Let’s look at what the President said about health care reform in his press conference yesterday:

Like energy, this is legislation that must and will be paid for. It will not add to our deficits over the next decade. We will find the money through savings and efficiencies within the health care system — some of which we’ve already announced.

The first sentence is good. By using “must” and “will be,” he is telling Congress that “not add

[ing] to our deficits over the next decade” is a bright line. It’s only one part of the test of a fiscally responsible bill, and a too-weak test at that. As JD Foster and some other commenters have pointed out, however, not adding to an already unsustainable future deficit path means you will have left an unacceptable situation unchanged. It’s even worse, because to offset the new entitlement, Congress will take the politically easiest Medicare and Medicaid spending cuts that would otherwise be used to bring future deficits in line. They will have swapped the least popular Medicare and Medicaid spending for popular new entitlement spending, making it harder to address this unsustainable spending trend in the future.

I believe the President is referring to this week’s prescription drug announcement when he says, “We will find the money through savings and efficiencies within the health care system … some of which we’ve already announced.” This is mixing apples and kumquats. Budget rules require you to offset government spending increases with tax increases or cuts in government spending. The pharmaceutical industry announced they would reduce the amounts they would charge Medicare beneficiaries by $80 B over the next ten years. The industry proposal will save money for seniors, not for the government. So the health care savings and efficiencies “which we’ve already announced” have nothing to do with [federal budget] “deficits over the next decade.”

We will also ensure that the reform we pass brings down the crushing cost of health care. We simply can’t have a system where we throw good money after bad habits. We need to control the skyrocketing costs that are driving families, businesses, and our government into greater and greater debt. …

… Unless we act, premiums will climb higher, benefits will erode further, and the rolls of the uninsured will swell to include millions more Americans. Unless we act, one out of every five dollars that we earn will be spent on health care within a decade. And the amount our government spends on Medicare and Medicaid will eventually grow larger than what our government spends on everything else today.

At some point this excellent language, which the President uses frequently, must confront the reality that nothing Congress is contemplating would actually do this. I can find only one provision in the Kennedy-Dodd draft that could claim to reduce private health care spending – a provision which would give the Secretary of HHS authority to mandate that firms effectively lower the premiums they charge by rebating a portion of those premiums to consumers. Even this provision does not address the primary driver of health cost growth, which is the interaction between low-deductible insurance and new medical care technology.

Aside from that (highly objectionable) provision, I can find nothing that would provide information and incentives to consumers, medical professionals, health plans, employers, or governments to slow the growth of long-term private health care spending.

I believe the President means this when he says it. His staff and the Congress are failing to deliver on this goal. At some point soon, it will be too late to introduce these needed but politically painful changes into legislation.

There’s no doubt that we must preserve what’s best about our health care system, and that means allowing Americans who like their doctors and their health care plans to keep them.

… Well, no, no, I mean — when I say if you have your plan and you like it and your doctor has a plan, or you have a doctor and you like your doctor that you don’t have to change plans, what I’m saying is the government is not going to make you change plans under health reform.

The legislation being developed does not fulfill this goal. Then again, no legislation could. This is a Presidential overpromise (and a serious tactical error) that the Congress will be unable to fulfill. CBO says the Kennedy-Dodd bill would cause 10 million people to lose their current employer-based insurance because their employer stops offering it, even if those people like their health plan and want to keep it.

I think in this debate there’s been some notion that if we just stand pat we’re okay. And that’s just not true. You know, there are polls out that show that 70 or 80 percent of Americans are satisfied with the health insurance that they currently have. The only problem is that premiums have been doubling every nine years, going up three times faster than wages. The U.S. government is not going to be able to afford Medicare and Medicaid on its current trajectory. Businesses are having to make very tough decisions about whether we drop coverage or we further restrict coverage.

So the notion that somehow we can just keep on doing what we’re doing and that’s okay, that’s just not true. We have a longstanding critical problem in our health care system that is pulling down our economy, it’s burdening families, it’s burdening businesses, and it is the primary driver of our federal deficits. All right?

This is a straw man. As an example, I strongly oppose both the Kennedy-Dodd draft and the House draft of health care legislation, but I don’t believe that if we just stand pat “we’re okay.” There will be health insurance and health provider interest groups arguing we need to maintain elements of the status quo because they benefit financially from those elements. The President’s comments, however, ignore that there are others who agree with him on the goal of slowing health care cost growth, but have a different way to go about it.

I would repeal the current-law exclusion for employer provided health insurance and replace it with a standard deduction not tied to employment. I would make changes in health insurance law to allow you to take your health insurance with you when you left your job (“portability”), and to shop outside your state to buy health insurance so that insurers were forced to compete for your business. I would change medical malpractice laws. All of these changes would actually slow private health cost growth by creating incentives for individuals to shop for high-value health care. I, for one, am not for the status quo, even though I oppose the bills being developed in the Congress. (I will explain my proposal in more detail at a later date.)

So if we start from the premise that the status quo is unacceptable, then that means we’re going to have to bring about some serious changes. What I’ve said is, our top priority has to be to control costs. And that means not just tinkering around the edges. It doesn’t mean just lopping off reimbursements for doctors in any given year because we’re trying to fix our budget. It means that we look at the kinds of incentives that exist, what our delivery system is like, why it is that some communities are spending 30 percent less than other communities but getting better health care outcomes, and figuring out how can we make sure that everybody is benefiting from lower costs and better quality by improving practices. It means health IT. It means prevention.

It means changing incentives. More precisely, it means eliminating policy-induced incentives that encourage people to ignore the costs of the health insurance they buy and the medical care they use. It means repealing the tax treatment of employer-provided health insurance.

Conventional wisdom is that the Obama White House is afraid of political blowback if they endorse this reform, especially from organized labor. They are leaving the door open to it if Congress chooses to include it.

I hope the President’s negotiators are privately offering specific proposals to change incentives in private sector health insurance markets and health care delivery, because they have offered no such proposals publicly. The President and his team have offered specific proposals to increase the amount of information available, but not to change the incentives. As CBO and I have explained, you need to do both.

Number two, while we are in the process of dealing with the cost issue, I think it’s also wise policy and the right thing to do to start providing coverage for people who don’t have health insurance or are underinsured, are paying a lot of money for high deductibles.

But the Kennedy-Dodd draft would increase federal health entitlement spending by 11%. The savings being proposed are far exceeded by the new entitlement expansion.

Also, when you expand government-financed health insurance coverage, private sector health spending goes up, not down. So while a new government insurance program will help those people who were previously uninsured, it will make solving the long-term health cost growth problem more difficult.

Now, the public plan I think is a important tool to discipline insurance companies. What we’ve said is, under our proposal, let’s have a system the same way that federal employees do, same way that members of Congress do, where — we call it an “exchange,” or you can call it a “marketplace” — where essentially you’ve got a whole bunch of different plans. If you like your plan and you like your doctor, you won’t have to do a thing. You keep your plan. You keep your doctor. If your employer is providing you good health insurance, terrific, we’re not going to mess with it.

This is the most frequent argument for a public health option – that it will “discipline insurance companies.” It’s a useful political argument because insurers are unpopular.

In most other sectors, however, we rely on market competition to discipline sellers. If you don’t like the company that sells you X, you instead buy from their competitor. I have not seen any evidence, nor heard any arguments from the Administration, to demonstrate that market competition among insurance companies is ineffective. Are there antitrust issues or market barriers that necessitate government intervention? Do the President’s advisors believe that insurers do not operate in a competitive market? For this argument to have validity they need to make this case. I am skeptical but would like to hear the argument.

Q: Won’t [a government option for insurance] drive private insurers out of business?

THE PRESIDENT: Why would it drive private insurers out of business? If private insurers say that the marketplace provides the best quality health care, if they tell us that they’re offering a good deal, then why is it that the government … which they say can’t run anything … suddenly is going to drive them out of business?” That’s not logical.

I am reminded of the old George Carlin joke: “Think for a moment about flamethrowers. The Army has all the flamethrowers. I’d say we’re ****ed if we have go up against the Army, wouldn’t you?”

The government option for insurance would drive private insurers out of business because the government has tools available to it that the private sector does not. Imagine if a private firm could set the rules under which it competes for business with other private firms. The playing field will not be level when one option has the power and force of the government behind it. The Army has all the flamethrowers.

It’s easiest to make this case by example:

  • Fannie Mae and Freddie Mac had a government imprimatur and specific policy advantages granted by the government that allowed them to dominate the mortgage securitization markets.
  • The federal government set a statutory “fence” to protect the Tennessee Valley Authority (a government-run power company) from competing for customers with privately-owned utilities. They are immune from state rate regulation and have a different tax system.
  • Ford Motor Company is now at a significant competitive disadvantage relative to the bailed out General Motors and Chrysler.
  • Private property and casualty insurers are not selling terrorism insurance above a certain amount. They were crowded out by the government program.
  • Direct student loans from the government are crowding out loans offered by private banks.

Q: Is [the inclusion of a government option for insurance] non-negotiable?

THE PRESIDENT: In answer to David’s question, which you co-opted, we are still early in this process, so we have not drawn lines in the sand other than that reform has to control costs and that it has to provide relief to people who don’t have health insurance or are underinsured. Those are the broad parameters that we’ve discussed.

There are a whole host of other issues where ultimately I may have a strong opinion, and I will express those to members of Congress as this is shaping up. It’s too early to say that. Right now I will say that our position is that a public plan makes sense.

Translation: Yes, it’s negotiable.

Now, by the way, I should point out that part of the reform that we’ve suggested is that if you want to be a private insurer as part of the exchange, as part of this marketplace, this menu of options that people can choose from, we’re going to have some different rules for all insurance companies — one of them being that you can’t preclude people from getting health insurance because of a pre-existing condition, you can’t cherry pick and just take the healthiest people.

So there are going to be some ground rules that are going to apply to all insurance companies, because I think the American people understand that, too often, insurance companies have been spending more time thinking about how to take premiums and then avoid providing people coverage than they have been thinking about how can we make sure that insurance is there, health care is there when families need it.

This is important, and it requires a full post in response. There are two points here:

  1. The President wants to change the rules for private health insurance, whether or not there’s a government option. I believe these rule changes will increase premium costs for most people.
  2. Even if the government option drops out of legislation, health insurance will largely become a function of government.

I will endeavor to keep you briefed as the health care debate continues. I expect a lot more activity over the next six weeks.

(photo credit: whitehouse.gov)