How to measure health care cost control

How to measure health care cost control

I want to propose a four-part test for measuring any particular bill on health care cost control.

short run

long run

Federal deficit

1

2

Government health care spending

X

3

Private health care spending

X

4

In each case, I will define the test so that “yes” is a good outcome:

Test 1: The bill does not increase the federal deficit in the short run.

Test 2: The bill significantly reduces the federal deficit in the long run.

Test 3: The bill significantly slows the growth of government health care spending in the long run.

Test 4: The bill significantly slows the growth of private health care spending in the long run.

I believe our Nation’s long-term fiscal problems, and the problems resulting from the growth of per capita health care spending, are higher priorities to solve than reducing the number of uninsured Americans now. I would rather solve America’s health care cost problems of the future than expand government now. This is my value choice. I expect and accept that others will disagree.

As a result of this value choice, I believe any bill that fails any one of these four tests is fiscally and economically irresponsible, and therefore worth defeating.

There does not have to be a tradeoff. A bill could go after the core policy drivers of health care cost growth, especially the tax exclusion for employer-provided health insurance, and replace it with incentives for individuals to shop for high-value health insurance and high-value health care. Such a bill could meet all of the above tests and significantly reduce the number of uninsured. I will describe such a bill in a future post. Such a bill is not going to be passed by this Congress.

I think the administration would agree with my test. They might define Test 3 to be a subset of Test 2. I think it’s important analytically to separate the two.

In practice the test gets slightly more complex. Test 1, “The bill does not increase the federal deficit in the short run,” breaks down into (1A) “over the next five years” and (1B) “over the next ten years.” The Congressional budget rules require that a bill not increase the federal deficit over the next five years. To his credit, the President and his advisors have also been emphasizing that it is important to meet the same test over the next ten years. From a formal legislative process standpoint, only the five-year window is formally binding, because Congress passed a 5-year budget plan (called a budget resolution). In particular, proponents of a bill will need 60 votes in the Senate for any bill that fails (1A). All other tests can be violated and passed with a simple majority.

I will apply this four-part test framework to each major legislative proposal considered by Congress. I want to begin today by walking briefly through each test.

Test 1: The bill does not increase the federal deficit in the short run.

I would like to make this test more stringent – my personal policy preference would be “The bill reduces the federal deficit in the short run,” especially given the path of expected budget deficits under the President’s budget. The actual test, “does not increase,” is the test in the Congressional budget resolution. It says that at a minimum, any new spending should be offset.

I would also like to make the test apply to federal spending, rather than just the federal budget deficit. I would almost certainly oppose a bill that increases government spending over the next ten years by a few hundred billion dollars, and offsets it with the same amount of tax increases. Again, I’m matching my test to the minimally binding one that Congress will apply to itself. This means that this test for me is one-way: any bill that fails it should be opposed, and some bills that pass it should still be opposed, because they dramatically increase the size of government. Still, for the purpose of this exercise I am applying the looser deficit-based short-term test.

By choosing a looser short-term test than I would prefer, I believe I accomplish two goals:

  1. This test conforms with the formal budget rules that will govern this bill (measured over a five year period).
  2. This test fits the “Blue Dog” / conservative Democrat / moderate Republican view of the world. I think I’m taking away an excuse for them to object to my four-part test.

Test 2: The bill reduces the federal deficit in the long run.

For each of these tests, I’m defining “long run” as more than ten years. That’s an arbitrary breakpoint.

While I’m willing to say I could swallow some bills that do not increase the short-term budget deficit, a bill must significantly reduce the long-run federal deficit to be fiscally responsible. Given that our long-term federal deficit path is unsustainable to the point of national economic collapse, and given that health care cost growth is one of the primary drivers of that deficit path, not making the problem worse is insufficient. A bill must result in dramatic reductions in future budget deficits to be fiscally responsible.

This test interacts with Test 3 in a somewhat subtle way. While Test 1 is a deficit test, the facts of our long-term budget problem mean that Test 2 is driven by Test 3, which is about government spending on health care.

Test 3: The bill significantly slows the growth of government health care spending in the long run.

Test 2 is about the long-term budget deficit. Test 3 is about long-term government spending on health care. The President and his budget director are correct when they identify unsustainable per capita health care spending as a primary driver of long-term deficits. (They are incorrect when they identify it as the primary driver of long-term deficits, and dismiss the importance of Social Security spending and aging of the population, as the President did yesterday. I will return to this point in a future post.)

In mid-April I explained that America’s long-term budget problems are driven by unsustainable spending growth, and not by the level of taxation. I think it’s one of my most important posts. I hope you will find time to read it if you have not done so already. Here is the key graph:

taxes and spending long term trends

On the above graph, the white line is federal spending, and the dotted lines are various tax policies. The expanding gap between the white line and the dotted lines is the federal budget deficit. You can see the gap (deficit) explodes as the spending line pulls away from the tax lines.

America’s long-term budget problems are driven entirely by the difference between the slope of the white spending line and the dotted tax lines. Over the long run, a constant tax policy always grows as fast as the economy, and so it remains flat on a graph that measures quantities as a share of the economy. So while we can and do debate about the level of the dotted tax lines, they’re always going to be flat.

You can see that any flat tax line cannot keep up with a rapidly growing upwardly sloped white spending line. Even if you were to rais the flat dotted line to 25% of GDP, you would still have a long-term deficit problem because of the slope of the spending line. The key to success is not just lowering federal spending, it’s tilting that white line dramatically downward. This is what the President and his budget director correctly mean when they say we need to bend the (government) cost curve downward. And they deserve praise for identifying federal health care spending as a major driver of that white line’s slope.

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.

To put it graphically:

  • The new health care entitlement for those who are now uninsured would raise the level of the long-term white federal spending line.
  • Even if you increase taxes, raising the dotted federal tax lines so that the deficit gap between spending and taxes over the next five or ten years does not increase (thus meeting my Test 1), in the long run the new health care spending will grow faster than the economy, while the new tax revenue stream will grow at the same rate as the economy. You will therefore be exacerbating the long-term deficit problem caused by the white spending line above.
  • The only way to solve this is if you make other changes in the bill that bend downward the slope of the white line.

This last bullet is the President’s stated solution. In effect, he is saying, I’m OK raising long-term federal spending on a new health care entitlement, and thus raising the level of the white line in the long run, as long as we raise the dotted tax lines to offset it in the short-run, and as long as we make other changes to tilt that white line downward (or at least not upward so much.)

The President and his allies have a problem, in that their specific policy of expanding pre-paid health insurance to tens of millions of uninsured Americans will instead increase the slope of the white spending line. The academic evidence is clear that as third-party payment for health care increases, sensitivity to cost decreases and health care spending (total and governmental) increases. Creating a new entitlement for the uninsured helps the uninsured. But it worsens our long-term budget problem in two ways: it raises the level of the long-term spending line, and it increases its slope. Both exacerbate an already-devastating long-term federal budget picture.

So for the President to meet his stated goal, and to make any significant progress on our long-term budgetary problems, the rest of the bill must not only bend the spending line downward, it must do so by more than these two factors that raise the white line by creating a new health care entitlement. I think it’s a mistake to make your most serious problem worse before trying to solve it.

Test 4: The bill significantly slows the growth of private health care spending in the long run.

This is closely related to but separate from Test 3. I praise the President for correctly identifying society-wide health care cost growth as the problem to be solved, rather than just government health care cost growth or the number of uninsured. Private sector health care cost growth is what keeps the number of uninsured high, and it is what squeezes the wages and budgets of more than 200 million Americans with private health insurance. We must make policy changes that stop distorting behavior to encourage unsustainable cost growth in private sector health care.

As I said above, the expansion of third-party payment for the uninsured exacerbates this problem, as would any policy changes that might discourage people from moving to high-deductible plans, or discourage people from shopping for health insurance or medical care based on quality and price.

The President correctly identifies this problem. He admirably says it is a condition that must be met by health care legislation. Unfortunately, he has made no specific policy proposals that would achieve this goal. The President and his budget director emphasize policies that would provide private sector consumers with better information about the health care they use. They have proposed policies that would change government spending policies. They have proposed no policies that would change incentives for private consumers of health care. (I wrote about this in April.) Without such policies, you cannot meet Test 3 or Test 4. And without such policies, expanding government entitlement spending is horribly irresponsible in the long run.

Understanding the House Democrats' health care bill

Understanding the House Democrats' health care bill

Yesterday I posted and described the draft Kennedy-Dodd health care bill. Today I would like to do the same for an outline produced by House Democrats.

Here is a three-page outline of “Key Features of the Tri-Committee Health Reform Draft Proposal in the House of Representatives,” dated yesterday (June 8, 2009).

The three committees are:

  • The House Ways & Means Committee, chaired by Rep. Charlie Rangel (D-NY). The Health Subcommittee is chaired by Rep. Pete Stark (D-CA).
  • The House Energy & Commerce Committee, chaired by Rep. Henry Waxman (D-CA). The Health Subcommittee is chaired by Rep. Frank Pallone, Jr. (D-NJ).
  • The House Committee on Education & Labor, chaired by Rep. George Miller (D-CA). The Health, Employment, Labor and Pensions Subcommittee is chaired by Rep. Robert Andrews (D-NJ).

The document suggests this is a joint product of the three committees and/or their subcommittees. My sense, however, is that it is Speaker Pelosi who is driving the bus. This is in contrast to the Senate, where the committee chairmen (Kennedy/Dodd and Baucus) appear to have the pen, in less well-coordinated efforts.

Kennedy-Dodd and the House bill outline are remarkably similar. Whether this represents House-Senate coordination or parallel thought processes is unclear.

I think the easiest way for me to present the House bill outline is in comparison with the Kennedy-Dodd bill. So here my description from yesterday of the Kennedy-Dodd bill, with today’s comparison to the House bill outline in red. I hope it’s comprehensible and useful this way. If you read yesterday’s post, you can skim the text in black and focus on the new text in blue.

Here are 15 things to know about the draft Kennedy-Dodd health bill and the House bill outline.

  1. The Kennedy-Dodd bill would create an individual mandate requiring you to buy a :qualified” health insurance plan, as defined by the government. If you don’t have “qualified” health insurance for a given month, you will pay a new Federal tax. Incredibly, the amount and structure of this new tax is left to the discretion of the Secretaries of Treasury and Health and Human Services (HHS), whose only guidance is “to establish the minimum practicable amount that can accomplish the goal of enhancing participation in qualifying coverage (as so defined).” The new Medical Advisory Council (see #3D) could exempt classes of people from this new tax. To avoid this tax, you would have to report your health insurance information for each month of the prior year to the Secretary of HHS, along with “any such other information as the Secretary may prescribe.” The House bill also contains an individual mandate. The outline is less specific but parallel: Once market reforms and affordability credits are in effect to ensure access and affordability, individuals are responsible for having health insurance with an exception in cases of hardship.
  2. The Kennedy-Dodd bill would also create an employer mandate. Employers would have to offer insurance to their employees. Employers would have to pay at least a certain percentage (TBD) of the premium, and at least a certain dollar amount (TBD). Any employer that did not would pay a new tax. Again, the amount and structure of the tax is left to the discretion of the Secretaries of Treasury and HHS. Small employers (TBD) would be exempt.The House bill outline also contains an employer mandate that appears to parallel that in Kennedy-Dodd: “Employers choose between providing coverage for their workers or contributing funds on behalf of their uncovered workers.”
  3. In the Kennedy-Dodd bill, the government would define a qualified plan:
    1. All health insurance would be required to have guaranteed issue and renewal, modified community rating, no exclusions for pre-existing conditions, no lifetime or annual limits on benefits, and family policies would have to cover “children” up to age 26.The House bill outline is consistent with but less specific than the Kennedy-Dodd legislative language. The House bill outline would “prohibit insurers from excluding pre-existing conditions or engaging in other discriminatory practices.” I will keep my eye on what “other discriminatory practices” means in the legislative language. Does that mean that a health plan cannot charge higher premiums to smokers? Like the Kennedy/Dodd bill, the House bill outline would preclude health plans from imposing lifetime or annual limits on benefits: “Caps total out-of-pocket spending in all new policies to prevent bankruptcies from medical expenses.” This would raise premiums for new policies. The House bill outline “introduces administrative simplification and standardization to reduce administrative costs across all plans and providers.” I don’t know what this means, but suggest keeping an eye on it.
    2. A qualified plan would have to meet one of three levels of standardized cost-sharing defined by the government, “gold, silver, and bronze.” Details TBD. Same: “… by creating various levels of standardized benefits and cost-sharing arrangements…” It also contains this addition relative to Kennedy-Dodd: “… with additional benefits available in higher-cost plans.” But note the “various levels of standardized benefits.” This appears to be more expansive government control of health plan design than in the Kennedy-Dodd draft.
    3. Plans would be required to cover a list of preventive services approved by the Federal government.This is unspecified in the House bill outline. We’ll have to wait to see legislative language.” The House bill would require plans to “waive cost-sharing for preventive services in benefit packages.”
    4. A qualified plan would have to cover “essential health benefits,” as defined by a new Medical Advisory Council (MAC), appointed by the Secretary of Health and Human Services. The MAC would determine what items and services are “essential benefits.” The MAC would have to include items and services in at least the following categories: ambulatory patient services, emergency services, hospitalization, maternity and new born care, medical and surgical, mental health, prescription drugs, rehab and lab services, preventive/wellness services, pediatric services, and anything else the MAC thought appropriate.This appears parallel but is less specific for now: “Independent public/private advisory committee recommends benefit packages based on standards set in statute.” I find the “standards set in statute” interesting. It suggests that provider and disease interest groups will have two fora in which to lobby for their benefits to be mandated: Congress, and the advisory committee.
    5. The MAC would also define what “affordable and available coverage” is for different income levels, affecting who has to pay the tax if they don’t buy health insurance. The MAC’s rules would go into effect unless Congress passed a joint resolution (under a fast-track process) to turn them off.The House bill outline is silent on this.
  4. Health insurance plans could not charge higher premiums for risky behaviors: “Such rate shall not vary by health status-related factors, … or any other factor not described in paragraph (1).” Smokers, drinkers, drug users, and those in terrible physical shape would all have their premiums subsidized by the healthy. The House bill outline says it would “prohibit plans [from] rating (charging higher premiums) based on gender, health status, or occupation and strictly limits premium variation based on age.” If the bill were to provide nothing more, this would appear to parallel the Senate bill and preclude plans from charging higher premiums for risky behaviors.
  5. Guaranteed issue and renewal combined with modified community rating would dramatically increase premiums for the overwhelming majority of those Americans who now have private health insurance. New Jersey is the best example of health insurance mandates gone wild. In the name of protecting their citizens, premiums are extremely high to cover the cross-subsidization of those who are uninsurable.The House bill outline is silent on guaranteed issue and renewal. I’m going to make an educated guess that the bill includes these provisions as part of “other discriminatory practices,” and they have just left them out of the outline. Given the philosophy behind this outline (with which I disagree), it would be a striking omission. But for now, the outline says nothing specific on these topics.
  6. The bill would expand Medicaid to cover everyone up to 150% of poverty, with the Federal government paying all incremental costs (no State share). This means adding childless adults with income below 150% of the poverty line.The House bill outline “expands Medicaid for the most vulnerable, low-income populations,” so we have no specifics other than that there’s an expansion.” I cannot tell if this is expanding eligibility or benefits. The outline also “improves payment rates to enhance access to primary care under Medicaid.” I assume this means the bill would expand the Federal share paid of each dollar spent by a State Medicaid program on primary care, rather than the Federal government actually mandating specific payment rates to be implemented by States. Federal micromanagement of specific Medicaid provider payment rates was eliminated in the mid 1990s.
  7. People from 150% of poverty up to 500% (!!) would get their health insurance subsidized (on a sliding scale). If this were in effect in 2009, a family of four with income of $110,000 would get a small subsidy. The bill does not indicate the source of funds to finance these subsidies.The House bill outline has a sliding scale up to 400% of poverty. If this were in effect in 2009, a family of four with income of $88,000 would get small subsidy.
  8. People in high cost areas (e.g., New York City, Boston, South Florida, Chicago, Los Angeles) would get much bigger subsidies than those in low cost areas (e.g., much of the rest of the country, especially in rural areas). The subsidies are calculated as a percentage of the “reference premium,” which is determined based on the cost of plans sold in that particular geographic area.The House bill outline is not specific on this point. I would not expect it to be – this is something you can tell only from legislative language.
  9. There would be a “public plan option” of health insurance offered by the federal government. In this new government health plan, the federal government would pay health care providers Medicare rates + 10%. The +10% is clearly intended to attract short-term legislative support from medical providers. I hope they are not so naive that they think that differential would last.The House bill outline “creates a new public health insurance within the Exchange … the public health insurance option competes on ‘level field’ with private insurers in the Exchange.” There are no specifics on how the public plan would work, or on provider payment rates.
  10. Group health plans with 250 or fewer members would be prohibited from self-insuring.” ERISA would only be for big businesses.The House bill outline is silent on this point.
  11. States would have to set up “gateways” (health insurance exchanges) to market only qualified health insurance plans. If they don’t, the Feds will set up a gateway for them.The House calls it an Exchange rather than a Gateway. While the Senate bill would tell each State, “Create a Gateway or we’ll create one for you,” the House bill outline says to each State, “We’re creating a single new national Exchange. You’re in it unless you develop your own State or Regional Exchange.”
  12. Health insurance plans in existence before the law would not have to meet the new insurance standards. This creates a weird bifurcated system and means you would (probably) be subject to a different set of rules when you change jobs.The House bill outline appears to parallel the Kennedy-Dodd draft: “Phases-in requirements to benefit and quality standards for employer plans.” This means that new plans will be more expensive than old plans. It also means they’re creating a bifurcated system with all sorts of perverse unintended consequences for employment flexibility.
  13. The bill does not specify what spending will be cut or what taxes will be raised to pay for the increased spending. That is presumably for the Finance Committee to determine, since it’s their jurisdiction. The House bill outline lists specific topics for changes to Medicare reimbursement:
    • Changing (how?) the Medicare reimbursement for doctors, called the “Sustainable Growth Rate” (SGR).
    • “Increasing reimbursement for primary care providers”
    • “Improving” the Medicare drug program. I won’t be surprised if, when I see the specifics, I disagree that their changes are “improvements.” In the past this has meant having the federal government mandate specific prices for drugs.
    • Cutting payments to Medicare Advantage plans.
    • Expanding low-income subsidies for seniors and eliminating cost-sharing for all preventive services in Medicare.

    The House bill outline also uses positive language to describe things that might generate budgetary savings from Medicare and/or Medicaid. The hospital readmissions point is specific. The first two points could increase or decrease federal spending, depending on the specifics.

    • “Use federal health programs … to reward high quality, efficient care, and reduce disparities.”
    • “Adopt innovative payment approaches and promote[s] better coordinated care in Medicare and the new public option through programs such as accountable care organizations.”
    • “Attack the high rate of cost growth to generate savings for reform and fiscal sustainability, including a program in Medicare to reduce preventable hospital readmissions.”
  14. The bill defines an “eligible individual” as “a citizen or national of the United States or an alien lawfully admitted to the United States for permanent residence or an alien lawfully present in the United States.” The House bill outline is silent on this point.
  15. The bill would create a new pot of money for state gateways to pay “navigators” to educate people about the new bill, distribute information about health plans, and help people enroll. Navigators receiving federal funds “may include … unions, …” The House bill outline is silent on this point.

This would have severe effects on the more than 100 million Americans who have private health insurance today:

  • The government would mandate not only that you must buy health insurance, but what health insurance counts as “qualifying.”
  • Health insurance premiums would rise as a result of the law, meaning lower wages.
  • A government-appointed board would determine what items and services are “essential benefits” that your qualifying plan must cover.
  • You would find a tremendous new disincentive to switch jobs, because your new health insurance may be subject to the new rules and would therefore be significantly more expensive.
  • Those who keep themselves healthy would be subsidizing premiums for those with risky or unhealthy behaviors.
  • Far more than half of all Americans would be eligible for subsidies, but we have not yet been told who would pay the bill.
  • The Secretaries of Treasury and HHS would have unlimited discretion to impose new taxes on individuals and employers who do not comply with the new mandates. (The House bill outline is not specific on this point.)
  • The Secretary of HHS could mandate that you provide him or her with “any such other information as [he/she] may prescribe.” (The House bill outline is not specific on this point.)

I strongly oppose the Kennedy-Dodd bill and the House Tri-Committee bill.

If this topic interests you, I highly recommend Jim Capretta’s blog Diagnosis.

(photo credit: speaker.house.gov)

Understanding the Kennedy health care bill

Understanding the Kennedy health care bill

Over the weekend a draft of Senator Kennedy’s (D-MA) health care bill leaked. After playing with Adobe Acrobat, here is the text of the draft Kennedy bill as a text file (173 K), and as a single Acrobat file (3.4 MB). Update: I fixed the broken link to the PDF. Unlike the leaked version, both of these are searchable.

Calling it the “Kennedy” bill is something of an overstatement. Senator Kennedy chairs the Senate Health, Education, Labor, and Pensions committee, and his staff wrote the draft. By all reports, however, Chairman Kennedy’s health is preventing him from being heavily involved in the drafting. Senator Reid has designated Senator Chris Dodd (D-CT) to supervise the process, but as best I can tell, it’s really the Kennedy committee staff who are making most of the key decisions. For now I will call it the Kennedy-Dodd bill.

As the committee staff emphasized to the press after the leak, this is an interim draft. I assume things will move around over the next several weeks as discussions among Senators and their staffs continue. This is therefore far from a final product, but it provides a useful insight into current thinking among some key Senate Democrats.

Update: I now have a three-page outline of the House Democrats’ health care bill. I have a new post which contains all of the content below, and compares it to the House bill. If you read the new post, you’ll get two for the price of one: Understanding the House Democrats’ [and Kennedy-Dodd] health care bill[s].

Here are 15 things to know about the draft Kennedy-Dodd health bill.

    1. The Kennedy-Dodd bill would create an individual mandate requiring you to buy a “qualified” health insurance plan, as defined by the government. If you don’t have “qualified” health insurance for a given month, you will pay a new Federal tax. Incredibly, the amount and structure of this new tax is left to the discretion of the Secretaries of Treasury and Health and Human Services (HHS), whose only guidance is “to establish the minimum practicable amount that can accomplish the goal of enhancing participation in qualifying coverage (as so defined).” The new Medical Advisory Council (see #3D) could exempt classes of people from this new tax. To avoid this tax, you would have to report your health insurance information for each month of the prior year to the Secretary of HHS, along with any such other information as the Secretary may prescribe.”
    1. The bill would also create an employer mandate. Employers would have to offer insurance to their employees. Employers would have to pay at least a certain percentage (TBD) of the premium, and at least a certain dollar amount (TBD). Any employer that did not would pay a new tax. Again, the amount and structure of the tax is left to the discretion of the Secretaries of Treasury and HHS. Small employers (TBD) would be exempt.
    1. In the Kennedy-Dodd bill, the government would define a qualified plan:
        1. All health insurance would be required to have guaranteed issue and renewal, modified community rating, no exclusions for pre-existing conditions, no lifetime or annual limits on benefits, and family policies would have to cover children up to age 26.
        1. A qualified plan would have to meet one of three levels of standardized cost-sharing defined by the government, gold, silver, and bronze. Details TBD.
        1. Plans would be required to cover a list of preventive services approved by the Federal government.
        1. A qualified plan would have to cover “essential health benefits,” as defined by a new Medical Advisory Council (MAC), appointed by the Secretary of Health and Human Services. The MAC would determine what items and services are “essential benefits.” The MAC would have to include items and services in at least the following categories: ambulatory patient services, emergency services, hospitalization, maternity and new born care, medical and surgical, mental health, prescription drugs, rehab and lab services, preventive/wellness services, pediatric services, and anything else the MAC thought appropriate.
        1. The MAC would also define what “affordable and available coverage” is for different income levels, affecting who has to pay the tax if they don’t buy health insurance. The MAC’s rules would go into effect unless Congress passed a joint resolution (under a fast-track process) to turn them off.
    2. Health insurance plans could not charge higher premiums for risky behaviors: “Such rate shall not vary by health status-related factors, … or any other factor not described in paragraph (1).” Smokers, drinkers, drug users, and those in terrible physical shape would all have their premiums subsidized by the healthy.
    1. Guaranteed issue and renewal combined with modified community rating would dramatically increase premiums for the overwhelming majority of those Americans who now have private health insurance. New Jersey is the best example of health insurance mandates gone wild. In the name of protecting their citizens, premiums are extremely high to cover the cross-subsidization of those who are uninsurable.
    1. The bill would expand Medicaid to cover everyone up to 150% of poverty, with the Federal government paying all incremental costs (no State share). This means adding childless adults with income below 150% of the poverty line.
    1. People from 150% of poverty up to 500% (!!) would get their health insurance subsidized (on a sliding scale). If this were in effect in 2009, a family of four with income of $110,000 would get a small subsidy. The bill does not indicate the source of funds to finance these subsidies.
    1. People in high cost areas (e.g., New York City, Boston, South Florida, Chicago, Los Angeles) would get much bigger subsidies than those in low cost areas (e.g., much of the rest of the country, especially in rural areas). The subsidies are calculated as a percentage of the “reference premium,” which is determined based on the cost of plans sold in that particular geographic area
    1. There would be a “public plan option” of health insurance offered by the federal government. In this new government health plan, the federal government would pay health care providers Medicare rates + 10%. The +10% is clearly intended to attract short-term legislative support from medical providers. I hope they are not so naive that they think that differential would last.
    1. Group health plans with 250 or fewer members would be prohibited from self-insuring. ERISA would only be for big businesses.
    1. States would have to set up “gateways” (health insurance exchanges) to market only qualified health insurance plans. If they don’t, the Feds will set up a gateway for them.
    1. Health insurance plans in existence before the law would not have to meet the new insurance standards. This creates a weird bifurcated system and means you would (probably) be subject to a different set of rules when you change jobs.
    1. The bill does not specify what spending will be cut or what taxes will be raised to pay for the increased spending. That is presumably for the Finance Committee to determine, since it’s their jurisdiction.
    1. The bill defines an “eligible individual” as “a citizen or national of the United States or an alien lawfully admitted to the United States for permanent residence or an alien lawfully present in the United States.”
  1. The bill would create a new pot of money for state gateways to pay “navigators” to educate people about the new bill, distribute information about health plans, and help people enroll. Navigators receiving federal funds “may include … unions, …”

This would have severe effects on the more than 100 million Americans who have private health insurance today:

    • The government would mandate not only that you must buy health insurance, but what health insurance counts as “qualifying.”
    • Health insurance premiums would rise as a result of the law, meaning lower wages.
    • A government-appointed board would determine what items and services are “essential benefits” that your qualifying plan must cover.
    • You would find a tremendous new disincentive to switch jobs, because your new health insurance may be subject to the new rules and would therefore be significantly more expensive.
    • Those who keep themselves healthy would be subsidizing premiums for those with risky or unhealthy behaviors.
    • Far more than half of all Americans would be eligible for subsidies, but we have not yet been told who would pay the bill.
    • The Secretaries of Treasury and HHS would have unlimited discretion to impose new taxes on individuals and employers who do not comply with the new mandates.
  • The Secretary of HHS could mandate that you provide him or her with “any such other information as [he/she] may prescribe.”

I strongly oppose this bill.

Update: If this topic interests you, I highly recommend Jim Capretta’s blog Diagnosis.

(photo credit: kennedy.senate.gov)

Will the stimulus come too late?

I began this blog at the end of March after the stimulus bill had become law. I had been struck by how much the stimulus debate had focused on whether the bill was efficient. (It clearly was not.) There was much less discussion of whether the stimulus would be effective, and of the timing of the macroeconomic boost.

Everyone wants to know when the U.S. economy will start growing. I will focus on a related question: when will the stimulus law begin to have a significant positive effect on U.S. economic growth? And could it have come sooner if the Administration had done something different?

I believe the Administration made an enormous mistake in its legislative implementation of the stimulus. As a result, the boost to GDP will come six to nine months later than it needed to (maybe more). Given the President’s desire to do a large fiscal stimulus, and given his policy preferences, he could have had a different bill that would have been producing significant GDP growth beginning now, rather than in the middle of next year. That’s a huge mistake with real consequences for the U.S. and global economies.

To illustrate this point, let me classify four types of fiscal stimulus:

  1. a permanent tax cut;
  2. a temporary tax cut;
  3. one-time checks to people independent of their tax liabilities; and
  4. increased government spending through federal and state bureaucracies: infrastructure, energy spending, etc.

There is of course a fifth option: no fiscal stimulus law.

If you’re going to do a fiscal stimulus (big if), the best kind is a permanent tax cut. It is effective, efficient, and fast:

  • effective – People spend a large proportion of a permanent tax cut. This is derived from Milton Friedman’s “permanent income hypothesis.”
  • efficient – People spend their own money on themselves, so they waste very little of it, and they spend it on things that matter to them. Again, see Milton Friedman.
  • fast – Checks are delivered quickly, and people spend most of their own money soon after they get the check.

This was part of the short-term logic behind the 2003 tax cut, which we designed to foster both short-term and long-term economic growth. I also have a strong general policy preference for lower taxes rather than more government spending, but that’s a separable question from how it works as short-term stimulus.

In 2008 we knew we could not get a Democratic Congress to enact a permanent tax cut. Q: Do you then go for a temporary tax cut, or do nothing? The President thought the risks of an economic slowdown in 2008 were significant enough that it made sense to pursue a (second best) temporary tax cut with the Congress.

Like the 2003 law, the 2008 law got the bulk of its short-term GDP boost by advancing tax refunds from the year to come, and delivering them as checks from the IRS to taxpayers. As in 2003, the checks were delivered to taxpayers in the summer (mid-June to early-August), and consumers immediately started spending a portion of their rebates.

Because the 2008 law was a temporary tax cut, taxpayers spent a smaller proportion of it than anyone would have liked. While designing the law, we assumed about 1/3 would be spent, and much of that fairly quickly. The rest would be saved, which is also good but doesn’t help short-term GDP growth. Economists agree that GDP in Q3 and Q4 of 2008 was higher than it otherwise would have been because of the 2008 stimulus law. It was efficient, fast, yet only partially effective, with a smaller GDP boost than we would have liked:

  • efficient – People were again spending their own money on themselves. You get very little waste, and people know what they want and need.
  • fast – Checks were delivered quickly, and much of the spending that did occur happened in Q3, with some in Q4, and with very little left by Q1 of 2009.
  • only partially effective – Because it was a temporary tax cut, people saved a lot of their checks, as we expected. Still we got a GDP bump in Q3 and Q4, and in retrospect we certainly needed it.

The 2008 law was mostly (2) from my list above – a temporary tax cut. Some of the money went to (3), checks to people who didn’t pay income taxes. This was necessary to reach a compromise with a Democratic Congressional leadership that placed a high priority on the distributional effects of the law. Speaker Pelosi insisted that poor people who owed no income taxes still get “rebate” checks, and that high-income taxpayers get nothing. So the 2008 stimulus law was mostly (2) with a little bit of (3).

Now fast forward to January of 2009, when President Obama proposed an enormous fiscal stimulus. The President’s mistake was in largely deferring to Congress on the composition of the stimulus bill. Rather than allowing Congress to pump hundreds of billions of dollars through slow-spending and inefficient bureaucracies, the President should have insisted that Congress instead send all the funds directly to the American people and let them spend it quickly and efficiently. Given his policy preferences, he could have directed a large share of those funds to poor people who don’t pay income taxes. He could have again mislabeled these payments as “tax cuts,” or just correctly labeled them as one-time entitlement payments. I would not have liked that policy, but it would have generated a faster macroeconomic boost than what he allowed Congress to do instead.

Let’s compare the two scenarios. The enacted 2009 stimulus is:

  • effective (eventually) – Most of the spending through government bureaucracies will (eventually) increase GDP. Some of the funds transferred to State governments will be used to offset State spending or tax cuts that otherwise would have occurred, so there’s a loss. But clearly the proportion of the $787 B that will eventually increase GDP will be high, and much higher than if all the funds were given to individuals and families.
  • inefficient – It will be inefficient in two senses. The spending represents the policy preferences of legislators (and all their ugly legislative deals and compromises), rather than the choices of hundreds of millions of Americans who presumably know better how they would like money spent on them. The spending will also be wasteful, and we are starting to see signs of this in the press.
  • s-l-o-o-o-w – CBO says that $25 B of spending had gone into the economy by May 22nd. That’s less than 4% of the total budgetary impact of that bill. Other news reports suggest that about $40 B is in the economy if you include the revenue side. Remember that almost all of the 2008 stimulus was in private hands by August 1. We will get very little GDP boost from fiscal stimulus in Q3 of 2009, and not much in Q4 either. The stimulus will begin to ramp up in Q1 of next year, and be in full swing by Q2 and Q3 of 2010.

Had the President instead insisted that a $787 B stimulus go directly into people’s hands, where “people” includes those who pay income taxes and those who don’t, we would now be seeing a stimulus that would be:

  • partially effective but still quite large – Because it would be a temporary change in people’s incomes, only a fraction of the $787 B would be spent. But even 1/4 or 1/3 of $787 B is still a lot of money to dump out the door. The relative ineffectiveness of a temporary income change would be offset by the enormous amount of cash flowing.
  • efficient – People would be spending money on themselves. Some of them would be spending other people’s money on themselves, but at least they would be spending on their own needs, rather than on multi-year water projects in the districts of powerful Members of Congress. You would have much less waste.
  • fast – The GDP boost would be concentrated in Q3 and Q4 of 2009, tapering off heavily in Q1 of 2010.

Why did the President not do this? Discussions with the Congress began in January before he took office, and he faced a strong Speaker who took control and gave a huge chuck of funding to House Appropriations Chairman Obey (D-WI). I can think of three plausible explanations:

  1. The President and his team did not realize the analytical point that infrastructure spending has too slow of a GDP effect.
  2. They were disorganized.
  3. They did not want a confrontation with their new Congressional allies in their first few days.

I think the Administration now recognizes this problem. Last month when they released a CEA paper “Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009,” the paper danced around the timing of job growth and government outlays in 2009 and 2010. Tips for reporters: (1) ask the Administration to give you OMB estimates of quarterly cash flows for the stimulus law, and (2) ask them to give you the quarterly GDP and job growth estimates behind this CEA paper. I know the first one exists, and I’d bet heavily the second does as well.

Fortunately, CBO Director Doug Elmendorf just gave a presentation titled “Implementation Lags of Fiscal Policy” to the IMF’s conference on fiscal policy. All of the following data are from his presentation.

The final 2009 stimulus law broke down like this:

10-yr total

% of total

Discretionary spending (highways, mass transit, energy efficiency, broadband, education, state aid)

$308 B

39%

Entitlements (food stamps, unemployment, Medicaid, refundable tax credits)

$267 B

34%

Tax cuts

$212 B

27%

Total

$787 B

100%

The problem is that only 11% of the first line (discretionary spending) will be spent by October 1 of this year. In contrast, 31-32% of the entitlement and tax cuts lines will be out the door by that time. (I have questions about the speed of the entitlement part. The bulk of that is Medicaid spending, and it’s not clear to me that a Federal payment to a State means the cash is immediately flowing into the private economy.)

If we extend our window to October 1, 2010, then less than half the discretionary spending will be out the door, while almost 3/4 of the entitlement spending and all of the tax cuts will be out the door and affecting the economy. The largest part of the stimulus law is therefore also the slowest spending part. This is fine if you’re trying to increase GDP growth over the next 2-4 years. If you’re going for short-term GDP growth, it makes no sense.

Director Elmendorf drills down further into discretionary spending and shows that defense spending happens quickly, highways and water extremely slowly:

  • If you allocate $1 to defense spending, 65 cents has been spent within one year.
  • If you allocate $1 to highway spending, 27 cents has been spent within one year.
  • If you allocate $1 to water projects, only 4 cents has been spent within one year.

In fact, the infrastructure spending in the stimulus law will peak in fiscal year 2011, which goes from October 1, 2010 to September 30, 2011. That’s too late from a macro perspective.

The Director further points out that the 2009 stimulus law created many new programs. This slows spend-out, as it takes time to create and ramp up the new programs.

The Administration has made much of working with federal and state bureaucracies to find “shovel-ready” projects to accelerate infrastructure spending. All of my conversations with budget analysts suggest this claim is tremendously overblown, and Director Elmendorf asks, “Is this practical on a large scale?”


The 2009 stimulus law will increase U.S. economic growth. But the actuals are matching the budget analysts’ projections for the speed at which that effect will occur.

I would not have liked a stimulus law that would have given cash to people who didn’t pay income taxes. But from a macroeconomic perspective, we need the faster economic growth now. Had the President and his team insisted on giving money to people (taxpayers or not) rather than to bureaucracies, we would be seeing a huge growth spurt in Q3 and Q4 of this year.

It is sad that instead we have to wait until the middle of next year because the White House deferred to Congressional desires to spend on infrastructure. This strategic mistake was avoidable, and the recovery will be delayed because of it.

Parsing the President’s health care reform letter

Parsing the President’s health care reform letter

The White House has released a letter from the President to the two Senate Chairmen who are working on (different) versions of health care reform: Senator Kennedy (D-MA), Chairman of the Health, Education, Labor, and Pensions (HELP) Committee, and Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee. The letter is dated yesterday and was delivered as part of a White House meeting between the President and Senate Democratic leaders, including the two Chairmen.

This important letter attempts to shape the pending legislation. It makes new proposals, and it tries to set boundaries to constrain the work of the Chairmen. I am going to walk through the letter and explain what I think it means. I will walk through it in sequence, but will cut out the fluff, and occasionally add emphasis in bold. Each of these quotes could merit a post by itself. I will instead provide a survey of the whole letter. The first notable text is the second paragraph:

Soaring health care costs make our current course unsustainable. It is unsustainable for our families, whose spiraling premiums and out-of-pocket expenses are pushing them into bankruptcy and forcing them to go without the checkups and prescriptions they need. It is unsustainable for businesses, forcing more and more of them to choose between keeping their doors open or covering their workers. And the ever-increasing cost of Medicare and Medicaid are among the main drivers of enormous budget deficits that are threatening our economic future.

This is fantastic, especially as 2. He is focusing on health cost growth as the underlying problem, rather than just focusing on the uninsured, which is only one symptom of the problem. I wrote about this in mid-April: By focusing only on covering the uninsured, are we solving the wrong problem? Here’s the key picture from that post. We need to focus on the red box, and not just the blue box.

hc cost flowchart

The President’s letter continues:

We simply cannot afford to postpone health care reform any longer. This recognition has led an unprecedented coalition to emerge on behalf of reform — hospitals, physicians, and health insurers, labor and business, Democrats and Republicans. These groups, adversaries in past efforts, are now standing as partners on the same side of this debate.

There is a less noble explanation for the existence of this coalition. I wrote in mid-May, “[The provider groups] want to share in the spoils of increased government spending on health care, they want to avoid being the political and policy targets of legislation, and they see no political downside to supporting a popular and powerful President with Democratic supermajorities in both the House and Senate.”

At this historic juncture, we share the goal of quality, affordable health care for all Americans. But I want to stress that reform cannot mean focusing on expanded coverage alone. Indeed, without a serious, sustained effort to reduce the growth rate of health care costs, affordable health care coverage will remain out of reach. So we must attack the root causes of the inflation in health care.

This is an astonishing paragraph from a Democratic President. As he has done in the past, he says his goal is health care for all Americans, rather than health insurance for all Americans. This language will allow him to declare victory with a bill that does not provide universal pre-paid health insurance.

He then reiterates that expanded coverage is insufficient. A bill “must attack the root causes of the inflation in health care.” This is fantastic and unexpected from a Democrat.

The President’s letter then veers wildly off course. That paragraph continues:

… So we must attack the root causes of the inflation in health care. That means promoting the best practices, not simply the most expensive. We should ask why places like the Mayo Clinic in Minnesota, the Cleveland Clinic in Ohio, and other institutions can offer the highest quality care at costs well below the national norm. We need to learn from their successes and replicate those best practices across our country. That’s how we can achieve reform that preserves and strengthens what’s best about our health care system, while fixing what is broken.

Geographic disparities in health spending are enormous, and if we could somehow magically reduce spending in high-cost areas to match that in low cost areas, without sacrificing too much quality, then we would make major progress in reducing the level of national health spending. Budget Director Peter Orszag is the primary proponent of this argument, since before he entered the Administration.

But the Administration has no plan and no proposals that would actually reduce geographic disparities in health care. They have proposals which would provide people with more information about the health care they use, but they have not proposed to change the incentives people have to use that care. If you don’t change the incentives, you will make no significant progress in reducing geographic spending disparities or slowing health cost growth. I wrote about this in late April: Slowing health cost growth requires information AND incentives, and then found that CBO had already made this point.

More importantly, it is absurd to say that geographic disparities are “the root causes of the inflation in health care.” We know what drives health cost growth: (1) technology, (2) income growth, (3) increases in third party payment, and (4) aging of the population. Some argue that administrative costs also contribute to growth, but I’m skeptical. We also know that the first three reasons account for two-thirds to nearly all of cost growth, depending on which study you prefer.

The President’s letter correctly identifies the problem to be solved as health cost growth, and then completely misdiagnoses the sources of that growth. The Administration continues to grossly foul up the problem definition, not propose a solution, and get a free ride from a lazy and compliant press corps. You cannot slow health spending growth merely by stating a vague intent to do so.

The letter continues:

The plans you are discussing embody my core belief that Americans should have better choices for health insurance, building on the principle that if they like the coverage they have now, they can keep it, while seeing their costs lowered as our reforms take hold.

Two things jump out from this sentence. The first is a clear and oft-repeated signal that “if [you] like the coverage [you] have now, [you] can keep it.” The President says this is a core belief. It also protects the Administration from one of the most effective attacks on expansions of government health care: that it will squeeze our your private care. This is tactically smart.

The second is the return to “seeing their costs lowered as our reforms take hold.” This addresses the first box on the right side in my diagram above, and I compliment the President and his team for identifying that growing health spending hurts the more than 100 million Americans who now have health insurance, and not just those who lack it.

But for those who don’t have such options, I agree that we should create a health insurance exchange … a market where Americans can one-stop shop for a health care plan, compare benefits and prices, and choose the plan that’s best for them, in the same way that Members of Congress and their families can.

  • A (singular) exchange, or 50 State exchanges? There’s a big difference.
  • I have never been enamored of the “one-stop shopping” argument. I’m not opposed to it, it just doesn’t excite me. Mostly I fear that exchanges become vehicles for Washington-directed redistribution.
  • It is fascinating that he takes the traditional liberal argument that “you deserve health care that is good as Members of Congress get,” and turns it into “Americans can … choose the plan that’s best for them, in the same way that Members of Congress and their families can.” This is creative.

None of these plans should deny coverage on the basis of a preexisting condition, …

The hardest problem in health care reform is how to deal with the small percentage of Americans with predictably high health costs. To quote Harvard’s Dr. Kate Baicker:

Uninsured Americans who are sick pose a very different set of problems. They need health care more than health insurance. Insurance is about reducing uncertainty in spending. It is impossible to “insure” against an adverse event that has already happened, for there is no longer any uncertainty. If you were to try to purchase auto insurance that covered replacement of a car that had already been totaled in an accident, the premium would equal the cost of a new car. You would not be buying car insurance – you would be buying a car. Similarly, uninsured people with known high health costs do not need health insurance – they need health care. Private health insurers can no more charge uninsured sick people a premium lower than their expected costs. The policy problem posed by this group is how to ensure that low income uninsured sick people have the resources they need to obtain what society deems an acceptable level of care and ideally, as discussed below, to minimize the number of people in this situation.

We need to distinguish between the uninsured and the uninsurable. The uninsured lack health insurance for a wide variety of reasons. Some uninsured are healthy, some are sick.

The uninsurable are those who are already sick or injured, and who have predictably high future health costs. If you have an incurable disease, you are uninsurable, because there is little uncertainty about your future spending. (I’m oversimplifying -there is little uncertainty that you will have high health costs.) As Kate points out, “Uninsured people with known high health costs do not need health insurance – they need health care.”  The policy problem posed by this group is how to ensure that low income uninsured sick people have the resources they need to obtain what society deems an acceptable level of care.

So when the President says that “None of these plans should deny coverage on the basis of a preexisting condition,” the practical effect is that health insurance plans will be required to provide health care to the uninsurable, label it as “insurance,” and then charge healthy people higher premiums than are merited by their own health status. It’s a way of hiding the cross-subsidization.

… and all of these plans should include an affordable basic benefit package that includes prevention, and protection against catastrophic costs.

The word “basic” is unusual from a Democrat. The traditional Washington health debate has Republicans (generally) arguing that we should want more people to be able to afford access to “basic” health insurance, while Democrats (especially those farther Left) saying everyone has a right to “good” health insurance. Setting aside the access vs. right debate for the moment, the word “basic” is a more centrist choice than I would have expected from this President.

He then runs into one of the classic problems of government-designed health care reform: who defines the benefit package? By saying that all of these plans should include X, he is punting the question of who gets to define X, and how specific will they be?Governments have a terrible track record of political micromanagement of medical benefits.

I strongly believe that Americans should have the choice of a public health insurance option operating alongside private plans.

Note that he chose “I strongly believe that Americans should have” rather than the stronger “Americans must have.” Despite the urgings of the Left, the President is leaving himself room to jettison the “public option” if that is the price of getting the Republican votes he may need. Also, he says “alongside private plans,” again emphasizing that the public option will not, in his view, squeeze out private coverage. I think he’s wrong and it will squeeze out private coverage, and would point to what his Administration is trying to do to Medicare private plans as proof.

I understand the Committees are moving towards a principle of shared responsibility — making every American responsible for having health insurance coverage, and asking that employers share in the cost. I share the goal of ending lapses and gaps in coverage that make us less healthy and drive up everyone’s costs, and I am open to your ideas on shared responsibility. But I believe if we are going to make people responsible for owning health insurance, we must make health care affordable. If we do end up with a system where people are responsible for their own insurance, we need to provide a hardship waiver to exempt Americans who cannot afford it. In addition, while I believe that employers have a responsibility to support health insurance for their employees, small businesses face a number of special challenges in affording health benefits and should be exempted.

This is a fairly hard slap at a mandate (individual or employer). “I understand [you] are moving toward … I share the goal … and I am open to your ideas on shared responsibility” is not a ringing endorsement of a mandate. He then guts the universal nature by saying that it should exempt “Americans who cannot afford it” as well as small businesses. These exemptions would create tremendous distortions and inequities. The resulting patchwork mandate would be a mess. With this paragraph, I think the President weakens the prospect of a mandate becoming law.

Health care reform must not add to our deficits over the next 10 years — it must be at least deficit neutral and put America on a path to reducing its deficit over time. To fulfill this promise, I have set aside $635 billion in a health reserve fund as a down payment on reform. This reserve fund includes a numb

er of proposals to cut spending by $309 billion over 10 years –reducing overpayments to Medicare Advantage private insurers; strengthening Medicare and Medicaid payment accuracy by cutting waste, fraud and abuse; improving care for Medicare patients after hospitalizations; and encouraging physicians to form “accountable care organizations” to improve the quality of care for Medicare patients. The reserve fund also includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent, which, together with other steps to close loopholes, would raise $326 billion over 10 years.

I am committed to working with the Congress to fully offset the cost of health care reform by reducing Medicare and Medicaid spending by another $200 to $300 billion over the next 10 years, and by enacting appropriate proposals to generate additional revenues. These savings will come not only by adopting new technologies and addressing the vastly different costs of care, but from going after the key drivers of skyrocketing health care costs, including unmanaged chronic diseases, duplicated tests, and unnecessary hospital readmissions.

  • “It must be at least deficit neutral” – Good.
  • “and [must] put America on a path to reducing its deficit over time” – Even better, if he were to actually propose a policy that might do this. Without such a proposal, this is empty and weak.
  • “I have set aside $635 billion in a health reserve fund as a down payment on reform” – Horrible. He wants to create the entire new obligation, but fund only about half of it.
  • “… cut spending by $309 billion over 10 years” – True, but his budget hides $330 B in additional spending on doctors and $17 B to expand Medicaid, so the net is a Medicare/Medicaid spending increase of $38 billion over 10 years. (See table S-5 on page 121 of the President’s budget.) The President’s budget increases spending on these entitlements, and uses a baseline game to claim budgetary savings to offset a new health entitlement.
  • “… cutting waste, fraud and abuse” – This is the old chestnut to suggest that the cuts are good policy and won’t hurt. There is waste, fraud, and abuse, but the cuts will also involve real reductions in payments to health providers, and they will hurt (which doesn’t make them wrong to do).
  • “… a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent” – Democrats in Congress rejected this months ago.
  • “… by reducing Medicare and Medicaid spending by another $200 to $300 billion over the next 10 years” – Excellent. Will he provide specifics? I would be happy to suggest some.
  • “… and by enacting appropriate proposals to generate additional revenues.”- aka “raise more taxes” – Horrible from my perspective.
  • “… going after the key drivers of skyrocketing health care costs, including unmanaged chronic diseases, duplicated tests, and unnecessary hospital readmissions.” – As I said earlier, these are not the key drivers of skyrocketing health care costs, and it is misleading and irresponsible to claim they are.

To identify and achieve additional savings, I am also open to your ideas about giving special consideration to the recommendations of the Medicare Payment Advisory Commission (MedPAC), a commission created by a Republican Congress. Under this approach, MedPAC’s recommendations on cost reductions would be adopted unless opposed by a joint resolution of the Congress. This is similar to a process that has been used effectively by a commission charged with closing military bases, and could be a valuable tool to help achieve health care reform in a fiscally responsible way.

This is new and interesting to me. “A commission created by a Republican Congress” is odd, since MedPac is not known as a nonpartisan advisory group. It is also odd to imagine giving MedPac real decision-making authority, given that it is comprised of representatives of provider groups (doctors, hospitals, nurses, etc.)

I know that you have reached out to Republican colleagues, as I have, and that you have worked hard to reach a bipartisan consensus about many of these issues. I remain hopeful that many Republicans will join us in enacting this historic legislation that will lower health care costs for families, businesses, and governments, and improve the lives of millions of Americans. So, I appreciate your efforts, and look forward to working with you so that the Congress can complete health care reform by October.

I can read this either way. My gut says this means, “Get me a bill by October.” I would prefer it be broadly bipartisan, but don’t let the lack of Republican support prevent you from getting me a bill.

Summary & Conclusions

The news in this letter is:

  • The President continues his rhetorical focus on reducing long run health costs in addition to expanding coverage.
  • While appearing to push for a public option and universality, he is leaving himself room to compromise on both if needed to get a bill to his desk.
  • He has made a mandate harder to legislate by insisting on large exemptions, and he has not signaled any support for a mandate. Goodbye mandate, I think.
  • He is insisting on deficit neutrality over 10 years and reducing the deficit in the long run, while not proposing policies that achieve either goal. He is opening the door to more Medicare and Medicaid savings to reach these goals and has floated a $200-$300 B number without specifics.
  • He has opened the door to a binding commission to cut Medicare and Medicaid spending, modeled after the Base Realignment and Closure (BRAC) process.

I have mixed conclusions:

  • At the 30,000-foot level, he has broken new ground for Democrats in defining the problem correctly as unsustainable health cost growth, rather than the subsidiary problem of the uninsured. I compliment him for this.
  • At the 5,000-foot level, he botches the problem definition by focusing on geographic disparities while ignoring the commonly acknowledged major drivers of health spending increases: technology, income growth, and third party payment. This is a fatal flaw.
  • He continues to assert that we must slow cost growth, without proposing any policy changes that would do so in a measurable way. This is an abdication of leadership and irresponsible.
  • To genuinely slow health cost growth, you need to change incentives. Doing so involves political pain. Congress will not want to do that pain, and will not do so if the President doesn’t propose specifics.
  • In addition, the short-term budget numbers still don’t add up. He has problems with the “down payment” meaning they’re not paying for the full new obligation, ignoring the doctors and Medicaid spending hidden in the baseline, and Congress rejecting his biggest tax increase proposal.
  • I am glad that he is leaning against, or at least undermining, the case for a mandate.
  • The MedPAC idea is interesting. It probably won’t work, but I don’t want to dismiss it out of hand.

The President’s letter makes it harder, not easier, to get a bill. While I like some elements of the letter, it is inconsistent with the President’s actual proposals. You cannot magically slow health spending growth without proposing policy changes that affect incentives and behavior. If the President is not willing to bite the bullet and lead on slowing long-term health cost growth, he will instead get a bill which is just a straight entitlement expansion, partly offset by Medicare Advantage cuts and tax increases, and obscured by budget gimmicks. His advisors will then have to construct a bogus argument that they have addressed long-term spending growth.

That would be a terrible outcome.

The Smoot-Krugman carbon import tariff

I wrote last Friday about the China/India hole in the American climate strategy:

America appears to lack a high-probability strategy for how to get China, India, and Russia to agree to self-impose a significant positive carbon price.

The Administration and its Congressional allies are trying to impose a significant carbon price in the U.S. through something like the Waxman-Markey bill, while entering an international negotiation process in which as much as 60% of global carbon emissions could face little to no carbon price. The likely outcome would dramatically tilt the global economic playing field, harming U.S. workers and firms relative to their counterparts in China and India.At the same time, it would make little progress toward addressing the risk of severe global climate change, as a large portion of global carbon emissions would remain effectively uncapped.

In that post I identified two questions that American policymakers need to answer to fill that hole. The first of those was:

What tools should we use to try to convince the government of China to impose a positive carbon price as part of a global effort? (choose one or more)

  1. Leadership: U.S. goes first and self-imposes a price. Then we use diplomacy to try to convince the Chinese to do the same.
  2. Carrots: The U.S. pays the Chinese to reduce their emissions.
  3. Sticks: The U.S. imposes import tariffs on Chinese goods as long as the government China does not impose a carbon price.

I now see that I was eight days behind Dr. Paul Krugman in identifying this challenge. On May 14th, he wrote in his New York Times column “Empire of Carbon“:

(T)he people I talk to are increasingly optimistic that Congress will soon establish a cap-and-trade system that limits emissions of greenhouse gases, with the limits growing steadily tighter over time. And once America acts, we can expect much of the world to follow our lead.

… But that still leaves the problem of China, where I have been for most of the last week. … But China cannot continue along its current path because the planet can’t handle the strain. … And the growth of emissions from China … already the world’s largest producer of carbon dioxide … is one main reason for this new pessimism.

I’d like to compare where I think Dr. Krugman stands on various elements of the strategic question I posed, and compare them with my own views. We differ in our concern about the risks and costs of severe climate change, and that difference leads us to radically different policy recommendations.

I should state at the outset my views on the science and risk of climate change. There is a significant amount of evidence that there is a long-term risk of severe climate change. But there is little discussion about the numbers: How big of a risk? How much warmer? How quickly? How certain are we? And the numbers matter a lot. If we knew with certainty that Earth would warm 10 degrees over the next 20-30 years, I would be screaming for an immediate big carbon tax. If instead we think Earth is likely to warm one degree over the next century or two, then climate change is a trivial concern and we needn’t worry about it. The problem is that nobody knows where we are between these two extremes. This uncertainty matters a lot, and it makes the problem hard.

Given this uncertainty, I believe there is a small but non-trivial risk that there will be severe climate change over the next century or two. And so I am willing to consider significant and effective policy actions to slow the growth of greenhouse gas emissions to reduce that risk. I do not, however, believe that risk is so great or so certain that we must immediately commit to drastic changes in our economy, or that we must ignore the costs of those policy actions. I treat this like any other policy question: Given tremendous quantitative uncertainty, what are the marginal costs and benefits of our current emissions path, compared with various recommended policy options? I will quantify my thinking on these questions in a separate post. I am willing to consider policies to set a domestic carbon price, if I can be convinced that they’re worth it and will work. So far I have not seen any carbon pricing proposal that I think (a) would have benefits that exceed the costs, and (b) is feasible in the real world of nation-states with differing national interests. But I’m open to suggestions.

For now, let’s focus on two different answers to the China/India question in the American climate strategy.

  • Dr. Krugman appears to believe that, if China does not slow its global greenhouse emissions growth, actions by the rest of the world will be insufficient to significantly slow global emissions. Krugman: “In January, China announced that it plans to continue its reliance on coal as its main energy source and that to feed its economic growth it will increase coal production 30 percent by 2015.” That’s a decision that, all by itself, will swamp any emissions reductions elsewhere.” I agree with him on this point.
  • I agree with Dr. Krugman’s read of the official Chinese position: “So what is to be done about the China problem? Nothing, say the Chinese. Each time I raised the issue during my visit, I was met with outraged declarations that it was unfair to expect China to limit its use of fossil fuels.” This is consistent with what I know about the Chinese position from our Administration negotiators in 2007 and 2008 , and with what the Financial Times reported last Friday: “Beijing reiterated its belief that developing countries, including China, should curb emissions on a voluntary basis, and only if the cuts ‘accord with their national situations and sustainable development strategies.'” Translation: We’re not setting a domestic carbon price. The Chinese are proposing that the U.S. and other rich nations choose answer (B) Carrots from my menu above: rich countries pay China to reduce their emissions.
  • It appears that Dr. Krugman believes Chinese leaders will not be swayed by option (A) Leadership: “And once America acts, we can expect much of the world to follow our lead.” But that still leaves the problem of China – I largely agree with him on this point.
  • Dr. Krugman appears to presume that we must slow the growth of global greenhouse gas emissions starting now. I disagree with Dr. Krugman on this point, and am more persuaded by Dr. Bjorn Lomborg. The state of technology is such that economic costs of near-term emissions reductions are high, and the long-term climate benefits are small. As an example, Dr. Lomborg estimates that $1 expended through the Kyoto agreement would produce the equivalent of about 30 cents of long-term climate benefits. To the extent you believe long-term climate change must be addressed, we are better off devoting resources to technology pushes that try to reduce the cost of carbon-reducing technologies. The less expensive these technologies, the easier it is for everyone to make significant emissions reductions, and the easier it would be to get a global emissions reduction agreement that includes China and India (presuming you think such an agreement is necessary).
  • Since Dr. Krugman believes that we must persuade the Chinese to change their growth path “because the planet can’t handle the strain,” he appears to conclude that we should threaten a carbon import tariff. His phrasing is quite careful, but he is clearly floating the idea:

As the United States and other advanced countries finally move to confront climate change, they will also be morally empowered to confront those nations that refuse to act. Sooner than most people think, countries that refuse to limit their greenhouse gas emissions will face sanctions, probably in the form of taxes on their exports. They will complain bitterly that this is protectionism, but so what? Globalization doesn’t do much good if the globe itself becomes unlivable.

  • Technically, Dr. Krugman does not say (1) the U.S. (2) should propose (3) a carbon import tariff. He instead predicts that “sanctions, probably in the form of taxes on their exports” will be imposed by unnamed countries “sooner than most people think.” By itself, this is only a prediction. But in the following two bolded sentences, he endorses such “sanctions, probably in the form of taxes on [Chinese] exports” by unnamed countries. With this clever phrasing, Dr. Krugman has floated an aggressive but ultimately deniable policy proposal: a carbon import tariff.
  • I believe there are cures that are worse than the disease. An import tariff would be protectionist (Dr. Krugman concedes this point). In the context of a global climate change negotiation in which different countries are establishing different domestic carbon prices, and in which two of the world’s largest economies (China and India) refuse to do the same, it is easy to see how a carbon import tariff by the U.S. could set off a global trade war, with potentially devastating effects on the world economy. It appears that Dr. Krugman is willing to bear the increased risk of a global trade war for the benefit of an increased probability that China (and India?) will slow their greenhouse gas emissions. I am not.

For completeness, my answer to my own strategic question is “(D) None of the above.”

  • Even if the U.S. establishes a domestic carbon price through a cap-and-trade or carbon tax, diplomacy alone will be unable to convince the Chinese and Indian leaders to do the same in their countries. Option (A) Diplomacy won’t work by itself.
  • Without reductions in Chinese and Indian emissions, I expect that the total climate benefits of the likely global reductions in future emissions growth would not be worth the economic costs to the U.S. of a domestic carbon price (in the near term).
  • I oppose the U.S. paying large developing countries like China and India to reduce their emissions. I am confident the U.S. Congress would agree with this view. Option (B) will not happen in the U.S., nor should it.
  • Because I think the risks of significant damage from severe climate change are small, and the costs of near-term emissions reductions using current technology are high, and because I am deeply concerned that a carbon import tariff might provoke a global trade war, I strongly oppose option (C) Sticks, including any form of carbon import tariff. Free trade, including with China, is more important to me than the possibility of creating leverage on Chinese leaders to try to change their energy development path.
  • We are not talking about small numbers here. China thinks developed countries should contribute 1/2 to 1 percent of GDP to help poorer countries cut their emissions, and the economic effects of domestic carbon prices are measured in the same orders of magnitude. When you’re measuring things in percent of GDP, you’re shooting with real bullets. I oppose imposing such a tariff, threatening one, or even floating the idea as Dr. Krugman has done.
  • Therefore, I conclude the best policy is for the U.S. not to impose a domestic carbon price in the near future. To the extent policymakers believe severe climate change is a risk that should be addressed, I instead recommend they focus on pushing carbon-reducing technology R&D, and reducing tariffs and other trade barriers to the exchange of such technologies, as Dan Price has recommended.
  • I would be comfortable with the U.S. contributing taxpayer funds to a joint international R&D effort, if it were an alternative to a domestic carbon price, and as long as U.S. firms maintained their property rights to such research.

I have tremendous respect for Dr. Krugman’s past work as an international economist. I am surprised that he is willing to risk a global trade war, and that he would apparently fire the first shot when the global economy is so weak.

Baseline games

Suppose I bought an iPhone yesterday for $500.

Suppose I argue that I will save $2000 this week, because I intend to refraining from buying an additional iPhone today, nor will I buy one this Wednesday, Thursday, or Friday.

Suppose I plan to buy a new flat screen TV tomorrow for $1500.

Can I claim I that have paid for my TV by cutting other spending, and that in addition I will be saving $500 this week?

This is what the Administration has done with war costs in their budget.

There is no debate about how much I will spend this week: $500 for the iPhone, plus $1500 for the TV, equals $2000 of total spending.

The question is instead whether I have increased or decreased my spending compared to what it otherwise would have been.

In this example, I argued that I will cut my total projected spending by $500, and I am also paying for the TV by cutting spending.

You argue that it is absurd to assume that I would buy an iPhone each day this week. The right baseline, you argue, is to treat the iPhone purchase as a one-time expenditure, and tp use a spending baseline of zero for the remainder of this week. Thus the $1500 TV purchase is a spending increase, not a spending cut.

The argument about whether the President’s budget increases or cuts the deficit is therefore a debate about the baseline – what would happen otherwise?

Rep. Paul Ryan (R-WI) did a good analysis of the war spending assumption in the President’s budget. He and his staff conclude that the President’s budget includes $1.5 trillion of phony savings (over 10 years) by inflating the war spending baseline the way I did with my mythical cancelled iPhone purchases. The President’s budget makes a similar $330 B assumption for Medicare payments to doctors.

Even more intriguing, the President’s budget (table S-5 in this document) argues that the $9 trillion of incremental baseline debt they argue they “inherited” should include $835 B of additional debt resulting from two laws President Obama signed: the stimulus law, and the omnibus appropriations law. Clearly that $835 B of additional debt was not inherited, and should be netted out against their claimed future deficit reduction.

Here is the math behind the Administration’s claim of fiscal responsibility, and CBO’s countervailing analysis. All figures are for the next ten years (2010-2019):

Administration CBO
Additional debt under the baseline $9.0 trillion $4.5 trillion
Additional debt under the President’s budget $7.0 trillion $9.3 trillion
Effect of the President’s budget on additional debt -$2.0 trillion of debt +$4.8 trillion of debt

Let us walk through this step by step.

  • The Administration has a radically different starting point than CBO. The President’s budget starts by assuming that $9.0 trillion of debt will be accumulated over the next ten years if the President’s budget is not enacted. The Congressional Budget Office assumes that $4.5 trillion of debt will be accumulated over the next ten years in the same scenario.
  • The Administration assumes that its policies will result in $7 trillion of additional debt added over the next decade. That is $2.3 trillion less than CBO assumes. We saw why yesterday – the President’s budget assumes that the economy will grow faster than CBO assumes. This faster economic growth assumption would result in faster revenue growth for the government, and therefore smaller (but still huge) budget deficits.
  • These two differences in assumptions result in two completely different views of the President’s budget. The President and his advisors argue they are being responsible by reducing the deficit by $2 trillion over the next decade, while someone relying on CBO’s numbers would say the President’s budget is horribly irresponsible and that it increases the debt by $4.8 trillion more than it would otherwise be.

This debate about whether the sign is a + or a – is politically significant. The -$2 trillion figure is the cornerstone of the Administration’s claim to fiscal responsibility. It allows them to justify big spending increases like the $600+ B new health entitlement.

At the same time, we should not let this important debate obscure that, even using the Administration’s more optimistic numbers, the President’s budget would mean that debt held by the public will increase by $7 trillion over the next decade, to a share of the economy not seen since the end of World War II.

Even if you believe the Administration’s deficit reduction claim (I do not), it is nowhere nearly enough deficit reduction. We need either to dramatically slow spending growth, or raise taxes, or some combination of the two. I support doing it all on the spending side while keeping taxes from increasing. Your view may differ. But we cannot accumulate $7 to $9.3 trillion more debt over the next decade and claim that we are being fiscally responsible.

America’s long-run fiscal problem is spending growth, not taxes

America’s long-run fiscal problem is spending growth, not taxes

Yesterday I wrote about the history of tax increases since World War II, and about the battle over the total level of taxation. Now I want to turn to spending.

I am a low-tax guy. I have worked on tax issues for 12 of my 15 years in Washington, helping elected officials lower taxes and prevent tax increases. You can see a list of the taxes President Bush cut here. I would like to cut taxes far below where they are today, and I will continue to make the case that America is better off with a bigger private sector and a smaller government. America’s long run fiscal debate, however, is instead principally about whether we will allow future spending increases to force taxes to increase dramatically above where they are today.

I believe that America’s greatest economic policy challenge is the projected long run growth of spending on three programs: Social Security, Medicare, and Medicaid.

I would like to show you why I believe this, and how it relates to taxes.

Continue reading

The total tax battle

The total tax battle

Now that we have reviewed how big a bite the government has taken out of the economy over time, let’s examine the competing tax proposals for the near future.

Revenues are only one element of a budget proposal. For a complete picture of the effect of a budget proposal on the rest of the economy, we should also look at deficits. At the same time, it’s useful to start by understanding how much each budget proposal would take from the economy in total taxes.

We are using the same graph format as before, in which we measure total federal revenues as a share of the economy. Please remember that even a flat line on this graph means the federal government is collecting more taxes in inflation-adjusted dollars each year.

Let’s compare the President’s proposed total federal revenues, with proposals from House Republicans and House Democrats. The House Republican proposal was authored by the ranking Republican on the House Budget Committeee, Rep. Paul Ryan (R-WI). The House Democrat proposal passed the House, and was authored by the House Budget Committee Chairman, Rep. John Spratt (D-SC).

Obama v Ryan v Spratt revenues short-term

From this graph you can see:

  • Over the next few years, all three proposals show a steep dip in revenues, followed by a steep increase. This has nothing to do with policy and is entirely about the predicted recession and recovery.
  • The President’s budget would have the government take 0.9 percentage points more of the economy than the Ryan proposal. That’s an extra 90 cents out of each $100 of income. This is a fairly steady gap over time.
  • The budget passed by House Democrats has higher taxes than even the President’s budget. The House Democrat budget is only a 5-year proposal, so the long run gap could be bigger, but the House is collecting at least another 0.5 percentage points more than the President’s budget. The budget passed by House Democrats means that government will take an additional 50 cents out of each $100 of income above what the President proposed. Compared to the House Republican alternative, the House-passed budget would take an additional $1.40 out of each $100 of income for the federal government. That’s a lot.

Now let’s compare these proposals to the historic average. I’m a low-tax guy, so I would like to use the post-WWII average of 17.9%. In most discussions, however, the range ends up being between the 50-year average of 18.1%, and the 30-year average of 18.4%. I will include those bounds on this graph, even though my preferred comparison path is a bit lower than the lowest line.

Obama v Ryan v Spratt revenues short-term with trends

By adding these historic averages, we can see that the House Republican proposal would bring revenues down to a bit below the 50-year historic average. Even under this proposal, the federal government would be getting more inflation-adjusted dollars each year, because a constant percentage still grows in real dollars as the economy grows.

The Obama tax proposal is above the top end of the historic range, and the Democrat House-passed budget is above even that.

A short history of higher taxes

A short history of higher taxes

There is always a lot of rhetoric on Tax Day. Later I will comment on some of today’s rhetoric. In this post I will instead focus on some basic facts that are not earth-shattering, but provide some important historic context for the current tax and spending debate.

Let’s start by looking at just the total amount of taxes collected by the Federal government over time, adjusting for inflation.

total federal taxes (real)

You can see taxes growing fairly steadily over time. The various bumps are a combination of changes in law and economic cycles. Still, even given those factors, the total amount of inflation-adjusted dollars going to the federal government has clearly climbed over time. In real terms, government’s take has gotten bigger.

Some argue that we should instead measure total federal taxes as a share of the economy. This presumes that as the economy gets bigger, government “should” get bigger proportionately. I disagree with that view. Some things that government does clearly are related to the size of our population, or are related to other measures of society’s income or wealth. I do not buy that principle as a general matter. Still, let’s look at that perspective.

total federal taxes share of gdp

You can see that the federal government’s take from the economy has remained roughly constant since the end of World War II. The flat line is at 18.1%, and shows that, on average over the past 50 years, Uncle Sam takes about 18.1% out of every dollar earned in America. This graph makes the policy changes and economic fluctuations easier to see. For instance, you can see the effects of the 1993 reconciliation bill (which raised taxes), plus the economic growth of the 90s, ending in the stock market “bubble” (I use that term loosely) in 1999 and 2000 with phenomenally high capital gains revenues, followed by the stock market decline and recession in 2001 and 2002, combined with the effects of the 2001 tax cuts.

There’s actually a slight upward trend to this line. If you look at share of GDP since the end of World War II, the average is 17.9%. If you look over the past 50 years, it’s the 18.1% I have displayed on the graph. Over the past 40 years, it’s 18.3%, and over the past 30 years it’s 18.4%. So there is a creeping upward (measured as a share of the economy), but it’s pretty slow: one or two tenths of a percent of GDP over time. Remember that a flat line on this graph would still represent more real dollars each year going to the federal government.

Still, the overwhelming impression this graph should give you is that of a basic constancy since World War II.

Now let’s add State & local taxes to this graph.

federal state and local taxes (share of GDP)

You can see that while Federal taxes have remained roughly constant (with fluctuations), State & local taxes have grown fairly steadily over time, measured as a share of GDP.

Now let’s add the two lines together to see government’s total take from taxpayers. Check out the orange line up top.

federal plus state and local taxes

It’s a little hard to see the long-term trends on the orange and red lines, but the greatest graphing program ever, Swiff Chart, allows me to add trend lines that make it easier to see.

total taxes with trend lines

From this graph, you can see our conclusions:

  1. Federal taxes have remained roughly constant as a share of the economy since the end of World War II, at just over 18% of GDP (I use 18.1%, others use 18.3%).
  2. Even if federal taxes remain constant as a share of GDP, total taxes collected by the federal government are going up in real terms.
  3. In contrast to federal taxes, State and local taxes have grown fairly steadily since 1950.
  4. So the trend line of government’s take of the U.S. economy is steadily upward since the end of World War II, from around 21% of GDP in 1950 to about 28% now. Seven cents more of each dollar earned are going to government now than in 1950.

Please remember that just-over-18 percent of GDP number from #1. You’re going to need it later.

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