James C. Capretta, Author at �鶹Ů�� Health News

On Political Expediency and Health Care Reform (Guest Opinion)

James C. Capretta — Sun, 12 Jun 2011 21:00:19 +0000

Once upon a time, President Barack Obama and many others who championed his health care plan actually professed faith in the power of a functioning health care marketplace. That now seems like a distant memory, given the demonization campaign that the president and his allies have launched against House Budget Committee Chairman Paul Ryan’s plan to inject consumer choice and competition into Medicare. But there’s no doubt that while the health law was under consideration in Congress, the president and his team wanted to leave the impression with voters that the plan they were pushing would rely mainly on market signals, not heavy-handed government control.

Recall the basics of the Obama reform. “Premium credits” (vouchers!) are given to participants in the new state-based health care exchanges. These credits are set based on a reference plan offered in the exchanges, and they don’t vary based on the plans selected by participants (but do vary based on the household incomes of the participants). Does all this sound familiar?

Ironically, after a tortuous debate, Congress decided that the Obama premium credits could only be used by exchange participants to enroll in private health insurance plans (privatization!). There’s no “public option” available (at least not officially). Moreover, the law imposes a requirement on citizens and legal residents to enroll in qualified coverage of some sort. So, without an explicit public option, the new law has effectively created a guaranteed pool of captive customers for profit-hungry, investor-owned and patient-abusing private plans.

Finally, the credits that are given to exchange participants won’t keep up in future years with the expected increases in premium costs. That’s right. The Obama “vouchers” are indexed in a way . For some reason, in all of the heat and fury over the Ryan Medicare blueprint, this feature of the Obama plan has been almost entirely overlooked by the media, with the notable of Jed Graham at Investor’s Business Daily.

It doesn’t help that the Obama indexing provision was written extremely carelessly, which has led the Congressional Budget Office and Health and Human Services actuaries to . But no matter the interpretation, it’s clear that, if health care costs don’t moderate, the new law will end up pushing higher premium costs onto low-income exchange participants. CBO recently on this subject that shows that the premium increases for low-income households could easily reach 10 to 12 percent every year.

Meanwhile, now that their plan is law, the tune has changed. The enthusiasm for premium credits, consumer choice of private health plans and decoupling of credits from health costs seems to have waned. Indeed, it’s waned to such an extent that these are now not just bad ideas but ideas that would !

Moreover, those who previously stressed that the new health law would have a strong component of consumer choice and competition are now saying that a functioning marketplace will never work.

For instance, Peter Orszag, who played a key role in the law’s passage as Obama’s first budget director, consumer choice – a fundamental component of the Ryan Medicare reform plan – won’t control costs at all. He mischaracterizes the Ryan plan as nothing more than a scheme to increase copayments and deductibles on seniors, which will actually add to overall costs.

What’s going on here?

First, it should be clear that the attacks on the Ryan plan have taken Washington political hypocrisy to a new level, which is saying something.

Second, it’s clear that the Obama administration and its congressional allies — despite what they said during the debate over the health law — actually don’t believe in a functioning marketplace. What they do believe in is the capacity of the federal government to impose cost control.

And that brings us to the fundamental disagreement at the heart of the Medicare debate.

Both sides agree that the key to slowing the pace of rising costs is continuous improvement in the productivity and efficiency of the health care delivery system. But what will bring that about?

Orszag argues that the new health law can improve health care delivery, by using the levers of Medicare to push concepts like bundled payments, accountable care organizations, and medical homes. But what evidence does he have that this will work? Medicare’s administrators have been trying for 40 years to build a higher value, lower cost network of care (remember “Centers of Excellence”?), without any success.

When push comes to shove, the program has been completely incapable of making real distinctions among providers of care based on quality and cost metrics. To hit budget targets, the solution has always been indiscriminate across-the-board payment-rate reductions that hit everyone equally, regardless of how well or badly they treat their patients. And the predictable consequence is a reduction in the willing suppliers of services.

Orszag says the Ryan plan won’t work because higher cost-sharing doesn’t change the delivery system. But that’s not an accurate description of the Ryan plan. Medicare beneficiaries will have strong financial incentives to sign up with plans that charge low premiums even as they deliver high value, and that means real delivery system reform. The fastest, surest way to get hospitals, physicians and clinics to re-organize their processes and achieve savings is by having engaged consumers in a position to reward market leaders who are the first to find ways to deliver more for less. That’s the Ryan plan.

When Ryan and his colleagues unveiled their budget plan in April, the president had a choice. He could work with his adversaries to find common ground on budget and health policy matters, or he could eschew bipartisan compromise and attempt to defeat them politically. He made his choice, and so the battle is on.

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The Hypocritical And Reckless Attacks On The Ryan Medicare Plan — Guest Opinion

James C. Capretta — Mon, 02 May 2011 20:00:18 +0000

It should be obvious by now that the president of the United States and his political allies are hoping to ride demonization of House Budget Committee Chairman Paul Ryan’s all the way to electoral victory in November 2012.

Following the president’s April 13 , in which he aimed his most intense partisan fire at the Ryan Medicare plan, the entire Democratic political machine has taken the cue and gotten cranked up. In recent days, the party’s campaign committees began running attack ads against the Ryan plan — a full year and a half before the next election. Professional agitators have been rounded up to heckle members of Congress in their districts. And a legion of administration apologists has filled the blogosphere and newspaper opinion pages with outrage — outrage! — at the “cruelty” of the Ryan plan.

Never mind that the nation is rushing headlong toward a debt-induced economic crisis — an enormous risk that the president should be doing everything he can to avoid. It is simply too tempting to pass up a golden opportunity to again (it’s a perennial) accuse Republicans of forcing poor seniors to choose between food and medicine, even if it means increasing the risk of an economic meltdown. It’s no accident that Standard and Poor’s listened to the president’s speech and promptly about the long-term creditworthiness of Treasury securities. They heard what everybody else heard, which is that the president wants to politicize the budget debate for electoral advantage instead of working with his adversaries to come up with a solution.

The primary source of the nation’s pressing budgetary problem is mounting entitlement costs. Between 1971 and 2010, spending on Social Security, Medicare and Medicaid rose from 4.3 percent of the gross domestic product to 10.3 percent of GDP. That jump in spending — 6 percent of GDP– is more than the country is spending today on the entire defense department. And it’s about to get much worse. Over the next two decades, spending on these programs is set to soar with the retirement of the baby boom generation and rapidly rising health costs. Leaving these programs on autopilot for another decade, or just tinkering around their edges, is a recipe for economic ruin. It is imperative to get serious, and soon, about rewriting the rules of these programs to ensure they are viable for the next generation. And yet it is plain that leaders of the Democratic Party continue to believe, as they have for many years, that their surest route to electoral success is a no-compromise defense of the entitlement status quo.

Which brings us back to the Medicare plan advanced by Ryan, a Republican from Wisconsin. To hear opponents tell it, it’s a “radical” proposal. But is it?

Beginning in 2022, new program entrants (those under age 55 today) would get their entitlement in the form of “premium support credits.” Today’s Medicare enrollees and those who enter the program over the next decade would be entirely exempt from this reform — an important piece of information that seems to have gotten lost in all of the shouting. Those receiving the credits would get to apply them to one of several competing private insurance plans. The federal government would oversee the plan choices, ensuring they meet standards for quality and accessibility of care. Low-income Medicare participants would get extra financial support to cover additional out-of-pocket expenses. In the years after 2022, the federally-financed “premium support credits” would rise commensurate with the consumer price index.

Premium credits for program participants. Competing private insurance options. Government oversight of plan choices. Additional help for the low-income.

If this all sounds vaguely familiar, it should. It’s the description used by advocates to sell the president’s own health reform program to the American people.

Moreover, these reforms are very similar to the ones enacted in 2003 to provide prescription drugs to today’s seniors. That benefit is delivered entirely by competing private insurers. Seniors get a fixed government contribution toward their coverage. If they select relatively expensive options, they pay a higher premium. If they select a less expensive option, their premiums are lower. At the time of enactment, opponents said this approach would never work. Costs would soar. Seniors wouldn’t enroll. Insurers would stay away. All dead wrong. Competition has been robust. Seniors have signed up in droves with low-premium plans that push cost-effective generic substitution, and they like the program. Costs have come in 41 percent below expectations. This is the model for fixing the rest of Medicare too, and the basis for the Ryan reform.

Ryan’s critics have focused particular attention on his plan’s indexation of the Medicare “premium support credits” to the CPI in the years after 2022, suggesting that this idea is somehow beyond the pale. But this is sheer hypocrisy on their part because the indexing of government-financed premium credits below cost growth is in the president” plan too, and yet not a complaint has been heard about that from its advocates. That’s right. After 2018, if the aggregate governmental cost of premium credits and cost-sharing subsidies provided in the state-run exchanges exceeds about 0.5 percent of GDP (a condition that the ), the recently-enacted health law requires the government’s per capita contribution to health plan premiums in the exchanges to rise more slowly than premiums. The administration actuaries interpret the law to mean that the government’s contributions toward coverage will rise with GDP growth after 2018. CBO appears to have a different interpretation. Still, under all interpretations and projections, it’s clear that the exchange credits in the new law will not keep pace with expectations of rising health costs. And that’s exactly what the president is now saying is so wrong with Ryan’s Medicare plan.

Critics contend that the Ryan plan would shift huge new costs onto Medicare beneficiaries for reasons beyond the indexing of the credits, and they cite as proof. But this analysis is based on two flawed assumptions. First, it assumes that traditional Medicare can keep cutting what it pays to hospitals and doctors with no consequences whatsoever for the beneficiaries. CBO’s assessment is that in 2022 traditional Medicare could provide the insurance benefit for just 66 percent of what a private insurance plan would cost. This is sheer folly based entirely on deep payment reductions for services. If those cuts really were to go into effect as scheduled, Medicare rates would be well below those of Medicaid, and seniors would have very restricted access to care. CBO’s analysis also assumes no savings from establishing rigorous competition in the Medicare program. But the cost-cutting in the prescription drug program demonstrates that the potential is there for massive savings from a functioning marketplace.

Last week, the country has serious issues to address. He’s right. One of the biggest is the budget challenge. Unfortunately, the president’s carefully orchestrated attack on the Ryan plan has made it much less likely that real progress will be made before 2013 to address the problem. That means the country remains at substantial risk that a debt crisis will hit before political leaders have acted. And if it does, it’s the president who will rightly take the blame.

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The President’s Health Care Predicament

James C. Capretta — Thu, 31 Mar 2011 07:11:39 +0000

Last week marked the one-year anniversary of President Barack Obama’s health reform law. It’s an appropriate time to take a look back at the events of last year, and what they might mean in 2012 when the president will almost certainly be seeking reelection.

In early 2010, after Republican Scott Brown was elected to the Senate from Massachusetts, Obama had no choice — if he really wanted the health bill enacted — but to turn its passage into a make-or-break moment for his presidency. Nothing else would have worked. He wasn’t winning the public argument over its merits, and wasn’t going to. The balance of public opinion had been solidly against it ever since the first trillion-dollar cost estimates were released in mid-2009. The only way he was ever going to get it across the finish line was by tying the measure’s success to that of his presidency, thus forcing the hand of wavering Democrats, who didn’t want to vote yes on the legislation but were even more squeamish about derailing their own party’s fresh and promising administration. And so he made that his closing argument. As numerous press accounts documented, in private conversations with lawmakers, the president pleaded with his allies to save his presidency by voting yes on the health measure.

In the end, it worked. The health bills did pass — but at a great political price. Congressional Democrats were worn down by the lengthy process and unwilling from that point on to take any more large political risks. They didn’t even want to consider a budget bill before the November 2010 election. Consequently, other than the 2009 stimulus bill, the health law is the only legislation passed in the president’s first two years that is likely to register with a broad cross-section of voters.

Moreover, passage of the health plan with only Democratic votes enraged opponents and fueled a populist movement that propelled Republican candidates to historically large gains in the midterm elections.

Having spent so much political capital to secure its passage, one might think that the health law would feature prominently in the president’s planned reelection campaign. Certainly other presidents have used early legislative successes, even on controversial measures, to make the case that their policies were working. President Bill Clinton’s tax and spending-reduction measure of 1993 was highly controversial and polarizing. It contributed heavily to the loss of Democratic control of Congress in 1994. But Clinton also used it as the foundation of his economic message throughout his presidency, and especially in 1996, when he tied the economic recovery then underway to its passage.

But Obama is not likely to follow that model, because, unlike Clinton’s budget program, the health law provides almost nothing that the president can claim he delivered for voters.

The main selling point of the law — that it will cover everyone, or nearly everyone, with health insurance, at least according to official estimates — won’t be tested until at least 2014, when the “big bang” reforms kick in. That’s when the individual mandate, the employer requirements, the Medicaid expansion and exchange subsidies, and the new insurance rules regarding benefit packages and premium-setting all go into effect. Until those changes are actually implemented, they are simply theoretical selling points that may or may not work out as planned. That’s not going to cut it with an electorate focused on results in the here and now.

Between now and 2014, a lot of regulation will be issued, but there won’t be any real action on the ground where Americans live (other than some tax increases and Medicare cuts the administration will never mention anyway). And so the law’s proponents are left with little to talk about except the law’s “early benefits,” like coverage of 26-year-olds on their parents’ plans and the new high-risk pools for those with pre-existing conditions.

But these provisions are minor matters in the scheme of things. They are not at all central to the rest of the law, and could easily have been addressed in other legislation. Moreover, so few Americans have benefited or will benefit from them that they hardly register at all in the public consciousness. Only about 12,000 people have signed up so far for the risk pools, and no one expects the other insurance regulations to help more than a tiny percentage of the population. For most Americans, these “early benefits” are simply non-events. That makes it very difficult for the president to tout them as significant achievements.

Meanwhile, opposition to the law is unlikely to subside. If the president were to make health care a central message point in 2012, he would immediately alienate a large number of independent voters who are extremely skeptical that the law will work as planned, especially with regard to premium hikes and costs to taxpayers.

No doubt, the president will defend the new health law from every attack, even as he tries to deflate the repeal push with concessions aimed at undermining opposition without giving real ground.

But it is the law’s opponents who are most likely to bring up health care, not the president.

And that’s ironic. Because it’s clear Obama and those who passed the law consider it to be an historic achievement. But, having exhausted his first term securing its passage, the president will have to find some other rationale to justify requesting a second one.

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An Irresponsible Roll Of The Dice

James C. Capretta — Mon, 14 Feb 2011 21:51:00 +0000

President Barack Obama’s 2012 budget is a breathtaking economic gamble — with other people’s money.

The president chose to submit a profoundly unserious budget. There’s no entitlement reform — which would include addressing funding issues related to Medicare, Medicaid and Social Security — to close the long-term fiscal gap. There’s no tax reform. There are some minor cuts to marginal programs for show. But, overall, it’s very much a business-as-usual budget, with a few new and expensive long-term commitments thrown in for good measure (see, for instance, the high-speed rail initiative).

It’s like the president and his team woke up after the November 2010 mid-term election with a bad case of political amnesia. What deficit? What debt commission?

This isn’t what the president promised when he ran in 2008, nor is it what he told voters as recently as one year ago. Over and over, he has promised not to “kick the can” down the road, as he says his predecessors did before him. Instead, he would provide real leadership to tackle the looming threat posed by out-of-control borrowing and debt accumulation. That was supposedly the reason for appointing the Bowles-Simpson National Commission On Fiscal Responsibility and Reform in the first place, to lay the predicate for engaging in a bipartisan effort to narrow medium and long-term budget deficits and reduce the risk of a debt-induced crisis.

But now, all of that kind of thinking is out the window. If the president won’t show leadership on the budget, there’s zero chance congressional Democrats will. Some moderate Democrats in the Senate may make some noise about going farther than the president. But when push comes to shove, the rank and file Democrats in both chambers are far more likely to take a pass, too. Why would they take on large political risks when the president of their own party won’t and is likely to pull the rug out from under them if they do?

So, realistically, the Obama “punt,” as House Budget Committee Chairman Rep. Paul Ryan, R-Wis., has aptly described it, means the odds of a serious deficit reduction effort before the next presidential election are now low and falling.

What explains the president’s sudden abandonment of the leadership he had been promising? The answer is surely politics. He and his advisers must have concluded they would be better off going into a re-election campaign with massive borrowing on their record than with the political damage that might be inflicted if they embarked on a serious entitlement and tax reform exercise.

They might be right. Certainly deficit reduction efforts haven’t paid political dividends in the past. But 2011 is not 1992 or 1984 for that matter, when President Ronald Reagan won re-election despite running large deficits. As seen in the 2010 mid-term election, voters are more concerned than ever by the government’s mounting debts.

And President Obama won’t go into 2012 with just run-of-the-mill deficits on his record. The numbers are eye-popping. Under the budget the president submitted Monday, the 2012 deficit would top $1.1 trillion — the fourth straight year in which the government ran a deficit in excess of $1 trillion. As Obama runs for re-election in late 2012, the debt will be approaching $12 trillion, up from $5.8 trillion at the end of 2008.

All of that has occurred even before the baby boom generation’s retirement has hit with full force. According to the Congressional Budget Office, spending on Social Security, Medicare, Medicaid and the new entitlements created in the health law will total about $1.6 trillion in 2011. By 2021, spending on just those programs will reach $3.0 trillion, a jump of $1.4 trillion in just 10 years. The president’s budget leaves these programs on auto-pilot. Consequently, according to the president’s own numbers, the debt will reach $19 trillion in 2021 — and it would be even higher if not for the assumptions of a booming economy and implausible “offsets” from the health law.

Politicians make political calculations all of the time, of course. That’s to be expected. But there’s also an expectation that the president will do whatever is necessary to steer the ship of state away from serious danger, not toward it, no matter the consequences politically.

Unfortunately, by “punting” on entitlements, the president is steering the nation’s economy directly toward the rocks. No doubt he is betting that there will be time to make a course correction after he is safely re-elected.

But that’s a bet that could go very wrong. Among others, former Federal Reserve Chairman Alan Greenspan has been sounding the alarm for months that there isn’t much time left to head off a crisis. Ratings agencies are warning that a downgrade of U.S. debt instruments is not only not out of the question, but it’s likely absent a sharp course correction. The government’s interest payments on the debt are set to explode in coming years as the economy recovers, which will mean servicing the debt could cost as much as the entire defense budget by the end of the decade. Peter Orszag, the president’s former budget director, has made it clear a debt crisis is headed our way, and that political leaders probably won’t head it off before it hits.

And if a debt-induced economic crisis does in fact hit the United States before political leaders have summoned the courage to take action themselves, the primary casualties will be the very people the president claims he wants to protect. If interest rates spike, the ensuing recession would throw millions more out of work. Government borrowing would become prohibitively expensive, necessitating deep and arbitrary cuts in programs serving the most vulnerable. It would be forced austerity, with no room for relief.

It would be far better to control our own destiny and choose the manner by which we impose more discipline. But the president has chosen otherwise, with risks for us all.

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A New ‘Definition’ For Health Care Reform

James C. Capretta — Fri, 14 Jan 2011 00:30:15 +0000

The principal divide in American health care policy is over what to do about rapidly rising costs. On one side are those who believe the solution is to enhance the government’s power to direct the system’s resources and enforce budgetary controls. This point of view animated the drafting of the recently passed health care law. On the other side are those who believe the answer is a functioning marketplace for insurance and care, not coercion and heavy-handed regulation. The key to such a competitive market is cost-conscious consumers, something sorely lacking today.

In Congress, the new House majority plans to pass a bill to “repeal” last year’s health law. That’s a start (even if the odds of enactment are long for now), but House leaders know that repeal of ill-advised legislation on its own will not fix health care’s complex challenges.

Pro-competition, pro-consumer-choice advocates should press for reforms that would begin to convert existing, federally subsidized arrangements from open-ended benefit guarantees into “defined contribution” programs. The comprehensive and strategic approach we propose would apply defined contribution financing by taxpayers to all three major insurance coverage platforms — Medicare, Medicaid and private health insurance.

The defined contribution revolution is already well underway in private pensions. In 1985, some 80 percent of all full-time U.S. workers were enrolled in defined benefit pension plans sponsored by their employers. By 2006, the number had dropped to just 20 percent.

However, this wholesale shift has not yet occurred in the health care context, largely because the vast majority of Americans are in comprehensive insurance arrangements that are heavily subsidized by the federal government. Further, these subsidies are generally without limit. Incentives for employers as well as workers and consumers to economize and seek better value are thus substantially muted by existing government policy.

The new health care law would make matters worse by moving millions of new enrollees into heavily subsidized, third-party insurance arrangements (either through Medicaid or state health benefits exchanges) — the very kind of open-ended financing arrangements at the heart of today’s cost escalation problem.

The prescription drug benefit, added to Medicare in 2003, provides one partial model for how to move toward a defined contribution approach. The government’s payment for a beneficiary’s Medicare drug coverage is fixed through competitive bidding each year, and it remains the same regardless of which plan the beneficiary selects. Seniors selecting more expensive plans than the average bid must pay the additional premium out of their own pockets. Those selecting less expensive plans get to keep the savings. Scores of insurers entered the program and competed aggressively with each other. The result is that costs were driven down, and federal spending came in 40 percent below initial expectations.

A similar but improved “premium support” structure could be developed for the overall Medicare program, as was recommended by a majority of members of the 1999 National Bipartisan Commission on the Future of Medicare. To properly move the broader set of Medicare-covered health benefits toward this defined contribution approach requires inclusion of the traditional fee-for-service Medicare program, not just private plan alternatives, in the competitive marketplace. Medicare fee-for-service, currently run by the Centers for Medicare and Medicaid Services, would instead be administered on a regional basis. Congress could still set its basic rules of the road and operating policies. But the program’s administrators would need to be given more leeway to respond to new market signals and competitive pressures. They would be running a public program that must sustain itself entirely from the government’s fixed contribution and beneficiary premiums, while meeting the same requirements applied to its private plan competitors. In paying hospitals, physicians and others, these fee-for-service programs would need to move away from imposing fees and toward an approach that would reflect market prices needed to build a network of willing providers.

The defined contribution approach to reforming the tax treatment of health insurance would focus on restoring a more level playing field for all purchasers. The current tax exclusion for employer-sponsored health insurance manages to be inequitable, inefficient and increasingly ineffective all at the same time! And, the new health law’s “Cadillac tax” on high-cost employer plans would send confusing incentive signals if it’s ever implemented almost a decade after enactment. The most important reform objectives of tax equity and greater cost consciousness both point toward flatter, fixed-dollar refundable tax credits as a starting point. From there, some adjustments may be necessary, such as those that would take into account enrollees’ differences in income, health risk status and geographic location.

Moving toward a universal, fixed dollar tax credit would represent a different, but real, “universal coverage” alternative to the new health law. Every American household would get a tax credit that could only be used to purchase health insurance and health care services. Any household that didn’t buy coverage would lose the entire value of the credit. The number choosing to do so would likely be very small.

Medicaid remains separate and not equal to the rest of the insurance system for working-age Americans. Its current structure provides no coordination or transition between Medicaid coverage and private health insurance. A move to replace both traditional Medicaid assistance and the tax preference for employer-paid health insurance with defined contribution payments would open up new possibilities for more beneficial coordination between both types of coverage. Integrating coverage options for the poorest Americans into the choices available to those with higher incomes will not be easy, in light of broader fiscal and political constraints, but it should proceed with all deliberate speed.

Moving toward defined contributions across Medicare and Medicaid, as well as employer-based plans, involves a complex transition well beyond just hitting new budgetary targets. Even the “Roadmap” offered by new House Budget Committee Chairman Paul Ryan, R- Wis., which fully embraces the defined contribution concept, needs a robust infrastructure for health information, better insurance markets and further navigational assistance for beneficiaries to reach its full cost-cutting potential. Nevertheless, it’s clear that taking the defined contribution route to health reform would create tremendous competitive pressure on the entire health sector to deliver more for less. Any player that did not step up would risk losing market share. That’s the way to slow rising costs while also improving, not compromising, quality.

Converting to defined contribution payments also will foster a more transparent political discussion over where and how to place limits on what is provided through taxpayer subsidies, while still allowing additional support for low-income households. Most importantly, it will set in motion a competitive dynamic from which all Americans would benefit.

James C. Capretta of the Ethics and Public Policy Center and Tom Miller of the American Enterprise Institute are co-authors of “The Defined Contribution Route to Health Care Choice and Competition.”

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A Bipartisan Budget Will Require Bipartisan Health Care

James C. Capretta — Mon, 20 Dec 2010 00:30:14 +0000

The November election has certainly shaken things up in Washington, even before most of the newly elected members to the House and Senate arrive in town and take their seats in Congress. That’s because all parties have begun recalibrating their positions in anticipation of the shifting balance of power that is coming in January.

Most notable, of course, is the president’s recent deal with congressional Republicans on taxes. Once the voters had spoken, the president pivoted quickly and began direct negotiations with his adversaries on one of the campaign trail’s most contested items: What should happen to the Bush-era tax rates scheduled to expire at the end of December. Democrats have spent the better part of the past decade decrying those rates as fiscally irresponsible. And yet the main result of the bipartisan tax deal is that those Bush-era rates on personal income, dividends and capital gains will all be left in place through the duration of the president’s current term in office. Who would have expected such an outcome after the 2008 Democratic landslide? Moreover, the deal calls for a temporary reduction in the payroll tax, which is a far more acceptable approach to short-term stimulus for many Republicans than the spending programs adopted in early 2009.

Now all attention is beginning to shift to the nation’s daunting short- and long-term budgetary challenges. Here, there is also a whiff of bipartisanship in the air.

The president’s fiscal commission, chaired by former Clinton White House chief of staff Erskine Bowles and former Sen. Alan Simpson, R-Wyo., issued its recommendations earlier this month, with the support of 11 of the 18 commissioners. Among the supporters were all of the current Republican senators serving on the panel (Tom Coburn of Oklahoma, Judd Gregg of New Hampshire and Mike Crapo of Idaho). The budget framework they endorsed is based on the approach of the commission’s co-chairs and thus commonly known as the Bowles-Simpson plan. It is far more ambitious in scope than was expected just two months ago, when many thought the commission wouldn’t produce anything of consequence.

Bowles-Simpson starts with a plan to radically reform the nation’s income tax laws by eliminating or scaling back many current tax expenditures while simultaneously instituting two much lower rates. The plan also calls for cutting the corporate income tax rate, capping discretionary spending, and reforming Social Security by raising retirement ages and limiting benefits for higher wage earners.

That’s certainly a bold agenda, and it very definitely points in the right direction with its inclusion of some important entitlement and tax reforms.

But on the most important budget issue that the country still faces — rapidly rising health care costs — Bowles-Simpson is a major disappointment. Yes, the plan calls for long-overdue tort reform. But that’s not nearly enough to overcome its downside — the plan’s implicit embrace of the entirety of the health care law enacted in March. The $1 trillion entitlement expansion; the $700 billion ten-year tax increase; the complete lack of any meaningful Medicare and Medicaid reform; the heavy reliance on arbitrary Medicare payment rate reductions to cut costs on paper; the poorly structured long-term care entitlement program that almost certainly will need its own bailout in future years; and, the ceding of almost all health sector regulatory authority to the Department of Health and Human Services — all of those provisions and more would remain in place under the Bowles-Simpson framework.

Indeed, if anything, Bowles-Simpson would build upon the law by expanding the authority of the Independent Payment Advisory Board, which was established to control Medicare costs with payment rate reductions, to oversee the health spending that occurs in the new state-sponsored insurance exchanges.

The fiscal commission members appointed by House Republican Leader John Boehner Rep. Paul Ryan, R-Wis., Rep. Dave Camp, R-Mich., and Rep. Jeb Hensarling, R-Texas — all opposed the Bowles-Simpson plan when it came up for a final vote, thus preventing it from advancing to Congress for potential near-term consideration. And, to their credit, the main reason they cited for their opposition was the failure of Bowles-Simpson to change direction on health care from what was enacted in March.

The yearlong debate over health care was contentious and polarizing because the opposing sides have strongly held and difficult to reconcile views of what needs to be done. By and large, the Democrats believe that what is needed is much heavier governmental management of the health sector. By contrast, most Republicans believe that what is needed is a functioning marketplace and consumer control of the allocation of resources.

Ordinarily, difficult legislative initiatives require some degree of support from both major political parties to pass. That’s particularly true with deficit reduction efforts. There’s very little to gain politically from cutting spending programs or increasing taxes. As the president looks to bring future deficits down in coming years, he is almost certain to try to enlist Republican help in the effort, as bipartisan support would shield Democrats from some of the political risks associated with fiscal consolidation.

But it will be near impossible for the president to succeed in building a strong bipartisan coalition of support for a budget plan if he takes the same approach as Bowles-Simpson and builds a wall around health care. Health care is the largest line item in the federal budget, and it will only become more important in future years. Most Republicans will not agree to any short or long-term budget framework that essentially ignores their point of view on how to address such an important component of the budget equation. Rising federal debt is now widely recognized as a serious threat to the nation’s long-term prosperity. It is essential that political leaders come together in a bipartisan fashion to put our government’s finances on more stable footing. But that won’t be done so long as the nation’s approach to health care is supported by only one of the two major political parties. No, a bipartisan budget framework is going to require a bipartisan approach to health care too.

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The Roadmap Lives

James C. Capretta — Mon, 22 Nov 2010 00:30:15 +0000

Last year, Rep. Paul Ryan’s — his far-reaching plan to restore long-term budget balance through tax and entitlement reform — was the subject of relentless attacks by those favoring a larger government role in American life. New York Times columnist Paul Krugman called Ryan the “Flimflam Man” in a widely cited in which he tried to dismiss the Roadmap as not a credible solution to the nation’s budget problems. The congressional Democratic leadership followed up with an organized campaign aimed at demonizing the plan as a callous assault on Social Security and Medicare beneficiaries. Their clear intention was to use the Roadmap to damage scores of Republican candidates for House and Senate seats by association.

None of it worked. In fact, not only did the Roadmap survive the 2010 mid-term campaign, the election results — and the dominoes that have fallen since — have made it far safer politically for Roadmap proponents to advance the plan’s ideas in the public square.

That the political and policy landscape has started to shift, and rather dramatically, became apparent just a week after the election when the co-chairs of a commission appointed by President Obama, on which Ryan, a Republican from Wisconsin, also serves, offered draft recommendations on how to close the short- and long-term budget deficits. President Obama had appointed former Clinton White House Chief of Staff Erskine Bowles and former Sen. Alan Simpson, R-Wyo., to chair the 18 member group earlier this year, and he asked them to report back by Dec. 1 — after voters were given a chance to decide the make-up of the 112^th Congress.

The draft proposal put forward by Bowles and Simpson caught just about everyone in Washington off guard. It’s not a business-as-usual plan. Very few sacred cows were spared. It calls for radical tax reform to lower rates and broaden the base, a reduction in the corporate tax rate, long-term entitlement spending cuts, and elimination of programs that have been around for decades. Among the most controversial items now on the table for consideration by the presidentially appointed commission is the full elimination of mortgage interest and state and local tax deductions, dramatically lower future Social Security benefits for higher-wage workers, and real cuts in pay for federal workers.

On Nov. 17, just a week later, another bipartisan commission looking at the nation’s deteriorating budget situation took its turn. This one is headed by former Sen. Pete Domenici, R-N.M., and former Clinton budget director Alice Rivlin, and is sponsored by the Bipartisan Policy Center. They and their commission colleagues — many of whom are Democrats — released their own version of a deficit- reduction plan, which received unanimous support from the 19 commission members.

Among other recommendations, the Domenici-Rivlin plan would cap the tax preference for employer-paid health insurance and then phase it out entirely over a number of years. It would also convert the Medicare program for future enrollees into a “premium support” program in which the beneficiaries get a fixed level of financial support from the government for the purchase of insurance. Enrollees selecting options more expensive than the average plan would have to pay the difference out of their own pockets.

Rivlin — who is also serving on the Bowles-Simpson presidential commission — followed up her work with Senator Domenici by announcing her public support for a “Ryan-Rivlin” health entitlement reform program, which the two then proceeded to offer to the presidential commission for its consideration. The Ryan-Rivlin proposal includes many of the same features in the health sector as the Ryan Roadmap. Future Medicare enrollees would receive their entitlement in the form of a fixed level of federal support for health insurance. The eligibility age would be increased gradually to age 67, up from 65 today. And the cost-sharing for current program enrollees would be modified to require most beneficiaries to pay something toward the cost of the services they receive before Medicare and secondary insurance kicked in. Medicaid would be converted into a block grant program to the states, with the states freed up to run the program as they see fit. The new long-term care program created in the health law — called the “CLASS Act” — would be repealed. And noneconomic and punitive damages in medical malpractice cases would be capped.

The Congressional Budget Office, , estimates the Ryan-Rivlin plan would reduce the federal budget deficit by $280 billion over the next decade and 1.75 percent of GDP in 2030 (with reasonable baseline assumptions). That kind of savings is going to be needed to prevent the federal budget from going entirely off the rails in the next two decades.

Still, there’s no expectation that any of these proposals are going to sail through Congress anytime soon. Indeed, what’s most likely to happen in the short term is absolutely nothing. The Bowles-Simpson commission may not find common ground, at which point Congress is under no obligation to take up draft recommendations from a subset of its membership. Moreover, both the Domenici-Rivlin plan and the Ryan-Rivlin health entitlement program have already set in motion frantic efforts to mount counter-offensives among the protectors of the status quo to prevent these ideas from gaining any political traction.

But what’s really important about the last month is not that any reform plan is about to pass. It’s that the terms of the budget, entitlement and health care debates have shifted dramatically, and very likely on a permanent basis. The fundamental elements of the Ryan Roadmap are sweeping tax reform; changes in health care which emphasize a marketplace and consumer choice; and modifications to retirement programs that reflect demographic reality. All of these elements can now be found in budget plans endorsed by prominent Democrats, including Democrats the president himself turned to find solutions to the nation’s budget problems. Consequently, it will be much harder in the future for Democrats to demonize these ideas as they have tried to do in the past.

Paul Ryan took the courageous step of going first with a bold plan to fundamentally restructure the tax and entitlement policies that threaten to push the federal budget past the breaking point. Now others, even some from the other side of the aisle, are joining him in sponsoring similar plans. The Roadmap does indeed live on.

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The Insurance Straw Man

James C. Capretta — Mon, 11 Oct 2010 00:30:00 +0000

Health and Human Services Secretary Kathleen Sebelius has to a Wall Street Journal that attacked her recent actions as secretary. According to Secretary Sebelius, the Journal’s criticism of her was really just one move in a larger effort orchestrated by the insurance industry to slow down her efforts to implement the new health care law. In her rebuttal, the secretary made it clear that she will not change course because, in her view, all she has been doing is providing long overdue oversight to a renegade industry that regularly runs roughshod over consumers.

It’s clear the secretary believes the best defense is a good offense, and the insurance industry makes for a good target. But her rebuttal doesn’t actually address the substance of the recent criticism. The Wall Street Journal editorial to which she was notionally responding did not fault her for faithfully executing what is required by statute – though it’s certainly the case that the Journal”s editorialists are among the new law’s staunchest critics. No, the Journal took her to task for abusing the power of her office for political purposes. And they were absolutely right to do so.

On Sept. 9, the secretary sent a to the trade group representing the nation’s health insurers expressing her displeasure with stories in the press that quoted insurers that blame a portion of their looming premium increases on the mandates in the new health law. Of course, it’s hardly breaking news that new insurance coverage requirements raise premiums, and sometimes substantially depending on the circumstances and market. Nonetheless, this kind of truth-telling in public was too much for the administration, which has been asserting, without any supporting evidence, that the new law would actually lower premiums for those with existing coverage.

And so, to apparently show how serious she is about getting the industry to toe the line, the secretary’s letter issued a plainly stated threat: Any insurer that dared to utter the truth about why premiums are rising might be banned from the government-managed “exchanges” through which the administration hopes most individual and small-group purchasers of insurance will eventually get their coverage. For many insurers, if the law gets implemented as planned, banishment from these exchanges could very well mean going out of business.

Washington sees more than its share of power plays, and there were many on display during the year-long health care debate. But even by Washington standards, the secretary’s letter is highly unusual, and startling. It is not every day that a cabinet secretary issues a threat aimed at controlling the speech of an entire industry for plainly political reasons.

But it does fit a pattern. For more than a year, the administration has sought to frame the health care debate as primarily a fight between advocates for consumers and the private health insurance industry, and Secretary Sebelius has been leading the way in this regard. Last summer, the president started calling the legislative effort “health insurance reform” and downplayed the arguments he had previously been using to sell his reform vision, such as “bending the cost curve” and universal coverage. In the weeks before final passage, Secretary Sebelius pounded Wellpoint for requesting a large premium increase for a segment of its market in California, arguing that the increase was unjustified and could be addressed with the new oversight provided in the law.

In recent weeks, both the president and the secretary have focused their public remarks almost exclusively on what the new law will supposedly do to help people with pre-existing conditions get and keep coverage as well as other mandated coverage requirements. Indeed, both have dared opponents of the new law to try and roll back the insurance requirements that have gone into effect this year.

It is no doubt useful politically for the administration to set up the private health insurance industry as its foil in this struggle. Many Americans have low regard for insurance companies. But this is largely a diversionary tactic on the part of the secretary. She wants to leave the misimpression that what the health care bill is really about is the relatively minor coverage requirements being imposed this year, not the much less popular provisions of the new law, such as the nearly $700 billion tax increase it imposes over the next 10 years. Or the long-term budgetary costs associated with adding 30 to 40 million people to federal health entitlement programs. Or the 7.4 million seniors who will lose access to the Medicare Advantage plan they would have preferred. Or the large numbers of employers who are likely to drop their existing coverage arrangements in favor of putting their workers into the exchanges. These are the major provisions of the new law, changes that will impose new costs on tens of millions of Americans – and they are the main reasons why the law remains highly unpopular with a very large segment of the electorate.

Of course, the insurance issue that most animates public concern is pre-existing conditions. In 1996, for those who stay in continuous coverage, but the rules, while far-reaching, have left a few holes. Consequently, a not-insignificant number of Americans with existing and expensive health conditions still have great difficulty securing affordable and stable coverage. The public rightly wants this fixed.

Ironically, the president and the secretary have now embraced a remedy for this problem – high-risk pools – that has strong bipartisan support. In 2008, then-presidential candidate John McCain proposed robust high-risk pool funding as a way to cover all of the uninsured with expensive pre-existing conditions. At that time, the Obama campaign attacked the concept as an inadequate half-measure. Now, however, the president is touting the coverage being provided through the modest high-risk pool funding as a primary argument against repeal.

In their recently issued , House Republicans also endorsed high-risk pool funding as a way to cover preexisting conditions. This should make it abundantly clear to the electorate that it is entirely possible to fix problems in private health insurance without embracing the rest of the president’s sweeping and government-centric health agenda.

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Debunking Medicare Myths

James C. Capretta — Thu, 02 Sep 2010 00:30:12 +0000

Here’s a puzzle: Critics say Medicare Advantage plans — the private insurance options offered to beneficiaries — are inefficient and costly. But those same critics oppose vouchers for Medicare — even though that would set up a direct competition between the private plans and the traditional fee-for-service program.

What are they afraid of?

After all, if the case critics (see Austin Frakt’s August 19 KHN column) make is correct and private insurers simply can’t do the hard work of cost control as well as the government, then Medicare’s “public option” would presumably win this contest.

But that’s apparently not how these critics see things. They are just as resistant to subjecting Medicare fee-for-service to a level playing field of competition as they are enthusiastic about cutting Medicare Advantage’s administratively determined payments.

Indeed, when the bipartisan leadership of the Medicare Commission in the late , would-be defenders of government-administered, fee-for-service Medicare viewed it as a mortal threat (“privatization!”). They took this position even though the fee-for-service plan would have been preserved as one of the options for beneficiary selection. In the end, the Clinton administration killed the idea to avoid offending the defenders of the fee-for-service status quo.

The Obama administration’s preferred approach to Medicare Advantage payment “reform” — rejected at the last minute by Congress in favor of more formulaic cuts — reflects the same bias. Private insurers would have submitted bids in competition with each other, with the average bid used to set regional benchmark rates. The benchmark would then establish a payment ceiling for all private plans competing within the same geographic area. But it wouldn’t have constrained Medicare fee-for-service. In regions where fee-for-service was more expensive than the average private plan, beneficiaries could have enrolled in the more expensive “public option” at no additional cost above the statutory part B premium.

It’s not just speculative musing to consider what would happen if fee-for-service were more expensive than private coverage in certain markets. Because, despite all of the talk about overpaid private plans, it turns out that some Medicare Advantage plans are almost certain to beat fee-for-service in a direct price competition. According to the (Medpac), the average cost of providing Medicare-covered benefits through private insurance is exactly the same as it is through fee-for-service. That average, however, includes some very loose networks.

Medpac also found that, on average, more tightly controlled Medicare Advantage HMOs provide Medicare benefits for just 97 percent of the cost of fee-for-service. These HMOs are by far the most popular form of Medicare Advantage plan, with nearly 80 percent of Medicare’s private plan enrollees choosing them.

And these HMOs win on costs despite the huge advantages fee-for-service enjoys in today’s arrangements. Fee-for-service is the default option for enrollment. If a beneficiary does nothing, that’s where they end up. There’s no advertising budget necessary. In addition, much of the administrative costs of running the fee-for-service program, such as revenue collection by the Internal Revenue Service, is not built into the premium paid by the beneficiaries. Most importantly, fee-for-service is able to dictate the prices it will pay to medical service providers. Private plans have no such option. They must negotiate contracts with their networks and get hospitals and physicians to agree to a fee schedule. Moreover, in many parts of the country, private plans are forced to pay premium rates to compensate hospitals and physicians for the losses they incur on their Medicare fee-for-service business.

But even with these advantages, fee-for-service is still more expensive than Medicare Advantage HMOs, which probably explains why fee-for-service’s advocates are so adamantly opposed to the kind of direct and transparent price competition that a move toward a defined contribution approach in Medicare would bring about.

and the chief actuary of the Medicare program confirm that a move in this direction would lower costs in the Medicare program because in many parts of the country efficient managed care models would be able to offer coverage at much less cost than price-controlled fee-for-service. Beneficiaries who chose to remain in fee-for-service would thus pay more for the privilege of doing so, and the assumption is that many of them would decide to switch into less expensive private coverage rather than face higher premiums in the traditional program.

Nearly everyone agrees that there is tremendous waste in today’s arrangements. But it is bordering on delusional to believe that the federal government has greater capacity than the private sector to engineer a more productive and efficient health delivery system.

The federal government has been running Medicare fee-for-service for nearly half a century, and the results speak for themselves. Medicare fee-for-service is the number one reason the nation suffers from dangerously fragmented and uncoordinated care. It pays any licensed provider of medical services a fee for rendering a service to a Medicare patient, no questions asked. Every provider is paid the same, regardless of how well or badly they treat their patients. To cut costs, Congress has always found it easier to impose arbitrary, across-the-board payment reductions than to steer patients away from some hospitals or physicians who provide low value at high cost.

The recently enacted health law is no exception. Despite all of the talk of “delivery system reform,” the cuts in Medicare come from arbitrary payment rate reductions decreases that will drive Medicare’s reimbursement levels below those of Medicaid by the end of the decade, according to Medicare’s chief actuary.

What’s needed most today in American health care is innovative change which drives up productivity and value. With the right incentives, that’s what the private sector can deliver, even as it’s been clear for some time that the federal government cannot do likewise.

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Gazing Into CBO’s Budget and Health Care Crystal Ball

James C. Capretta — Thu, 29 Jul 2010 00:30:10 +0000

Last week, Peter Orszag, the president’s outgoing Director of the Office of Management and Budget, on behalf of the Obama administration. The numbers are unsettling, to put it mildly, which probably explains why they were released late on a Friday afternoon.

The federal budget deficit is expected to set a record this year, at nearly $1.5 trillion, or 10 percent of GDP, and next year will be about the same, with a deficit exceeding $1.4 trillion for a third straight year. Over the period 2010 to 2020, the Obama budget plan would run up deficits totaling nearly $10 trillion. At the end of 2008, total government debt stood at $5.8 trillion. It is now expected to reach $18.5 trillion in 2020, or 77 percent of GDP.

Last month, the Congressional Budget Office issued , but the frame of reference was the long-term, and not just the next 10 years. Unfortunately, the farther out one looks, the worse the picture gets. CBO’s latest projections again make it clear that the nation is rushing headlong toward a fiscal crisis, and the health law does nothing to head it off.

According to CBO, Social Security costs will rise from 4.8 percent of GDP in 2010 to 6.2 percent in 2035. Over the same period, spending on Medicare, Medicaid, the state children’s health insurance program and the new premium subsidy entitlement created in the health law will increase from 5.5 percent of GDP this year to about 9.7 percent of GDP in 2035. In total, federal spending on the nation’s main retirement and health programs will jump by 5.6 percent of GDP over the next quarter century, and that assumes all of the Medicare cuts enacted in the health law go into effect as written.

But that is almost certain not to happen. Despite all of the talk of “reforming the delivery system,” the big savings in Medicare come from indiscriminate, across-the-board payment rate reductions that will hit all institutional providers of services proportionally, without regard to any metric of quality.

The biggest cut comes in the form of a “productivity adjustment” in the annual inflation updates applied to Medicare’s payment rates for hospitals, rehabilitation facilities, nursing homes, hospices and home health providers. Beginning as early as next year, these payments won’t be increased to fully reflect the rise in input costs. Instead, a “productivity adjustment” will reduce the inflation update by varying amounts, depending on the provider. In most instances, the “productivity adjustment” is not a one-time hit; rather, it is assumed to take place every year, in perpetuity. The compounding effect of reducing provider payment rates each and every year in this manner produces very significant Medicare savings–on paper, that is.

But it begs the question: if Medicare’s payment rates do not keep up with inflation, will those who supply services to Medicare’s patients continue to do so? Richard Foster, the chief actuary of the Medicare program thinks a large number of them won’t, predicting that about 15 percent of the nation’s hospitals would run into serious financial distress in just the first decade if they accepted such low reimbursement for caring for Medicare beneficiaries. Over the longer-run, the problem would of course become much more acute, which is why Foster has expressed serious doubts that the savings will materialize.

CBO did everyone a favor by producing an alternative baseline forecast which does not assume these Medicare reductions continue cutting deeper into rates after 2020. In 2035, in CBO’s alternative baseline, health entitlement spending including Medicare would reach 10.9 percent of GDP, or a full 1.2 percent of GDP higher than the baseline that assumes the unrealistic Medicare cuts will continue forever.

It is also clear from CBO’s forecast that the health law represents one of the largest tax increases ever enacted. By 2020, CBO estimates that the tax hikes in the new law will add 0.5 percent of GDP to federal revenue collection. By 2035, the tax hike will jump to 1.2 percent of GDP.

Like the Medicare cuts, however, those revenue projections are based on dubious assumptions. The health law imposed a Medicare payroll tax hike of 0.9 percent and a 3.8 percent tax on non-wage income. These new taxes would apply to individuals with incomes exceeding $200,000 per year and couples with incomes exceeding $250,000 per year. But those income thresholds are not indexed for inflation, so by 2035 the new taxes would be hitting a large portion of the American middle class, and more so with every passing year.

Similarly, the so-called “high cost” insurance tax will apply to family coverage plans in 2018–well after the president will have left office, by the way–with premiums of at least $27,500 per year. But once imposed, the tax would hit more and more households every year as the threshold would rise with general consumer inflation, not health costs. By 2035, it wouldn’t be just “Cadillac” plans bumping up against the premium threshold.

Unfortunately, there is also a strong possibility that the cost of the new premium subsidy entitlement program provided through the law’s “exchanges” will far exceed current projections. CBO’s estimate assumes that most low and moderate wage workers will continue to get their insurance on the job, and thus be ineligible for the new federal assistance program. But former CBO Director Doug Holtz-Eakin has estimated that some 35 million workers would be better off in the exchanges than in employer plans.

The history of federal entitlement programs is that potential beneficiaries eventually find their way to the money. One way or another, it seems likely that firms will adjust to make workers eligible for maximum federal assistance, especially over the long run. Holtz-Eakin estimates that migration of more low-income workers into the exchanges could add $500 billion to the new law’s cost over the first decade compared to CBO’s forecast, and much, much more over long-run.

The primary threat to the nation’s long-term prosperity is runaway federal entitlement spending. Entitlement costs are set to rise so fast and so quickly that the implications for federal deficits and debt are staggering. If allowed to stand, the health law has dramatically reduced the flexibility of the federal government to respond to the coming budget crisis. It locks in massive new spending commitments, and uses every trick in the book to make it look like those commitments have been paid for.

The truth is that the new law did not match the dead-certain new spending commitments with realistic and sustainable reforms, much less make a dent in the underlying problem of rising entitlement costs.

James C. Capretta is a Fellow at the Ethics and Public Policy Center. He served as an associate director at the White House Office of Management and Budget from 2001 to 2004.

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