Hockett takes exception to columnist Charles Krauthammer’s arguments against the current health-care bills being considered in Congress.

First, Hockett objects to Krauthammer’s accusation that the bills are sprawling, inelegant, 2,000-plus page behemoths. Hockett argues that this is the norm whenever Congress attempts a large-scale reform of a complex sector of American society. To condemn the current health-care bills on this score would be to suggest that no health reform legislation should be considered — because any credible one would look equally unwieldy once the congressional sausage-making process got a hold of it.

But Hockett misses Krauthammer’s larger point. Yes, the bills under development in Congress are unwieldy messes partly because the subject is health-care. But the bills are much more unwieldy, complex, and bureaucratic because the authors start from the premise that the federal government has the capacity to centrally plan one-sixth of the American economy from Washington, D.C. That’s the main reason the bill contains scores of new agencies, mountains of regulations, and pages and pages of taxes, mandates, and fees.

Krauthammer is also right that, if enacted, all of this complexity would create perverse incentives and unintended consequences. For instance, as this paper from the Heritage Foundation demonstrates, the Senate bill would create powerful financial incentives for employers to discriminate against low-wage workers from low-income households. Employers that hired teenagers from poor neighborhoods could face penalties for not complying with the government’s new health insurance requirements, but they would face no such penalties if they hired teenagers from more well-to-do families.

Moreover, the bills would create massive inequities by treating households with identical incomes very differently depending on where they got their health insurance. At a recent session at the American Enterprise Institute, Eugene Steuerle of the Urban Institute presented data which shows that a family of four with $42,000 in compensation from an employer in 2016 would get $7000 more in governmental subsidization if they got their insurance through an “exchange” instead of at the workplace. This massive disparity is created by the complex rules in the bill which were written into it to artificially hold down costs. But, if enacted, it would only be a matter of time before Congress greatly increased the cost to the government by giving the same subsidy to everyone with the same income.

Krauthammer is also correct that many of the fines and fees are arbitrary. For instance, the fine for not obtaining health insurance is set at $750 in the Senate bill. Was this picked because it was found to optimize coverage at the lowest possible amount? No. As Jon Gabel explains in this Health Affairs blog post, no effort has been made to calibrate where the fine should be set to induce robust participation without being overly punitive. What’s happened instead is that Congress picked an arbitrary number for the fine and crossed their fingers that it would result in favorable budget and coverage numbers. There wasn’t any sophisticated modeling of the effectiveness of the $750 fee. It’s a guess, and nothing more.

Finally, there is the issue of what Krauthammer proposes as an alternative. For starters, Hockett says that savings from tort reform are overblown, but the Congressional Budget Office disagrees. CBO’s latest estimate shows the federal government alone would save $54 billion over ten years from a serious reform plan. Private costs would fall even more. In addition, Krauthammer’s proposal to convert today’s tax preference for job-based insurance into something that is fair, uniform, and limited — a proposal also suggested by Senator John McCain in his presidential campaign last year — would have dramatic implications in the health sector. All American households would have access to an equal level of insurance subsidization, thus solving the uninsured problem. In addition, there would much more pressure for decentralized efforts to control costs, without any need for clumsy governmental efforts which always lead to queues and lower-quality care. Yes, such a reform would be difficult to pass. But mainly because President Obama and his allies oppose it. They want a reform that is centered on full governmental control of health care. That’s why the bill is 2,000 pages and filled to the brim with governmental micro-management of every corner of the health sector. It doesn’t have to be so.

[Cross-posted to Mirror of Justice.]

posted by James C. Capretta | 10:12 am
Tags: Robert Hockett, Charles Krauthammer, central planning
File As: Health Care

The Health Care Bill in the Senate

December 4, 2009

I have a piece over at First Things on the prospects of the health care bill currently under debate in the Senate, from a possible amendment on abortion coverage to potential hold-outs such as Senator Lieberman:

While Senator Reid was able to garner sixty votes to proceed to his bill before Thanksgiving, it is much less clear that he has the votes locked up to pass it. He will need sixty senators at several more steps along the way to provide their assent, and some who voted with him to proceed to the legislation have publicly stated they would not now vote to stop debate unless significant revisions are made to the bill.

You can read the whole thing here.

posted by James C. Capretta | 3:37 pm
Tags: Senate health bill, abortion coverage, Harry Reid, Joe Lieberman
File As: Health Care

Debating Cost-Control

December 4, 2009

In my latest column for Kaiser Health News, I examine competing claims about the health care legislation now in Congress:

In recent days, a growing chorus of voices has expressed alarm that the health care legislation emerging in Congress does not come close to “bending the cost-curve” as President Obama has promised it would. David Broder and Robert Samuelson in the Washington Post, David Leonhardt in the New York Times and Harvard Medical School Dean Jeffrey Flier on the editorial page of the Wall Street Journal have all, to varying degrees, said the health care plans being developed by Congressional Democrats would vastly expand governmental health care commitments without fundamentally altering the arrangements that today push costs rapidly upward every year.

Now, top officials in the Obama administration are pushing back hard with their own “narrative” on the cost-containment potential of the health care bills in Congress. Specifically, White House Budget Director Peter Orszag and Director of the Office for Health Reform Nancy-Ann DeParle contend in a series of recent interviews that the health care plan introduced by Senate Majority Leader Harry Reid is more than sufficient to meet the “bend the curve” test. Their views have been echoed by MIT Economist Jonathan Gruber, who has been arguing that the Reid bill contains every conceivable idea to slow the pace of rising costs. And Ronald Brownstein of The Atlantic has hailed Senator Reid’s legislation as a “milestone” in the health reform journey because of its superior cost-control provisions.

To get a sense of who’s right here, some perspective is necessary. Both the House-passed bill and Senator Reid’s proposal would put in place the most costly entitlement expansion in more than four decades. They would add millions of households to the Medicaid program and promise all Americans between about 100 and 400 percent of the federal poverty line — some 127 million people under the age of 65 in 2008 — that their health insurance premiums will not exceed a certain percentage of their incomes. They would also extend subsidies to small businesses offering insurance coverage. The Congressional Budget Office expects the combined federal cost of these new commitments to reach about $200 billion by 2019 and to increase eight percent annually every year thereafter.

You can read the whole thing here.

posted by James C. Capretta | 12:07 pm
Tags: Jeffrey Flier, Robert Samuelson, David Leonardt, David Broder, Peter Orszag, Nancy-Ann DeParle, Harry Reid, Nancy Pelosi, Ronald Brownstein
File As: Health Care

On Rosy Premium Scenarios

November 30, 2009

As the Senate starts its debate of the health-care bill introduced by Senate Majority Leader Harry Reid, the back-and-forth has intensified over what the legislation would do to insurance premiums and rising costs in the coming years.

Over the Thanksgiving break, M.I.T. economist Jonathan Gruber released a short paper in which he claimed the Reid bill would reduce premiums for people buying insurance in the individual market. It was clear from a story in Politico that the Obama White House was gearing up to argue the Gruber analysis was proof positive of the virtues of the Senate legislation. Unfortunately for Team Obama, Gruber’s paper was quickly shot down by a new study from the Congressional Budget Office (CBO). CBO estimates that the Reid bill would drive premiums up, not down, in the individual market — by 10 to 13 percent compared to current law. For family coverage, the Reid bill would increase premiums by, on average, $2,100 in 2016, according to CBO. So much for the argument that Obamacare will cut premium costs across the board. It clearly won’t.

But even this CBO analysis is terribly optimistic. For weeks, experts have been warning that the Senate legislation would lead to serious “adverse selection” in the individual and small-group insurance markets. Adverse selection occurs when, on average, the pool of insured lives becomes less healthy over time compared to a relevant comparison group. The Senate bill would require insurers to take all comers, with heavily regulated rates. These rules would help those with chronic conditions get less expensive coverage. But they would also drive up premiums for the young and healthy. If the healthier people left or stayed out the insurance risk pool, premiums for those who remained would go up quite dramatically. Indeed, that’s exactly what Wellpoint, a large national insurer, predicted would occur under the bill prepared by Senate Finance Committee Chairman Max Baucus, which formed the basis of much of the Reid plan. The Wellpoint actuaries estimated that, under the Baucus bill, premiums for a person at the average age and in average health would go up by more than 50 percent in the individual insurance market in California, and by more than 20 percent in the small-group market.

CBO argues that risk selection problems will be mitigated by the presence of new insurance subsidies, penalties for those who don’t get coverage, a once-a-year enrollment window which will limit the opportunity to come back into insurance, and the tendency for people to comply with mandates even if they are costly. But, as others have shown, even with subsidies, the cost of coverage for many low and moderate wage families will be very substantial. Many people could reduce their costs if they paid the penalty instead of premiums and signed up with insurance only when they really needed it. Would the fact that they might have to wait a few months before getting insurance be enough to keep them in coverage all year? Hard to predict. In fact, as pointed out here, it appears that none of most-cited models used to estimate the impact of health-reform plans, including CBO’s, has an explicit capacity to calibrate insurance take-up rates based on the penalties imposed on those who go without coverage. Apparently, the premium estimates are based as much on judgment as analytics, and CBO’s judgment is clearly on the optimistic side. But what if they are wrong? What if adverse selection is more pronounced, as many experts are predicting? At a minimum, before any votes are cast, CBO should make it clear how sensitive their premium estimates are to their assumptions about the risk pool. That way Senators could decide for themselves what to believe.

posted by James C. Capretta | 6:11 pm
Tags: CBO, Reid bill, Jonathan Gruber, adverse selection, risk pools
File As: Health Care

A $4.9 Trillion Spending Increase

“Bracket Creep” and the Return of Tax-and-Spend
November 19, 2009

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

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

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

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

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

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

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

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

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

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

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

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