Sunday, October 18, 2009
“You Lie!” The American Health Care Debate
In my lifetime no domestic issue has raised more rancor in America than the debate raging over health care. Representative Joe Wilson’s outburst has been repeated over and over by both sides, from the capitol to my own dinner table, as we wrestle with what may be the seminal issue of the Obama presidency’s first year. So, is government-funded health care just one more Unfunded Liability? Let’s take a look.
Support for the Senate version of health care reform got a boost this month when the CBO, in a letter from Director Douglas Elmendorf to Senator Max Baucus, said, “…enacting the Chairman’s mark, as amended, would result in a net reduction in federal budget deficits of $81 billion over the 2010-2019 period.” 
The “Chairman’s mark” of the America’s Healthy Future Act is a marked up version of the proposed legislation that came out of the Senate Committee on Finance. It is not the legislation. As Director Elmendorf’s letter states, “…analysis is preliminary in large part because the Chairman’s mark, as amended, has not yet been embodied in legislative language.”
Payment for reform comes from two sources: new revenue and cost savings in existing government funded programs. So as I thought about how to approach an analysis it occurred to me there are two steps: The first is to look at the line items to see who pays and the second is to ask the question of how likely these items, if passed, will survive and generate the revenue or savings envisioned. At the very least the analysis provides a baseline from which to track the legislation to see what passes and what doesn’t and to monitor its performance over time.
The cost for the proposal is broken down into the following three categories: Medicaid and Children’s Health Insurance Program (CHIP), insurance exchange subsidies, and tax credits for small employers. The total estimated cost is $829 billion. Cost offsets (revenue) in the form of additional taxes amount to $311 billion and are divided into these four categories: a tax on high premium insurance plans, penalty payments by uninsured individuals, penalty payments by non-offering employers, and tax revenue from the expansion of insurance. Two thirds of the revenue (or $201 billion) is tax on premium plans. How likely are those plans, once the rules are set, to be modified to avoid some or all of the tax? Beware the law of unintended consequences. Nevertheless the net result still leaves a half trillion dollar hole.
Now we look at the intangibles
Of the total $420 billion in savings $404 billion comes from reductions in direct spending, or in other words, savings on existing government outlays. There are 19 categories and multiple sub categories. I will focus on the largest.
Excluding the Medicare Improvement Fund, which I will address later, I see these five major categories: (1) savings from reduction in direct benefits under current programs; (2) reductions in payments to health care providers; (3) savings in payments to drug companies; (4) reductions in payments to health care facilities primarily hospitals; (5) and modification of current plans.
Figures in Billions of Dollars
1. Reduced benefits..........................................................$ 18.8
2. Reduced payments to health care providers.....................$ 73.7
3. Reduced payments to drug companies............................$ 28.6
4. Reduced payments to health care facilities.......................$168.4
5. Modification of Medicare Advantage (Part C)..................$117.4
Benefit reductions are accomplished by means testing and raising co-payments on higher earning individuals. Savings pertaining to payments to health care providers are made by reducing and/or capping the growth of payments to doctors and other providers. Reductions in payments to drug companies are accomplished by switching to generics. Reduced payments to facilities come from a significant shift from emergency room use to other facilities, presumably primary care providers. The last savings is a modification of a current program called Medicare Advantage that has resulted in significantly higher delivery costs than Medicare A and B. Medicare Advantage lets a beneficiary shift the administration of Medicare to other plan providers such as Health Maintenance Organizations (HMO), Preferred Provider Organizations (PPO), Private Fee-for-Service Plans (PFFS), Special Needs Plans (SNP) and Medical Savings Account Plans (MSA).
While there is little doubt the expense side of the ledger will survive, one must question the revenue side. As pointed out earlier none of the proposals are in legislative language. We can only imagine the depth of lobbying going on. We can also imagine a world where the legislation actually passes as envisioned. What are the consequences? For example if we drain $168.4 billion of revenue from the hospitals in this country, how many will survive? With shorter patents on drugs and reduced cash flow to drug companies how much capital will flow into innovation? And how likely is sapping doctors, nurses, hospice care providers and homecare providers of $73.7 billion in income to promote better care and service if in fact it happens? As we shall see shortly, for the doctors it won’t.
But the real question in my mind is this: can the government execute? For example, in the past, cuts scheduled in fee-for-service to physicians have been routinely overridden by congress. From the 2009 annual report for the trust funds of Medicare parts A and B, “Congressional overrides of scheduled physician fee reductions…could jeopardize Part B (payments for doctor visits) solvency… Part B costs have been increasing rapidly, having averaged 7.8 percent annual growth over the last 5 years, and are likely to continue doing so. Under current law, an average annual growth rate of 5.5 percent is projected for the next 5 years. This rate is unrealistically constrained due to multiple years of physician fee reductions that would occur under current law, including a scheduled reduction of 21.5 percent for 2010. If Congress continues to override these reductions, as they have for 2003 through 2009, the Part B growth rate would instead average roughly 8.5 to 9.0 percent.” To watch Secretary Giethner’s press conference releasing the report click here.
So what did Congress do? The answer is sleight of hand. $22.2 billion, 5% of the “savings” in the current legislation, are from funds scheduled to be spent between 2014 and 2019 from the Medicare Improvement Fund. They were actually moved to a budget resolution for Fiscal Year 2010 and increased to a whopping $285 billion overriding past and future reductions in one fell swoop. So the way the current bill became “deficit neutral” was to actually authorize a quarter of a trillion dollars of Medicare spending that will occur during the years the bill covers but keep it out of the bill. Where is Joe Wilson when we need him?
The last item I will address is the Medicare Commission. From Director Elmendorf’s letter to Senator Baucus, “The projected longer-term savings for the proposal also assume that the Medicare Commission is relatively effective in reducing costs—beyond the reductions that would be achieved by other aspects of the proposal—to meet the targets specified in the legislation. The long-term budgetary impact could be quite different if those provisions were ultimately changed or not fully implemented. (If those changes arose from future legislation, CBO would estimate their costs when that legislation was being considered by the Congress.)” The Medicare Improvement Fund was created by Congress in 1999 with complete implementation by 2003 with three objectives:
• the design of a premium support system,
• improvements to the current Medicare program, and
• financing and solvency of the Medicare program
So can the government execute? Can we trust Congress to pass the legislation they are proposing without bowing to pressure from lobbies? Even if passed will Congress avoid tinkering either with the level of benefits or the adjustments in compensation? All evidence suggests the answer is no. Each year we continue to add one unfunded liability to another. The most dangerous four words in the English language be it investing or government spending are, “This time is different.” Albert Einstein defined insanity as, “Doing the same thing over and over again expecting different results.”
But the most frightening result of this is that if it succeeds at all levels it is only deficit-neutral. With an unfunded liability of $107 trillion in the current Social Security and Medicare can we afford to just spin our wheels?