Yesterday President Obama sent an email on health care reform to the White House mailing list.

Respectfully, here is my counterpoint.

From: Keith Hennessey [mailto:kbh.blog@gmail.com]
Sent: Thursday, July 30, 2009 2:00 PM
To:  Taxpayers
Subject: What health insurance reform means for you

Dear Taxpayer,

If you’re like most Americans, you like the health insurance you have today but think the system needs improvement.  You would like things to work better, but are aware of the threats that arise from politicians who promise you something for nothing.

President Obama is correct that the underlying problem with health care is rising costs.  Because of this problem, your paycheck grows more slowly, millions of Americans cannot afford to buy health insurance, and the escalating costs of Medicare and Medicaid will force enormous tax increases onto you and your children.  The President wants to slow the growth of health care spending, and so do I.

Congress has gone in the opposite direction.  Rather than changing incentives to reduce the cost of health insurance, they are trying to shift those costs onto someone else:  you.  The facts are not in dispute.  The bill being developed in the House of Representatives would mean:

• No reduction in the growth of average private health insurance premiums;
• More than $1 trillion of new government spending over the next decade;
• $239 billion more debt in the short run, with ever-increasing additions to the deficit forever; and
• More than $500 billion of tax increases, including higher income tax rates on successful small businesses.

The U.S. economy is struggling to recover from a deep recession.  America cannot afford a bill that imposes these extra burdens on an already weak economy.  Rising health care costs are the problem, and so Congress’ solution begins by spending a trillion dollars more on health care.  That doesn’t make sense.

The President is correct that it’s time to fix our unsustainable health insurance system.  I disagree with the way that Congress is trying to fix it.

You will soon hear that these bills would not increase government involvement in your health care.  That is incorrect.  These bills give government officials authority to determine benefit packages, copayments and deductibles, relative premiums, as well as health plan expenses and profits.  The government would, in effect, control health insurance.  That’s the wrong way to fix a flawed health insurance system.  There is a better way.

Health insurers today are partially insulated from competitive forces.  If they convince the human resources manager at your employer to offer their plan, they’re all set.  Your choice is secondary and therefore less important.  We need a system that instead forces health insurance companies to compete for your business.

You can’t watch a televised sports event without being overwhelmed by the competition among auto insurers.  They compete based on reliability and service when you have an accident and need help.  They offer incentives for safe driving.  Some emphasize that they can cover you even if you are a high-risk driver with a less-than-perfect driving record.  They aggressively cut premiums to attract new customers.  They reassure you that you’re “in good hands” if you choose to give them your premium dollars.  These insurers don’t behave this way because they’re nice.  They do it because it’s how they win your business, and because they know you will go elsewhere if you can get better value.  Your health is both different and more important than your car, and we need to bring those same benefits to the health insurance market.  We need a thoughtfully regulated market that means insurers will compete for your business by offering reliable, high quality health insurance that you can afford.

When insurers have to compete for your business, it will put you and your doctor in control, rather than your insurer or your employer.  The bills moving through Congress assume that we all have the same health care needs, and they create one-size-fits-all solutions.  But your situation is different from your neighbor’s, and only you can make the right decisions for you and your family, based on advice from medical professionals you trust.

This does not mean you’ll have to negotiate prices in the ambulance.  Health insurance must protect you and your family when you need it most – when there is an emergency, or a severe accident or disease that threatens not only your family’s health, but your family savings.  We buy insurance to protect ourselves against the small chance of a really bad situation, and that’s what health insurance must do.

More control means putting the resources in your hands while giving you both the information you need to make good decisions, and the incentives to consider whether that fourth MRI is really necessary, or whether you could save some money with a generic drug or a semi-private recovery room in the hospital, instead of a more expensive alternative.  Health care and health insurance cost a lot today primarily because we’re often spending someone else’s money, so we don’t think about the cost of the care that we use.  These tradeoffs and decisions about what care is worth the cost must happen.  We must answer a basic question:  who is more likely to make good decisions about your health insurance and health care – you and your doctor, or a government bureaucrat who doesn’t know or care about your particular situation?

The right kind of health care reform is not a free lunch.  It carries obligations as well.  While others offer you the hollow promise of government-provided and underfunded health care security, I’m telling you that you’re going to have to take more responsibility for decisions about your own health.  A well-functioning system will offer financial incentives to keep yourself healthy, and to avoid risky behaviors that are the source of so much of the costs in today’s system.  You will have to spend more time talking with your doctor and making hard choices yourself, although that’s far preferable to spending that time fighting with your insurer or with a government bureaucracy.  You will have to shop intelligently for health insurance and decide what tradeoffs make sense for your family situation.  You will have lower insurance premiums but more financially responsibility for relatively minor medical costs, and you can have a tax-free reserve fund that you can spend wisely on everyday non-critical medical expenses.  It means more personal responsibility and control, and less dependence on the government.  It means your health security comes from you buying insurance to protect your family against catastrophe, rather than hoping the government won’t ration your care when it’s needed.  Others want to tell you that you have the right to have someone else pay for your health insurance.  I think you have the responsibility to provide for your family’s health security, and that it’s government’s job to set rules so that you have affordable options, and to subsidize the poorest who cannot afford basic catastrophic protection.

The right kind of health care reform means your wages will grow faster as insurance premium growth slows.  It means portable health insurance that you can take with you from one job to another, so you don’t get locked into your current job because you’re afraid to lose your health insurance.  It means that millions more Americans will be insured because premiums are less expensive and the uninsured can better afford to buy it, not because we are shifting those costs onto other hard-working Americans and small businesses through higher taxes.  It means no increase in the short-term budget deficit.  It means dramatic reductions in unsustainable long-term budget deficits, rather than the explosive deficit increases contained in the current legislation.

The President is promising to guarantee your health care security by changing the way health insurance works and making someone else pay for it.  If you’re reading this, you’re probably that someone else. You’ll probably pay for it through higher insurance premiums, as they do in New Jersey where these “protections” make insurance unaffordable for many.  You’ll probably pay for it through higher taxes, whether you’re one of the eight million people who would remain uninsured and still pay higher taxes under the House bill, or a successful small business owner who would face higher income tax rates that kill your ability to grow your business.  You and your kids will definitely pay for it through higher taxes when the massive deficit increases from this bill come due, on top of the unresolved long-term problems of Social Security, Medicare and Medicaid.

Over the next month you will hear the claim that opponents of the pending Congressional health care bills are defenders of the status quo.  You are going to hear that the choice is between a broken system and these bills, and that reform is better than no reform.  You will hear that the cost of doing nothing is too high, and that we must therefore enact one particular solution, no matter how flawed.

This is misleading, and there is a better way.  I strongly oppose the health care bills now being advanced in Congress, and I think the status quo is a mess.  There is no free lunch in health care reform, and fixing our current system without breaking the good parts will involve some hard choices.  There are alternatives to the pending bills that do health care reform the right way.  I have a plan you can find at KeithHennessey.com.  If you’d rather see a good plan from someone who actually matters, then check out the Ryan-Coburn Patients’ Choice Act from Rep. Paul Ryan and Senator Tom Coburn.

You will soon be told that it’s time to act, and that we must therefore enact the wrong kind of reform.  You can help by telling your friends, your family, and the rest of your social network that Washington needs instead to start over, and to put you, the patient/worker/taxpayer/consumer/citizen, at the center of health care decision-making, not the government.  We need the right kind of health care reform, not these bills now being considered.

Washington – Please stop promising us free lunches.  The country is going bankrupt – don’t make it any worse.  We’re adults.  We can handle the hard choices.

Sincerely,

Keith Hennessey

KeithHennessey.com

A counterpoint to the President’s health care reform email

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. President Obama’s health care reform email
2. Hennessey’s health care reform plan, v2
3. Hennessey’s health care reform plan

In a letter to four key Republican Congressmen (Camp, Barton, Kline, and Ryan), the Congressional Budget Office destroys the House Democrats’ implementation of the President’s goal of long-term fiscal responsibility through health care reform.  With this analysis the fight about the House bill is over by a technical knockout (TKO).  The proposed income tax increases were the key vulnerability.  I will walk you through the analysis and why I reach the following conclusion.

Conclusion:  CBO says that because the proposed new health spending would grow faster than the proposed new income tax increases, the House health bill would increase the long-term deficit.  Since the President has said he would not sign a bill that increases the long-term deficit, the bill is dead in its current form.  Any tax increase that would grow more slowly than the proposed new spending faces the same irreconcilable problem.  The only way to solve this problem and meet the President’s long-term goal is to cut health spending or tax employer-provided health insurance.

We can start by looking at the short-term budget effects of the House Tri-Committee health bill over the next ten years:

The new CBO information is about the long run deficit.  Here is the key paragraph from the 18 page CBO letter:

Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time.  The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade.  The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion.  Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.

In the long run, it’s all about growth rates.  Let’s go to the chalkboard.  All numbers are from CBO’s July 14th estimate of the House bill, Joint Tax Committee’s July 16th estimate, and CBO’s July 26th letter to Mr. Camp.

We start with the short run, and look just at the new coverage provisions in green, and the net spending increase in blue.  Proposed Medicare savings bring the gross new coverage spending of the green line down to the net spending increase of the blue line.  As always, you can click on any graph to see a larger version.

Spending would start in 2013 and ramp up to its long-term path by 2015.  In 2019 the bill spends $202 B on the new coverage provisions and saves $51 B from Medicare, for a net spending increase of $151 B.

A small caveat:  both the new coverage section of the CBO estimate and the Medicare savings include some indirect revenue effects, such as the higher taxes that would be collected from individuals and employers who don’t comply with the mandates.  So technically these lines show the net deficit effects of the “New coverage” and Medicare sections of the bill.  The revenue components are relatively small, and this oversimplification does not affect the analysis, so I’m labeling the blue line “net spending increase.”  In addition, this is how CBO packages things, so I am confident it’s a safe oversimplification.

Now let’s add to the graph the tax increases in the House bill as a new yellow line.  Everything else is the same as on the first graph.

The House bill raises $87 B of taxes in 2019, compared to the $151 B net spending increase in that year.  The area between the light blue and yellow lines is the deficit impact.  Up to 2013, the bill collects more in taxes than it spends, so the bill actually reduces budget deficits in the early years.  After 2013, the light blue net spending line is above the yellow tax line, so the bill adds to the deficit.  In 2019, the bill increases the deficit by $151 B – $87 B = $64 B.  The net of the deficit-reducing and deficit-increasing areas is the $239 B deficit increase over 10 years from the first table above.  Again, all of these are CBO and Joint Tax Committee numbers.

Now we turn to the long run, relying on that key CBO paragraph.  Here are the key numbers:

The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade.  … Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade.

CBO phrases this a little bit carefully, so I want to be clear that this last graph represents my interpretation of the above language, rather than explicit calculations provided by CBO.  I’m going to extend the blue and yellow lines from the graph above through the second decade.

Here are some details for the technicians:

• All figures through 2019 are from CBO’s July 14th estimate and Joint Tax’s July 16th estimate.
• The average annual growth rate of the yellow line from 2017 to 2019 is 5.1%, derived from the JCT July 16th estimate.
• Beyond 2019, the yellow line is the 2019 figure of $87 B from Joint Tax, grown at a 5.1% annual rate.
• The average annual growth rate of the blue line from 2017 to 2019 is 8.7%, derived from the CBO July 14th estimate.
• Beyond 2019, the blue line is the 2019 figure of $151 B, grown at an 8.7% annual rate.
• The $205 B deficit increase in 2029 is simply the delta between the two calculated points for that date.
• Here is a high-resolution version of this graph.  Feel free to use it as you like, and please follow my Creative Commons license.  Thanks.

I am being a little more precise than CBO’s language.  They were careful not to explicitly say that the growth rates would be precisely 8.7% and 5.1% over the next decade, but it’s the most reasonable conclusion from their language if you have to pick numbers.  It’s not fair to say that the $205 B figure is a CBO number — it’s not.  It is fair to say that the ever-widening red area, representing large and increasing long-term deficit increases, represents CBO’s conclusion.

What does this mean?

This is the most important analysis CBO has done of the House health bill.

Remember the President’s three part test:

1. A bill should not increase the budget deficit in the short run (the first ten years).
2. A bill should not increase the budget deficit in the tenth year.
3. A bill should “bend the health cost curve down” in the long run.  (More recently, a weaker test that a bill must not increase long-term deficits.)

I would prefer stronger tests, which I proposed six weeks ago.

The second graph demonstrates that the House bill would fail the first two tests.  CBO and Joint Tax said that in their July 14th and July 16th estimates.  The House bill increases deficits by $239 B over the next decade, and by $64 B in the tenth year.

The new information is CBO’s conclusion that the House bill would increase long-term budget deficits, because the new spending will grow faster than the income tax increases.  This is logical:  if the net spending increases start the second decade $64 B higher than the tax increases, and if the spending will grow 8.7% per year while the taxes will grow only 5.1% per year, then the gap between the two, the budget deficit, will only grow over time.  CBO has concluded that the House bill would make America’s long-term deficit problem dramatically worse than it is under current law.  This clearly fails the third Presidential test.

There’s another conclusion that is implicit in CBO’s analysis.  Because of the different growth rates, there is no way to solve this problem by raising income taxes like the House bill does.  If you want to include tax increases in your bill, they have to match the net spending increase in the tenth year, and they have to grow at least as fast as the 8.7% growth rate of long-term net spending.  The only thing that has a chance of doing that is the taxation of health benefits.

I think this is fatal to the House bill.  The income tax increases were already in serious trouble because of opposition from Blue Dog Democrats who do not want to raise taxes on small business owners, and who do not want to be BTU’d (again) by Senate Democrats who have said they won’t raise income taxes.  But House Democratic Leaders were relying on these tax increases to avoid having to make deeper entitlement spending cuts, tax employer-provided health insurance, or dramatically scale back their proposed new spending.  CBO has called the fight over by a technical knockout.

Where have I heard this before?

If you are patient enough to have read this blog over the past few months, some of this may look familiar to you.  Here’s what I wrote on June 12:

It is therefore odd and self-contradictory that they have proposed raising taxes to offset the higher spending of a new health care entitlement for the uninsured.  While you can technically meet my short-term Test 1 by doing so (in a Blue Dog / centrist way that I would oppose, but you’d meet it), it is mathematically impossible in the long run to offset a new health care entitlement with higher taxes, unless your bill also slows the growth of health care spending in other ways.

CBO calls a TKO on the House health bill

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. CBO scores the Kennedy-Dodd bill
2. CBO Director Elmendorf destroys a core Presidential health care argument
3. Does the House really want to raise taxes on eight million uninsured people?

House Majority Leader Steny Hoyer and Rep. George Miller, Chairman of the House Democratic Policy Committee, write in today’s Wall Street Journal that “Congress Must Pay for What It Spends,” subtitled “Democrats won’t be the party of deficits.”  They argue in favor of their pay-as-you-go, aka “paygo” rule.  I have a different perspective and offer it here in response.

The paygo rule is a self-imposed Congressional rule designed to make it harder to enact legislation that violates certain budgetary conditions.  There are two variants, known as two-sided paygo (favored by most Democrats, including Leader Hoyer and Chairman Miller), and one-sided paygo (favored by most Republicans, including me).

• two-sided paygo makes it harder to enact legislation that increases the federal budget deficit, whether as a result of increased spending or lower taxes;
• one-sided paygo makes it harder to enact legislation that increases the federal budget deficit as a result of increased spending (only).  One-sided paygo does not raise procedural barriers to cutting taxes.

Both versions have common features:

• They are rule changes specific to each body (the House and Senate) that can we waived with a simple majority in the House, and with 60 votes in the Senate.
• They do not by themselves reduce the deficit.
• They do not prevent government from getting bigger, if spending increases are accompanied by tax increases of the same size.
• They do not prevent the deficit from going up due to external factors like a recession or an increase in inflation.  They only inhibit new deficit-increasing laws.

There used to be a stronger version of statutory paygo that included the Executive Branch.  This version has fallen out of favor.

Since these points are somewhat disjoint, and since the blogosphere seems to love a numbered list, here are my thoughts in response to Leader Hoyer and Chairman Miller.

1. After enacting a stimulus law that increased future deficits by $787 billion directly, Leader Hoyer and Chairman Miller argue for Congress to act responsibly.  They begin by blaming the Bush Administration for the current budget deficit, but ignore their actions of the past five months that have made future deficits significantly larger.  Now that the horses are all out of the barn, they argue we should lock the door tight.  (A friend points out that most of the stimulus bill was discretionary spending which would not have been covered by any paygo rule.  I guess the pigs, too, have left the barn.)
2. In effect, they are arguing that Congress should shift from the borrow-and-spend regime of the past five months to a new tax-and-spend regime.  While paygo makes it harder to increase the deficit, it does not limit expansions in government as long as they are accompanied by tax increases.  Spending $1.6 trillion on health care is OK under two-sided paygo, if it’s offset by the same amount of tax increases.  Similarly, a massive expansion of government through the impending cap-and-trade bill does not violate their two-sided paygo rule since it raises power costs by imposing new taxes on power producers.
   

   In contrast, I care about budget deficits and about the size of government.  On the whole government allocates resources less efficiently than the private sector, so when government expands at the expense of the private sector, we make the total American pie smaller.  That’s a key reason why I’m a small government guy, and why I tend to oppose most expansions of government spending, even when their deficit impact is offset by higher taxes.  Just because it’s “paid for” doesn’t mean the government should do it.

3. While their op-ed is written as Democrat v. Republican, an intraparty subtext is evident.  Since the House can waive any paygo rule with 218 votes, the rule they advocate places no practical limit on their majority party if that party is united.  Paygo rules matter much more in the Senate.  Instead, this rule provides rhetorical leverage when the House leaders and committee chairmen are meeting in Speaker Pelosi’s office, debating whether a big new spending bill needs to be offset.  Paygo is a useful tool for Mr. Hoyer and Mr. Miller behind those closed doors when they want to argue in favor of a tax-and-spend approach, in contrast to their borrow-and-spend Democratic colleagues (who tend to be farther Left).
4. More broadly, fiscal policy is far more complex than the simple partisan split suggested by Messrs Hoyer and Miller.  The makeup of both parties has changed over the past 15 years that I have been in Washington.  There are no more tax-cutting Democrats in Congress:  Sen. Breaux and Sen. Torricelli used to cause their party no end of heartburn by working with Republicans to cut taxes.  There is also no viable Democratic Congressional faction to actually reduce the debt.  Budget Chairmen Spratt and Conrad argue the case, and are routinely overruled by their colleagues who want to use all tax increases to offset new spending priorities.  On the Republican side, more Republicans have been captured by spending constituencies, and for almost any spending bill there is a natural Republican constituency who will work with Democrats to increase spending without offsetting spending reductions (e.g., agriculture, highways, health research, border security).
5. Two-sided paygo focuses on deficits.  One-sided paygo focuses on deficits caused by increased spending.  I believe our most serious deficit challenge is the long-term problem, driven by the growth rate of entitlement spending.  I therefore want to make it harder for Congress to exacerbate this specific problem, and thus I favor one-sided paygo.
6. If you think of tax cuts as “the government giving up revenue,” this naturally leads you to two-sided paygo.  If instead you think of tax cuts as “preventing the government from taking money from the people who earned it,” this leads you to one-sided paygo.  I don’t think of tax cuts as something that the government must “pay for.”  I don’t want to make it harder for the government to take less money from the people who earn it.  This is a philosophical difference:  advocates of two-sided paygo often use “we” to refer to the government and its deficits.  Advocates of one-sided paygo generally use “we” to refer to taxpayers.
7. I believe that Leader Hoyer is one of only a handful of powerful Democrats who would like to reform our entitlement programs to address our Nation’s long-term spending challenge.  I believe he would be a leader on bipartisan Social Security reform, if Speaker Pelosi did not prevent him from doing so.  My private sources confirm recent press reports that the White House quietly reached out to Democratic Congressional leaders to explore the possibility of working on Social Security reform, only to be shut down by Speaker Pelosi.  Similarly, in 2005 when we in the Bush White House quietly approached certain Senate Democrats to see if they would enter into negotiations with us over Social Security reform, we were told repeatedly that Leader Reid forbade them from negotiating with us.
8. Leader Hoyer will soon confront a difficult situation in which his paygo rules will not help.  House Democrats will produce a health care bill which will contain the largest expansion of entitlement spending since the creation of Medicare and Medicaid in 1965.  I assume they will comply with the paygo rules by slowing the growth of Medicare and Medicaid spending, and/or increasing taxes, so that the bill does not increase the deficit over the next 10 years.  But because health spending grows faster than the economy, and taxes grow at the same rate as the economy, it is highly likely that such a bill will make our Nation’s long-term deficit situation even more bleak than it is today.  It will also substitute a new politically popular entitlement for the least popular Medicare and Medicaid spending, making it more difficult to bring the spending growth of those programs down to address future deficits.  Leader Hoyer will then be called upon by the Speaker and the President not only to vote for such a bill, but to help round up the votes to pass it, and to place his credibility on fiscal policy at risk by arguing that this massive new deficit-exploding entitlement expansion is fiscally responsible because it complies with his short-term paygo rules.

A wise man once said to me in a paygo discussion, “The problem isn’t the process.  The problem is the problem.”  Elected officials have spent countless hours debating one-sided vs. two-sided paygo, in large part because it’s an easy and theoretical fight.  Nobody’s ox is directly gored when the paygo rule is being voted upon.  Actual legislating to slow the growth of Social Security, Medicare, or Medicaid spending involves real pain to real people who complain loudly.  Unfortunately, that’s what must happen to prevent eventual budgetary collapse.  Trumpeting process changes is a poor substitute for making the necessary and difficult legislative changes to slow the growth of the entitlement programs that constitute America’s long-term deficit problem.

(photo credit: Piggy savings bank by alancleaver_2000)

From borrow-and-spend, to tax-and-spend

© 2010 Keith Hennessey - Your guide to American economic policy

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2. Senate floor #009: Middle class tax increases
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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)

The President’s press conference: health

© 2010 Keith Hennessey - Your guide to American economic policy

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