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.


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

Wednesday, October 7, 2009

CBO and a Firewall That Will Never Hold 

The Congressional Budget Office (CBO) has issued a preliminary cost estimate (available here) for the Senate Finance Committee bill, as amended during committee consideration.

The cost over ten years will be advertised as only $829 billion. But after all that spending, there would still be 25 million uninsured Americans in 2019.

Even so, CBO’s estimate of the Baucus plan substantially understates its true cost because it is based on key assumptions that will never hold up over time.

First, there is the new tax on so-called “high-cost” health-insurance plans. The Democrats are trying to sell this as a tax on insurers. But no one is buying that, especially not the unions. It’s the insurance enrollees who will pay it, in the form of higher deductibles and cost-sharing to keep premiums below the thresholds. The tax would hit all coverage that costs more $8,000 for single people or $21,000 for families in 2013. Those thresholds would be indexed to general consumer inflation (the CPI) plus one percentage point every year, even as health-care costs are expected to increase at a much more rapid rate. So by 2019 and beyond, this tax would hit pretty much the entire middle class of America very hard. The Baucus plan is counting on $46 billion in revenue from it in 2019, with annual increases in the revenue generated of 10 to 15 percent thereafter. With each passing day, this revenue source will lose political support.

Second, there are the Medicare and Medicaid cuts. By 2019, CBO expects them to reach nearly $100 billion annually, including more than $20 billion from Medicare Advantage plans. That’s a direct hit on benefits for seniors, many of whom signed up with Medicare Advantage because they can’t afford Medigap premiums. The last time Congress went down this road of arbitrary, across-the-board cuts, it was only a matter of months before they were scrambling to restore the cuts.

Third, the Baucus plan assumes deep and continuous cuts in physician fees that no one supports or believes will occur. Restoring those cuts would add more than $200 billion to the plan’s bottom line.

Finally, there is the so-called “firewall,” which is really central to how the whole bill works. CBO’s assessment of the Baucus bill is built on the dubious assumption that Congress can hand out a lucrative new entitlement to a limited number of low- and moderate-income voters while denying it to tens of millions of others.

The centerpiece of the Baucus plan is a promise to all households with incomes between 100 and 400 percent of the federal poverty line that the premiums they owe for health insurance will be limited to a fixed percentage of their income. At the low end of this income range, families would pay no more than 3 percent of their income — initially — toward health insurance. The premium cap would be gradually raised as incomes rise until it reaches a little more than 13 percent for families with incomes between 300 and 400 percent of the poverty line.

CBO estimates the average cost of subsidized family coverage at $14,400 in 2016. Under the Baucus plan, a household with an income at 200 percent of the federal poverty line — or about $48,000 for a family of four in 2016 — would pay about $5,300 toward this insurance, so long as they were getting it through one of the insurance “exchanges” established in the bill. The rest of the premium — over $9,000 in this example — would be paid by the federal government.

If that sounds too good to be true, it’s because it would be, for the vast majority of workers — at least as the Baucus plan is currently written. All but the smallest employers would be required to offer qualifying coverage to their full-time workers to avoid hefty taxes, and the employees would have no choice but to take what is offered to avoid paying a penalty tax themselves. The “firewall” thus prevents workers from exiting employer-based plans for the exchanges.

The Baucus plan would appear to establish a limit on premiums for these employees too, at 10 percent of their income. For a breadwinner with a spouse and two children and an income at twice the poverty rate, that would mean paying no more than $4,800 as the employee share of the premium for an employer-sponsored plan. But where would the rest come from? Not the federal government. The employer would be required to pay the other $9,600. But as CBO — and most every economist — notes, employer-paid premiums are paid by workers, too, in the form of reduced cash wages.

Of course, employer-paid premiums do come with a federal tax preference, but it is worth much less for most low- and moderate-wage workers than what Senator Baucus is offering to those getting insurance in the exchanges. At 200 percent of the federal poverty line, the forgone tax liability on an average employer-sponsored plan is about $4,300 (including payroll taxes), or nearly $5,000 less than what is being promised to households with the same income in the insurance 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 17 million people would get subsidized premiums in the Baucus plan. The vast majority of American workers would get no additional federal assistance due to the “firewall,” even as the government pushed the cost of compulsory health insurance much higher with regulations, taxes, and fees. This is how Senator Baucus shoehorns a $1.5 to $2.0 trillion “universal coverage” scheme into an $830 billion sack.

But will it last? Congressional Democrats are already racing ahead with amendments to demonstrate their commitment to insurance “affordability” for the middle class. It would be only a matter of time before Congress responded to the inevitable political pressure and expanded the entitlement, perhaps in steps, to larger and larger numbers of Americans.

The history of federal entitlement programs is one of growth and expansion. The new entitlement in the Baucus plan will be no exception. Indeed, it is likely to become the fastest-growing one ever enacted, with costs far in excess of what CBO has assigned to the bill as currently written.

posted by James C. Capretta | 8:10 pm
Tags: Max Baucus, CBO, Medicare cuts, gold-plated plans, firewall
File As: Health Care

Tuesday, October 6, 2009

A 70 Percent Tax on Work 

President Obama said Monday that the debate on health care has gone on long enough, and now is the time to pass something.

But does Congress, let alone the public, really understand what these bills would mean for the health sector and the wider U.S. economy? In 1994, the Congressional Budget Office (CBO) issued a lengthy assessment of the Clinton administration’s proposal, covering everything from its distributional consequences to the budgetary treatment of its various moving parts. The public should get the same kind of thorough review of what Obamacare would mean before Congress takes any further steps toward passage.

For instance, there hasn’t yet been a thorough analysis of what the bills moving in the House and Senate would mean for work incentives among low-wage families. A cursory review indicates that Obamacare would impose a massive new implicit tax on low-wage households, effectively penalizing the family that tries to do the right thing by working their way into the middle class.

According to CBO, family coverage in 2016 is likely to cost about $14,400 under the so-called “silver option” in the health-care reform plan sponsored by Senate Finance Committee Chairman Max Baucus. In the Baucus plan, a family of four at the poverty line (about $24,000 in 2016) would have pay to about $1,400 toward coverage, with the federal government paying the other $13,000 on their behalf. In addition, the government would also provide $3,500 to reduce the family’s deductible and co-payment costs for health services. Thus, the new entitlement provided by the Baucus bill would be worth a whopping $16,500 for a family at the poverty line.

As incomes rise, however, the Baucus bill cuts the value of the entitlement. A family with an income at twice the poverty line, or $48,000 in 2016, would get $9,072 in federal assistance for coverage — still a substantial sum. But it’s $7,400 less than the family would get if they earned half as much. The Baucus plan thus imposes an implicit marginal tax rate of about 30 percent ($7,400/$24,000) on wages earned by families in this income range.

And that would come on top of the high implicit taxes already built into current law. Low-wage families with children also get the Earned Income Tax Credit (EITC). The EITC boosts incomes for those with the very lowest wages, but it is also phased-out as incomes rise. Past a certain threshold (about $21,400 in 2016), the EITC is reduced by $0.21 for every additional $1 earned. Throw in the individual income tax rate (15 percent) and payroll taxes (7.65 percent), and the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers.

The more Obamacare is rushed through Congress, the more likely it is to produce highly regrettable unintended consequences. Surely even the Democrats in Congress can see how damaging it would be to send signals to low-wage breadwinners that it no longer makes sense to seek a higher-paying job.

posted by James C. Capretta | 10:13 am
File As: Health Care

Thursday, October 1, 2009

The Public Option Contradiction 

Perhaps the most fundamental question in the health care debate is this: what process has the best chance of producing continuous improvement in the efficiency and value of patient care? President Obama and many Democrats believe new and improved versions of governmental control can do the job. Yet we have nearly half a century of experience with the government running the Medicare program in a way that increases costs for everyone, not just seniors. That's the subject of an op-ed I wrote, up at Kaiser Health News today and available here.

posted by James C. Capretta | 1:21 pm
File As: Health Care

Tuesday, September 29, 2009

This “Public Option” Resuscitation Program Won’t Work 

House Speaker Nancy Pelosi has stated on numerous occasions that the health-care bill she plans to bring to the House floor will include the so-called “public option” because a bill couldn’t pass in the House if the public option were left out of it. Of course, she said that in June, and in July, and in early September too, and still no bill is heading to the House floor for a vote anytime soon.

So, yes, there would seem to be a vote problem in the House, but solving it is not quite as simple as including a government-run plan in the legislation. The truth is that Speaker Pelosi and her lieutenants are having trouble finding a majority to pass anything because their starting point is far too liberal for many rank-and-file Democrats.

Indeed, it seems the president himself doesn’t much like the House bill anymore. In his prime-time speech to a joint session of Congress earlier this month, he said he wanted a bill that costs no more than $900 billion over ten years, doesn’t increase the federal budget deficit “one dime,” and is paid for with offsets coming from within the health-care system. The House bill, as passed by three committees this summer, fails all of these tests. A back-of-the-envelope estimate indicates the House legislation would add about $10 trillion in unfunded liabilities to the federal books over 75 years.

Moreover, the president didn’t mention the signature “offset” in the House bill — a new surtax on upper-income households — when he explained to Americans how he planned to make the numbers add up. The omission spoke volumes. Are House Democrats really going to support a massive income-tax increase that President Obama himself has walked away from?

For now, it seems the answer is yes, because they have no alternative, which is why House leaders are working overtime to convince the Blue Dogs and others that the bill really isn’t as liberal as it seems.

Hence the flurry late last week around the “cost-saving” potential of a “strong” public option. It seem the Congressional Budget Office (CBO) has produced estimates for House leaders indicating that a government-run plan built on Medicare payment rates would cost $85 billion less than one that had to negotiate fees with willing suppliers of services. This was touted in several blogs as evidence that support of a “strong” public option is actually the fiscally conservative position (see this post by Ezra Klein).

The confusion of government price setting with efficiency really goes to the heart of the entire debate. Yes, Medicare does dictate payment rates to hospitals, physicians, and others. On paper, that can, for a time, look cheaper. But hardly anyone believes that is really the solution to our long-term cost problem. In fact, a consensus is finally forming that Medicare’s current fee-for-service payment systems are really the problem, not the solution. Medicare’s payment rules are arbitrary, shift costs to others, promote fragmentation and autonomy among health-care providers instead of integration, and reward volume instead of quality and efficiency. A growing chorus, including the leaders of the Mayo Clinic, says what’s really needed is a far-reaching reform of how health care is actually delivered to patients. The last thing we need is for more of the health-care system to adopt Medicare’s payment rules.

Of course, then there is the issue of government-driven rationing of care. Sector-wide price controls always lead to a reduction in the number of willing suppliers of services. If proponents of widespread adoption of Medicare’s payment schedules really got their way, it would only be a matter of time before demand far outstripped supply for any number of critical services and procedures. And waiting times would get much longer.

There’s a right way and wrong way to promote more efficiency in American health care. Price controls, from long experience, are clearly the wrong way, which is why an effort to sell a “strong public option” on cost grounds is a dead end.

posted by James C. Capretta | 10:15 am
File As: Health Care

Wednesday, September 23, 2009

The Death of Medicare Reform 

The greatest threat to the nation’s long-term prosperity is rapidly escalating entitlement costs. The Congressional Budget Office (CBO) projects that between 2010 and 2030, federal spending on Social Security, Medicare, and Medicaid will increase from 9.8 percent to 14.4 percent of GDP. It will only get worse from there.

Now, unfortunately, the Obama White House and its allies in Congress are pushing for changes in the health-care bills that would make really fixing the entitlement problem nearly impossible.

At the heart of the rise in entitlement costs is the Medicare program. For months, the president and his aides suggested that they could neutralize Medicare’s rapid cost growth with targeted interventions in the health sector that would make care delivery more efficient. The cost curve could be bent, we were told, with painless investments in information technology, comparative effectiveness research, and prevention and wellness efforts.

This line of argument was quickly discredited by CBO. The core problem, CBO noted, is financial incentives. Providers of medical care increase their income when they deliver more services, and beneficiaries are largely insulated from the additional costs of higher use, since those costs are paid by a third party. No amount of federal spending on health IT is going to change that.

And so the Obama administration went back to the drawing board and returned in July with another idea: the IMAC. That’s the proposed independent commission that would have the power to make sweeping changes in the Medicare program. In the original White House version, the IMAC’s recommendations would have gone into effect automatically unless Congress could muster a two-thirds majority to stop them. The commission was to have broad authority to rewrite the Medicare program from top to bottom.

I noted at the time that this was an especially audacious proposal, representing as it did a massive, unprecedented power grab by the White House. Under the Obama IMAC, the president would pick all the commissioners, and the process gave him the power to reject the commission’s annual recommendations if he wanted to — but if he accepted them, they would be nearly impossible to block in Congress.

Now Senator Max Baucus (D.-Mont.) has taken the IMAC idea and made a few very revealing changes (see page 156 of the chairman’s mark). For starters, the commission would have many more members — 15, as opposed to 5 in the original IMAC — and the expectation is that they would look very much like the members of the existing Medicare Payment Advisory Commission, or Medpac, which means there will very likely be representation from insurers, physicians, hospitals, and other segments of the health sector, in addition to some academic experts.

In addition, the commission’s mandate would be very different in the Baucus version. It would be required to come forward with recommendations to hit specific spending-reduction targets each year, beginning in 2015, but the kinds of changes it could recommend would be very limited. As stated in the Baucus mark, the commission could not make recommendations that would change the structure of the Medicare entitlement. Amendments that altered “cost-sharing, benefits, or eligibility” would be off-limits.

What does that leave? Price controls, of course. Inevitably, the Baucus commission would feel the same political pressures Congress does today, which means it would resort to the same kinds of arbitrary, across-the-board price cuts that are routinely adopted whenever budgetary targets must be hit. Just look at the health-care bill Senator Baucus is pushing through his committee this week. It is filled with cuts in payment rates for hospitals, insurers, and others, as well as new industry-specific taxes. These kinds of cuts and fees make no distinctions based on quality or value; all providers are treated exactly the same, no matter how well or badly they treat their patients.

If the Baucus commission is adopted, we can expect more of the same in perpetuity as the commission is charged with hitting future budgetary targets. Worst of all, with the commission making annual provider-payment recommendations, Congress will have a ready excuse for never taking up what’s really needed to fix the entitlement problem: a fundamental reform that brings the same kind of competitive structure used in the drug benefit to the rest of the program. And that’s a disaster that would last for generations.

posted by James C. Capretta | 9:43 am
File As: Health Care

Tuesday, September 22, 2009

Let the Unraveling Continue 

In July, House Democratic leaders were insistent that they had the votes to pass a bill with a new, aggressively managed government-run insurance option for the under-65 population, total federal costs approaching $1.5 trillion over a decade, and a new surtax on upper income taxpayers to pay for about one-third of it.

Where is that bill now?

It never came up for a vote, and there’s no plan to bring it up in coming days, even though Congress has now been back for two weeks from its summer recess. What’s the holdup? Well, it turns out the President of the United States — who was telling House members in July that it was critical to pass their bill before the August recess — doesn’t really like the House version after all. In his speech to Congress just after Labor Day, President Obama spelled out several key objectives for a bill that the current House version does not come close to meeting. The president said he wanted a bill that costs no more than $900 billion over a decade (the House bill’s price tag is at least $1 trillion, but it’s really far higher than that when properly assessed); doesn’t increase the deficit by “one dime” over ten years, or ever (the House bill would increase the government’s unfunded liabilities by about $10 trillion over seventy-five years); and is financed with Medicare and Medicaid cuts and a new tax on higher-cost insurance plans (the House bill imposes new taxes on higher income households, which the president essentially killed by never mentioning). He also all but said that dropping the government-run insurance option would be fine with him — letting even more air out of that particular, sinking balloon.

So much for the inevitability of the House plan.

But what about the Baucus plan, released last week?

Again, the White House and Senate Democratic leaders are hoping its introduction and the scheduling of a markup in the Senate Finance Committee will create a sense of irresistible political momentum that will feed on itself. “Closer than we’ve ever been before.” “Doing nothing is not an option.” “Now is the time for action, not debate.” Etc. Etc.

But the Baucus plan suffers from the same problem that derailed the House bill: the more the public hears and learns about it, the less they like it.

In particular, there are three key provisions in the Baucus plan that are on very shaky ground politically, so much so that it’s hard to see how they survive intact.

First, there’s the so-called “individual mandate.” This is the key provision of Obamacare. It turns out that the grand plan to finally bring civilized, “universal coverage” to America amounts to nothing more than a hefty, regressive tax on low and moderate wage working Americans. They must either buy government-approved health insurance — the cost of which is driven up by excessive government regulation — or they must pay a $3,800 per household tax to the IRS. Sunday, President Obama tried to argue that this kind of overt government coercion doesn’t amount to a tax. Good luck with that argument.

Second, there are the cuts in Medicare Advantage (MA) payment rates, which Democrats have targeted for nearly three years now. President Obama keeps trying to sell these cuts as nothing more than reductions in profits for insurance companies, but senior citizens know better. Today, about 20 percent of the Medicare population is in MA plans (the private insurance option in Medicare), and most of them get coverage that goes well beyond what’s offered by traditional Medicare. If $120 billion is taken out of MA payment rates, as suggested by Senator Baucus, there will be large cuts in benefits for many millions of seniors and many will also be forced out of their current MA plans. So much for the promise that Americans can “keep the insurance they have today.” In the coming weeks, the Medicare population is likely to turn even more decisively against Obamacare as they hear and learn more about these cuts.

Third, there’s the new tax on high-cost insurance plans. Here especially, the president has no one to blame but himself for the fix Democrats are in. Many conservatives actually favor reforming the tax treatment of health insurance to foster cost-conscious consumption in a competitive marketplace. But President Obama won the election last November in part because he attacked his Republican opponent, Senator John McCain, for endorsing a proposal to convert the job-based tax preference into individual tax credits. In scores of ads, the Obama-Biden campaign warned that the McCain plan would tax workplace health benefits “for the first time in history.” Now, the president and Senator Baucus want to do exactly that — without admitting that’s what they are doing. It won’t work, though, as this story in the New York Times demonstrates, because it is obvious to all that the Baucus tax on insurers and employers will get passed on to workers and individual insurance enrollees, including many middle income households and union members.

The White House and their allies in Congress could avoid the political fallout associated with these highly controversial provisions if they worked with Republicans on a sensible, measured, bipartisan bill that covered more people with voluntary enrollment in a reformed marketplace, not heavy-handed government coercion. But Democrats are bound and determined to try and pass something akin to the Great Society, despite clear signals from the public that they aren’t interested in any such thing. Much hangs in the balance.

posted by James C. Capretta | 10:20 am
File As: Health Care

Wednesday, September 16, 2009

Who’s Really Paying for Obamacare? 

The health-care debate is finally turning to the core issue: who is really paying for Obamacare?

Here’s a hint: it’s not the rich.

The House bill and the proposal unveiled this week by Senate Finance Committee Chairman Max Baucus are built on three key provisions: a requirement that individuals secure “qualified coverage” or pay a hefty tax to the federal government (the so-called “individual mandate”); a requirement on most employers to offer “qualified coverage” to their full-time workers; and a “firewall” that requires most working Americans to sign up with insurance offered on the job without any additional governmental assistance.

In recent days, there have been a number of stories reporting on Democrats who are fretting that the subsidies for insurance under consideration in the Finance Committee are too meager (see this story in today’s Wall Street Journal and this column by Ruth Marcus in the Washington Post). These pieces focus on the provision in the Baucus plan that would limit the total premium a low-income household must pay — if they get their insurance through the “exchanges” — to a fixed percentage of their income. So, for instance, a family at 200 percent of the federal poverty line — $44,100 for a family of four in 2009 — would be required to sign up with insurance costing about $13,375 (the average cost for employer-sponsored family coverage in 2009). Under the Baucus plan, the family’s premium would be capped at about 8 percent of their income, or $3,538. The rest of the cost — nearly $10,000 — would be paid by the federal government (with perhaps a $400 per worker offset from some firms). House and Senate liberals are complaining that these caps on premiums in the exchanges should be lower — and thus the governmental subsidies higher. Of course, liberalizing those subsidies in the Baucus plan would push the price tag higher too, probably well above the president’s stated commitment to keep it to no more than $900 billion over ten years.

But there’s an even bigger issue here which is not yet getting the attention it deserves. Yes, the individual mandate would be a heavy burden for those low-income households getting their insurance through the exchanges. But it will be much, much worse for the far greater number of working Americans who will have no choice but to sign up with their job-based plans. The whole point of the so-called “firewall” is to prevent these workers from accessing the additional federal assistance for premiums that are only available for coverage offered in the exchanges. That’s how Senator Baucus and other Democrats jam their $2 trillion schemes into $900 billion sacks. Full-time workers have to have insurance, and they really have no choice but to take what’s offered at work. Period. The Baucus plan says these workers will get a ceiling on their premiums too — set at 13 percent of their income. But where would the rest come from? Not from the federal government. Employers would be paying these premiums on behalf of their workers, but, in competitive labor markets, employer-paid premiums also get paid by workers in the form of lower cash wages, as the Congressional Budget Office (CBO) has confirmed.

So, for low-wage, full-time workers who are offered qualified coverage on the job, the hidden and implicit taxes of Obamacare are truly stunning. A worker with an annual income at 200 percent of the federal poverty line — again, $44,100 if the worker is married with two children — could be required to sign up with insurance costing $13,375 per year. The employee portion of the premium would be notionally capped at 13 percent of annual income, or $5,720. The employer would pay the other $7,655 — but the employer portion too would come out of the worker’s take-home pay (possibly after some period of adjustment). Employer-paid premiums are tax-subsidized, but this existing federal tax subsidy is worth much less for low-wage workers than their higher-salaried colleagues and it’s certainly worth much less than the subsidies being proposed for insurance secured through the exchanges. At 200 percent of the federal poverty line, the foregone tax liability on an average employer-sponsored plan is likely to be about $4,000 (including payroll taxes). The other $9,000-plus in health insurance premiums — regardless of how it is split between worker and firm — would be shouldered by the worker himself. At $44,100, a $9,000 health insurance premium amounts to 20 percent of income.

The president and his allies in Congress are trying to convince Americans that they have found a painless way to achieve “universal coverage” that will involve no sacrifice from anyone. But the truth is that the Democratic plans all depend on coercion and hidden and regressive taxes. Low- and moderate-wage workers are the ones who will pay the bulk of the costs. Indeed, last week, the Lewin Group found that the House bill would increase costs for households with at least one uninsured member by $1,400 per year, on average. The same is almost certainly true of the Baucus plan. “Taxing the uninsured” is not likely to be a winning slogan for Obamacare. But it’s an accurate description.

posted by James C. Capretta | 12:37 pm
File As: Health Care

Tuesday, September 15, 2009

Are Democrats Going to Tax Health Benefits and “Cap” Medicare? 

Let’s start with some good news: the House health care bill is, for all intents and purposes, dead, and the president is the one who killed it.

In a key passage in his health care speech last week, President Obama committed himself to opposing any bill that would add “one dime” to the federal budget deficit over the next decade — or ever. As David Brooks pointed out in his Friday column, that presidential line in the sand should be the final nail in the coffin for the House bill because it would so plainly violate the president’s “deficit-neutral” commitment. And not by a little bit. The Congressional Budget Office (CBO) said in July that the House bill would set in motion a new entitlement program with costs growing at about 8 percent per year, while the revenue raised to pay for it would only grow at about 5 percent per year. In the medium and long term, after everything is phased in, the House legislation would therefore add increasing amounts of deficit spending to an already disastrous long-term budget outlook. Last week, the Lewin Group confirmed CBO’s finding and said the House bill, as reported out of the Energy and Commerce Committee, would add $1 trillion to the federal budget deficit from 2020 to 2029.

Of course, it was only a few weeks ago that the president was trying to strong-arm the House bill through the lower chamber. And a couple of months ago the president talked of “bending the cost curve,” not deficit neutrality. Still, given the unambiguous nature of the Obama pledge and where and when it was made, it’s hard to see how House leaders could resurrect the budget-busting bill they were working on in July.

Now for the bad news: The death of the House bill does not mean the death of Obamacare, unfortunately. The president and his allies are simply moving on to plan B (or perhaps it is C or D).

This latest version of Obamacare is likely to include two key provisions that Democrats hope will get them over the CBO hurdle. Depending on the specifications, it is certainly conceivable that provisions could be written to generate savings from within the “health system” that keep pace with the massive entitlement Democrats want to create.

The first provision the president endorsed was a new tax on health benefits. He didn’t put it that way in his speech, of course. He said he was for imposing a tax on high-cost insurance plans. But there really is no such thing as a tax on high-cost insurance plans. Senator Max Baucus has included such a tax in his draft proposal, but the financial burden would fall entirely on insurance enrollees, not insurance companies. Insurers, and employers who sponsor expensive insurance plans, would respond to such a tax by making adjustments in coverage, such as imposing higher deductibles, to ensure the cost of their plans fall below whatever threshold is set (now $21,000 for family coverage in the Baucus draft). And so its consumers and patients who would pay more if this particular Obama tax were to get enacted — including many in middle-class households and some who are union workers. Moreover, such a tax would amount to a tax on health benefits “for the first time in history” — which is the same criticism President Obama launched against the McCain plan in the final stages of the 2008 campaign.

The second provision the president endorsed in his speech was an “automatic trigger” to cut health spending if the savings he envisions from other changes don’t materialize. The president provided no specifics on how this mechanism would work, but a piece in the New York Times last week speculated that additional cuts in Medicare’s hospital and physician payment rates would kick in if health spending targets were missed.

We’ve seen this kind of “reform” before in Medicare. Physician fees are capped today, and Congress regularly overrides the automatic cuts which are supposed to occur to keep spending in line. There’s no evidence to suggest Congress will act differently in the future than it has in the past.

Moreover, Democrats have made a living attacking Republicans for harboring secret plans to undermine Medicare. Are they really ready now to endorse a plan that amounts to a permanent “cap” on Medicare spending? Apparently, some administration allies are trying to convince House and Senate members to do just that to get around their CBO problem. They argue that the trigger will never be pulled because other “reforms” in the bill will work so well that governmental health care savings will more than offset the expanded entitlement programs.

But that’s a very dubious assumption. The bills as they now stand have very little in them that will change the basic financial incentives for most health care providers, which is why CBO and most everyone else sees no reason to believe cost escalation will slow in any meaningful way. So if the Democrats impose a cap on Medicare spending, hospitals and physicians should assume the trigger will be pulled, forcing them into a never-ending struggle to get fully paid for what it costs to take care of Medicare patients.

It’s pretty clear at this point that President Obama will do just about anything to get a health care bill to his desk this year. It remains to be seen if he is so persuasive that he can convince his fellow Democrats that they are better off endorsing taxation of health benefits and a cap on Medicare than compromising with Republicans. Smart Democrats will be more than a little skeptical of that argument.

posted by James C. Capretta | 11:46 am
File As: Health Care

Monday, September 14, 2009

Health Reform Then and Now 

Last Friday, I participated in a panel discussion at the American Enterprise Institute (AEI) entitled, “Health Reform Then and Now: What Do We Need to Know?” The session focused on the differences in analytical information available in 1994, when President Bill Clinton proposed a health-care reform plan, compared to this year. In 1994, the Congressional Budget Office (CBO) released a detailed analysis (available here) of the Clinton plan very early in the year, which gave Congress plenty of time to understand its implications and make judgments. This year, House leaders unveiled their plan and CBO’s analysis of it in mid-July with the intention of voting on it by July 31st. During the discussion, I focused my comments on three assertions made by President Barack Obama about the plan being worked on in Congress that are highly questionable based on the verifiable facts: that it won’t not add “one dime” to the federal budget deficit; that it will lower costs for households, businesses, and governments; and that most of the cost of new coverage will be paid for by eliminating “waste” in Medicare and Medicaid. C-SPAN carried the event live; the full (2 hour plus!) video is available here. More information on the event and biographical information for all of the speakers can be found here, at AEI’s website.

posted by James C. Capretta | 11:58 am
File As: Health Care

Sunday, September 13, 2009

Presidential Assertions vs. Facts 

During his speech on Wednesday, the president made three crucial but unsubstantiated assertions. He said the plan he will sign won’t add “one dime” to the federal budget deficit, now or at any time in the future. He said this plan would lower costs for families, businesses, and government. And he said he would pay for most of the cost of the plan by eliminating waste and inefficiency in Medicare and Medicaid.

Again, these were assertions, with no facts or detailed legislative specifications to back them up. Indeed, the president made these assertions despite the fact that all available evidence indicates that the plans being worked on in Congress don’t come close to meeting these stated objectives.

First, regarding the budget deficit, we received confirmation on Wednesday from the Lewin Group that the House bill — as amended in the Energy and Commerce Committee — would increase the federal budget deficit by ever increasing amounts after 2019. The Lewin analysis — produced for the Peter G. Peterson Foundation, and available here — indicates the House bill would add over $1 trillion to the annual deficits between 2020 and 2029, including $188 billion in 2029 alone. So, the House bill would make our already bleak long-term budget outlook much, much worse — not better.

This should surprise no one. The Congressional Budget Office (CBO) said weeks ago that the House bill would set in motion a new entitlement program that would grow indefinitely at about 8 percent per year — just like Medicare and Medicaid have for four decades — while the “offsets” to pay for it would only grow at about 5 percent per year. That’s the makings for another very large unfunded liability on the federal books. In an earlier post, I suggested that the House bill would create a $10 trillion unfunded liability over seventy-five years.

Lewin also produced detailed estimates of what the House bill would do to household spending on health care. President Obama and other Democrats like to say they are providing “universal coverage.” But who is really paying for this coverage? It turns out it’s the uninsured workers themselves who would shoulder the financial burden in the Democratic plans. According to Lewin, households with at least one uninsured member would see a jump in their health-care expenses of $1,400 per year, on average. For uninsured households with incomes between $40,000 and $50,000 per year, the jump in annual health-care costs would average $1,700.

This, too, should not be surprising. The bills under consideration really only reduce the ranks of the uninsured by force. To keep federal costs “down,” the bills prohibit workers who are offered coverage on the job from getting new subsidies for insurance through the so-called “exchanges.” But these workers are required to have some coverage to avoid paying the individual mandate “penalty.” Consequently, they really have no choice but to sign up with their job-based plans. And that will mean paying for this insurance through lower take-home pay, whether they can afford it or not. Thus, the individual mandate — the basis upon which Democrats can claim to “cover everybody” — is really just a hidden and regressive tax on lower and moderate wage workers.

Finally, the president again said he could pay for “his plan” with painless reforms which will eliminate waste and inefficiency in Medicare. Where are these painless reforms? The president’s budget, the House bill, and Senator Baucus’s outline are filled with the same kinds of arbitrary, across-the-board provider payment reductions that have been used countless times in the past to hit budgetary goals. These are not “reforms” that will change the basic dynamics of how health care is delivered to patients. There is no effort to make distinctions based on quality or value. All hospitals will get smaller payment increases, no matter how well or how badly they treat their patients. Moreover, all the “fees” that are imposed on insurers, drug companies, and device manufacturers will simply get passed on to patients and consumers in the form of higher prices.

On Wednesday, the president described a health care plan that doesn’t exist. There is no proposal in Congress or offered by the president which would lower costs for households, businesses, and the government, and the president doesn’t have a magic solution which will “bend the cost curve” with painless efficiency gains.

What is clear is that the bills under consideration in Congress would impose massive new hidden costs on low and moderate wage households — the very people the president and his allies say they want to help. And that’s a fact, not an assertion.

posted by James C. Capretta | 5:49 pm
File As: Health Care

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