Debating the President's Portsmouth pitch (part 20)

Thanks for making it all the way through this series of posts analyzing and discussing the President’s health care remarks at the Portsmouth, New Hampshire town hall.

I have converted this entire series into a memo for easy printing and reading.

If you’d like the entire series in printed form, here is a PDF of all 2o posts in one document.

THE PRESIDENT: I don’t have to explain to you that nearly 46 million Americans don’t have health insurance coverage today. In the wealthiest nation on Earth, 46 million of our fellow citizens have no coverage. They are just vulnerable. If something happens, they go bankrupt, or they don’t get the care they need.

But of those 45.7 million people:

  • 6.4 million are enrolled in Medicaid or S-CHIP and just gave the Census taker the wrong answer. I’m serious. This is called the Medicaid undercount.
  • Another 4.3 million are eligible for Medicaid or S-CHIP and have not enrolled. If they need care, the hospital or clinic generally enrolls them. They are protected against risk even though they don’t show up on the rolls as insured.
  • Another 9.3 million are non-citizens. Different people come to different conclusions about what portion of this group should receive taxpayer-subsidized health insurance.
  • Another 10.1 million have income more than three times the poverty line.
  • Leaving about 15.6 million remaining uninsured, of whom about 5 million are childless adults.

The 46 million figure is technically correct, but it dramatically overstates the size of the population that many Americans would conclude is deserving of additional taxpayer subsidies.

I wrote about this topic in early April: How many uninsured people need additional help from taxpayers?

I hope you have found this series of posts to be a positive contribution to a civil, impassioned, informed policy debate.


Here are all 20 posts in this series:

  1. The President’s overpromise that everyone can keep their health plan
  2. Putting the government in charge of your health insurance
  3. Waiting in line
  4. Government-mandated benefits
  5. Preventive care does not save money (in the aggregate)
  6. The House bill would increase short-term, 10th year, and long-term budget deficits
  7. The President was incorrect — AARP opposes the bill
  8. The bills would take Medicare savings needed for solvency and spend them on a new entitlement
  9. Medicare is not a good example of government-run health care because Medicare is fiscally unsustainable
  10. Even if the public option drops out of legislation, other parts of these bills would put private insurance under government control
  11. The President says the public option will keep private insurers honest at the same time he proposes cutting payments to private insurers competing with the Medicare public option
  12. The pending bills would move more cost-benefit decisions from insurers to people chosen by the government
  13. Guaranteed renewal and guaranteed issue
  14. The President says “we may be able to get even more than” the $80 B of budgetary savings that the pharmaceutical industry thought was a ceiling promised by the White House.
  15. The President says he’s not “promoting” a single-payer plan, but the only concern he raises is a disruptive transition.
  16. Many examples suggest that the government cannot compete on a level playing field with private firms.
  17. The President trashes the U.S. Postal Service and undermines the case that government can run a complex health system.
  18. The President understates the annual cost of new spending by a factor of two.
  19. The President says that 2/3 of the offsets come from Medicare and Medicaid spending, while the only public estimate (for the House Bill) shows 21% instead. He also advocates a tax proposal that Congressional Democrats killed last Winter.
  20. There are 46 million people who are technically uninsured, but the target population is probably one-third to one-half that size.

I agree with the President that America needs to have a vigorous and well-informed debate about the substance of health care reform. I hope this series contributes to that debate.

Debating the President's Portsmouth pitch (part 19)

Here’s the second-to-last post in this series discussing the President’s remarks on health care reform in Portsmouth, New Hampshire:

THE PRESIDENT: About two-thirds of those costs we can cover by eliminating the inefficiencies that I already mentioned. So I already talked about $177 billion worth of subsidies to the insurance companies. Let’s take that money, let’s put it in the kitty. There’s about $500 billion to $600 billion over 10 years that can be saved without cutting benefits for people who are currently receiving Medicare, actually making the system more efficient over time.

That does still leave, though, anywhere from $300 billion to $400 billion over 10 years, or $30 billion to $40 billion a year. That does have to be paid for, and we will need new sources of revenue to pay for it. And I’ve made a proposal that would — I want to just be very clear — the proposal, my preferred approach to this would have been to take people like myself who make more than $250,000 a year, and limit the itemized deductions that we can take to the same level as middle-class folks can take them.

Maybe the President knows something about the Baucus bill that isn’t public. In the House bill only 21% of the savings come from Medicare and Medicaid, not two-thirds.

Congressional Democrats rejected the President’s proposal to limited itemized deductions last winter. The House bill would instead raise income tax rates on high-income individuals and successful small business owners.


Other posts in this series:

  1. The President’s overpromise that everyone can keep their health plan
  2. Putting the government in charge of your health insurance
  3. Waiting in line
  4. Government-mandated benefits
  5. Preventive care does not save money (in the aggregate)
  6. The House bill would increase short-term, 10th year, and long-term budget deficits
  7. The President was incorrect — AARP opposes the bill
  8. The bills would take Medicare savings needed for solvency and spend them on a new entitlement
  9. Medicare is not a good example of government-run health care because Medicare is fiscally unsustainable
  10. Even if the public option drops out of legislation, other parts of these bills would put private insurance under government control
  11. The President says the public option will keep private insurers honest at the same time he proposes cutting payments to private insurers competing with the Medicare public option
  12. The pending bills would move more cost-benefit decisions from insurers to people chosen by the government
  13. Guaranteed renewal and guaranteed issue
  14. The President says “we may be able to get even more than” the $80 B of budgetary savings that the pharmaceutical industry thought was a ceiling promised by the White House.
  15. The President says he’s not “promoting” a single-payer plan, but the only concern he raises is a disruptive transition.
  16. Many examples suggest that the government cannot compete on a level playing field with private firms.
  17. The President trashes the U.S. Postal Service and undermines the case that government can run a complex health system.
  18. The President understates the annual cost of new spending by a factor of two.

Debating the President's Portsmouth pitch (part 18)

This is #18 in a series of 20 posts discussing the President’s remarks on health care reform in Portsmouth, New Hampshire:

THE PRESIDENT: So it’s about a hundred billion dollars a year to cover everybody and to implement some of the insurance reforms that we’re talked about.

I assume this is just an honest arithmetic error, in which he assumed that a trillion dollars of new spending would be spread out over 10 years. Since the spending doesn’t start until year 4, and isn’t fully phased-in until year 6, the actual spending is much higher. The House bill would increase federal spending by $202 B in 2019, the 10th year of the estimate, twice the President’s stated figure.


Other posts in this series:

  1. The President’s overpromise that everyone can keep their health plan
  2. Putting the government in charge of your health insurance
  3. Waiting in line
  4. Government-mandated benefits
  5. Preventive care does not save money (in the aggregate)
  6. The House bill would increase short-term, 10th year, and long-term budget deficits
  7. The President was incorrect — AARP opposes the bill
  8. The bills would take Medicare savings needed for solvency and spend them on a new entitlement
  9. Medicare is not a good example of government-run health care because Medicare is fiscally unsustainable
  10. Even if the public option drops out of legislation, other parts of these bills would put private insurance under government control
  11. The President says the public option will keep private insurers honest at the same time he proposes cutting payments to private insurers competing with the Medicare public option
  12. The pending bills would move more cost-benefit decisions from insurers to people chosen by the government
  13. Guaranteed renewal and guaranteed issue
  14. The President says “we may be able to get even more than” the $80 B of budgetary savings that the pharmaceutical industry thought was a ceiling promised by the White House.
  15. The President says he’s not “promoting” a single-payer plan, but the only concern he raises is a disruptive transition.
  16. Many examples suggest that the government cannot compete on a level playing field with private firms.
  17. The President trashes the U.S. Postal Service and undermines the case that government can run a complex health system.

Debating the President's Portsmouth pitch (part 14)

We continue reviewing the President’s remarks on health care reform in Portsmouth, New Hampshire:

THE PRESIDENT: Now, in terms of savings for you as a Medicare recipient, the biggest one is on prescription drugs, because the prescription drug companies have already said that they would be willing to put up $80 billion in rebates for prescription drugs as part of a health care reform package.

Now, we may be able to get even more than that. But think about it.

Huh. So much for that secret deal that the drug companies had with the White House that their savings would not exceed $80 B over 10 years. “We may be able to get even more than that.” Hmm…

Even after 15 years of working in economic policymaking, I continue to be surprised at the naivete of some American business leaders. Almost three weeks ago I sounded an initial warning:

Hospitals: You’re the deep pockets. Insurers, Business and Pharma: They can make you villains again if they need to cut you more to make the budget numbers work.


Other posts in this series:

  1. The President’s overpromise that everyone can keep their health plan
  2. Putting the government in charge of your health insurance
  3. Waiting in line
  4. Government-mandated benefits
  5. Preventive care does not save money (in the aggregate)
  6. The House bill would increase short-term, 10th year, and long-term budget deficits
  7. The President was incorrect — AARP opposes the bill
  8. The bills would take Medicare savings needed for solvency and spend them on a new entitlement
  9. Medicare is not a good example of government-run health care because Medicare is fiscally unsustainable
  10. Even if the public option drops out of legislation, other parts of these bills would put private insurance under government control
  11. The President says the public option will keep private insurers honest at the same time he proposes cutting payments to private insurers competing with the Medicare public option
  12. The pending bills would move more cost-benefit decisions from insurers to people chosen by the government
  13. Guaranteed renewal and guaranteed issue

Debating the President's Portsmouth pitch (part 8)

Here is the President talking about health care reform in Portsmouth, New Hampshire:

THE PRESIDENT: [If we do nothing] our deficit will continue to grow because Medicare and Medicaid are on an unsustainable path. Medicare is slated to go into the red in about eight to 10 years.

This statement is true. But the President and his budget director have lowered their bar to say only that health care reform must not increase the deficit, not that it must reduce the deficit. If legislation “cuts” Medicare spending and turns right around and re-spends those funds to create a new rapidly growing health care entitlement, then the underlying deficit problem is unresolved. The legislation being developed in both the House and the Senate just barely meets this condition.

The President’s budget director argues that other reforms in legislation will “bend the cost curve down.” The nonpartisan Congressional Budget Office disagrees, and says the House bill will increase long-term budget deficits relative to current law.

Continue to the next post in this series…


Other posts in this series:

  1. Introduction and the President’s overpromise that everyone can keep their health plan
  2. Putting the government in charge of your health insurance
  3. Waiting in line
  4. Government-mandated benefits
  5. Preventive care does not save money (in the aggregate)
  6. The House bill would increase short-term, 10th year, and long-term budget deficits
  7. The President was incorrect — AARP opposes the bill

Debating the President's Portsmouth pitch (part 3)

Here’s the President again at the Portsmouth, NH town hall on health care reform:

(In response to a gentleman’s question about Medicaid forcing him to take a generic equivalent for Lipitor):

THE PRESIDENT: Now, I want to be absolutely clear here: There are going to be instances where if there is really strong scientific evidence that the generic and the brand name work just as well, and the brand name costs twice as much, that the taxpayer should try to get the best deal possible, as long as if it turns out that the generic doesn’t work as well, you’re able to get the brand name.

The proxy for the taxpayer is the government bureaucrat running the program. At least for this Medicaid patient, he President is in effect saying that, “if there is really strong scientific evidence” of medical equivalence, then a government official, on behalf of the taxpayer, should make the decision for you “to get the best deal possible.”

It’s hard to square this with his earlier statement that “This is not about putting the government in charge of your health insurance.”

Continuing with this same case, the President said:

THE PRESIDENT: So the basic principle that we want to set up here is that — if you’re in private insurance, first of all, your private insurance can do whatever you want. If you’re under a government program, then it makes sense for us to make sure that we’re getting the best deal possible and not just giving drug makers or insurers more money than they should be getting. But ultimately, you’ve got to be able to get the best care based on what the doctor says.

And it sounds like that is eventually what happened. It may be that it wasn’t as efficient — it wasn’t as smooth as it should have been, but that result is actually a good one.

The questioner said “And I had to go through two different trials of other kinds of drugs before it was deemed that I was able to go back on the Lipitor through the New Hampshire Medicaid system.” The President responded, “It may be that it wasn’t as efficient … it wasn’t as smooth as it should have been, but the result is a good one.”

This man had to wait in a line. Earlier the President said about reform, “You will not be waiting in any lines,” and yet in this case, “The result is a good one.”

Continue to the next post in this series…


Other posts in this series:

  1. The President’s overpromise that everyone can keep their health plan
  2. Putting the government in charge of your health insurance

The President's press conference: health

The President's press conference: health

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)

Demographics is a bigger problem than health care costs

Demographics is a bigger problem than health care costs

The President and Budget Director Peter Orszag frequently say we need to “bend the health care cost curve downward” to address our long-term fiscal problems. This is correct but incomplete.

Here is Director Orszag, writing in last week’s Financial Times: (emphasis added)

As the healthcare debate picks up in the US, there has been much discussion about how to pay for it. Coinciding with this debate are vocal concerns about the country’s underlying fiscal position … which some have suggested as a reason to delay healthcare reform.

What this argument ignores is that healthcare is central to the long-term fiscal and economic prospects of the US. If costs per enrollee in Medicare and Medicaid grow at the same rate over the next four decades as they have over the past four, those two programmes will increase from 5 per cent of gross domestic product today to 20 per cent by 2050.

Healthcare cost growth dwarfs any of the other long-term fiscal challenges the US faces. Nothing else we do on the fiscal front will matter much if we fail to address rapidly rising healthcare costs.

Director Orszag is correct that rising per-capita health spending is a key driver of our long-term fiscal problems. But he overstates his case by ignoring the other driver of federal spending growth, demographics. We need to address both. We need health care reform that will slow the growth of per capita health spending. And we need to change the promises made under Social Security, Medicare, and Medicaid to adjust for a rapidly aging U.S. population.

Let’s look at a graph from the President’s Budget (page 191 of the Analytical Perspectives volume):

chart13-3 This chart shows the combined effects on the big three entitlement programs (Medicare, Medicaid, and Social Security) of two factors: demographics, and age-adjusted per capita health cost growth. The effect of demographics is larger than the effect of “excess growth in health care costs” up until some time in the 2040s. This is why Director Orszag chooses 2050 to make his case.

Director Orszag’s own graph shows that the aging of the population is a bigger driver of spending increases in the federal budget for the next 30-40 years.

There are two forces driving the aging of the U.S. population. People are living longer. This is a good thing.

life-expectancy

This means people are collecting benefits for more years. That’s good for people and expensive for the government.

years-collecting-benefits

Longer life expectancies are a permanent and positive feature of the U.S. demographic landscape. There is a second, transitory cause of the aging of the U.S. population: the Baby Boom. Fertility rates surged after World War II. Before and during the war, each woman had on average about 2.2 – 2.4 babies. That surged to 3.6 babies per woman in 1960, and is now down to 2.0, where it is predicted to stay.

fertility-rate

The Baby Boom began in 1946. You can start collecting early retirement benefits under Social Security at age 62. This means the first cohort of Baby Boomers started collecting their checks in 2008. You can see how the number of new retirees each year is going to spike over the next ten years.

baby-boomers-retire

I think of longer lifespans as a permanently rising tide, and the Baby Boom as a huge wave that supplements that tide. Together, the two of them mean that America is rapidly aging. This is affecting federal and state budgets beginning now. Since Social Security and Medicare are pay-as-you-go systems, in which current workers pay for the benefits of current retirees, this means a larger tax burden is placed on each younger worker. (No, the government does not save your payroll taxes. It has spent and is spending them on other stuff.)

In 1950, there were 16 workers paying payroll taxes for each retiree collecting Social Security benefits. Today, there are 3.3 workers supporting the Social Security and Medicare benefits of each retiree. In the future there will be only 2 workers paying taxes to support the benefits of each retiree.

workers-per-retiree

The rapid growth of per capita health spending in the U.S. is a critical policy problem that needs to be addressed. It is not, however, the primary driver of our federal budget problems over the next 30-40 years. The aging of the population is. Policy changes need to address both pressures to prevent an eventual fiscal meltdown. We must not ignore demographics.

Director Orszag’s 10th year test and the health spending gap

Director Orszag’s 10th year test and the health spending gap

The President and his Budget Director Peter Orszag argue they are being fiscally responsible when they support a massive new health entitlement. They are proposing savings in Medicare and Medicaid, and they are proposing ephemeral long-term policy changes that they argue will save money. The savings are insufficient to offset the new spending, and CBO says their long-term changes are insufficient to save money in the federal budget.


In last Monday’s Financial Times, President Obama’s Budget Director Peter Orszag wrote:

Healthcare cost growth dwarfs any of the other long-term fiscal challenges the US faces. Nothing else we do on the fiscal front will matter much if we fail to address rapidly rising healthcare costs.

Although his focus is too much on the far future (e.g., 2050, rather than 2020 or 2030), Director Orszag is correct that, if we don’t slow the growth of federal health spending, the U.S. budget and economy will in time collapse.

Director Orszag therefore deserves credit for making Congress’ job much harder last Wednesday, when he established a new Administration test for health care legislation by opening his blog post like this: (emphasis added)

As I have written before, the Administration is committed to the principle that health care reform must be deficit neutral over the next decade (as well as being deficit neutral in the 10th year alone).

Despite his “As I have written before,” I think the “10th year test” is new for the Administration. It jumped out at me, and I have been unable to find any previous references to it by Director Orszag or anyone else. Maybe they have been communicating it privately to their allies in Congress.

I commend Director Orszag for setting forth this new test, which I believe he intends as a proxy for addressing the long-term health spending trend. It’s an insufficient proxy, but it’s better than nothing. If your legislation does not increase the deficit in the last year that you measure budgetary effects, then you can argue that your legislation isn’t making things worse in the long run.

This is an insufficient proxy if Congress uses certain tax increases to close the gap, because of the difference in long-term growth rates between health spending and revenues. I’ll cover that another time. Today I want to examine the size of the gap between Director Orszag’s test and legislation being developed by Congressional Democrats. CBO and the Joint Tax Committee estimate the effects of legislation over a 10-year budget window. The “tenth year” for our purposes is 2019.

As a preview, here’s my conclusion:

Combining Kennedy-Dodd with all of the President’s proposed Medicare and Medicaid savings would make America’s long-term entitlement spending problem much worse than under current law.

This conclusion may be obvious if you are closely following this debate. But the President and his Budget Director continue to assert that they are being fiscally responsible by supporting this new entitlement. Those repeated assertions demand a rigorous analytical response. I am going to walk through this step by step, to try to prove they are wrong.

Let’s look at some pictures.


Here is federal health entitlement spending under current law. The graph below shows huge programs growing at an unsustainable rate. Under current law, spending on these three programs would grow from $676 B this year, to $1,228 B in 2019. (And I think CBO is being optimistic.)

As always, you can click on any graph to see a larger version.

health spending step 0 Here’s technical stuff for the budget wonks:

  • Source: CBO’s Baseline Projections of Mandatory Outlays (Table 1-8)
  • Medicare spending is net of premiums
  • These are federal expenditures, so Medicaid is the federal share.
  • CBO uses baseline SCHIP spending, which drops from $14 B in 2013 to $6 B by 2015. This is unrealistic, but it helps make the Democrats’ job easier, so I’ll leave it this way for now.

Let’s add the proposed new health spending in the Kennedy-Dodd bill, as scored by CBO. You can see it would significantly increase federal health spending.

health spending step 1


Now let’s focus on the 10th year, the new test defined by Director Orszag. The following graph shows the stacked column just for 2019 from the prior graph, with one addition. While the red on the prior graph showed only health spending, now I want to include the effects of Kennedy-Dodd on taxes as well. Kennedy-Dodd would result in some people buying health insurance outside of employment. If they were to do so, that income would be taxable, and the federal government would collect more in tax revenues. So while Kennedy-Dodd would increase health spending by $237 B in 2019 (and that’s what’s displayed in the graph above), from a budget deficit standpoint, that would be partially offset by $48 B in higher taxes.

I’m not just a low-deficit guy, I’m also a small(er) government guy. I also focus on the medium and long run, where the spending growth rates overwhelm the tax growth rates. So I think the $237 B figure is a better measure of Kennedy-Dodd’s impact. I realize that others don’t share my concern about size of government, and instead focus just on the budget deficit. Even by this measure, Kennedy-Dodd makes things $189 B worse in the 2019, the year chosen by Director Orszag.

health spending step 2


The Administration, and in particular Director Orszag, argue that the higher health spending from expanding taxpayer-financed health insurance coverage to millions of people will be offset by three factors:

  1. new proposals to slow the growth of Medicare and Medicaid spending;
  2. new proposals to raise taxes; and
  3. in the long run, policy changes that will slow the growth of private health care spending, and which they argue will flow into savings in federal health care programs.

In looking at the 10th year, factor (3) is automatically incorporated into CBO’s estimate of Kennedy-Dodd. CBO gives Kennedy-Dodd no credit to slowing the growth of private health care spending. If they did, those savings would already be built into the above graph. And the Administration does not claim that any of its desired policy changes would produce savings in that 10-year period. If they did, those savings would be built into their projections for factor (1). So for this exercise, we can effectively ignore factor (3).

I will set aside the Administration’s proposed tax increase for the moment. I will return to it.

Let’s now assume that Congress adds to Kennedy-Dodd all of the Administration’s proposed Medicare and Medicaid savings. According to OMB, that’s about $628 B of Medicare and Medicaid savings over the ten-year period. The first half of that was in the President’s budget. The President proposed the second half, $313 B of the total, ten days ago with much hoopla about his commitment to offset higher health spending. I wonder if he knew that his proposals would come up short.

Now it’s unreasonable to assume that Congress will adopt all of these savings proposals, but I’m going to give them and Director Orszag the benefit of the doubt and assume they do.

On the next graph I have erased the parts of Medicare and Medicaid spending that would result from the President’s savings proposals in those programs. These green areas show the effect in 2019 of the President’s proposed Medicare and Medicaid savings.

Why is it so little? Because while the President proposed $628 B in savings over ten years, the amount saved in the tenth year is much smaller. His proposals would reduce federal Medicaid spending by about $23 B in 2019, and would reduce Medicare spending by about $79 B in that same year. That’s a lot, but not compared to the proposed spending increases. The next graph will collapse the stack to eliminate those green gaps.

health spending step 3

  • Source: “Paying for Health Care Reform,” White House Medicare fact sheet, released June 12, 2009.
  • Source: Table S-6 in the President’s budget (pp. 127-128).
  • I did not have a 10-year savings stream for the Administration’s second tranche of savings proposals, so I assumed the timing would be distributed the same as in their first tranche. I am confident that’s a reasonable assumption.

Our last graph will be a before-and-after. The stacked column in back (yellow-blue-red) shows the net effects of current law, plus Kennedy-Dodd, minus all of the President’s proposed Medicare and Medicaid savings. It’s the graph from the last chart, with the bars collapsed together to account for the savings. The green bar in front shows current law spending – it’s the same as the 2019 bar in the very first graph.

You can see the gaps:

  • Health spending would be $135 B higher in the tenth year (2019) under (Kennedy-Dodd + President’s savings) than it would be under current law.
  • Accounting for the higher taxes that would result from Kennedy-Dodd, the deficit would be $87 B higher in 2019 than under current law.

health spending step 4

The Administration has also proposed raising taxes to pay for higher health care spending. The President’s budget proposes to raise taxes for high-income tax filers who itemize their deductions. If Congress were to consider this proposal, it would raise $46 B of revenues in 2019, leaving Director Orszag with a $41 B gap in 2019.

There are two caveats to this proposal:

  1. It causes the “tenth year” test to lose meaning. In the long run, federal health spending is growing faster than the economy. The revenues raised by this proposal would grow at the same rate as the economy. So closing the 2019 gap through this kind of tax increase means that you still have a long-term health spending problem.
  2. Congress has rejected this proposed tax increase. They are considering others, almost all of which fall into caveat #1. The only one that does not is limiting or repealing the exclusion for employer-provided health insurance, which grows faster than the economy.

Conclusions

  • Kudos to Director Orszag for trying to focus the debate on long-term federal health spending trends.
  • Kudos to him for setting a new “10th year test” for health care legislation. I hope the White House doesn’t undercut him in its desire to get a bill to the President’s desk.
  • The 10th year test is an imperfect and misleading proxy for our long-term health spending problem, if you use tax increases to close the 10th year gap (excepting the employer-provided exclusion).
  • Kudos to the President for proposing additional Medicare and Medicaid savings.
  • The Congress will not adopt all of those savings, and they have rejected his proposed tax increase.
  • Even if they were to adopt all of his proposed Medicare and Medicaid savings, Kennedy-Dodd would fail the 10th year test by about $87 billion, and it would increase federal health spending by 11% in 2019, or about $135 B.
  • As a measure of our Nation’s long-term fiscal problems, the +11% / +$135 B is a better metric.
  • Combining Kennedy-Dodd with all of the President’s proposed Medicare and Medicaid savings would make America’s long-term entitlement spending problem much worse than under current law.

Ten more things about the official Kennedy-Dodd health care bill

Ten more things about the official Kennedy-Dodd health care bill

The Senate HELP Committee staff has filed an official copy of their draft legislation with the Senate clerk. A friend and I were discussing today two possible tactical scenarios:

  1. The weekend leak forced the majority staff to release their official text as damage control. Under this scenario, filing the official copy is a damage mitigation strategy: “If there’s going to be a version out there, let’s at least have it be a version we want.”
  2. The weekend leak was by the majority staff, and filing the official text is part of a gradual rollout strategy.

I’m guessing scenario 1 is right. Either way, we now have official text to chew on. This text is more expansive than the leaked version I posted Monday. It contains some new items, but is largely identical to the leaked draft.

More importantly, I have now had more time to read the 615 page bill. (I skimmed some parts.) Doing so turned up some things I missed the first time. So here are ten more things you should know about the official draft of the Kennedy-Dodd health care bill.

(Editorial note: I have made a page that will always have the latest version of this complete list, along with the comparison to the House Democrats’ bill. I will also post when I update that page.)

  1. The employer mandate section from the leaked draft has been replaced with [Policy under discussion].

    A few inside friends confirmed my guess – they think this is a tactical move by the majority staff to try to relieve blowback from the employer groups: Chamber of Commerce, Business Roundtable, NFIB (the small business lobby), etc. Until it is otherwise demonstrated, I will continue to assume that the Chairman’s mark will include language that will roughly parallel that in the leaked draft.
  2. The bill gives the Secretary of Health and Human Services authority to limit premiums and profits of health plans by forcing plans to rebate to enrollees premiums above a certain margin.
    Specifically,  section 2704(a) is the “Requirement to provide value for premium payments.” A health plan must report how much of their premium revenues are used for clinical services, how much for “activities that improve health care quality,” and how much for “all other non-claims costs.”Section 2704(b)(1) then tells the Secretary to look at how much other health plans spent on “all other non-claims costs,” and based on that survey, set an allowable percentage for this category. Plans are then required to rebate premiums if they go above this amount. This is direct (but confusing) regulation of premiums and profit margins.I found the labeling of this section interesting. It appears that this section will be the justification for the claim that this bill reduces health care costs. Loosely phrased, it appears their argument will be “We’re reducing health care costs by forcing plans to lower their administrative costs and profits.”
  3. The bill mandates that health plans include and provide financial incentives for the “medical home model” for services, then gives a highly prescriptive description of this model, detailing the interactions among the health plan and different types of providers.

    Section 3101(m) requires qualified health plans to develop and adopt a strategy “that provides increased reimbursement or other incentives for … improving health outcomes … including through the use of the medical home model defined in section 212 [of the] Affordable Health Choices Act, for treatment or services under the plan or coverage;”Section 212 then sets up the “medical home model” over seven pages of legislative text. I am far from an expert in plan-provider relationships, and am not familiar with the medical home model. But the language looks highly prescriptive, as if it is defining an extensive set of rules about the interactions among plans and different types of providers. I would love help from some commenters on what’s going on here, or some more education about the “medical home model.” My instinct is that, even if it is a good delivery model, the federal government should not be tilting the playing field for or against it.
  4. The bill requires health plans adopt Medicare and SCHIP�s �generally implemented incentive policy to promote high quality health care.
  5. Employers must offer the same health insurance to all employees, independent of salary.
  6. Gateways can charge a tax of up to 3% of premiums to cover implementation and administrative costs.This is a huge deal. Take a typical $13,000 (employer-based) family health insurance policy. That means the State can add up to $390/year to the cost.
  7. The Secretary of Health and Human Services shall required that Gateways shall “ensure that [uninsured] individuals are directed to enroll in the program [that she deems] most appropriate.” This is in the context of whether they should enroll in a private health plan, or a government plan: Medicaid, SCHIP, or the new “public option.” The bill gives SecHHS authority to push/force State Gateways to push/encourage/force? the uninsured toward (or away from) particular types of plans. The danger is that a SecHHS could say, “It’s best to have all the uninsured in a government plan.”
  8. States (through Gateways) shall redistribute premiums from plans with low-risk individuals to those with high-risk individuals.

    This gives the people running Gateways a tremendous amount of power over health plans.
  9. States can opt out their state and local employee plans for the first four years. I’m trying to think of a reason why they should be treated differently. Otherwise, it looks like caving to pressure either from State governments, or from public employee unions.
  10. The bill creates a new $10 B “Reinsurance for Retirees” fund to subsidize costs for those between ages 55 and 64. The bill defines eligible “employers” to include “a voluntary employee benefit association.” This may include the UAW VEBA.

    This looks like a fallback. Traditionally, health advocates on the Left have wanted to allow near-retirees (55-64) to “buy in early” to Medicare. And I need to be clear – I cannot conclude that this provision was written specifically to benefit the UAW VEBA. I just know that it allows a VEBA to apply as an employer for a share of this fund, and that the UAW VEBA is the most prominent one that might ask for such funds.

Remember, you can now always find an updated version of the complete list here.

While the list of two dozen items surely creates an impression of why I oppose this bill, I would like to put some structure on it. I hope to post in the next few days a higher-level view that crystallizes my biggest concerns with this bill in a structure that is easier to understand.

(photo credit: Wikipedia)

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