Obamacare's Unlikely Coverage Goal

In the midst of the troubled launch of Obamacare's health insurance exchanges, it is looking less and less likely that the law will lead to the net increase of insured Americans that the administration has promised, as I explain in a column at National Review Online.

At the time of enactment, CBO estimated that the net effect of the various Obamacare provisions would be 10 million new enrollees in Medicaid in 2014, 8 million enrollees in plans offered on the exchanges, 4 million new enrollees in plans sponsored by employers, and a reduction of 2 million people in the non-exchange individual insurance market. The net effect was an estimated reduction in the ranks of the uninsured of 19 million in 2014.

The Obama administration relied heavily on this CBO cost estimate to argue that the law would dramatically expand insurance coverage even as it also reduced projected federal budget deficits, in the short and long term. The CBO estimate was also instrumental in rounding up the final votes in favor of passage of the legislation in Congress. A strong case can be made that the numbers in the CBO cost estimate were what was promised to the American people, and therefore represent the benchmark against which Obamacare should be assessed.

The likelihood that such a sizeable reduction in the uninsured can be achieved in 2014 is slim. To date, far more people have learned that they are losing their plans next year than have signed up for new coverage in the exchanges. Moreover, even though Medicaid enrollments are running above those in the exchange plans, they are still not nearly on pace to reach the levels promised at enactment.

You can read the rest of the column here.

posted by James C. Capretta | 5:58 pm
Tags: exchanges, CBO
File As: Health Care

Some Progress on Premium Support

Medicare premium support, the entitlement reform plan that has been part of budgets passed by the House Republicans in 2011, 2012, and 2013, was harshly criticized during the last election, with the president repeatedly, and falsely, claiming that the plan would “end Medicare as we know it.” But, as I explain in a column at National Review Online, a new report from the Congressional Budget Office shows that premium support would not undermine Medicare benefits, even though it would be effective at cutting costs.

The CBO’s new analysis concludes that, depending on the specifics of the reform, it would indeed be possible to build a program that moderates federal costs and eases premiums for beneficiaries. For instance, under a premium-support model that used the average of premium bids by region (weighted by the size of the insurer’s beneficiary enrollment) to determine the government’s contribution, federal spending would drop by 4 percent relative to current law and beneficiary premiums would fall by 6 percent.

The key change in the CBO’s assessment: They forecast that intense price competition would cause the private insurance plans to submit bids that are 4 percent below the bids they would submit under today’s Medicare Advantage program. That’s a big difference, given that Medicare’s total per capita costs are expected to approach $12,500 in 2020. This assumed reduction in costs from private insurers would mean an even wider cost gap than the one that already exists between today’s Medicare Advantage plans and the traditional fee-for-service (FFS) program. CBO’s assessment leaves no doubt that private plans, properly run, can deliver Medicare benefits at far lower cost than the existing fee-for-service plans in most regions of the country.

You can read the rest of the column here.

posted by James C. Capretta | 11:37 am
Tags: premium support, CBO
File As: Health Care

Obamacare Remains a Budgetary and Policy Disaster

I have a new issue brief at the Heritage Foundation on the CBO’s updated cost estimate for Obamacare after the recent Supreme Court decision, and what CBO’s assessment leaves out.

CBO now projects that Obamacare’s Medicare and Medicaid cuts will reduce federal spending by over $700 billion over the coming decade. (Most of the cuts come from Medicare, although CBO did not break the estimate down by program.) However, these cuts are being double-counted. The cuts are being used to replenish the Medicare trust fund for hospital and other institutional care and pay future Medicare claims. Over the next 75 years, this will add about $8 trillion to the government’s unfunded liabilities. Over the next decade, when the double-counted cuts are taken out of the equation, Obamacare adds at least $340 billion to projected budget deficits.

You can read the rest of the brief here.

posted by James C. Capretta | 12:27 pm
Tags: CBO, double count

Obamacare’s Creation of Instability in Insurance Subsidies

I have a new column up at e21 on the recent CBO study that shows the strange inequalities that will result in the health insurance options for certain families:

CBO’s analysis confirms a crucial point about ObamaCare which remains poorly understood, which is that the law creates a massive inequity in insurance subsidies for working families with low wages.... The problem is that the subsidies inside the exchanges will far exceed the tax subsidy for employer-paid premiums at the lower end of the wage scale.


CBO believes that other preexisting labor laws will make it very difficult for employers to selectively dump their workers into the exchanges.... But what if CBO is wrong and employers are able to find ways around the existing rules to create a two-pronged approach to coverage, with high-wage workers staying in tax-preferred employer plans and low-wage workers migrating to the exchanges?

You can read the rest of the article here.

posted by James C. Capretta | 10:40 am
Tags: Obamacare, health exchanges, CBO
File As: Health Care

The $6,400 Question

The ongoing delusion of the price-control solution

When President Obama decided to take the political low road and demonize House Budget Committee Chairman Paul Ryan’s Medicare reform plan in his budget speech last month, it wasn’t really surprising. President Obama demonstrated in the 2008 campaign that he is a world-class practitioner of shamelessly dishonest political attacks when he went after Senator John McCain for proposing a change in the tax treatment of health insurance, and then pushed for a change himself once he was elected. Given this track record, there was every reason to believe he would jump on the chance to demagogue on health care again if the opportunity presented itself. And boy has he. It’s now clear based on four weeks of a relentless barrage that his reelection effort will be based heavily on creating fear in the electorate, and specifically among seniors, about the supposed negative consequences of the Ryan Medicare plan. So much for an administration devoted to hope and change.

But what exactly is the substantive basis for the president’s attack on Ryan’s proposal? Here’s the key paragraph from the speech:

[The Ryan plan is] a vision that says America can’t afford to keep the promise we’ve made to care for our seniors. It says that 10 years from now, if you’re a 65-year-old who’s eligible for Medicare, you should have to pay nearly $6,400 more than you would today.

Where did the $6,400 figure come from?

Best as anyone can tell (the president didn’t cite a source), it seems to have been derived from the Congressional Budget Office’s April 5 analysis of the Ryan budget. On page 22 of that report, CBO (always so helpful!) provided its assessment of what it would cost an average 65-year-old to enroll in a private health plan compared to what it would cost that same average 65-year-old to stay in traditional Medicare. It’s an illuminating piece of work on the part of CBO, but perhaps not for the reasons CBO intended.

The mechanics appear to be as follows: CBO says the Ryan plan would provide an $8,000 “premium support credit” for average-health 65-year-olds in 2022, which would only cover 39 percent of the total cost of providing a standard Medicare package of services to such beneficiaries. That puts the total cost of the private plan at $20,500, of which the beneficiaries would be required to cover $12,500 out of their own pockets.

By contrast, CBO says the traditional Medicare program could provide the same standard package of services for just $14,800 in 2022 (in what’s called the “alternative fiscal scenario”). Under current law, the government would cover about $8,600 of the total cost, leaving a little under $6,200 for the beneficiaries to cover themselves. With rounding, the difference between what it would cost the average 65-year-old under the Ryan plan compared to what it would cost under current law is “nearly $6,400” in 2022, or so it would seem from CBO’s numbers.

Ironically, this analysis from CBO actually tells us much more about CBO than it does about what the Ryan plan will mean for seniors in 2022.

There are two key assumptions underlying the numbers that are highly implausible and reveal a systematic tilt toward government-run health care.

First, CBO says that in 2022 government-run Medicare could provide the standard package of health coverage for just 72 percent of what it would cost a private plan to do so. How could that possibly be? Simple: Price controls, and especially the deep cuts in Medicare’s fixed prices imposed under Obamacare. If one assumes that there are no consequences whatsoever to paying ever-lower rates of reimbursement for medical services, then, sure, government-run Medicare, and for that matter government-run health care more generally, would look cheaper on paper than private health insurance.

And, in fact, this is not a new development. Health care price controls have always looked good on CBO tables, which is a huge problem in the policymaking process. But they never look quite so good in the real world. Consider Medicaid. State governments have imposed extremely low rates for most medical services, and the program’s participants often have a difficult time securing access to needed care. Far too often, it’s insurance on paper and not in practice. Moreover, because the rates are so low, the quality of care provided to the Medicaid population is well below what most Americans would find acceptable.

CBO’s analysis makes none of these quality distinctions. Price-controlled Medicare, with payment rates as low as Medicaid’s today relative to private insurance, is assumed to provide the same quality care as private coverage. It’s absurd.

Incidentally, it should be noted that in Medicare Advantage, private-sector HMOs were able in 2010 to provide the standard package of Medicare services for less than what government-run Medicare costs (according to MedPAC data). And that’s in spite of the price controls imposed by government-run Medicare. The reason is that government-run Medicare is a massively inefficient operation. Yes, it pays very little per service, but the volume of services provided has been soaring on an annual basis for years and years.

The other crucial assumption is that competition in Medicare has no effect whatsoever on the efficiency or cost of the options offered to Medicare participants. The whole point of the Ryan plan is to build a functioning marketplace, in which plans have to compete for the business of cost-conscious consumers. Ryan rightly believes that this is the key to genuine “delivery-system reform,” by which those delivering the services to patients find new, better, and more efficient ways of providing needed services at less cost. But CBO’s assessment assumes nothing will change at all.

Those who have been pushing for a market-based solution for health care have long complained that CBO’s analyses inevitably favor a command-and-control approach. This latest analysis only confirms that point of view. Unfortunately, it’s a sad reality that genuine reform of the nation’s health entitlements and broader health system are likely to be enacted in spite of analyses from CBO, not because of them.

posted by James C. Capretta | 10:13 am
Tags: Ryan Plan, CBO, Medicare
File As: Health Care

The CLASS Act Fraud

Those who conducted the campaign to force Obamacare through Congress in 2009 and 2010 made a whole series of fraudulent arguments. “You can keep the plan you have today if you like it.” “Premiums will go down, not up — by $2,500 per year for those with existing coverage.” “We can cover 32 million people with heavily subsidized and expansive third-party insurance, and it won’t cost the American people anything.” “The only people who will pay the $800 billion of Obamacare’s new taxes over the next decade are the rich.”

All of that is plainly false, of course, and most Americans know it, which is one reason the November 2010 election turned out the way it did.

But of all the deceptive arguments and tactics Obamacare’s apologists employed to jam their government takeover of health care through Congress, none was more egregious than the CLASS Act fraud.

CLASS — for Community Living Assistance Services and Supports Act — was one of the late Senator Ted Kennedy’s pet projects. It was sold as a miraculous twofer: the new program would provide both a self-financing, voluntary long-term care insurance program for those needing continuous assistance with daily living, and it would reduce the deficit to boot! What’s not to like?

Indeed, of the supposed $210 billion in deficit reduction over ten years that the Congressional Budget Office assigns to Obamacare, $86 billion is expected to come from CLASS Act operations.

But it’s all a dangerous and cynical game. CLASS is expected by CBO to produce deficit reduction over the next ten years only because the program’s rules require participants to pay premiums for five years before they become eligible for benefits. So, at start up, there is the illusion of a “surplus” as participants begin paying premiums but very few of them qualify for any benefits. But, very quickly, those “excess” premiums will be needed to liquidate the entitlement obligations that participants will be earning. It’s another example of Obamacare’s shameless double-counting.

What’s worse, the CLASS Act is a ticking entitlement time-bomb. Every expert who has looked at it — see here — reaches the same conclusion: it’s a poorly designed and ill-advised program that will suffer from severe adverse selection. Because it is voluntary, it will mainly attract enrollees who are at a higher risk of actually needing the benefit. Consequently, the premiums will need to be set very high, which will only make it even less attractive to healthy workers who generally aren’t that interested in long-term care insurance anyway.

Very quickly after the first decade, CLASS’s finances will become untenable. The premiums, though very high, will still be insufficient to cover all of the entitlement benefits earned and expected by participants. As the program rushes toward insolvency, the only options will be to cut promised benefits, raise premiums even more, or — surprise! — bail the program out with taxpayer subsidies. So, far from being a program that eases budgetary pressure, CLASS is actually a perfect example of all that is wrong in federal budgeting. It was sold under false pretenses as short-term deficit reduction when, in reality, it puts American taxpayers at great risk of another expensive bailout.

Stunningly, the Obama administration, after spending months defending CLASS’s virtues, now says it agrees with the program’s critics. How convenient. Now that it has served its main purpose, which was to create the false impression of deficit reduction from Obamacare, the administration is willing to “pivot” — in that all-too-familiar Washington way — and pretend that they have just now discovered the program’s flaws.

This is absurd. The Obama administration and its congressional allies knew all along that CLASS was an ill-advised risk to taxpayers. But they defended it every step of the way during legislative consideration in Congress because of the convenient and deceptive “score” it produced from CBO.

Now, Health and Human Services Secretary Kathleen Sebelius says she has the administrative flexibility to essentially rewrite the program herself from scratch, with no input or changes necessary from lawmakers. This too is absurd. Her lawyers no doubt have an expansive view of her discretion. But they are between a rock and hard place here. The only way CLASS works is if millions of healthy workers sign up for a program (though it will almost surely be a bad deal for them) even as sick workers who are likely to benefit are screened and kept out.

In one more sign of their shamelessness, the administration wants funding to conduct an “education campaign” to browbeat reluctant workers into signing up for a voluntary program that should never get off the ground.

The most serious threat to the nation’s long-term prosperity is runaway federal entitlement spending, and the CLASS Act is the perfect example of how not to go about starting and running a federal entitlement program. And yet the Obama administration is doing whatever it can to salvage it. It’s yet another example of the president’s complete detachment from budgetary reality.

posted by James C. Capretta | 4:30 pm
Tags: CLASS Act, Obamacare, CBO, Kathleen Sebelius
File As: Health Care

“Fiscal Consequences of the Health Care Law”

[NOTE: Last week, on January 26, 2011, I testified before the U.S. House Committee on the Budget in a hearing on the new health care law. Anyone interested in watching the hearing can find video here courtesy of C-SPAN; my testimony starts around 56 minutes in. The complete text of my testimony as prepared appears below.]

Mr. Chairman, Mr. Van Hollen, and members of the Committee, thank you for the opportunity to participate in this very important hearing on the fiscal consequences of the health care law.

The most serious threat to the nation’s long-term prosperity is projected large fiscal deficits over the years and decades ahead. And the main reason the nation’s budget deficits are expected to remain at dangerously high levels for the foreseeable future is because of the rapid growth of entitlement spending.

Importantly, entitlement spending was a problem even before the enactment of the Patient Protection and Affordable Care Act (PPACA). In 1975, the combined cost of Social Security, Medicare, and Medicaid was 5.4 percent of GDP. In 2009, these entitlement programs cost 10.1 percent of GDP.

That jump in spending — 4.7 percent of GDP — is the main reason it is so difficult to bring the nation’s budget closer to sustainable fiscal balance. Every year, we are spending more and more to fulfill entitlement promises made years and decades ago, leaving less and less to finance other priorities, even as the growing levels of entitlement spending puts enormous pressure on taxpayers.

And we haven’t even hit the really rough patch yet. Over the coming two decades, the United States will undergo an unprecedented demographic transformation, as the baby boom generation moves from its working years into retirement. The number of Americans age 65 and older will rise from 41 million in 2010 to 71 million in 2030. As these baby boomers enroll in Social Security and Medicare, costs will soar.

We were therefore already racing toward a budget and entitlement crisis before the health care law was considered and passed. Indeed, for the proponents of the legislation, that became a primary argument for its enactment. The president argued that his health care plan would begin to address the entitlement problem, at least from the perspective of the health programs. “Health reform is entitlement reform” was the catch-phrase.

But is that really the case? Did the new health care law ease the entitlement and budget crisis, or did it make matters even worse? That is the crucial question, and this Committee should be commended for taking it up as one of the first items for discussion in this new Congress. I believe the evidence is overwhelming that the new law will make matters not better, but far worse.

The most noteworthy characteristic of the new law is that it is the largest entitlement expansion since the 1960s. So, at a time when the federal budget is already buckling under the weight of existing entitlement programs, the new law stands up three new ones which will enroll tens of millions of Americans into taxpayer-financed programs promising permanent access to uncapped benefits. Moreover, spending on these new entitlements is expected to grow at rates that are above the level of growth of the economy or general inflation.

How then does a new law which increases spending by nearly $1 trillion over the period 2010 to 2019 reduce the federal deficit (by about $130 billion over ten years according to the Congressional Budget Office and by a modest amount in the decade after that)? The only way is by raising taxes and cutting spending by amounts in excess of the new spending commitments. According CBO’s estimate of the final legislation, spending reductions will bring the net increase in spending down to about $430 billion over the next decade. The tax hike to pay for this spending will total about $560 billion over the same period.

Thus, although the legislation has often been described by proponents as a deficit reduction measure, it might be more accurate to say that it is a very large spending bill, offset, at least on paper, by even larger tax increases.

But even these numbers do not tell the whole story. It is also important to look carefully at the assumptions underlying these estimates to determine if the promised deficit reduction will occur in reality, or just on paper. There are a number of reasons to be very skeptical in this regard.


The argument that the new law reduces the federal budget deficit over the coming decade rests in large part on the supposed deficit reduction from the creation of the Community Living Assistance Services and Supports Act, or CLASS Act, which is a new long-term care insurance entitlement program. CBO’s estimate assumes that $70 billion in supposed deficit reduction through 2019 is to come from the CLASS Act.

But, in truth, the CLASS Act is another budgetary time-bomb waiting to explode, not a solution that produces deficit reduction. In the short term, because the program is brand new and no one is eligible for benefits until they have paid in for five years, premiums are collected and no benefits are paid — producing what appears to be a temporary surplus. But beyond the visible ten-year window, those premiums are needed to pay long-term care insurance claims.

Moreover, every actuarial analysis done on the program indicates it will suffer from severe adverse selection. That is, it will attract mainly enrollees who expect to need the benefit. The result is that individual premiums are likely to be quite high because too few healthy workers will enroll. Overall premiums will fall well short of what is needed to cover the implicit benefit promises. Pressure will then build for a future taxpayer bailout to avoid imposing cuts on the vulnerable citizens who elected to enroll and pay premiums. In short, this program is not going to solve our entitlement crisis. Indeed, it is a perfect illustration of why federal entitlement spending is our central budgetary problem.

Disequilibrium in Federal Insurance Subsidies 

The new law promises members of households with incomes between 135 and 400 percent of the federal poverty line new premium subsidies if they get their coverage through the new state-run “exchanges.” Census data show that today there are about 111 million Americans under the age of 65 who are living in households with incomes in that range. But CBO estimates that only 19 million people will be getting the new premium assistance in 2019. They assume the other 90 million Americans will stay in job-based plans.

If that were really to happen, it would be terribly unfair. As Stephanie Rennane and Eugene Steuerle of the Urban Institute have documented, the new premium subsidies in the exchanges are worth far more to low- and moderate-wage workers than today’s federal tax preference for employer-paid premiums (see Chart 1). For instance, a household of four with compensation of $60,000 in 2016 would get $3,500 more in government assistance if they moved from employer coverage to an exchange. The extra subsidies would be even more for lower wage workers.

The new law thus sets up a situation where two families with identical compensation totals from their employers can get very different levels of federal support depending on where they get their insurance.

In my judgment, that’s not likely to be a politically stable situation. Pressure will build on elected leaders to treat every American equally. That is likely to lead to regulatory and legislative decisions making it easier for workers now in job-based plans to migrate to the exchanges.

Over time, what is likely to happen is that those who would be better off in the exchanges will end up there, one way or another, even as higher wage workers retain the tax advantage for job-based coverage. As the labor market segregates, costs will soar well above the $1 trillion in new spending over ten years currently projected for the law.

AMT-Like Bracket Creep

The new law relies heavily on tax increases to cover the new entitlement spending. According to CBO’s latest long-term budget projections, by 2035, the tax increases in the new law will collect revenue equal to 1.2 percent of GDP, which is very substantial. In today’s terms, that’s a $180 billion tax increase, every year.

How can that be, given that the tax hikes do not go nearly that high in the first decade? The answer is AMT-like bracket creep. The new tax on high-cost insurance plans, sometimes called the “Cadillac” tax, applies to policies with premiums for families above $27,500 in 2018. That threshold will only grow with general consumer inflation in 2020 and beyond, not growth of health costs. Thus, by 2030, the tax will be binding on many millions of Americans’ insurance plans.

Similarly, the new Medicare taxes on wages and other sources of income apply only to individuals with incomes above $200,000 per year beginning in 2013 ($250,000 for couples). But those income thresholds are fixed; they won’t rise with inflation at all. In very short order, that means these taxes will begin hitting middle-class Americans with massive tax hikes. By 2030, inflation will have eroded the $200,000 threshold so that it is the equivalent of $130,000 today (assuming 2.5 percent annual inflation).

The Medicare Payment Rate Reductions

The largest spending reduction in Medicare comes from automatic reductions in the inflation updates for hospitals and other institutional providers of care. The notional rationale is that these cuts represent productivity improvement in the various institutions getting Medicare payments. The reductions, amounting to a 0.4-0.5 percentage point reduction off the normal inflation update for Medicare payments, will occur every year, in perpetuity. The compounding effect of doing this on a permanent basis would be massive savings in Medicare — if they really were implemented. CBO says the cuts will generate $156 billion over the first decade alone.

But there are strong reasons to suspect these cuts will not be sustained. Medicare’s actuarial team, led by Richard Foster, has warned repeatedly that these cuts are not viable over the medium and long-term because they would jeopardize access to care for seniors. The cuts would push average Medicare payments to levels that are below what Medicaid is expected to pay, and the network of providers willing to take care of Medicaid patients is notoriously constrained. It is hard to imagine political leaders allowing Medicare to become less attractive to those providing services than Medicaid is today.

It’s worth noting here that these cuts in payment rates do not constitute “delivery system reform,” which the administration has often stated is what it is trying to achieve with the Medicare changes in the new law. These cuts in inflation updates will hit every institution equally, without regard to whether or not the institution is treating its patients well or badly. The savings that are expected from other reforms, such as Accountable Care Organizations, are minor by comparison.

The Budgetary Effect of Tax Hikes and Medicare Cuts in a Second Decade 

The administration and others have noted frequently that CBO’s cost estimate indicates the possibility of modest deficit reduction in the second decade after 2019 (although CBO notes that such an estimate carries more uncertainty than its ten-year projections). But the expectation of long-term deficit reduction is entirely dependent on huge spending reductions from the Medicare inflation cuts and from more and more middle-class Americans paying higher taxes under the new law’s tax provisions.

As shown in Chart 2, the tax hikes from the new law plus the savings from the “productivity adjustment” in Medicare would generate about $180 billion in “offsets” in 2020. By 2030, the spending cuts and tax hikes from these provisions will have more than tripled, to over $600 billion. If these taxes and spending cuts do not materialize, the new law will be a budget-buster of significant proportions.

Debt Subject to Limit

Both CBO and the Medicare actuaries have both noted that the Medicare cuts and payroll tax hikes which are supposed to improve the solvency of the Medicare hospital trust fund in the new law can only be counted once, not twice. Here is how CBO put it in a Director’s blog post from December 2009:

“To describe the full amount of HI trust fund savings as both improving the government’s ability to pay future Medicare benefits and financing new spending outside of Medicare would essentially double-count a large share of those savings and thus overstate the improvement in the government’s fiscal position.”

In other words, these taxes and cuts in Medicare either improve the government’s ability to pay future Medicare claims, or they pay for a new entitlement program — but not both.

One way to see that clearly is by looking at the impact of the health care law on debt subject to limit. According to CBO, the new law will increase that debt, by about $230 billion over the coming decade, because the Medicare tax hikes and spending cuts are double-counted instead of devoted to deficit reduction.


Mr. Chairman, you and your colleagues on this committee face a daunting challenge. The nation is rushing rapidly toward a fiscal crisis, driven by excessive borrowing and debt. Even before the health law was enacted, it was necessary to reform the nation’s entitlement programs to bring spending commitments more in line with what the country can afford. Now, with enactment of the health law, the climb to a balanced budget got much steeper.

The solution is to start by unwinding what was just passed and replacing it with a program that constitutes genuine entitlement reform.

posted by James C. Capretta | 1:44 pm
Tags: Paul Ryan, House Budget Committee, Obamacare, CLASS Act, payment-rate reductions, CBO
File As: Health Care

Resetting the ‘Obamacare’ Baseline

The analyses and cost estimates provided by the Congressional Budget Office have had an enormous effect on the public debate about health care reform over the last two years. But, as Douglas Holtz-Eakin and I point out in an op-ed today in Politico, CBO, a professional and respected institution, in this instance based its analyses on unrealistic assumptions, which can harm the policy debate and the public understanding of the new health care law:

The core promise of the new law is that low- and moderate-income households getting insurance through new state-run “exchanges” will have their premiums capped as a percentage of income.... The population potentially eligible for this new federal entitlement is large. The Census Bureau says there are about 111 million Americans under the age of 65 in households with incomes between 135 percent and 400 percent of the poverty line.

But the Congressional Budget Office forecasts that only 19 million people will be getting the new federal premium subsidies in 2019. That’s because the law stipulates than any person offered qualified insurance coverage by an employer is ineligible for premium assistance offered by the exchanges, and the CBO expects most employers to continue sponsoring insurance plans. This would sharply limit the migration to the heavily subsidized exchanges.

But is that a reasonable assumption?... [A more realistic estimate] is that an additional 35 million workers and their families with incomes below 250 percent of the poverty line — who would clearly be better off in the exchanges as opposed to on job-based coverage — could end up there over time, one way or another.

And when they do, costs will soar. The CBO projects that the premium-assistance program will cost about $450 billion from 2014 to 2019, but that cost would rise to $1.4 trillion if workers and their family members with incomes between 133 percent and 250 percent of the poverty line were to migrate out of their current job-based plans and into the exchanges on Day One. That’s nearly $1 trillion more than the amount advertised by the law’s supporters.

You can read the entire piece here.

posted by James C. Capretta | 12:58 pm
Tags: Obamacare, baseline, CBO, Douglas Holtz-Eakin
File As: Health Care

The Shameless Medicare Propaganda Continues

Today, the Department of Health and Human Services (HHS) issued what it is calling a “report” on the supposed improvements to Medicare passed as part of Obamacare.

The first thing to note here is that this so-called “report” isn’t really a report at all. It provides no new information. By all rights, it shouldn’t generate any news, as it contains no news. It’s just a rehash of administration talking points, half-truths, and deceptive arguments, repeated many times previously, based on cost estimates produced by the chief actuary of the Medicare program in April and by the Congressional Budget Office (CBO) in March.

So why is HHS Secretary Kathleen Sebelius touting this so-called “report” today, four months after the law’s passage, including scheduling a conference call about it with reporters?

Perhaps it has something to do with the fact that another Medicare report — the Medicare trustees’ report — is also scheduled to come out later this week. The trustees’ report always generates news because it is the once-a-year update to the long-term cost projections for the Medicare program. The report must be approved by the Medicare Board of Trustees, which is made up almost entirely of political appointees from the Obama administration. But the report itself is largely written by the chief actuary, Richard Foster, and his staff, who are civil servants in the executive branch but, by longstanding tradition, are given much more independence than other federal workers because of the importance and sensitivity of their estimates and judgments.

That independence was on full display when the chief actuary released his cost projections for Obamacare on April 22, including a separate memorandum directly addressing the issue of Medicare trust fund solvency.

On the surface, the chief actuary’s findings would seem to confirm one of the administration’s main talking points — which is that the new health law will postpone depletion of the Medicare hospital insurance (HI) trust fund by a dozen years, to 2029. But a full reading of both memoranda makes it clear that the apparent good news on trust fund solvency is nothing but a mirage.

The problem is that the administration is trying to count the same Medicare cuts and tax increases twice, once to pay for a massive entitlement program to expand insurance coverage to low and moderate income households, and then again to fill the coffers of Medicare so future benefits can be paid.

That of course seems fishy to commonsense Americans, and for good reason. Even the federal government hasn’t found a way to spend the same money twice — a point both the chief actuary and CBO confirmed in their separate analyses of Obamacare. As stated by the chief actuary’s office, “In practice, the improved [Medicare hospital insurance] financing cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions under the [the new health law]) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.”

In other words, because Congress spent the Medicare savings on a new entitlement program, when Medicare’s bills mount in 2017 and beyond, the federal government is in no better position today than it was before enactment of Obamacare to pay them. On paper, Medicare’s HI trust fund has new reserves, but those reserves are not backed by real assets. When Medicare’s costs rise, the federal government is still going to have to borrow more money, raise new taxes, or cut spending elsewhere to meet its obligations. The administration and its allies in Congress could have improved the government’s ability to pay Medicare’s bills in the future by devoting all of the Medicare cuts and taxes to deficit reduction. But that’s not what they did; consequently, we now have more government obligations and much less flexibility to find ways to pay for it all.

The HHS “report” released today also continues to ignore another important finding by the chief actuary about Obamacare, which is that the deep, arbitrary, and across-the-board payment-rate reductions for hospitals, nursing homes, and other providers of medical services are highly unlikely to be sustained because they will harm access to care for Medicare’s enrollees. The largest cut enacted by Congress would impose an annual reduction in the inflation update for many institutional providers of care. This cut would occur every year, in perpetuity, thus driving payment rates down well below what private payers will be forced to pay. These kinds of arbitrary price controls always drive out willing suppliers of services. The chief actuary expects about 15 percent of the nation’s hospitals would lose so much money from Medicare patients that they would have to drop out of the program. And yet the HHS “report” continues to argue that Obamacare will “strengthen” the program on behalf of beneficiaries.

Similarly, the HHS paper glosses over the deep reductions in the Medicare Advantage program (some $150 billion over ten years), arguing in Orwellian fashion that the Medicare Advantage cuts will somehow be good for seniors. As the chief actuary has noted, Obamacare will push millions of seniors out of the health insurance plans they voluntarily selected, and millions more will now pay hundreds if not thousands of dollars more for their health care every year as a result the new law’s cuts.

The administration is clearly in full campaign mode now. Seniors are a critical voting bloc in an off-year election. Democrats have now targeted them with taxpayer-funded mailings that are blatantly deceptive, a taxpayer-funded television campaign featuring Andy Griffith that FactCheck.org has said uses “weasel words” to avoid telling the truth, and now a Medicare “report” that is a rehash of Team Obama’s stale and discredited talking points. Unfortunately for the administration, no matter how much money they throw at the problem, it’s unlikely to work. America’s seniors have enough common sense to know that down is not up, and up is not down, no matter how many times the president says otherwise.

posted by James C. Capretta | 5:10 pm
Tags: Kathleen Sebelius, Medicare Board of Trustees, CBO, chief actuary, Medicare Advantage
File As: Health Care

Changing The Name — But Not The Political Game

[Co-authored with Thomas Miller of the American Enterprise Institute] 

Earlier this month, the Obama administration launched the latest version of high-risk pools, as authorized by the Patient Protection and Affordable Care Act (PPACA). The new pools are off to a stumbling start – behind schedule, facing resistance (or indifference) from many state governments, structurally flawed, and substantially underfunded. In other words, “Close enough for government work.”

But if you can’t solve a problem by first overstating it, and then underfunding it, you can at least change its name – to the “Pre-Existing Condition Insurance Plan,” increase the gaping chasm between its overreaching promises and likely results, and provide an emblematic preview of larger problems ahead in the rest of ObamaCare.

A better solution would begin with redefining the problem to avoid the temptations of trying to achieve multiple policy objectives with a single tool, which results in mission creep and failure to target scarce resources more effectively and sustainably. True high-risk pools should be limited to covering the most likely, highest-risk individuals, as identified before the fact. They don’t work as well as a mechanism for subsidizing the health care costs of low-income individuals more broadly, or for covering the uninsured in general.

The Medically Uninsurable Are Less Numerous Than Sometimes Claimed …

The plight of “medically uninsurable” Americans is serious and substantial, though frequently prone to exaggeration (and occasionally minimization) for political purposes. If defined as those who report being denied access to health insurance due to a serious medical condition, it’s closer to two to three million people. If the definition is expanded also to include those who face significant coverage exclusions, or much higher premiums, due to pre-existing medical conditions, this estimated population probably ranges closer to four to five million. The problem is essentially limited to potential customers in the individual insurance market, given both longstanding insurer practices and more recent HIPAA rules for portability and against health status discrimination in the group market. Guaranteed renewability for those already insured in the individual market further reduces the actual size of those at risk.

More spectacular numbers sometimes are tossed around far too indiscriminately, based on mixing and matching overinflated estimates of Americans with at least some sort of chronic medical condition (as high as 72 million working-age adults; or 45 percent of the non-elderly adult uninsured) with high-end estimates of those lacking insurance at some point in time, rather than persistently. But those loose extrapolations confuse, or fail to link, cause (health status) with effect (denial of coverage).       

… But PPACA’s High-Risk Pools Are Still Underfunded 

Even though the actual size of the medically uninsurable population is much smaller than the Obama administration once estimated last year, in trying to oversell its proposals for tighter regulation of private insurers, Congress and the White House still managed to substantially underfund their interim solution to the problem. The PPACA enacted last March included only $5 billion in federal taxpayer funds to finance a more generous version of state-based high-risk pools (HRPs). More likely annual costs to do the job adequately are closer to two or three times that amount.

The design for shallow pools represented an unconvincing ploy to distract voters from the unpleasant fact that all but a tiny portion of the new law’s provisions to increase coverage (through Medicaid expansion and subsidized policies in new health exchanges) will not go into effect until 2014. The higher private premiums, new taxes, increased regulatory burdens, and formulaic spending cuts it triggers will kick in well before then. 

Standard health care politics tends to tempt legislators to use regulatory cross-subsidies (community rating, guaranteed issue, standardized benefits, etc.) to hide the cost of covering the most expensive risks within “private” coverage instead of using public funds and government budgets to do so more directly and transparently. But in this case, the Obama White House and congressional leaders discovered not only that the full budgetary price tag for their ambitious near-universal coverage goals through direct subsidies remained out of reach. Even delivering a menu of mandated coverage, required benefits, and risk-insensitive premiums through a new regulatory infrastructure would take nearly another four years after passage of an initial legislative framework. 

The Provisions For High-Risk Pools In The Senate Bill, Which Democratic Leaders Had To Adopt, Are Particularly Troublesome

So the short-term gambit of inserting a new version of underfunded, state-level HRPs into the final law provided an opportunity both to overpromise deliverable benefits and fast forward assumptions of the long-term architecture of Washington-directed health insurance on a more limited basis. However, the final legislation made the goal of providing access to coverage for those with high-cost/high-risk medical conditions even harder because, for procedural and political reasons, Democratic congressional leaders had to adopt the Senate’s sketchy version of HRPs included within a bill originally passed in December 2009. The new HRPs will operate very differently from the high-risk pools already established in 35 states that are designed to match even more limited resources. The new state pools under PPACA rules cannot allow any exclusions or waiting periods for coverage of pre-existing conditions, age-based premium variation must be compressed, cost-sharing is restricted, and (most importantly) enrollees can only be charged standard rates. Even the House version of HRPs passed in November 2009 (HR 3952) allowed premiums to be as high as 125 percent of the prevailing standard rate in a state’s individual market (still the low end of what most existing state HRPs charge). 

Both the earlier Senate and House versions of the health reform law apparently tried to limit HRP eligibility to those already uninsured for at least six months. The House bill also established somewhat better-defined “medically eligible” categories for such HRP coverage (previously denied coverage, offered coverage with condition limits, or offered coverage at rates above those for HRP coverage – within the previous six months) than simply the Senate’s looser requirement in section 1101(d) of what became the final law’s language that an enrollee also must have a “pre-existing condition” as determined by the guidance of the HHS Secretary.

In any case, the final version of the PPACA ensures that operating costs for the new HRPs will be much higher per enrollee and the authorized funding for them will be exhausted ahead of schedule – perhaps as soon as next year. Even the most conservative estimates of the mismatch between likely HRP costs and PPACA funding for them have suggested that the latter would come up short well before 2014. The Office of the Actuary at the Centers for Medicare & Medicaid Services estimated that the initial $5 billion authorized for this program would be exhausted by 2011 and 2012. If the likely policy response was substantial premium increases to sustain the program, further participation beyond an initial 375,000 enrollees would be quite limited.  

The Congressional Budget Office relied on a more simplistic estimate. Although CBO suggested that the public funding available for HRP subsidies would not be sufficient to cover the costs of all applicants through 2013, it then assumed that HHS would use the authority given to it under the PPACA to limit enrollment in the program and spend no more than the capped amount of $5 billion, on an average of about 200,000 enrollees a year through 2013. CBO acknowledged that the actual number of people who may be eligible for the HRP program is much greater – in the millions – and if more people are allowed to sign up initially, the funds will be exhausted prior to 2013.      

One might ask whether this flawed set of design assumptions represented a half-hearted unwillingness to fully fund HRPs to handle the much larger pre-existing condition problem imagined by Obama administration policymakers. Such a robust solution would diminish the rationale for controlling even more of the private health insurance market through sweeping regulation, tight premium controls, and complex cross-subsidies. Or did it reflect the tacit acknowledgement that the actual pre-ex condition problem had been greatly exaggerated?  Most likely, it represented a combination of both, along with the budgetary imperative to suppress demand for such HRP coverage and stretch out the limited taxpayer funding at least until broader coverage expansions under Medicaid and the new exchanges kicked in after 2013. 

Subjecting Consumers To A Bait-And-Switch 

The new HRPs were designed to encourage the worst sort of boom-bust coverage cycle imaginable. On the one hand, the Obama administration would engage in a hurried political clearance sale this year, in which as much HRP enrollment as possible would be encouraged in order to demonstrate visible results before the November off-year elections. (Early evidence suggests that even this will be an uphill and slow-developing climb). But after boosting initial coverage expectations through the bait of seemingly generous promises, HRP administrators would have to pivot and switch to different set of appetite suppressants included in the PPACA language. The new law not only limited HRP enrollment to those already uninsured for at least six months; it also authorized the HHS secretary to close enrollment to comply with funding limitations and make other unspecified “adjustments” as needed to eliminate HRP program deficits in any fiscal year. Enrollees already “insured” in older versions of state-based high-risk pools must remain in their higher priced, less comprehensive coverage. Other individuals suffering from high-cost health conditions (but not yet uninsured for a full six months) must simply wait their turn. 

This two-tiered structure of coverage subsidies foreshadows the forthcoming disparate treatment of lower-income individuals expected to gain health insurance exchange subsidies versus otherwise-similar workers stuck in employer-sponsored group insurance plans, beginning in 2014. The political sustainability of such parallel health subsidy worlds is suspect, to put it mildly.

Proponents of PPACA have spent the better part of two years harping on the perceived deficiencies of private insurance arrangements, including after-the-fact benefit limits, waiting periods for coverage, and unaffordable premium increases, but those are exactly the kind of adjustments now prescribed to close the yawning gap between inadequate public funds, administrative feasibility, and exaggerated political gestures in the new HRPs. The PPACA first authorizes the HHS Secretary to determine which pre-existing conditions would make a potential enrollee eligible for federal HRP coverage, and then figure out how to spend less money actually to cover fewer of them, as budget funds run short.

The larger lesson is not to abandon the important concept of special subsidized coverage for those Americans facing the greatest health risks with the fewest personal resources, but rather to target HRP assistance more transparently and sustainably. Trying to spread such public subsidies as widely and thinly as politically possible leads to mission creep and broken promises.

A Better Way Forward

We have written elsewhere about a better vision of high-risk pools needed to protect the highest-risk uninsured that will not spring budgetary leaks. They certainly must be funded more generously, but other essential principles also need to be established first. For example, it’s appropriate for individuals anticipating more expensive health care needs to pay somewhat more than others to handle them (i.e., higher premiums and more cost sharing), but with some realistic and equitable ceilings on just how much is too much and guidelines for when public subsidies should step in. Adequately funded high-risk pools need to be augmented with broader remedies, such as:

  • supplemental income-based subsidies
  • stronger protection for those maintaining continuous insurance coverage against the risk of new insurance underwriting based on future changes in health status, and
  • more effective incentives and tools for both patients and providers to make higher-value health care decisions   

Unlike the approach used in a number of current state-run high-risk pools, the funds to subsidize coverage for high-risk individuals should come from general revenue instead of from higher premiums charged to other private insurance enrollees (such as through narrowly-based premium taxes). Making the full costs of adequate HRP financing more transparent will encounter criticism that this approach is simply unaffordable. However, the actual future costs of treating individuals with high-risk conditions will not disappear if we instead try to finance them less directly and effectively through higher insurance premiums for everyone else. They simply will appear in other forms (including reduced coverage and less adequate treatment).   

With state budgets overdrawn and overstretched for several years to come, the reality is that such initial funding will have to come from Washington in the form of a series of generous, but capped, appropriations. Capping the amounts would help head off the dangers of open-ended entitlement misincentives, and a switch to state matching funds should be reconsidered in later years. One overlooked way to find most of the funds needed — in places other than the emptying pockets of federal taxpayers – would be to redirect some of the hundreds of billions of dollars in new insurance subsidies scheduled for later years in other portions of the PPACA (for higher-income Medicaid expansions and health exchange coverage) and help those in the greatest need first. 

A more targeted approach to assisting those with high-risk/high-cost medical conditions offers several other advantages beyond fiscal ones. As suggested by health researchers John Cogan, Glenn Hubbard, and Dan Kessler, publicly subsidizing the most costly and risky “tail” of the health spending distribution can strengthen and expand the rest of the private insurance market. Properly structured HRPs also have the potential to concentrate resources and attention on the most important, highest-cost cases. They could identify and gather together exactly those individuals who need additional disease management, navigational assistance, and specialized care from centers of excellence. 

In addition, initial reliance on private insurance market screening and designation of “high-risk” applicants would retain risk-reduction incentives for both insurers and patients, while tempering the bureaucratic rigidities of complex risk-adjustment calculation. The less-likely danger of risk dumping by private insurers still could be discouraged at the state level by contracting out final HRP eligibility determinations to neutral third-parties with experience in medical insurance underwriting, and applying penalty fees to private insurers that repeatedly abuse objective, independent criteria.

The PPACA version of federally-guided HRPs represents a half-hearted and misguided attempt to help those who really need the most assistance. The new pools are off to a rocky start and remain destined to disappoint because, like many other provisions of the overall law, they promise far more than they can deliver. Critics of the HRPs should seize the opportunity to change the game, by replacing their flawed structure with one that actually could work, based on less federal regulation, more consumer choice, and better-targeted financing.  

The notion that the only way to solve the problem of covering Americans with pre-existing conditions is through a massive transformation of America’s health-care system — one that will increase costs, raise taxes, displace millions of the happily insured, create a new entitlement, and undermine our private insurance sector — is simply wrong.

[Cross-posted at HealthAffairs]

posted by James C. Capretta | 11:53 am
Tags: high-risk pools, CBO