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.


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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)

 

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

Monday, November 9, 2009

After the House Vote 

Conservatives need to hammer home four points to shift indepedent voters and moderate Democrats even more decisively against enactment of Obamacare.

One, Obamacare will impose substantial new costs on the already insured middle class. The bill approved by the House establishes one-size-fits-all insurance rules which will drive up premiums and raise taxes on the health-care sector which will be passed onto middle-class health-care consumers.

Two, Obamacare will destroy jobs. The House bill would impose an 8 percent payroll tax on all but the smallest employers who do not offer health insurance and a 5.4 percent income tax surcharge on higher income individuals who also own small businesses. These taxes will discourage hiring and force layoffs when the number one concern of most American voters is job creation.

Three, Obamacare will ration care. The House bill relies almost exclusively on arbitrary, across-the-board payment rate reductions for health-care providers to achieve savings. If passed, that would just be the beginning of it. Despite all of the talk of painless efficiency measures, the Democratic sponsors really have no plan to control costs except with price-setting. Always and everywhere, price controls drive out willing suppliers of services, leading to queues and waiting lists.

Fourth, Obamacare is entirely unnecessary. We can fix the problems in U.S. health care without a government takeover by pursuing sensible, targeted reforms. With properly structured high-risk pools and insurance regulation, pre-existing conditions could be insured at reasonable costs. With tax credits and small-business reforms (such as those implemented in Utah), most of the uninsured would have access to coverage. And the competitive model used to deliver Medicare drug coverage should serve as the basis for controlling costs.

posted by James C. Capretta | 4:22 pm
Tags: Obamacare, House bill, tax hikes, rationing
File As: Health Care

Friday, November 6, 2009

The Central-Planning Conceit 

This weekend, House Democrats are planning to pass two health-care bills. One is a sweeping plan that would shift nearly all power over the organization of American health care to Washington, D.C. The other — a full repeal of the “sustainable growth rate” (SGR) formula governing Medicare physician fee payments — is proof positive that the first bill’s strategy of centralized planning is ill-conceived and dangerous to the quality of U.S. medical care.

To understand why, it is worth reviewing how the SGR came to be. In the late 1980s and 1990s, the Medicare bureaucracy set out to reform the way physicians are reimbursed for providing services to the program’s enrollees. The idea was to shift more resources toward generalists, who were then thought to be undercompensated for spending time with patients, and to control overall costs by limiting the growth of aggregate payments to growth in the size of the U.S. economy. After several years of study, lengthy payment regulations were issued, including a predecessor to the SGR formula, which had immediate and profound financial consequences for nearly every practicing physician in the United States.

And so what happened? The exact opposite of what was intended. Instead of encouraging more physicians to enter into primary care, the Medicare physician-fee schedule has rewarded more specialization. The fee schedule only controls prices, not volume. As Medicare’s administrators have tried to hold down costs with fee cuts, specialists increased their share of the pie with more tests and procedures, at the expense of primary-care reimbursement rates. Not surprisingly, the trend of physicians entering specialist practices has accelerated dramatically in the last twenty years. Moreover, overall costs have never been brought under control. With volume soaring, the SGR formula governing annual fee updates has gone completely off the rails. In 2010, fees are supposed to get cut by 21 percent unless Congress overrides it yet again. To secure the AMA’s endorsement of their health-care bill, House leaders are planning to scrap the SGR component of the physician fee system altogether, at a cost of more than $200 billion over a decade.

The irony of the situation seems to be lost on House Democrats: Congress is moving to repeal a prime example of health-care central planning run amok while simultaneously extending federal control to every corner of American health care.

For its part, the Obama administration has been promising for months that it would deliver new and improved central planning to “bend the cost-curve.” The White House Budget Director, Peter Orszag, in a February interview with Politico, suggested that the incoming Obama team was working on groundbreaking ideas that would use the levers of government payment policy to painlessly eliminate inefficiency in American health care. As Orszag put it, “Medicare and Medicaid are big enough to change the way medicine is practiced.”

Now, nine months later, it turns out the Obama administration doesn’t actually have any new ideas of what to do. It is instead proposing to empower an unelected, unaccountable commission to come up with the whiz-bang ideas, which would go into effect automatically without further congressional action. But House Democrats found the commission approach unacceptable, as it would take too much of the central planning power away from them. And so they have instead filled their bill with assorted pilot projects and tests of new Medicare payment approaches. Orszag touts these as good ideas with potential, too. But these ideas would have virtually no impact on federal spending, according to the Congressional Budget Office, and they certainly are not up to the task of offsetting the costs of the massive increase in entitlement spending contemplated in the House leadership bill.

Instead of clever new ideas that painlessly root out waste and inefficiency, the House bill finds savings the same way all central planners ultimately do: with deep and arbitrary across-the-board payment rate cuts. Despite all of the talk of delivery system reform, there’s no real effort to make distinctions based on the quality of patient care. Everyone gets cut the same.

And that’s the real danger of the House bill. There’s no prospect that the federal government will become more nimble overnight at managing the vast and complex health sector in the United States. To control costs in health care, the federal government will do what it always does — it will set prices. In time, that will have the predictable result of driving out willing suppliers of services, leading to queues and access problems. Call it centrally-planned rationing of care.

posted by James C. Capretta | 9:29 am
Tags: central planning, House vote, Medicare, Peter Orszag
File As: Health Care

Thursday, November 5, 2009

Not Even Health-Care Trumps Pro-Abortion Radicalism of Obama Democrats 

The stated number-one priority for Democrats is passage of a government takeover of American health-care. President Obama and his allies in Congress have essentially bet the future of their party on securing something radical and sweeping. Congressional leaders have set aside everything else until they can pass some version of Obamacare, and they have pledged to do whatever is necessary — taxpayers beware — to reach their goal.

But there’s apparently one thing most Democrats aren’t willing to do, even if it jeopardizes their health-care ambitions. And that’s back down on their unwavering commitment to abortion radicalism.

For months, pro-life Democratic Congressman Bart Stupak has warned Democratic leaders that he and a sizeable bloc of like-minded colleagues would vote against the Democratic health-care bill in the House if it didn’t clearly and unambiguously preclude taxpayer funding of elective abortions in a reformed system of subsidized health insurance.

This should be a no-brainer for House Democratic leaders. Giving Rep. Stupak what he wants — which is a clean vote on a no-funding-for-abortion amendment — would remove one more roadblock on their way to the nirvana of government-run health insurance.

But Speaker Pelosi apparently sees a big problem with that approach, which is that Rep. Stupak would very likely win, perhaps cementing for good in permanent law a strong prohibition against taxpayer funding of abortions in a national health-care plan. To abortion radicals, that’s simply too much to stomach.

So instead of giving in to Stupak, House Democratic leaders are apparently working overtime on another course of action, which is to try to divide the Stupak bloc and pick off enough of his fellow Democrats with minor tweaks to the existing bill to allow passage.

Squishy pro-life Democrats shouldn’t be fooled. If they enable passage with their votes of a health-care bill that facilitates public funding of health insurance covering elective abortions, they will be held accountable by pro-life voters. It won’t matter if every pro-abortion politician in the country, from President Obama on down, asserts that the plan doesn’t pay for abortions. Pro-life voters won’t listen to them. They will listen to more trusted voices, and if they say that the health-care plan expands the abortion license, that’s all that will matter.

President Obama came in to office proclaiming a new openness to the pro-life position. But that was just a lot of talk to divide the conservative coalition. Actions speak louder than words. And his administration and its allies in Congress are using every tool at their disposal to make elective abortions a part of mainstream insurance coverage. Any Democrat who helps them to do so is no pro-lifer.

posted by James C. Capretta | 10:18 am
Tags: Bart Stupak, Nancy Pelosi, federal funding of abortion, pro-life Democrats
File As: Health Care

Friday, October 30, 2009

It’s $1.5 Trillion, Not $900 Billion 

The health-care bill unveiled yesterday by House Speaker Nancy Pelosi is being advertised as costing “only” $894 billion over a decade. But that is highly misleading.

For starters, the gross cost of expanded Medicaid coverage and a new entitlement to subsidies for health insurance is much higher than Democrats are suggesting, according to the cost estimate released yesterday by the Congressional Budget Office (CBO). The Democrats report a lower number by netting out the taxes some individuals pay when they don’t enroll in insurance, as well as the tax payments from employers who choose to “pay” rather than “play.” But that accounting confuses tax increases with spending reduction. The gross spending increase from the entitlement expansions in the revised House bill is $1.055 trillion over ten years, not $894 billion.

In addition, as I noted previously, House Democrats have conveniently decided to take the so-called “doc fix” out of the larger health-care bill and pass it as a standalone measure, at a cost of $250 billion over ten years. The House health-care bill is bursting with other Medicare-related provisions. What could possibly justify separate accounting for the physician fee fix? In fact, there is no justification, other than budgetary smoke and mirrors. House leaders are splitting the costs of their scheme into two bills and pretending that this maneuver somehow brings down the overall cost to taxpayers. It doesn’t. In reality, House Democrats are still planning to spend $250 billion on Medicare physician fees, and that should be made clear in any honest accounting of what’s afoot here.

Finally, there’s the other spending in the health-care plan. There’s loads of it. Higher Medicaid matching funds to buy off selected governors. A new program aimed at encouraging more physicians to enter primary care. Prevention spending. And apparently just about anything else House Democrats could think of to spend taxpayers’ money on. When it’s all racked up, these programs cost $230 billion over a decade. And that’s not even including the extra spending on Medicare drug coverage, which is obscured in CBO’s accounting by provisions which allow the government to set payment rates for certain products.

All totaled, then, Democratic leaders are planning to ram a $1.5 trillion spending program through the House in coming days, far exceeding the $900 billion threshold that President Obama supposedly established in his speech to a joint session of Congress.

How are House leaders planning to cover these costs? Well, for starters, they aren’t. The cost of the physician fee fix will simply get added to the ballooning debt President Obama is planning to run up during his presidency. The rest will supposedly be covered by a whopping tax increase and implausible price-controls in Medicare and Medicaid.

On the tax side, Democrats are planning to saddle those with annual incomes exceeding $500,000 with a new 5.4 percent surtax. That would raise $461 billion over a decade, according to the Joint Tax Committee. But there’s also the penalty tax imposed on individuals who don’t sign up for health insurance. That raises $33 billion. There’s also the employer “pay or play” mandate, which brings in $135 billion. And finally, there are the taxes on medical device manufacturers and many others. These provisions raise an additional $100 billion over a decade. In all, therefore, House Democrats want to raise taxes on Americans by $725 billion over the period 2010 to 2019 to partially pay for their health-care scheme.

The Democrats close the remaining gap (excluding the physician fee spending) by cutting Medicare and Medicaid spending by about $550 billion over ten years and starting up a new, budget-busting long-term care program that brings in $72 billion in excess premiums in its early years.

President Obama has claimed all year that he would work with Congress to put in place reforms that would make health-care delivery more efficient. But that’s not what House Democrats are proposing with their changes to Medicare. Their plan is for payment rate reductions, indiscriminately applied to all providers without regard to any measure of quality. All hospitals would get basically the same percentage cut in their payments, no matter how well or badly they treat their patients. As the Washington Post noted this morning, these cuts imply that House Democrats have found the magic formula for slowing Medicare per capita spending from a 7 percent average over the past two decades to just 4 percent for the coming twenty years. That is beyond implausible. Congress and the Medicare bureaucracy have been trying to slow the pace of entitlement spending with price controls for nearly half a century, and it has never worked. CBO has to score the provisions as they are written. But common sense indicates that these Medicare payment rate reductions will never finance the massive entitlement spending House leaders are planning.

In sum, then, the House plan is not a $900 billion program. It’s a $725 billion tax increase and a $1.5 trillion spending program. Tax and spend, indeed.

posted by James C. Capretta | 8:16 pm
Tags: House bill, Democrats, CBO, budget, tax increases, Pelosi, Obama
File As: Health Care

Thursday, October 29, 2009

The Insanity of the House Bill 

At the beginning of this year, there was great hope in some circles that Congress would enact significant health-care reform that would address the central, vexing problem of today’s arrangements, which is rapidly escalating costs. That hope has waned considerably as the Democrats controlling the process have made a series of decisions revealing that their only real ambition is to get to a signing ceremony for something called “universal coverage.”

Still, there have been some true believers in the business, health, and policy communities who have thought it better to keep their powder dry and not criticize the emerging legislation based on the hope that some level of constructive engagement might improve matters. Fat chance. The bill unveiled today by House Speaker Nancy Pelosi should put to rest for good the thought that this year’s legislative process will produce anything other than a total fiscal and health policy disaster.

To sum it up, the House bill is nothing but a massive, uncontrolled federal entitlement expansion — at a time when the central, looming threat to the nation’s long-term prosperity is the unaffordable health-care entitlements already on the federal books. To create the impression of fiscal responsibility, the bill is jury-rigged with budget gimmicks, implausible eligibility rules, and arbitrary, government-dictated price controls — that have been tried repeatedly without success — to make it look like it costs “only” $900 billion over a decade.

Let’s start with the much ballyhooed effort to bring the costs of the bill down from the $1.5 trillion budget-buster which was introduced by House leaders in July. There are two significant changes from that earlier version. First, the bill simply drops altogether the repeal of the so-called “sustainable growth rate,” or SGR, formula. The SGR, ironically, is a product of just the kind of central planning that is at the heart of Obamacare. It was designed by the Medicare bureaucracy to control costs, but all it has done is cut doctors’ fees while volume soars. The scheduled cut in 2010 is for more than 20 percent. Everyone knows it must be fixed, but the full, ten-year costs of repeal approaches $250 billion. The Democratic solution? Repeal it separately from Obamacare — and borrow more. Presto. The House bill now “costs less.” The Congressional Budget Office (CBO) projects that the Obama budget will push the nation’s debt to more than $17 trillion in 2019, up from $5.8 trillion at the end of 2008. It’s only a matter of time before that level of borrowing precipitates a crisis. The last thing our country needs is more unfinanced Medicare spending.

The second major change is a massive expansion of Medicaid, raising the upper income cutoff from 133 percent of the federal poverty line in the July bill to 150 percent in today’s version. According to CBO’s estimate of the plan released today, the total, ten-year cost of the higher Medicaid enrollment will be $425 billion. By 2019, some 50 million Americans will be enrolled in the program (and its companion program for children’s coverage), compared to 35 million under current law. Even before this massive expansion, CBO projected that the combined costs for Medicare and Medicaid would increase from 5.3 percent of GDP in 2009 to 9.7 percent in 2035. Adding more enrollment to Medicaid will only make matters much worse. Indeed, CBO acknowledges that the additional spending on Medicaid in the House bill is likely to increase at an annual rate of about 8 percent indefinitely. That’s not surprising. Medicaid spending has been escalating rapidly for nearly half a century, and the House bill does nothing to change the trajectory. It is true that Medicaid expansions appear to cost less than private insurance coverage, but that’s only because Medicaid shifts costs to private payers by underpaying doctors and hospitals.

Still, CBO’s cost estimate shows neutrality, at least on paper. How? There’s a new, nearly $500 billion income-tax increase, aimed at high-income households. Of course, many of these households own businesses, and so the Democrats are planning a heavy new tax on just the individuals who may be in a position to do some hiring in a recession.

Then there are the payment-rate reductions in Medicare and Medicaid, totaling more than $400 billion over a decade. The president and many other Democrats have claimed for months that they were going to make health-care delivery more efficient, thus painlessly finding new money to pay for more coverage. Nothing of the kind is in the House bill. Instead, there are scores of provisions that are essentially more of the same price-setting payment regulations that have failed so miserably in the past. They get scored by CBO, but that doesn’t mean they will happen. In fact, they have been tried countless times over the past quarter century, and have never worked to permanently slow the pace of rising costs. All they ever really do is shift more costs onto middle-class enrollees in private insurance.

There’s much else in this bill that would do great damage to the health sector and the American economy. Heavy payroll taxes that will reduce low-wage employment. Mandates on employers that will drive up costs and reduce wages. Intrusive federal bureaucracies that will come between patients and doctors. They can do a lot of damage in nearly 2,000 pages.

Fortunately, there remains one very powerful opponent to what House and Senate Democrats are considering — the public. Most Americans want no part of this massive liberal overreach. And there’s still time to put a halt to the madness. But the window is closing.

posted by James C. Capretta | 6:28 pm
Tags: Obamacare, Nancy Pelosi, House bill, Medicare, Medicaid, tax increase, small businesses
File As: Health Care

Thursday, October 29, 2009

The Insurance Fix 

Most Americans are generally satisfied with their current insurance, and they do not believe a government takeover is needed to address the problems they see occuring from time to time. They’re right: It isn’t necessary. What's needed is a targeted reform that ensures reliable protection for those who stay continuously insured. That's the subject of an article I wrote with Tom Miller of AEI, published in the latest edition of National Review, and available here (in PDF format) as well.

posted by James C. Capretta | 11:37 am
Tags: targeted reform, alternative reform
File As: Health Care

Thursday, October 22, 2009

The Death of the House Bill 

In July, the president and the Democratic leaders in the House of Representatives argued that the time for analysis and debate was over and that the House should pass its version of health-care reform before the August recess.

Now, just three months later, House Democrats are saying that the bill they were in such a hurry to pass during the summer is old news and irrelevant. What matters now, they assert, is their “new and improved” version of reform, which they promise will be much better and easier to pass. Of course, they aren’t sufficiently confident in its virtues to open it up to public scrutiny just yet. No, they assert the bill will be different even though the legislative plan is clearly going to be just as it was in July. House Democrats are hoping to unveil their updated version of Obamacare as close as possible to a vote, probably in November, so that there is no time for public opposition to stop it.

It might work. But then again, that’s what they tried to do with version 1.0. The original bill was made available on July 14 with the intention of having a vote in the full House on July 31. That strategy failed miserably because it took just a few days for the public to figure out that what House Democrats were pushing represented far more governmental control of health care than the public was comfortable with. Momentum toward passage dwindled.

Now even the original sponsors of the House bill are walking away from it. On Wednesday, Representative Pete Stark (D.-California), the chairman of the Ways and Means Health Subcommittee, responded to a new and devastating analysis of the original House bill (as passed by the Ways and Means Committee on July 17) by saying that it is beside the point. House leaders are constructing a new version, so the new analysis is “out-of-date relative to what will ultimately be voted on in the House,” Representative Stark said.

The analysis in question was conducted by the Chief Actuary at the Centers for Medicare and Medicaid Services (CMS). Given what it says, it’s understandable that Representative Stark would now disown the bill he helped write. Here are some of the findings:

  • Total national health spending would increase by $750 billion over the next decade. (So much for “bending the cost curve.”)
     
  • The overall cost of the House bill will be $1.2 trillion over the period between 2010 and 2019. By 2019, the annual cost of the entitlement expansions would be $236 billion, rising at a rate of 9 percent annually. After all this spending, there would still be 23 million uninsured residents in 2019.
     
  • The president’s signature initiatives to slow the pace of rising costs — comparative effectiveness research, prevention and wellness efforts, and payment changes in Medicare — won’t work as advertised. The savings are almost non-existent.
     
  • The cuts in Medicare Advantage plans would result in “less generous benefit packages” for millions of seniors. The actuaries estimate the House’s Medicare Advantage cuts, which are unlikely to change in any new version of the bill, would force about 8.5 million seniors out of the coverage they would prefer and back into the traditional program. (So much for “keeping the coverage you have today.”)
     
  • Democratic proposals to impose arbitrary, across-the-board payment rate cuts for hospitals, nursing homes, and home health agencies based on presumed “productivity gains” are unlikely to work as planned. The actuaries suggest that some institutions won’t be able to hit the targets because health care is more labor intensive than other sectors of the economy. Consequently, the cuts could force some organizations to leave the Medicare program, thus “possibly jeopardizing access to care for beneficiaries.”

In recent days, House Speaker Nancy Pelosi and her “leadership aides” have let it be known to reporters that they have gotten more favorable reviews of their updated bill from the Congressional Budget Office (CBO). According to press accounts, the new bill, which is not available to the public, comes in under $900 billion and will cut the federal budget deficit for two decades.

From a process standpoint, CBO should never allow members of Congress to characterize the findings of confidential cost estimates without consequences. Undoubtedly, CBO staff is told not to share its analysis with anyone until the bill is unveiled. But if House leaders decide to go public with CBO’s apparent bottom line, CBO really should be obligated to go public with the entire analysis to ensure no misunderstanding. Otherwise CBO’s findings can be distorted. House Democrats are trying to build momentum again toward passage by creating the impression they have found a painless way to turn their budget-busting bill from July into one that actually cuts the deficit. It’s CBO’s job to make sure no one gets away with this kind of phony free-lunch argument. If in fact a new version of the House bill reduces the federal budget deficit over two decades, someone is paying. Who? Here’s betting that’s it’s the American middle class. And as soon as that becomes known, the new updated House bill is likely to become just as unpopular as the now dead and buried old one.

posted by James C. Capretta | 10:37 pm
Tags: CBO, CMS, House, Ways and Means, Pete Stark, Medicare Advantage, Nancy Pelosi
File As: Health Care

Thursday, October 22, 2009

HHS Actuary Says House Bill Will Increase Health Spending 

Yesterday, the Chief Actuary at the Department of Health and Human Services, Rick Foster, issued a lengthy memorandum (available here in PDF format) analyzing the House version of health-care reform. The memo makes several devastating points about the House, not the least of which is that it would increase overall national health spending, not reduce it. I will have much more to say about this memo shortly.

posted by James C. Capretta | 1:08 pm
Tags: Rick Foster, HHS, increased spending, House bill
File As: Health Care

Monday, October 19, 2009

On Deficits and Doctors 

Late last week, Senate Budget Committee Chairman Kent Conrad told his fellow Democratic colleagues that he wouldn’t play along with their transparent scheme to offload $247 billion — the amount needed to pay for the so-called Medicare “doc fix” over ten years — from Obamacare onto another piece of budget-busting legislation. For that bit of independent thinking, Senator Conrad is getting his own, personal meeting today with the president of the United States in the Oval Office.

Why would the president drop everything to have a last minute, one-on-one meeting with a single Democratic Senator? Because he will do anything to get a bill done this year, and Democratic strategists have told him that running the “doc fix” as a standalone measure is key to passing a governmental takeover of American health-care, which is their goal. They may be right.

Some kind of “doc fix” provision has been enacted every year since 2002 to override the current Medicare physician-payment rule, known as the “sustainable growth rate,” or SGR, formula. Ironically, the SGR is a prime example of how the kind of health-care central planning at the heart of Obamacare will inevitably run amok. Medicare administrators have been trying for two decades to use bureaucratically-devised payment schemes like the SGR to keep total physician spending in line with overall growth of the economy. But Medicare’s payment regulations can only control prices, not volume. So as use of services has gone up, the SGR formula has called for large, annual reductions in the per service fees Medicare pays to physicians. In recent years, Congress has regularly overridden the SGR formula on an ad hoc basis to avoid the 10 to 20 percent cuts in payment rates that would otherwise have occurred. Under current law, application of the SGR formula would result in a 21 percent reduction in physician fees in 2010.

Everyone knows that won’t happen because neither party supports such deep cuts in physician fees. The only question is how it will get fixed.

House Democrats, sensing an opportunity, offered to include a full SGR repeal in their health-care plan if the American Medical Association (AMA) were to endorse the bill. Tens of thousands of U.S. physicians are adamantly opposed to government-run health-care and would never have agreed to compromise their principles for short-term financial gain. But the AMA bureaucracy is another matter entirely. They worked overtime to get their leadership to accede to the deal.

Then came the president’s September speech to a joint session of Congress, during which he pledged to hold the line on the health-care plan at “only” $900 billion over a decade. The House bill overshoots that mark by about $300 billion at last count, and that’s before Democratic leaders engage in a round of aggressive vote-buying.

And, so, faced with a budget constraint, enterprising Democrats settled on a solution. Instead of one budget-busting bill, why not two? The plan now is to try to pass a full SGR repeal, at a cost of $247 billion over a decade, separate from the health-care bill, thus allowing more spending all around.

The only problem is that even some Senate Democrats find this scheme too shameless by half to support. Senator Evan Bayh said last week that he agreed with Senator Conrad that a physician-fee fix should not add to the nation’s already skyrocketing debt.

Indeed, despite the setting, there’s no reason today’s meeting should have changed Senator Conrad’s mind. The facts are on his side.

On Friday, the Treasury Department announced that the federal government ran a $1.42 trillion budget deficit in 2009, or about 10 percent of GDP. That’s the largest nominal budget deficit in history, and the largest as a percentage of GDP since World War II. From 1789 to 2008, the federal government borrowed about $5.8 trillion. In just two years, 2009 and 2010, the government will borrow nearly $3 trillion more. Further, the Congressional Budget Office (CBO) expects the federal government’s debt to exceed $14 trillion by 2019, and that’s before the full force of the baby boom retirement has hit the government’s books. The Obama administration’s budget plan would make this very daunting budgetary outlook much worse.

In this environment, the last thing our nation needs is another piece of legislation — after all of the bailouts and buyouts of 2009 — to dump $250 billion more onto the pile of debt that will be passed on to the next generation of taxpayers. Doctors’ fees in 2010 will not get cut. That’s a certainty. It only costs about $11 billion to fix the problem next year.

Indeed, this really shouldn’t be a close call for any politician claiming to be a fiscal conservative. The Democratic plan would add $250 billion to the federal budget deficit over a decade, thus allowing an even more expansive entitlement in Obamacare. That should be enough to draw unified Republican opposition. And if Senator Conrad and a few of his colleagues don’t buckle, there should be more than enough votes to defeat this blatant attempt to force taxpayers to pay yet again for plans hatched entirely for political reasons.

posted by James C. Capretta | 6:18 pm
Tags: Conrad, physician-fee fix, deficit, Obamacare
File As: Health Care

Wednesday, October 14, 2009

The Baucus Death Spiral 

Full disclosure: I do consulting work for private health insurers, but I had no prior knowledge of the PriceWaterhouseCoopers study before it was released. Having said that, its conclusions were not at all surprising, nor was the heated reaction of the Obama White House. Democrats understand how dangerous the PwC study is to their effort to pass a health-care bill because it exposes a crucial and irrefutable flaw in the health-care plan approved this week by the Senate Finance Committee.

And what is that flaw? In short, the plan sponsored by Finance Committee Chairman Max Baucus would almost certainly lead to a death spiral in many private health insurance markets.

Insurance death spirals occur when regulators force insurers to offer coverage (“guaranteed issue”) at premiums below the known risk of those they are insuring, without any assurance that the shortfall can be made up elsewhere. When insurers comply with these rules and offer relatively low cost health insurance policies to all comers, quite predictably, many sick people step forward to sign up. When the insurers then try to turn around and charge higher premiums to the relatively healthy to cover their costs, the healthy, also quite predictably, are more reluctant to enroll because they can see the premiums they would have to pay would very likely exceed their health-care costs. So they often say ‛no thanks’ to the insurance and decide to take their chances by going without coverage instead. As more and more healthy people exit the marketplace, insurers are then forced to raise premiums for everyone who remains, which only further encourages the lower risks to opt out. This vicious cycle of rising premiums and an increasingly unhealthy risk pool is called a ‛death spiral’ because it eventually forces the insurer to terminate the plan.

This is not a hypothetical, textbook scenario of what might happen to a poorly run insurance market. It has happened before — many times and in many places. See, for instance, the experience in Kentucky, and in Washington state, and in Maine too. There’s no reason it couldn’t happen nationwide.

The Obama White House and congressional Democrats convinced themselves months ago that they could avoid the fate of these failed state reform efforts by forcing the young and healthy to buy insurance, whether they wanted it or not. And so, all of the bills under consideration in the House and Senate would make government-approved health insurance enrollment compulsory for all Americans. Those not complying would have to pay a new tax, collected by the IRS.

But the assumption that Congress would be able to hold the line and permanently sustain a punitive new tax on Americans for not buying government-approved insurance was always dubious. And, sure enough, Democrats, staring political reality in the face, have been backing away from a tough “individual mandate,” step by step, ever since they returned from their August recess. The Finance Committee adopted amendments that delayed the mandate’s full implementation and dramatically reduced the tax penalties for non-compliance.

But as Democrats watered down the mandate, there was no commensurate adjustment in the insurance rules. The Baucus plan continues to require insurers to take all comers without regard to health risk starting in 2013. And therein lie the makings of an insurance market fiasco.

Robert Laszewski, a long-time observer of the health insurance scene and no political partisan, wrote a devastating blog post on Monday documenting the folly of the Baucus plan. He cites several very real examples of low- and moderate-wage families that would clearly be better off financially if they paid the tax and waited to sign up for insurance until they were really sick. It’s hard to imagine any insurance actuary coming to a different conclusion about what would happen if the Baucus plan were actually enacted into law.

Of course, the insurance industry is bringing renewed attention to this problem because it is hoping to get a tougher mandate back into the Senate bill. That seems highly unlikely at this point, and would be a real mistake in any event. The problem with Obamacare is not insufficient governmental force; the problem is that the Democrats are pursuing the wrong goal. They are desperate to enact something they can call “universal coverage” without any coherent plan to slow the pace of rising costs. In that context, a new entitlement for subsidized insurance is exceedingly expensive, which is why the sponsors try to hide some of the costs behind mandates, hidden taxes, compulsion, and insurance regulation. However, as they are now finding out, there’s no free lunch here. Someone has to pay for it all. It’s just a question of who and how much.

What Democrats should be doing is working with Republicans on a sensible plan to gradually introduce reforms that would inject more market discipline into the health sector, thus making coverage more affordable for everybody. If, however, they insist on trying to pass something like the Baucus plan instead, they should be informed of the consequences, whether they like them or not. As matters stand now, if the Baucus bill were to become law, in a couple of years Congress would be forced to take up the issue again to clean up the mess the bill will have created.

posted by James C. Capretta | 3:00 pm
Tags: Max Baucus, Finance Committee, insurance death spiral
File As: Health Care

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