During last month’s Blair House health care summit, President Barack Obama was forced to change the subject after Rep. Paul Ryan(R-WI) Blair House thoroughly refuted the President’s claim that his health care plan would reduce the deficit. It took over a week for the White House to respond to Ryan, but last Thursday they finally produced this blog post by OMB director Peter Orszag followed by a Washington Post op-ed Friday titled: Health reform that won’t break the bank. Ethics and Public Policy Center fellow James Capretta responded to the White House that same day at NRO:
Orszag and DeParle start by agreeing with Ryan that delaying the start date of an entitlement expansion is a tried-and-true budget gimmick, designed to push the full cost of the additional spending outside of the “budget window” covered by a cost estimate.
But, not to worry, they say. In this instance, it’s not a gimmick because the deficit reduction from their plan just keeps growing over time. They claim the president’s health plan would produce deficit reduction of $100 billion over ten years and $1 trillion in the second decade.
Of course, there’s another reason besides balancing revenue and spending to push the start of an entitlement back, and that’s to make the ten-year cost look much smaller than it really is. Recall that the president promised in his address to Congress last September to deliver a bill that costs only “$900 billion” over a decade. The new entitlements the Democrats want to create would cost much, much more than $90 billion per year. In fact, the Congressional Budget Office (CBO) says they will cost about $200 billion per year by 2019. And so, to get the media to now say his plan costs only “$1 trillion” (what’s $100 billion among friends!), the administration delays the coverage expansion provisions until 2014. Never mind that the president also says the uninsured can’t wait a day longer for the legislation. Once enacted, he would make them wait — for four years.
As Ryan noted, however, once the program did get up and running, costs would soar. The Senate Budget Committee Republican staff estimates the Senate bill’s cost at $2.3 trillion over ten years when fully implemented.
In their Post op-ed, Orszag and DeParle do not even attempt to address the many other points Ryan made which expose the dubious assumptions and sleight of hand behind their deficit-cutting claims.
For instance, the health-reform bill is filled to the brim with Medicare changes, but the one Medicare provision the president and the Democrats want to pass separately from the health bill is the so-called “doc fix,” which would repeal a cut in Medicare physician fees at a cost of $371 billion over ten years. Of course, splitting their agenda into two or three bills doesn’t change the total cost. When the “doc fix” is properly included in a tally of what the president is pushing, all of the supposed deficit reduction vanishes.
Then there’s the double-counting that Ryan exposed. The president’s plan starts up yet another entitlement program, providing long-term care insurance. Enrollees have to pay premiums for a number of years before they qualify for any benefits. Consequently, at startup, there’s a surplus of premium collections — $73 billion over ten years, according to CBO — because no one qualifies for the benefits yet. The president and his team count these savings against the cost of health reform — even though the money will be needed later to pay out long-term-care insurance claims. When this gimmick is taken out of the accounting, the president’s health proposal goes even deeper into the red.
Over the long-run, the administration’s claim of large-scale deficit reduction hinges on the dubious assumption that future elected officials will demonstrate more political courage than those in office today.
For most of last year, the president said that he would “bend the cost-curve” in large part by imposing a new tax on “high-cost” insurance plans. The tax would hit more and more middle-class beneficiaries each year because the threshold for determining what constitutes a “high-cost” plan would grow much more slowly than medical costs. In fact, after a number of years, virtually all Americans would be in plans at or above the “high-cost” threshold.
House Democrats and their union allies despise this tax. Last week, the president caved in to their pressure and pushed the start date of the tax back to 2018, well past the point when he will have left office. Even so, Orszag and DeParle still claim credit for the massive revenue hike that would occur in a second decade of implementation. They want us to believe we can finance a permanent, expensive, and rapidly growing new entitlement program with a tax the president himself was never willing to collect.
In Medicare, Orszag and DeParle like to highlight so-called “delivery system reforms” the administration has touted. In the main, these are extremely small-scale initiatives and pilot programs. CBO says they will amount to virtually no savings. The big Medicare cuts in the president’s plan come from across-the-board payment-rate reductions. In particular, the president wants to cut the inflation update for hospitals, nursing homes, and others by half a percentage point every year, in perpetuity. On paper, this change produces huge long-run savings. But it does nothing to control the underlying cost of treating patients. It just pays everyone less, without regard to patient need or quality of care. The chief actuary of the program has said repeatedly that these cuts are completely unrealistic for these very reasons. If implemented, he expects they would drive one in five facilities into serious financial distress. And yet Orszag and DeParle want us to believe these savings can be counted to finance the president’s massive entitlement promises.
And massive they are. CBO says the coverage expansion provisions in the Senate-passed bill would cost about $200 billion by 2019, and that cost would rise 8 percent every year thereafter.
But even these estimates understate the true cost of Obamacare. The president’s plan, like the House and Senate bills, would extend generous new insurance subsidies to low- and moderate-wage workers getting insurance through the new “exchanges.” Workers in job-based plans would get no additional help. That means two workers with identical incomes would be treated very differently. Gene Steuerle of the Urban Institute has estimated that, in 2016, a worker with job-based coverage and a $60,000 income would get $4,500 less than someone with the same income but health insurance through the exchange. This kind of inequitable treatment would never last: one way or another, the entitlement would get extended to everyone in the targeted income range, sending the overall costs of the program soaring.
The president started off last year by saying he wanted to “bend the cost-curve” even as he broadened coverage. But after a year of partisan political and legislative maneuvering, all that’s left is a massive entitlement expansion. The new costs would get piled on top of the unreformed and unaffordable entitlements already on the books. It’s a budgetary disaster in the making.
One of the central arguments President Barack Obama has made on behalf of the health care plan he wants Congress to approve in coming weeks is that it would begin to address the problem of rising costs and thus also begin to bring down future federal budget deficits.
But will it?
The president’s plan has not yet been assessed by the Congressional Budget Office. But CBO has provided a cost estimate for the Senate-passed bill, upon which the president’s proposal is built. That estimate shows the Senate bill would reduce the budget deficit by $132 billion through 2019. CBO also says that the Senate bill would likely reduce projected deficits even more during the second decade of implementation.
But, as Republican Rep. Paul Ryan of Wisconsin noted at last week’s Blair House meeting, there are a number of reasons to be skeptical about this claim.
For starters, the Senate bill omits the president’s proposal to permanently restore a 21 percent reduction in Medicare’s fees for physician services, now in effect as of March 1. The administration estimates that overriding this cut will cost $371 billion through 2020. Last summer, the House planned to include a permanent repeal of the cut in its health reform bill. But when the president imposed a 10-year budget of $900 billion on the reform legislation, Democratic leaders decided to pull the physician fee spending out of it and pass it separately.
The health bill includes scores of Medicare provisions, touching on just about every aspect of the program. The only major Medicare provision not in the bill is the costly “doc fix.” And the only reason for the omission is to make the total cost of the health reform bill appear lower. But passing the “doc fix” in a separate bill doesn’t make the cost go away. When the president’s entire health care agenda, including the “doc fix,” is tallied up, there is no deficit reduction over the next 10 years.
Ryan noted in his remarks at Blair House that the Senate bill would start up a new long-term care insurance program for the disabled. Participants would be required to pay in premiums for a number of years before becoming eligible for any benefits. Consequently, in the new program’s early years, there would a surplus, which CBO estimates at $73 billion over 10 years. The president’s claim of deficit reduction depends on double-counting these funds, first as an offset for the larger health care bill and then as a revenue source for long-term care insurance benefits beyond the 10-year window of the CBO estimate.
Over the long run, what matters in terms of the budget in the president’s health plan are the entitlement expansions, the effectiveness of “bending-the-cost-curve” measures, and the tax increases and spending cuts used to pay for broadened insurance coverage.
CBO expects the cost of the new entitlement spending aimed at coverage expansion in the Senate bill – the premium subsidies in the exchanges and the expansion of Medicaid — to reach about $200 billion by 2019 and then grow at a rate of 8 percent every year thereafter. In other words, this new health entitlement spending is expected to escalate just as rapidly as Medicare and Medicaid have in the past. CBO does not expect the “delivery system reforms” in the Senate bill, which are mainly small initiatives and pilot programs, to amount to much of anything in terms of cost control.
So how would the president pay for another expensive and rapidly growing entitlement? First, he would try to slow the rate of growth in the Medicare program, but not with new measures to weed out wasteful spending. His claim of long-term deficit reduction comes mainly from across-the-board payment rate reductions for hospitals, nursing homes and other providers of Medicare services. They would get a lower inflation update every year, in perpetuity. But these kinds of cuts do nothing to improve the efficiency of patient care or reward quality.
The chief actuary of the Medicare program has said repeatedly that these cuts are unrealistic because they would continuously cut reimbursements without touching the actual costs of providing care. He expects many facilities would be driven into serious financial distress. And without these Medicare cuts, the Senate bill is almost certainly a long-term budget buster.
The Senate bill also includes the so-called “Cadillac tax,” a new fee imposed on insurers and employers offering high-cost plans. As passed, this provision would generate substantial revenue in the second decade of implementation because the threshold for what constitutes “high cost” would rise much more slowly than medical inflation. Eventually, virtually the entire country would be in plans deemed “high cost.”
The president is relying heavily on the large, second-decade revenue increase associated with this tax for his claim of long-term deficit reduction. But just last week, under heavy pressure from union leaders, the president proposed to delay the tax from 2014 to 2018, well past the point when he will have left office. It will now raise almost nothing over the next 10 years, but the administration still claims credit for the sizeable revenue that would come in a second decade. That revenue would materialize, however, only if future officeholders were more willing than their counterparts today to impose large new taxes on a broad cross-section of the American middle class.
The federal government is piling up new debt at rates not seen since World War II. As Warren Buffett said recently, what the country desperately needs is a serious plan to slow the pace of rising health care costs.
What the president’s plan would deliver, however, is dead-certain entitlement spending, financed with speculative revenue and spending cuts that almost certainly will not work as advertised. The president says Congress should pass his plan to improve the budget outlook. In fact, Congress should reject it to protect the budget from more unfunded entitlement obligations.
Cross-Posted on Kaiser Health News