About the Author

James C. Capretta

James C. Capretta

New Atlantis Contributing Editor James C. Capretta is an expert on health care and entitlement policy, with years of experience in both the executive and legislative branches of government. E-mail: jcapretta@aei.org.


 READ MORE

James C. Capretta’s Latest New Atlantis Articles

 Health Care with a Conscience” (Fall 2008) 

 Health Care 2008: A Political Primer” (Spring 2008) 

 The Clipboard of the Future” (Winter 2008)

 

 More on James C. Capretta

Text Patterns - by Alan JacobsFuturisms - Critiquing the project to reengineer humanity

Monday, December 14, 2009

Harry Reid's Ticking Entitlement Time-Bomb 

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

Monday, December 14, 2009

From Awful to Worse 

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

Tuesday, December 8, 2009

Unwieldy, Complex, and Arbitrary 

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

Friday, December 4, 2009

The Health Care Bill in the Senate 

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

Friday, December 4, 2009

Debating Cost-Control 

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

Monday, November 30, 2009

On Rosy Premium Scenarios 

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

Thursday, November 19, 2009

A $4.9 Trillion Spending Increase 

“Bracket Creep” and the Return of Tax-and-Spend

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

Wednesday, November 18, 2009

Is Government-Driven “Cost Containment” Our Only Option? 

President Obama continues to argue that it is crucial for Congress to pass a health-care bill because it will help slow the pace of rising costs. Perhaps the president and his aides actually believe that to be the case. But, in recent days, it has become abundantly clear that virtually no one else does.

Today, in a column in the Wall Street Journal, the dean of the Harvard Medical School, Jeffrey Flier, says the bills under consideration in Congress are not health reform bills at all, but just access expansion proposals. As he puts it, “I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it.”

Flier is just the latest commentator to sound the alarm on costs. Robert Samuelson and David Broder made similar points in columns published in recent days in the Washington Post, as did David Leonhardt in the New York Times.

So what do Obama apologists say in response to this chorus of criticism?

Here, a friendly discussion between the Post’s Ezra Klein and MIT Economics Professor Jonathan Gruber is useful. Their counter-argument can be essentially boiled down to two points: there’s no real alternative to the kinds of government-driven cost controls favored by most Democrats, and, although the measures inserted into the House and Senate bills are perhaps weak, they’re directionally right and better than nothing.

Of course, in the current environment, with large Democratic majorities determined to pass a bill based on heavy, centralized governmental control, there is little prospect for bipartisan reforms that would rely on decentralized financial incentives and cost-conscious consumers to allocate resources in the health sector. But it is flat wrong to suggest there is no alternative to a clumsy and politicized governmental process for health-care cost control. There is. It’s just that Democrats don’t like it. They want full governmental control, not a functioning marketplace.

Indeed, that’s the debate we should be having this year. Are Klein and Gruber right? Or are their opponents? In other words, what process stands the best chance of bringing about continual improvement in the efficiency and quality of patient care? Can the federal government really root out wasteful spending in the health sector without harming the quality of American medical care?

Most Democrats seem to think so, but all of the evidence indicates otherwise. The federal government has been running the Medicare and Medicaid programs for more than four decades. There have been countless efforts to use the leverage of provider payment regulations to push doctors and hospitals to organize themselves differently and to change the way they care for patients. They haven’t worked. In fact, Medicare’s current payment systems are now rightfully seen as effectively underwriting the problems found in today’s arrangements. They encourage fragmentation and autonomy, not integration and coordination. The focus is on maximizing revenue from the government, not patient satisfaction. And yet, if the current bills in Congress were to become law, in ten years time, Medicare would look and operate pretty much just as it does today, except with even heavier reliance on fee-for-service medicine. In fact, the administration’s push for a new Medicare Commission with the authority to rewrite how providers are paid by the program is a tacit admission that neither Congress nor the executive branch can be trusted to run a governmental health insurance program efficiently. But there’s also little reason to assume a commission, accountable to its political patrons, would do any better.

The only thing the federal government can ever do well to cut costs is to impose arbitrary payment reductions. Of course, that’s exactly what the Democrats are proposing to do in the current health-care bills. These cuts aren’t calibrated based on the quality of patient care. All providers would get cut pretty much the same. If Obamacare passes, we can expect more of the same, just with worse consequences. At some point, price controls always lead to a reduction in the willing suppliers of services, which means queues and other barriers to accessing care.

There is an alternative, however. Congress could establish a decentralized approach to resource allocation — an arrangement in which consumers have strong financial incentives to pick lower-cost insurance and health delivery options, and in which insurers, hospitals, and physicians have strong incentives to reorganize for efficiency. Importantly, building such a marketplace would require converting today’s open-ended federal tax and entitlement arrangements into fixed contributions which the consumers, not the government, would control. That was the basic design of the prescription-drug benefit in Medicare, and it has worked far better to hold down costs than any other health program introduced in recent years.

The real debate in health care has always been the same: should the country adopt full governmental control, or can a market deliver better value at lower cost? There is a choice, even if those currently in power don’t want to admit it.

posted by James C. Capretta | 5:41 pm
Tags: Obamacare, Medicare Commission, Robert Samuelson, David Broder, David Leonhardt, Ezra Klein, Jonathan Gruber, cost control
File As: Health Care

Monday, November 16, 2009

Gas on the Entitlement Fire 

President Obama has argued all year that a primary reason to enact a version of his health-care plan is to “bend the cost-curve” that has been burdening government and household budgets for years. Of course, the president has not shown that he has a credible plan to address rising health-care costs. But that hasn’t stopped him or his aides from talking as if they did.

Robert Samuelson has been a skeptic of Obamacare’s supposed cost-control potential from the beginning, but his column in today’s Washington Post summarizes his case with particularly effective force. It doesn’t hurt that all the evidence is on Samuelson’s side in this debate.

Samuelson’s critique is particularly important because the nation’s long-term prosperity is already threatened by rising entitlement costs. For starters, we are on the cusp of an unprecedented demographic shift. Over the course of the next quarter century, the population age 65 and older will increase from 39 million to 76 million people. This flood of new enrollees in Social Security and Medicare will push the costs of these programs up very dramatically. And runaway per capita health-care costs will exacerbate the problem substantially. According to the Congressional Budget Office (CBO), between 1975 and 2007, per capita Medicare spending rose, on average, 2.3 percentage points faster than per capita GDP growth. Medicaid’s per capita spending growth rate was not far behind. CBO expects both programs to continue growing at an accelerated pace for the foreseeable future. With an aging population and rising health costs, the long-term budget outlook is already challenging, to put it mildly. CBO projects that federal spending on Social Security, Medicare and Medicaid will rise from 10.1 percent of GDP in 2009 to 15.7 percent in 2035. That jump — 5.6 percent of GDP in twenty-five years — would be equivalent to adding another Social Security program or Defense Department to the federal budget without any additional revenue to pay for it.

And so, faced with a mountain of unfunded entitlement obligations, what would Obamacare do? Pile on more. 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. The House and Senate health-care bills would essentially promise all of them either free insurance through Medicaid or caps on their insurance premiums based on their incomes. This would constitute the single largest entitlement spending expansion since the Great Society programs of the 1960s. CBO expects the federal spending associated with these new open-ended health entitlement commitments to reach about $200 billion annually by 2019 and escalate at about 8 percent annually thereafter.

Meanwhile, the measures being touted as potential health-care cost-control steps are, by and large, nothing more than minor adjustments to existing provider payment arrangements in Medicare, and sometimes only tests of new payment approaches. For instance, the administration has been pushing a provision that would limit payments to hospitals that have high rates of preventable readmissions. The House-passed bill includes this change, but at a savings of only $1.6 billion in 2019. And even this level of savings is highly questionable, given the tendency of Congress to water down “payment reforms” over time. Indeed, it’s easy to imagine Congress rolling this payment change back at the first word that some hospitals are keeping the sickest patients out of their beds to avoid risking readmission payment “adjustments.” But even if it and other tweaks in the bills survive, they wouldn’t amount to much and certainly wouldn’t offset the cost pressures unleashed by extending new entitlement promises to a vast portion of America’s middle class.

And that’s not just the conclusion of critics like Samuelson. That’s also what the Chief Actuary for the Centers for Medicare and Medicaid Services (CMS) found in his review of the House-passed bill, released on Friday. As he put it, the provisions aimed at slowing the pace of rising costs would, by and large, have a “relatively small savings impact.” Consequently, instead of “bending the curve,” overall national health expenditures would rise by nearly $300 billion over a decade.

The only cost-cutting items in the House bill that the Chief Actuary said would really pinch costs are the across-the-board Medicare payment rate cuts applied to hospitals, nursing homes, and others. Of course, these kinds of arbitrary payment changes have been tried many times before and have never worked to really ease cost pressures. But, on paper at least, they appear to reduce federal spending. However, the Chief Actuary made it clear in his review that even though he listed the savings on his tables, he doesn’t think things will work out that way in the real world. As he put it, the cuts would push payment rates so low over time that some institutions wouldn’t be able to survive if they continued to serve Medicare patients. The threat of reduced access to care would be reason enough for Congress to reverse course and increase the payment rates at a later date. (Of course, that’s exactly what Congress is planning to do this year with physician fees, now scheduled to get cut 21 percent in January based on a previous congressional payment-rate policy that has now run amok.)

For a while, some Democrats liked to deflect calls for entitlement reform by suggesting that what the country really needs is a health-care plan that slows the pace of rising costs. Indeed, it has become almost a mantra among some Obama apologists to say “health reform is entitlement reform.”

But the bills moving through Congress thoroughly discredit that contention. There’s no reform in these bills. They are entitlement expansions, plain and simple.

Indeed, the Obama administration likes to suggest it has a plan to painlessly root out unnecessary health spending without harming patient care. In truth, there is no such plan, and there never will be. The federal government has no capacity to drive greater efficiency in the diverse and complex health sector. When cost pressures mount, as they surely would if Obamacare passes, the federal response will be what it has always been in the past: price controls and arbitrary caps. All Americans will pay the cost with inferior quality of care and access restrictions. The proponents of the current bills are betting that, by the time this reality has sunk in, it will be too late to wean the public off of another vast and irreversible entitlement.

posted by James C. Capretta | 5:45 pm
Tags: CBO, entitlements, cost, Obamacare, Robert Samuelson, CMS
File As: Health Care

Tuesday, November 10, 2009

Rahm Emanuel vs. Obamacare 

Obamacare is predicated on the assumption that the federal government has the knowledge, capacity, and will to drive greater efficiency in American health care. Inadvertently, White House Chief of Staff Rahm Emanuel has become an articulate spokesman for why that assumption is dead wrong.

For months, the president and his team argued that stepped-up investments in health information technology, comparative effectiveness research, and prevention and wellness programs could “bend the cost-curve,” thus making an expansion of coverage affordable for taxpayers. But the Congressional Budget Office, along with a chorus of independent skeptics, said those steps would never be up to the task of reliable cost control without more fundamental changes in the financial incentives facing consumers and providers of services.

Unfazed, the administration argued that it had other ways to control costs waiting in the wings. The conversation turned to “delivery system reform,” with the administration and its allies in Congress suggesting that new ways of paying health-care providers in Medicare could spur a wholesale shift in how doctors and hospitals cared for patients. As White House Budget Director Peter Orszag put it, “Medicare and Medicaid are big enough to change the way medicine is practiced.” The implication was that the new team was working on ways to painlessly root out wasteful spending by compensating providers for their services differently than they are paid today.

But no such proposals were ever forthcoming (except for relatively minor adjustments related to payments for hospitals with high readmission rates, and some baby steps toward more “bundling” of payments for a full episode of care). What the White House did eventually propose was a commission that would have the authority to change the way Medicare pays for services without further approval by Congress. So instead of offering a serious plan to “bend the cost-curve,” the administration offered a commission that would come up with a serious plan to “bend the cost-curve.” Quite predictably, many in Congress have not been so keen on this idea, as it would hand off to an unelected commission the power to rewrite Medicare’s provider-payment regulations. The administration’s commission idea is not in the House-passed bill.

Not to worry! The administration has another favorite cost-cutting tool. The idea is to tax so-called “Cadillac” health insurance plans, thus forcing both the insurers and the plan enrollees to find ways to economize to avoid the tax. But there’s a little problem with this idea too. President Obama was against it before he was for it. Recall that Republican presidential candidate John McCain proposed to convert today’s preferential tax treatment of employer-paid insurance premiums into a refundable credit. In October 2008, the Obama-Biden campaign excoriated this idea in scores of ads because it would tax health benefits “for the first time ever.” Now, the president wants to do just that — but, again not surprisingly, the populist revolt he stoked against it in 2008 was still smoldering when he endorsed it in 2009. It turns out that taxing high-cost insurance plans will actually hit many middle-class households, especially those with union members enrolled in collectively-bargained plans. House Democrats wouldn’t go near the idea, and reports indicate that the version of the high-cost insurance tax in the Senate Finance Committee bill is getting watered down by the day. If some version of it survives at all, it is highly unlikely to pinch enough to generate meaningful cost control.

Reviewing this legislative landscape, it’s suddenly dawning on all concerned that the bills moving in Congress won’t come close to “bending the curve” after all. That’s the thrust of a piece today in the New York Times, as well as one from last week in the Washington Post. Of course, even as House members and Senators shy away from tough decisions, they are not nearly as reticent about extending new health entitlement commitments. Thus, it is now abundantly clear that if anything is produced by this legislative process, it will be a bill that piles more unaffordable entitlement commitments on top of the unreformed ones already on the books.

And so what’s the White House response to this alarming state of fiscal affairs? As recounted in the Times piece, Emanuel blames the limits of politics. “Let’s be honest,” Emanuel apparently stated in a recent interview. “The goal isn’t to see whether I can pass this through the executive board of the Brookings Institution. I’m passing it through the United State Congress with people who represent constituents.”

That’s exactly right of course. But it’s also an indictment of the entire Obamacare enterprise. The health-care bills under consideration would hand over to the federal government nearly all power for organizing American health care. And yet there is not a shred of evidence that Congress or the administration can handle these tasks well. Indeed, there is abundant evidence that, in a crunch to control costs, politicians will do what they always do, which is impose across-the-board payment-rate cuts. That’s certainly how the House-passed bill reduces Medicare spending. There’s no delivery system reform. It’s not “pay for performance.” There’s no calibrating of reimbursement levels based on the quality of care provided. It’s cuts for all providers, no matter how well or badly they treat patients.

Ultimately, the question in health reform is this: what process has the best chance to bring about continual improvement in the efficiency and quality of patient care? The only way to provide better care at less cost is with higher productivity in the health sector. What can make that happen, year in and year out?

Rahm Emanuel has given us the answer. The federal government, subject as it is to the constraints of politics, can’t do it. The only way to slow the pace of rising costs without sacrificing quality is by building a functioning marketplace, with cost-conscious consumers driving the allocation of resources. The government must play an important oversight role in such a marketplace. But if we rely on politicians, or even commissions that answer to them, for cost control, what we will get is lower quality, not more efficiency.

posted by James C. Capretta | 4:27 pm
Tags: Obamacare, Peter Orszag, Rahm Emanuel, control, competition, taxes
File As: Health Care

Total records: 429 [ Previous  |  Next ]