Health Care

OMB in the Health-Care Driver’s Seat, for Now

February 16, 2009

In this piece in today’s Washington Post, advocates for Obama-style health reform express anxiety that the withdrawal of former Sen. Tom Daschle’s nomination to be Secretary of the Health and Human Services (HHS) has set back the Administration’s health policy agenda for months.


But it seems just as likely that Obama’s health agenda is still moving forward, just with the Office of Management and Budget (OMB), not HHS, in the driver’s seat—at least for now.

OMB’s power tends to rise at the beginning of a new presidency anyway. Cabinet departments and agencies take months to get re-organized when their political leadership leaves en masse, as they did at HHS on January 20th. That leaves a power vacuum which OMB’s staff is eager to fill.

Meanwhile, the calendar dictates the need for speed. Obama is scheduled to deliver a State of the Union-style address to Congress on February 24th and a budget document two days later, barely a month after taking office. There has been no time to run an elaborate consensus-building process, with full engagement from every office of government. With such tight deadlines, the only way to get the job done is to give OMB the authority to pull together the data and options for a decision-making process tightly controlled by a few key White House aides.

It also doesn’t hurt OMB’s relative power position that the new Director, Peter Orszag, is seen as a health policy expert in his own right. During his two-year tenure at the Congressional Budget Office (CBO), he devoted much of his time to researching and commenting on the reasons for rapidly rising health-care costs.

Conservatives shouldn’t take too much comfort in the strong role OMB is undoubtedly playing in setting Obama’s first-year agenda, though. True, there is an institutional culture in favor of spending restraint at OMB, but that impulse is always set aside if it conflicts with the president’s agenda, no matter who is sitting in the Oval Office.

Plus, Orszag is not going to be a champion of market-based reforms in health care. While at CBO, he pushed for “comparative effectiveness research” and a stronger role for the federal government in cost-control efforts. Consequently, what we are likely to see in Obama’s first budget are deep cuts in Medicare’s payment rates for private insurance plans, hospitals, and pharmaceutical manufacturers. The savings will be used to either cut the budget deficit or enroll more people in public insurance, or both. These reforms will look good on paper, as price controls always do, but they won’t make health care provision any more efficient, which is the only way to control costs without rationing.

[Cross-posted at the Corner]

posted by James C. Capretta | 2:25 pm
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CBO’s Tutorial

February 13, 2009

This week, the new Director of the Congressional Budget Office (CBO), Doug Elmendorf, delivered important testimony to the Senate Budget Committee. His full, written presentation is available here.

Health policy expert Bob Laszewski helpfully noted at Healthcare Policy and Marketplace Review that, during the back and forth at the hearing, Elmendorf delivered these gems:

The cleanest and strongest lever that [the Congress has] for private health care [reform] is the tax exclusion. Many analysts would agree that adjusting that exclusion can be very beneficial for health insurance coverage and for ensuring a more efficient health care system.... In the public sector...the comparably clean and strong lever would be increasing cost-sharing by Medicare beneficiaries.

It’s not every day that Congress gets such clear and sound advice.

In his written statement, Elmendorf made similar points which were just as striking. He said a consensus has emerged among analysts that the country needs to move away from “fee-for-service” insurance, which is the dominant form of coverage provided in Medicare. Fee-for-service rewards volume, leads to fragmented and uncoordinated care, and undermines incentives for efficient delivery of services.

He also said the current tax preference for employer-paid health insurance “dampens incentives for cost control because it is open-ended.” Replacing or restructuring the tax preference “would encourage workers to join health plans with higher cost-sharing requirements and tighter management of benefits.”

Fixing heath care in the United States to broaden coverage and slow the pace of rising costs mainly requires getting the financial incentives right. Today, through the tax law and public programs, the federal government is providing a strong incentive for more expansive insurance and ever-increasing use of services of marginal value. The first order of business in reform should be to fix existing public policy to encourage more cost-conscious consumption.

That will not be easy for Congress to do. No politician wants to begin reform by forcing constituents to face financial trade-offs. But, as Elmendorf’s testimony made clear, do it they must—else we are headed toward unbearable financial burdens for both the government and households.

The full hearing can be viewed by clicking on the webcast listed for February 10th at the Senate Budget Committee’s website, available here.

posted by James C. Capretta | 5:32 pm
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Permanently Altering the Path of Spending

February 12, 2009 • I took part in a panel discussion today on the stimulus bill, Obama’s health care plan, and more. The entire conversation was taped by PJTV, and is available as a webcast here.

posted by James C. Capretta | 2:36 pm
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What’s Wrong with “Comparative Effectiveness Research”?

February 11, 2009

[Cross-posted at the Corner]

Let’s set aside the issue of whether funding for a new “comparative effectiveness research” (CER) program belongs in a “stimulus” billLet’s instead ask: Is CER a good idea on the merits?
In theory, CER is intended to ensure that medical decisions are grounded, whenever possible, in empirical evidence. The government would pay researchers to collect data and conduct experiments to determine what medical procedures actually improve patient health. That seems reasonable enough: Too often, patients receive care for which there is little evidence demonstrating effectiveness. 
But CER is only going to be beneficial to our health if the research is well-executed and put to good use. This raises a new question: Who is calling the shots, cost-conscious consumers or the government? 
In the hands of consumers, new evidence on efficacy, especially if comes from many sources, can be weighed against other concerns. That’s crucial, because as Scott Gottlieb demonstrates i
n this excellent piece, evidence from CER will rarely be definitive enough to mandate specific judgments on treatment options. 
By contrast, government bureaucracies don’t do nuance and subtlety very well. If the federal government is in charge, the tendency will be to take single studies and use them to make decisions for the entire population. 
That’s why Betsy McCaughey was right to say in
this piece that the CER funding in the “stimulus” legislation is really the first installment of Obamacare. The president and his allies in Congress believe that the federal government is up to the task of managing the health sector. 
But evidence from around the world indicates that centralized government control always leads to price controls, under-funding of institutional care, arbitrary restrictions on access to new drugs and technology, and a drying up of investment in medical innovation. That’s certainly not “stimulus,” or the kind of health-care “change” the public wants.

posted by James C. Capretta | 4:07 pm
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The House’s Hidden Employer Mandate

February 9, 2009

 [Cross-posted at the Corner]

The House-passed “stimulus” bill includes a little-noticed provision which would impose substantial new costs on employers—exactly what is not needed right now with so many companies struggling to maintain profitability.

Under current law, laid off workers can elect to stay on with their former employer’s health plan (so-called “COBRA” coverage), but the displaced workers have to pay the “full” premium associated with the plan and find other coverage after eighteen months.

Even though employers don’t have to pay an explicit subsidy for COBRA enrollees, the program is nonetheless costly because it suffers from “adverse selection.” COBRA enrollees pay premiums based on average plan costs, but they tend to be older and have more costly conditions than active workers, so their health care costs exceed the premiums they pay. Previous studies have estimated costs for the average COBRA enrollee at 145% of premium payments. Economic logic indicates these extra costs are passed on to current workers in the form of reduced cash wages, or perhaps a smaller workforce.

Now, the House has passed a provision—section 3002(b) of the stimulus bill—which would require employers to extend the period of COBRA eligibility beyond eighteen months for anyone with at least ten years of service with the firm or anyone who is at least 55 years old (this is in addition to a provision establishing a temporary federal subsidy at 65 percent of premium costs). These special categories of former employees could stay enrolled in a COBRA plan until they become eligible for Medicare at age 65.  This would mean that a thirty-something displaced worker could potentially stay enrolled in a former employer’s health plan for three decades after separation.

The HR departments for large employers are looking at this provision with great alarm, as indicated in this policy brief. PricewaterhouseCoopers produced an analysis which pegs the ten-year cost of this provision at $39 billion to $65 billion just for those current COBRA-eligible workers age 55 to 64. The estimated costs would be even higher if the analysis assumed, as is reasonable, that many more workers would elect early retirement if they were assured of access to group-rated insurance.

What would employers do if faced with the costs of implementing this provision? It’s fairly predictable.  They would hire fewer workers, and pay their current employees less. Not exactly “stimulus.”

Indeed, this is exactly the kind of complex provision which should be considered by Congress only after careful study and a hearing or two to avoid unintended consequences. Certainly it has no business on a bill purportedly aimed at promoting short-term job growth. Unfortunately, logic and reason may not be enough to prevail in the current mad-dash rush to “pass something.” 

posted by James C. Capretta | 7:18 pm
File As: Health Care

Daschle’s Downfall

February 4, 2009

Over at National Review Online, I discuss the opportunity the withdrawal of Tom Daschle’s nomination for HHS secretary presents to President Obama:

The president says he wants to build reform of health care on a broad base of bipartisan support and consensus. In fact, Daschle said that was his goal as well, but conservatives never really believed him. The divisive issue in health care is cost-control, and Daschle’s book is a battle cry for the Left’s point of view that only the federal government, not markets, can bring financial discipline to the system. Then there is the matter of entitlements. Obama says he plans to build bipartisan support to finally address the nation’s long-term budgetary problems, which stem primarily from the escalating costs of Medicare and Medicaid, as well as Social Security. If he is serious about tackling entitlements, he needs someone at HHS who actually wants to do it. There is nothing in Daschle’s record to indicate he was interested or prepared to make tough decisions which would alienate his base of political support.

So what does this mean for Obama’s selection criteria?

Read the whole thing here.

posted by James C. Capretta | 5:43 pm
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Accountable Care Organizations

February 2, 2009

Last week, the journal Health Affairs published an important article calling for the creation of “Accountable Care Organizations” in the Medicare program.

Reform of how health care is actually delivered to patients is the Holy Grail of health policymaking. The delivery system can be broadly understood to be those processes by which physicians and institutions provide care to patients. (How do patients come into contact with care providers? What happens to them when they do?) Health care in the United States is costly because, in most instances, no one is in charge of making the delivery system patient-focused and cost-effective. Rather, there is a strong incentive for autonomous and unaffiliated small practices to maximize their revenue by providing ever-increasing numbers of services to patients.

The authors of the Health Affairs piece—Elliott Fisher, Mark McClellan, John Bertko, Steve Lieberman, Julie Lee, Julie Lewis, and Jonathan Skinner—have been studying the problems in the nation’s delivery system from a number of governmental and academic vantage points for years. They are truly the experts; their proposal deserves a careful review.

What they are suggesting is creative, although it raises a lot of questions. From experience, they know there is fierce political resistance to switching from fee-for-service financing to capitation (payment of a fixed amount per person). Seniors worry that HMO-style organizations have strong incentives to withhold needed care.

And so, the authors bypass the beneficiaries and go straight to the doctors and hospitals. They suggest allowing doctors and hospitals to voluntarily join up with others in “Accountable Care Organizations,” or ACOs. ACOs would have to be capable of accepting capitated payments for all Medicare-covered services—and willing to be held accountable for the results. The physicians and hospitals participating in an ACO would keep 80 percent of any savings that result from holding costs below baseline projections, and there is a presumption that a beneficiary would follow his primary care doctor into an ACO environment, if the doc signed up with one.

It is certainly an intriguing approach. It could be the catalyst for the creation, nationwide, of new, integrated, provider-owned legal structures. It would be voluntary all around, but physicians would likely find it attractive because of the potential financial rewards. And beneficiaries wouldn’t necessarily lose their rights under current Medicare.

But is it too good to be true? Would it really be possible to move millions of Medicare beneficiaries into a capitation-based system without their explicit consent? What would happen if a beneficiary wanted care inside and outside of an ACO? Could he get it? And shouldn’t competition play a role anyway, with beneficiaries getting to choose among competing ACOs based on price and quality? Otherwise, what would be the catalyst for ongoing improvement?

Still, despite these questions, the article deserves to be widely read. Certainly, its bottom-line message needs to be heard loud and clear by policymakers: The United States urgently needs delivery-system reform, and that requires a fundamental rethinking of Medicare’s reimbursement model.

posted by James C. Capretta | 6:01 pm
File As: Health Care

Budgetary Advice, Sort Of

January 29, 2009

On Tuesday, some of Washington’s leading budget experts released a public memo to the President providing advice on what he should do in his upcoming 2010 budget.

The list of signatories is a who’s who of seasoned fiscal policy experts. There are three former directors of the Congressional Budget Office (CBO), a former director of the Office of Management and Budget (OMB), and several others with long experience in senior level positions in the White House and Treasury. In short, these people know what they’re talking about. And this is what they said to President Obama:

Although we are rightly absorbed by our short-term problems, the long-term budget situation ultimately poses graver challenges to the success of your presidency.... Your budget should make it very clear that you take the long-term budget problem seriously. It must quantify the cost of our long-term promises and explicitly state the goal of achieving fiscal sustainability.

That’s right. The country is in the midst of a severe economic contraction and financial crisis, but we are also heading into the years marked by the retirement of the baby boom generation. Very shortly, there will be a tidal wave of new applications for Social Security and Medicare benefits, and spending pressures will grow.

But what should President Obama do about the long-term budget imbalance? Here, the experts have precious little to offer:

First, you should give high priority to putting Social Security on a sound fiscal basis to reduce future deficits and show our creditors that we are taking serious steps to manage our national finances. Second, you should take quick action to reduce the growth of Medicare by shifting to payment systems that reward effective treatments and discourage wasteful spending.

Certainly, with regard to Social Security, there are many different plans available to close the program’s financing gap, so it is perhaps understandable that their advice to Obama was not overly specific.

But Medicare is a different story. Yes, Medicare should revamp its payment systems to reward efficiency. But how, exactly? Congress and HHS have been working on just that for decades, with almost nothing to show for it.

The reality is that Congress and the federal bureaucracy are simply incapable of engineering a more cost-effective system for delivering care to the beneficiaries because political pressures always ensure protection of incumbents.

What’s needed is a structural change in the program so that beneficiaries, not the bureaucracy, control the use of the entitlement. Beneficiaries should be given the freedom—and the responsibility—to select a delivery system for their care, as well as the insurance they would like to finance some of the costs. With cost-conscious consumer choice and appropriate government oversight, competition in the marketplace can bring about the kind of change and productivity improvement that Congress and the bureaucracy have never been able to deliver.

posted by James C. Capretta | 11:41 am
File As: Health Care

The “Stimulus” Bill and Health Care Rationing

January 27, 2009

The House is racing toward passage of an $815 billion economic “stimulus” bill this week (the full text is available at The Congressional Budget Office issued a cost estimate for the measure yesterday.

There are many features of the bill that are troubling. The federal government will need to borrow hundreds of billions of dollars for the spending, but much of it will do nothing to jump-start the economy. So the federal budget deficit will increase—dramatically and without a commensurate economic payoff.

What is just as disturbing is that the bill includes a large number of far-reaching policy changes that have gotten little scrutiny because of the crisis atmosphere and rush to passage.

For instance, in health care, the Democratic majority is laying the foundation for government rationing of health care—and the public has heard virtually nothing about it.

The bill provides $1 billion for a new program of comparative effectiveness research. The idea is to study more carefully medical practice patterns, new products, and new technology to determine what is cost-effective. In the United Kingdom, a similar program run by the National Institute for Clinical Evidence is used to deny payment by the government for certain drugs and procedures that are said to be “cost-ineffective.”

Democratic lawmakers will deny that rationing is their intent, but that is not credible. Why create a government program to study what’s cost-effective if not to use the data to inform payment decisions in public programs? The problem is that this kind of research inevitably includes value judgments best left to the market (for instance, how much is an extra year of life worth?) and the data can often be interpreted in more than one way.

It is probably inevitable that President Obama and his allies in Congress will succeed in passing a large portion of their agenda in the early days of 2009. The public voted for change in November 2008—and change they will get.

But that does not mean the Democratic majority should be given a pass when they tuck away sweeping and ill-conceived policy changes in otherwise unrelated legislation.

President Obama has said that he hopes to secure strong bipartisan support for his health care reform agenda later this year, but his allies in Congress are pulling together the stimulus bill in a way that makes bipartisan cooperation less, not more, likely as the year progresses.

[UPDATE: Some More specifics on the money and the politics of the stimulus bill.]

posted by James C. Capretta | 6:45 pm
File As: Health Care

Where’s the Money Going to Come From?

January 13, 2009 • President-elect Barack Obama went on ABC News’s This Week on Sunday for an interview with George Stephanopoulos and had some very interesting things to say about health care and fiscal policy (the full transcript is available here). Consider this exchange:

STEPHANOPOULOS: But you’re going to face some real hard choices. You brought up health care a couple of times—

OBAMA: Absolutely.

STEPHANOPOULOS:—in this interview already. During the campaign you said you would pay for health care by repealing the Bush tax cuts on the wealthy. According to the CBO, you’re going to get a $1.2 trillion to $1.8 trillion deficit even if all of the tax cuts are repealed.

OBAMA: Right.

STEPHANOPOULOS: So how do you pay for health care?

OBAMA: Well, you know, these are going to be major challenges. And we’re going to have to make some tough choices. Now what I’ve done is indicated to my team that we’ve got to eliminate programs that don’t work.

And I’ll give you an example in the health care area. We are spending a lot of money subsidizing the insurance companies around something called Medicare Advantage, a program that gives them subsidies to accept Medicare recipients but doesn’t necessarily make people on Medicare healthier.

And if we eliminate that and other programs, we can potentially save $200 billion out of the health care system that we’re currently spending and take that money and use it in ways that are actually going to make people healthier and improve quality.

So what our challenge is going to be is identifying what works and putting more money into that, eliminating things that don’t work, and making things that we have more efficient.

I’m not suggesting, George, I want to be realistic here, not everything that we talked about during the campaign are we going to be able to do on the pace that we had hoped.

STEPHANOPOULOS: Let me press you on this, at the end of the day, are you really talking about over the course of your presidency some kind of a grand bargain? That you have tax reform, health care reform, entitlement reform, including Social Security and Medicare where everybody in the country is going to have to sacrifice something, accept change for the greater good?


STEPHANOPOULOS: And when will that get done?

OBAMA: Well, the—right now I’m focused on a pretty heavy lift, which is making sure that we get that reinvestment and recovery package in place. But what you describe is exactly what we’re going to have to do.

What we have to do is to take a look at our structural deficit, how are we paying for government, what are we getting for it, and how do we make the system more efficient?

STEPHANOPOULOS: And eventually sacrifice from everyone.

OBAMA: Everybody is going to have to give. Everybody is going to have to have some skin in the game.

So, the president-elect says he is looking for ways to save $200 billion per year in health care to pay for reform, but the only specific savings item he cites—retrenchment of the Medicare Advantage program—would save about $16 billion in 2014, according to a recent estimate by the Congressional Budget Office of the proposal most often mentioned by Congressional Democrats. (We’ll leave for another day a lengthier discussion of Obama’s characterization of Medicare Advantage. Suffice it to say that seniors losing benefits due to the Obama payment cut will not view the change as an “efficiency gain.”) The obvious question is: where’s the other $184 billion going to come from? I suspect no one in the Obama orbit has a credible answer.

Indeed, it is a bit puzzling to listen to Obama and his team in recent days. There is a sudden, albeit abstract, interest in restoring fiscal discipline over the long run. Apparently the president-elect is even interested in pursuing bipartisan reform of the Social Security and Medicare programs, after essentially swearing off any cuts during his campaign. The transformation is certainly welcome. But it is hard to take terribly seriously given the dearth of specifics.

How exactly will the president-elect and his team bring spending back into line with revenue over the long-run?

Here’s a hint: we won’t get there with yet more vague promises to eliminate programs that don’t work (which ones?), the appointment of a Chief Performance Officer (what does OMB do?), and the creation of new health care entitlements that substitute public funding for private premiums and make our budget outlook worse, not better.

posted by James C. Capretta | 11:43 am
File As: Health Care

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