Our nation is on an unsustainable fiscal course. The three major entitlements – Social Security, Medicare, and Medicaid – alone are set to eclipse historical tax levels by 2052 and a realistic assessment of the Congressional Budget Office baseline shows the government piling on an additional $13 trillion over the next ten years.
The time for pointing out the existence of a problem is over. Both Democrats and Republicans now agree entitlement reform must be a top priority. The question now is what exactly the inevitable reform will include. Specifically, does Congress drastically raise taxes and allow spending to skyrocket or do they maintain spending and revenue at historical levels?
This afternoon Congressman Paul Ryan (R-WI), along with several other House Republicans, held a press conference presenting the updated “Roadmap for America’s Future.” The bill, introduced today, would return the nation to a sustainable fiscal path without raising taxes. The proposal, which has been scored by the non-partisan Congressional Budget Office accomplishes this by focusing on four specific areas for reform:
First, the Roadmap would give universal access to health care by providing a substantial tax credit to enable individuals to purchase their own insurance, allowing for the purchase of insurance across state lines and creating state-based high risk pools to provide those with pre-existing conditions affordable health care options.
Second, the bill would reform Medicare specifically focusing on preserving existing benefits for those over 55 and ensuring future generations of elderly citizens have access to affordable care. Fully funding Medical Savings Accounts for low income beneficiaries, and creating a Medicare payment of $11,000 to purchase Medicare approved plans would contain costs and ensure coverage for generations to come.
Third, the legislation would put Social Security spending on a sustainable course by offering citizens the choice to invest in personal retirement accounts comparable to the Thrift Savings Account used by federal employees. This in combination with slightly increasing the retirement age will finally set Social Security on a sustainable path.
Finally, the bill would reform the tax code by implementing a simple two tier tax system. Individuals with income up to $50,000 and households with income up $100,000 would pay 10 percent. Those with higher income would pay 25 percent. The Roadmap also eliminates the alternative minimum tax, the death tax and the corporate income tax. The corporate income tax, which is currently the second highest in the world, is replaced with an 8.5 percent business consumption tax.
These bold reforms mark an important departure from the Washington norm of ignoring the looming fiscal crisis. In the past politicians avoided entitlement reform in an effort to steer clear of a potential political backlash. Congressman Ryan’s Roadmap confronts entitlement reform head on and proves Congress does have the option to return the nation to a fiscally sustainable course without increasing taxes.
This week the Commonwealth Fund released a report purporting to explain, as the title says, “Why Health Reform Will Bend the Cost Curve.” It is an exercise in pure, unsubstantiated speculation. They resurrect the long-discredited claim that the bill passed by the House and a somewhat similar but different bill currently before the Senate would not only slow the rate of growth in health care spending, but would reduce average family premiums. Ironically, most of the sources of alleged “cost savings” cited in the report are due to factors that will actually increase health care spending and/or health insurance premiums – and which are counted as such by other studies of the effects of proposed reform.
Even more ironically, they attribute the difference between their conclusions and those of other studies that show an increase in costs and premiums (by groups such as the CBO and the CMS Office of the Actuary) as due to the fact that the other studies “rely largely on peer-reviewed studies utilizing carefully controlled comparison groups,” whereas their own study is based on a “less formal, but no less important literature that sees the world very differently.” They also note that front-line physicians see vast amounts of waste due to misaligned incentives in the current system. However, doing a study less “carefully” and looking at “the world very differently” will not change the fact that the current proposals under consideration in Congress would, in the real world, establish a system with even more drastically misaligned incentives, increasing waste and costs for almost all categories of patients and providers.
The report concedes that “Extending health insurance coverage to essentially all Americans would increase medical spending, at least in the short run,” as the previously-uninsured enjoy greater access to health care. However, they assume that this is almost offset by reductions in Medicare and Medicaid benefits. According to the CBO report (Table 3), almost half of the reduction in the number of uninsured is accounted for by an increase in number covered by Medicaid. So in effect, they are saying we can obtain coverage for the uninsured by expanding Medicaid, and then pay for it by cutting Medicaid (and also by cutting Medicare). Somehow, providing health care to some poor people by taking it away from other poor people and the elderly is supposed to save money.
Next is a claim that “insurance exchanges … would group individuals and small firms into larger entities and thus drive down those administrative costs.” This is approximately the opposite of what these exchanges are designed to do, which is to break up groups so not everyone with the same small employer has to be in the same health plan. In other words, it breaks up groups. Also, any savings in administrative costs such as underwriting would be offset by increases in advertising to influence the choice of customers – and by the compliance costs associated with the regulations in the new exchanges. Both the House and Senate bills require insurers to seek regulatory approval individually for both the benefit package and the premium each health plan they offer – in addition to complying with existing state laws.
They also claim that: “In many areas of the country, there is little meaningful insurance competition. … A public option would contribute to this effort.” This claim is implausible on two counts. First, while there is some evidence of higher premiums due to limited competition in the large-employer market, the neither the exchanges nor the public option would be available to large employers. Second, while the exchanges and the public option would be available to individual purchasers, there is no evidence of a lack of competition in the individual market. There are over 1,300 companies, including not-for-profit organizations, currently competing in the individual market; it is hard to imagine one more playing on a level playing field making much difference.
They also claim that “a requirement that plans devote 85 percent of premiums to medical care, and authority for states [and in the House bill, the federal government] to review and reject premium increases. These can be expected to place downward pressure on administrative costs.” This is precisely backwards. Meeting the 85 percent requirement can be accomplished by either decreasing administrative costs or increasing medical costs. With most of their administration managing compliance with federal and state regulations, there will be little ability to reduce administrative costs. On the other hand, a plan that finds itself out of compliance with the 85 percent rule can always increase payments to physicians and hospitals, and increase premiums until the more-or-less fixed administrative costs fall below 15 percent. As a result the 85 percent rule would bend the cost curve upward, not downward.
The remainder of the author’s argument consists of a list of new categories of increased expenditures, together with the claim that all this increased spending will eventually decrease spending. For most of these, the reverse is true. For example:
- “Pay-for-performance incentives for Medicare providers,” despite their name, are really extra payments for providing (and documenting the provision of) specific lists of “recommended” interventions.
- “Higher reimbursements for preventive care services” and “increased emphasis on prevention and wellness” may benefit patients and physicians, but the overwhelming evidence is that it only rarely saves money and usually increases spending.
- “Increased funding for comparative effectiveness research” will cost money in the short run, with benefits in the long run that are purely speculative at best. Furthermore, as the recent controversy over the recommended mammogram schedule shows, government-run programs such as Medicare, Medicaid, and the proposed “public option” are subject to political pressure, making them less able to derive cost-saving benefits of such research.
- “An excise tax on high-cost insurance plans (in the Senate bill).” The Senate bill would impose a 40 percent excise tax on health premiums in excess of specified thresholds health plans would be forced to pass these taxes on to those paying the premiums, making high premiums even higher.. Cutting benefits to lower premiums could be difficult given a government-mandated benefit package.