Category Archives: James Capretta

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View: Can Massachusetts’ experiment tell us what’s next?

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James C. Capretta, Fellow, Ethics and Public Policy Center

Now that the year-long debate in Congress over health care legislation has come to a close, it’s reasonable to ask: What’s next?

Some think that enactment will quickly lead to widespread and generally quiet acquiescence to the terms of the new law, even by those who were strongly against its passage by Congress. Perhaps.

But most of the law’s major provisions don’t get implemented until 2014.

Indeed, though President Barack Obama is now daring his adversaries to try to repeal the law’s protections and benefits, hardly anyone will see benefits for more than three years.

In the meantime, there will be two federal election cycles and plenty of Medicare cuts, tax increases, and insurance premium hikes to inflame passions.

Moreover, the manner by which the legislation was enacted virtually guarantees that the mid-term election this November, as well as the presidential contest in 2012, will become de facto referenda on the health care plan.

Put another way, the last words in this debate were not uttered at the law’s signing ceremony. Those will be reserved for the voters, when they make their voices heard at the ballot box.

And, as matters currently stand, things don’t look particularly rosy for proponents of the new health legislation. In most polls, a plurality of Americans remains opposed to it, even after it was signed into law.

Further, the intensity of opposition far exceeds the intensity of support. The bruising and partisan manner by which the bill was pushed through its final legislative stages has further enraged its most ardent opponents.

In the end, no Republican supported the final bill, and there’s no sign of adverse political consequences for not doing so. The same cannot be said for those many Democrats who supported the bill at various stages despite clear opposition from a majority of their constituents.

Of course, it’s a long time to November, and longer still to 2012; anything can happen. But if Republicans do in fact pick up a sizeable number of House and Senate seats and the balance of power in Washington shifts, the consequences for health care policy could be very dramatic.

At a minimum, those who are elected on an explicit platform of opposition to the recently passed law would feel emboldened, and probably obligated, to propose a sharp shift in direction, even in the face of unwavering opposition from the administration. How a standoff between the two warring sides would then play out is anybody’s guess.

But, assuming for the moment that implementation proceeds as scheduled, what will the future hold?

The president himself has said that the national plan contains many of the features of the Massachusetts program, now operating in its third year.

He is right. There are striking similarities between the reform plans, which is why what’s happening in Massachusetts today is very instructive.

When Massachusetts rolled out its coverage program in 2007, many more people signed up for the new heavily subsidized insurance than was originally predicted by budget officials.

Almost immediately, costs far exceeded what had been budgeted, forcing state officials to scramble to find cuts elsewhere in government and other sources of revenue.

After three years, no real progress has been made on rising costs. The program remains well over budget, with no end in sight. Further, state residents who now must buy state-sanctioned coverage are bristling at their rising premiums and the inability to find coverage which covers less and thus costs less.

State politicians are responding to the cost crisis the only way they know how: by promising to impose arbitrary caps on premiums and price controls for medical services.

The governor and state regulators have disallowed 90 percent of the premium increases insurers –all of whom are not-for-profit–submitted for their enrollees for the upcoming plan year.

The state says premium increases above eight percent are too high and unacceptable, though they themselves don’t have a plan to make health care more efficient in Massachusetts. They just want lower premiums.

The insurers have responded by refusing to sell any coverage at the rates the state wants to impose.

The way out of this stand-off is predictable: more price controls. To hold premiums down, Massachusetts officials are already laying the groundwork to impose government-set payment rate schedules for services beyond the realm of public insurance.

The risk of cost overruns is even higher at the federal level than in Massachusetts. The Congressional Budget Office projects just 17 million people will be getting subsidized insurance through the state-based exchanges in 2016.

But the population with incomes between 100 and 400 percent of the federal poverty line–roughly the group targeted for subsidized coverage–is more like 130 million people.

CBO assumes the vast majority of low- and moderate-wage families will stay in job-based plans with no additional federal help. But what if they are wrong?

Employers are already looking for ways to shed as much of their health care bill as they possibly can onto taxpayers. If 30 or even 50 million Americans end up in the exchanges, federal costs will soar.

The federal government is already running up debt at an unprecedented pace even before the new health care entitlement has been rolled out.

If the health bill’s costs exceed projections, the same pressures which have led Massachusetts officials to impose premium caps and price controls as the solution to costs would lead some politicians at the federal level to call for the same approach nationwide.

Indeed, the administration has already laid the predicate for just such steps with its proposal to establish a federal insurance rate authority to oversee insurers’ premium submissions. That idea did not make the final legislative cut, but it could easily be resurrected in a budget crisis.

And that’s the real danger of what’s just been enacted. There are only two ways to slow the pace of rising costs: with a functioning marketplace or with government-imposed cost controls.

The new health law adopted neither approach in any significant way. But when push comes to shove, it’s clear which direction the Obama administration will go to really slow the pace of rising costs, which is the same direction Massachusetts is already heading today–toward heavy-handed price controls.

Such controls, however, do not make health care delivery more efficient. They cut costs only by driving out willing suppliers of services. In other words, it’s cost control through restricted access to care.

This column was reprinted from kaiserhealthnews.org with permission from the Henry J. Kaiser Family Foundation. Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health care policy research organization unaffiliated with Kaiser Permanente.

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The President’s Budget and Health Care Reform

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James Capretta, Fellow, Ethics and Public Policy Center

President Barack Obama and Democratic leaders in Congress continue to insist that the push for health care reform is far from over.

But the release of the president’s budget for fiscal year 2011 marks another turning point in the debate, one that means the climb toward passage of the bill — or any bill for that matter — has only gotten steeper.

The problem for those trying to pass a version of the current plans pending in Congress starts with the avalanche of debt the nation is staring at in coming years.

From 1789 through 2008, the U.S. government borrowed a total of $5.8 trillion. In 2009, the federal budget deficit exceeded $1.4 trillion.

The administration now expects the 2010 deficit to break that record, topping $1.6 trillion. And in 2011, it would only fall to about $1.3 trillion. Thus, in just three years, the debt will have jumped an astonishing $4.2 trillion.

And it will only get worse from there.

In 2020, the administration expects total federal debt to reach $18.6 trillion — and that assumes all of the president’s budgetary policies are adopted in full, including a health care bill that the administration says will reduce the ten-year budget deficit by $150 billion.

The average annual deficit in the president’s budget for the next decade is $853 billion, and it would be rising rapidly at the decade’s end as the full force of the baby boom retirement starts showing up in the numbers for Social Security, Medicare and Medicaid.

If the country has not gotten its fiscal house in order by then, it will be wrenching to do so at that time. Debt service payments alone will reach $912 billion in 2020, a full 20 percent of all federal revenue collections.

It is now readily apparent that piling up debt at the rates implied by the president’s budget would all but invite an economic crisis. At some point, the flood of Treasury debt instruments worldwide would lead lenders to demand higher rates of return for their loans, or perhaps to runaway inflation — or more probably both.

The result could be quite devastating to private-sector business investment, productivity and job growth, making it all the more difficult to get out from under the debt spiral that would ensue.

The very real prospect of a looming calamity has gotten people’s attention. Economists from across the political spectrum are urging action to reduce the risks associated with out-of-control federal borrowing.

It’s not that the president and his advisors don’t recognize the problem. They speak frequently about the dangers of business as usual. The problem is that the president’s stated solution will never work.

What the administration would like to do is to have Congress pass the health care bill and then follow it up with a bipartisan deficit-cutting plan, put together by a special commission assigned with assembling a medium and long-term solution to the nation’s budgetary woes.

The first problem with this sequencing is its unrealistic political calculus. The president and Democratic majority in Congress are exhorting Republicans to cooperate in what will surely be a highly unpopular deficit-cutting exercise — after they have locked into place the most expensive new entitlement program in decades. There is virtually no chance this will work.

The other problem is the planned timing of the debt commission’s recommendations and congressional action. The president would like the commission to issue its plan after the November congressional elections, and have a lame-duck Congress vote on it between early November and the start of new Congress next January.

So the most far-reaching tax hikes and spending cuts in a generation would be recommended by an unelected commission and passed by an exiting Congress, all in a matter of days and weeks, even as newly elected members are set to take their seats. To say the odds are long is quite an understatement.

Still, congressional Democrats press on and continue their search to put this plan into action. In the wake of Scott Brown’s election to the Senate, the latest tactical twist is to pass the health care plan in two bills, not one.

The Senate has already passed a health care bill, which is now awaiting action in the House chamber. House leaders are suggesting that they might be able to pass the Senate bill and send it to the president for signature if Congress could simultaneously consider and pass a series of amendments to the Senate bill which would make it more palatable to House members. Moreover, these amendments would be taken up and passed in a reconciliation bill, which means they couldn’t be filibustered in the Senate.

It’s certainly a novel approach. The problem is that a Senate bill awaiting passage in the House is not a law. Reconciliation measures are supposed to address budgetary matters. How could amendments to something that is not yet in law change outlays or revenues in any rational way?

In normal years, the submission of the president’s budget kicks off a new legislative session. The Congressional Budget Office resets its baseline and looks one more year into the future. The congressional budget committees start with a clean slate and write a new budget resolution governing legislation over the coming year.

All that machinery will be cranking up in the days and weeks ahead, making it even more difficult to turn back and try to pass a bill based on last year’s assumptions.

The president and congressional majority should take the opportunity a new budget and legislative year brings to rethink how they are proceeding. The nation faces daunting challenges, economically and budgetarily.

There are opportunities for building bipartisan consensus on sensible solutions, including in health care, where both parties could come together to expand coverage and slow the pace of rising costs. But those opportunities will almost surely vanish if Democrats continue to insist on rewriting American health care their way — which is to say in a way that much of the country plainly does not support.

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.

This article was reprinted from kaiserhealthnews.org with permission from the Henry J. Kaiser Family Foundation. Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health care policy research organization unaffiliated with Kaiser Permanente.

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View: An entitlement certain to grow in spite of ‘firewalls’

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James Capretta, Fellow, Ethics and Public Policy Center

One of the main arguments President Barack Obama and other Democrats have made on behalf of the health care bills that have passed the House and the Senate is that they would reduce the federal budget deficit in the coming decade and in the years following as well.

Their claim is backed up by the official cost estimates provided by the Congressional Budget Office that show modest improvements in the budget outlook through 2019 if the bills become law.

But there are important reasons to be very skeptical that a final health care bill will improve the nation’s budget outlook, both in the short and the long term.

For starters, neither bill addresses the impending cut in the fees paid to physicians under the Medicare program. There is bipartisan opposition to these cuts, but the cost of fixing the problem would exceed $200 billion over 10 years.

Consequently, congressional Democrats aren’t providing a permanent solution in the health care bills; they are in effect understating the cost of the reform program they have promised to deliver.

If the so-called “doc fix” were included in the accounting, the health care reform effort would no longer be a deficit reducer at all.

In addition, CBO expects the financing provisions of the bill to produce revenue and spending reductions that more than offset the growing cost of the new health entitlement expansions contemplated in the legislation.

That would be no small feat, because the entitlement spending is expected to increase at a very rapid rate indeed, just as Medicare and Medicaid spending have for more than four decades.

By 2019, the Medicaid expansion and the subsidies for health-insurance premiums in the exchanges are expected to cost about $200 billion annually, and grow at an eight percent rate every year thereafter.

On paper, of course, CBO is right. The “pay fors” would grow at an equally rapid rate, as they are currently written in the bills. But that’s only because they assume key indexing provisions that function like a tightening of the vise over time.

The House bill includes a new surtax for upper income taxpayers, while the Senate passed an increase in the Medicare payroll tax for high earners as well as a new excise tax on high-cost insurance plans.

In all instances, the thresholds used to determine tax liability would be set in ways that capture more taxpayers over time. The threshold for application of the Medicare payroll tax hike — $200,000 for individuals — would not be indexed at all to keep up with inflation. Nor would the House-passed income-tax surtax.

Meanwhile, the threshold for what constitutes a “high-cost” insurance plan would be indexed below expected medical inflation. Consequently, in 10 or 15 years’ time, many more Americans would find themselves in plans deemed to be unacceptably costly.

CBO also gives both the House and Senate bills credit for substantial savings in the Medicare program. A large part of that would come from shaving off a half percentage point every year from the normal Medicare inflation update for hospitals and other service providers; that annual cut assumes improvements in productivity.

Both the Chief Actuary of the Department of Health and Human Services, as well as CBO, have essentially raised serious doubts about whether such a perpetual cut in payment rates can be sustained without leading large numbers of hospitals and other service suppliers to drop out of the Medicare program, and thus harm beneficiary access to timely care.

Nonetheless, that’s what the House and Senate sponsors of the health legislation are relying on when they claim their bills will improve the nation’s fiscal standing.

But even if all of the offsets work out as planned, which is not likely, the House and Senate bills would still create substantial budgetary risks because of the pressures for entitlement expansion they would unleash.

Both bills assume the new entitlement spending can be held down with the so-called “firewall” provisions. These are the rules that essentially preclude individuals from gaining access to premium subsidies available in the exchanges. If an employer offers “qualified” insurance coverage to a worker, the employee really has no choice but to take it if he wants to avoid paying the penalty for going uninsured.

But these rules would create large disparities in the federal subsidies made available to workers inside and outside the exchanges.

Gene Steuerle of the Urban Institute has calculated that, under the Senate bill, a family of four with an income of $60,000 with employer-sponsored health care would get $4,500 less in federal support outside of the exchange than a similar family inside the exchange would get in 2016.

And there would be many tens of millions more families outside the exchange than in it, according to CBO. Today, there are about 127 million Americans under the age of 65 with incomes between 100 and 400 percent of the federal poverty line, but CBO expects only about 18 million people will be getting exchange subsidies in 2016.

If enacted as currently written, it’s entirely predictable what would happen next. Pressure would build to treat all Americans fairly, regardless of where they get their insurance.

One way or another, the subsidies provided to those in the exchanges would be made more widely available, driving the costs of reform well above the $900 billion limit the administration has set for the initiative.

The president has said that he wants a health reform bill in large part because it’s necessary to get better control of the federal budget. But the bills that have been developed in Congress fall far short of his stated objective.

The new entitlement expansions are certain to occur, followed quickly by irresistible pressure to make them even more widely available and generous.

Meanwhile, Congress would have to show heroic restraint to allow the tax increases and spending cuts to play out as written. That’s a recipe for another unfunded federal program.

This article was reprinted from kaiserhealthnews.org with permission from the Henry J. Kaiser Family Foundation. Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health care policy research organization unaffiliated with Kaiser Permanente.

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Will the current health-reform bills control costs?

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Debating Cost-Control

James CapretaJames Capretta, Fellow, Ethics and Public Policy Center

In recent days, a growing chorus of voices has expressed alarm that the health care legislation emerging in Congress does not come close to “bending the cost-curve” as President Obama has promised it would.

Kaiser Logo BlackDavid Broder and Robert Samuelson in the Washington Post, David Leonhardt in the New York Times and Harvard Medical School Dean Jeffrey Flier on the editorial page of the Wall Street Journal have all, to varying degrees, said the health care plans being developed by Congressional Democrats would vastly expand governmental health care commitments without fundamentally altering the arrangements that today push costs rapidly upward every year.

Now, top officials in the Obama administration are pushing back hard with their own “narrative” on the cost-containment potential of the health care bills in Congress. ‘

Specifically, White House Budget Director Peter Orszag and Director of the Office for Health Reform Nancy-Ann DeParle contend in a series of recent interviews that the health care plan introduced by Senate Majority Leader Harry Reid is more than sufficient to meet the “bend the curve” test.

Their views have been echoed by MIT Economist Jonathan Gruber, who has been arguing that the Reid bill contains every conceivable idea to slow the pace of rising costs.

And Ronald Brownstein of The Atlantic has hailed Senator Reid’s legislation as a “milestone” in the health reform journey because of its superior cost-control provisions.

To get a sense of who’s right here, some perspective is necessary. Both the House-passed bill and Senator Reid’s proposal would put in place the most costly entitlement expansion in more than four decades. They would add millions of households to the Medicaid program and promise all Americans between about 100 and 400 percent of the federal poverty line – some 127 million people under the age of 65 in 2008 — that their health insurance premiums will not exceed a certain percentage of their incomes. They would also extend subsidies to small businesses offering insurance coverage.

The Congressional Budget Office expects the combined federal cost of these new commitments to reach about $200 billion by 2019 and to increase eight percent annually every year thereafter.

So the bar for what constitutes credible “bending of the curve” potential should be set very high indeed. As currently written, the additional spending for coverage expansion provided in the House and Senate plans is absolutely certain to occur, putting tremendous additional pressure on the federal budget at a time when the federal government is already adding to the nation’s debt burden at an unprecedented pace. Are the provisions aimed at slowing the pace of rising costs similarly certain and robust?

Most analysts agree that what’s needed to address the cost challenge is real change in the way hospitals and doctors are organized and deliver care to patients. There’s abundant evidence that health care is needlessly expensive in many settings and regions.

But getting at the inefficiency is much easier said than done. Indeed, the crucial question in the entire reform debate has always been this: what process has the best chance of bringing about continual improvement in the efficiency and quality of patient care?

The Obama administration believes a governmental process is the answer. There are a series of provisions in the Reid legislation which try to use the leverage of Medicare payment policy to force doctors and hospitals to change their practices.

For instance, there are penalties for hospitals that have too many of their patients readmitted for care, and for physicians who are outliers in terms of how many services they render for certain diagnoses.

Other reforms are introduced as pilot programs that might be expanded later. In addition, the Reid bill picks up on the idea pushed by the administration to set up an independent Medicare commission which would make ongoing recommendations for cost-cutting in the program through provider payment reforms.

Congress could not reject the commission’s proposals without substituting ideas that achieve similar levels of savings, but the commission couldn’t make any recommendations that alter any aspect of the program other than payment policies for providers of services.

Some of these reforms might work and marginally improve matters from the status quo. But would they fundamentally change Medicare, much less the rest of American health care? No, they wouldn’t.

CBO assigns relatively small savings to the Medicare commission, and even smaller amounts to the other payment ideas that are called “delivery system reform.” In 10 years time, even if all of ideas are fully implemented, the Medicare program would look and operate largely as it does today, which is to say as a fee-for-service insurance model that rewards volume and fragmentation, not integration.

Indeed, under the Reid bill, fee-for-service Medicare would be even more dominant than it is now, as millions of seniors now in Medicare Advantage plans would migrate back into the traditional program.

The Reid bill would achieve significant Medicare savings in the coming years, but not with innovative payment policies or more efficient health care delivery. The savings would come from across-the-board payment rate cuts, applied without regard to any metric of quality, which is instructive.

Whenever Congress is in a budget crunch, the preferred route to savings is indiscriminate provider payment reductions. Politicians don’t want to be forced to pick winners and losers among their hospitals and physician groups. It is much easier to pass equal cuts for all licensed providers, no matter how well or badly they treat their patients. That’s been the history of Medicare and Medicaid for forty years, and there’s no reason to expect cost-control driven by the federal government will ever be any different.

The alternative, of course, is a decentralized process, where cost-conscious consumers choose from insurers and delivery systems that are competing on price and quality. The government can and should play an important oversight role in such a reformed system, much as it does in Medicare’s prescription drug benefit.

But the difficult organizational changes and innovations necessary to provide better care at less cost would come from those delivering the services, not Congress, or the Department of Health and Human Services, or even a commission.

The Reid bill nods in a market-based direction with a new tax on high-cost insurance plans. But it would change incentives for a relatively small segment of the market, and certainly would not be enough to counter the pressures for rising costs built into today’s health entitlement programs and tax policies.

Of course, it shouldn’t be all that surprising that Congress is more interested in entitlement expansion than difficult and lasting reform. That’s why we are in our current budgetary predicament. And, despite protests to the contrary, the bills under development are more of the same. They are likely to make our health care cost problems much worse.

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.

This column was reprinted from kaiserhealthnews.org with permission from the Henry J. Kaiser Family Foundation. You can view the entire Kaiser Daily Health Policy Report, search the archives and sign up for email delivery. © Henry J. Kaiser Family Foundation. All rights reserved.

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The President should oppose the House bill

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The President should be opposing the House bill

James Capretta, Fellow, Ethics and Public Policy Center

James CaprettaWhen Speaker Nancy Pelosi unveiled the revised House Democratic health care bill last week, the Obama White House hailed it as a “critical milestone” in the process.

No doubt senior administration officials were relieved to see signs of “momentum” toward passage of something.

Kaiser Logo BlackBut if the president really meant what he has said about health care policy throughout this year, his administration would be working to defeat the Pelosi bill, not supporting it.

On Sept. 9, the president addressed a joint session of Congress and said the plan he is pushing would cost “around $900 billion over 10 years.”

During August, at many town hall meetings across the country, large numbers of Americans had expressed serious reservations with the level of government spending and debt projected to occur in coming years.

The president’s statement was aimed at assuaging those fears by imposing a fixed budget on the congressional process.

Indeed, after the president’s speech, it was assumed by all concerned that no health care bill costing more than $900 billion would be acceptable to the administration.

Then, last week, along came the long-awaited revision to the House’s July bill. The Speaker asserts that the new version stays within the president’s $900 billion budget, but that is plainly not the case.

The Congressional Budget Office estimates that the Medicaid expansion, the new subsidies for insurance premiums in the exchange, and the tax credits for small businesses offering coverage will cost $1.055 trillion over 10 years.

In addition, the bill has scores of other spending provisions that would add to the government’s costs. There’s an expansion in the program that subsidizes the premiums and cost-sharing for low-income seniors, costing $13.5 billion over a decade. There’s also a new program to pay primary care physicians more in Medicaid ($57 billion), increase the Medicaid matching rates in 2011 ($23.5 billion) and much, much more.

All totaled, these other spending provisions add well over $200 billion more to the bill’s total spending.

The only way House Democrats can claim to stay within the president’s stated budget is by ignoring the non-coverage spending in the bill and by netting the cost of the coverage expansion with new taxes collected from those who decline insurance and employers who “pay” rather than “play.”

But this kind of accounting makes no sense. If the spending budget set by the president can be met by netting out taxes, it’s essentially meaningless, because any level of expenditure could be acceptable if coupled with an offsetting tax increase. That’s not what the president meant to convey in his speech. And Democrats have yet to explain what could possibly justify all of the other spending in the bill.

Then there’s the issue of physician fees in Medicare. The “sustainable growth rate” formula calls for a 21 percent cut in physician fees in 2010, which no one supports. However, the 10-year cost of full repeal is nearly $250 billion.

In July, House Democrats proposed to include a full repeal in their health care plan, along with scores of other Medicare provisions.

Now, however, they want the SGR repeal to pass in a standalone bill so they can claim the costs of health care reform are lower. It doesn’t matter to taxpayers if Congress passes all of this in one bill or two. The total cost is the same either way.

Overall, then, the House plan, including the SGR fix, is to spend about $1.5 trillion over the period 2010 to 2019 on health care, well in excess of the $900 billion budget the president promised to the American people.

In his September health care address, the president also said that “we’ve estimated that most of this plan can be paid for by finding savings within the existing health care system.”

But the House bill imposes a new income tax surcharge on filers with incomes exceeding $500,000 if they are single or $1 million for couples.

This provision would increase taxes by $460 billion over 10 years, according to the Joint Tax Committee, by far the largest “pay-for” in the House bill.

So, instead of financing new coverage from efficiency and savings within health care, the House bill would pour hundreds of billions of dollars of new money into the current system.

CBO estimates that this additional revenue and other non-health “pay-fors” will push the federal commitment to health care up nearly $600 billion over a decade.

The president spent much of the first half of this year promising that a health care plan would “bend the cost curve.” Last week, White House Budget Director Peter Orszag stated in a blog post on the Office of Management and Budget Web site that the administration is banking on two provisions to bring about this dramatic slowing of the escalation of health care costs.

The first is the suggested new tax on high-cost insurance plans. The Senate Finance Committee approved a provision to impose a tax on plans with premiums exceeding $8,000 for single coverage or $21,000 for family coverage. By all accounts, the incidence of this new tax will largely fall on high-cost insurance enrollees, which is why union opposition is intense.

The second provision would empower an independent commission to propose and implement payment reforms in Medicare. There are real questions about whether these provisions are the “game changers” claimed by administration officials. Regardless, neither is in the House bill. The House did include an independent review of regional disparities in Medicare payment structure, but the mandate is very limited, and certainly is not aimed at cost control. CBO estimated the provision would have no effect on the federal budget.

So what does the House bill do to cut costs? Orszag touts the inclusion of more bundled payments, incentives for hospitals to cut back on preventable readmissions, and other similar changes.

But these are minor adjustments that are doomed to get watered down as time passes.

In the main, the House bill would simply reduce payment rates in Medicare and Medicaid to save money, including large cuts in reimbursement levels for hospitals, nursing homes, and home health agencies. These cuts are not calibrated to reward quality or encourage more integrated models of care. They are applied across the board.

And they certainly do not constitute delivery-system reform. On paper, they appear to reduce Medicare’s per capita cost growth rate. But if payment rates were the answer to the cost problem, it would have been solved long ago.

The president built high expectations at the beginning of this year that health-care reform would finally tackle the difficult entitlement and cost issues necessary to building a sustainable system of insurance coverage.

But the House plan has devolved into a large tax increase (about $725 billion over 10 years) and entitlement expansion, with very little by way of “reform.”

It’s not too late for a serious course correction. But if the president and his aides continue to signal that House bill is acceptable, they will never be able to deliver the real reform the president has promised.

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.

This column was reprinted from kaiserhealthnews.org with permission from the Henry J. Kaiser Family Foundation. You can view the entire Kaiser Daily Health Policy Report, search the archives and sign up for email delivery. © Henry J. Kaiser Family Foundation. All rights reserved.

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The Public Option Contradiction

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James CaprettaBy James Capretta, Fellow, Ethics and Public Policy Center

President Barack Obama continues to send conflicting signals on standing up a new, government-run insurance option for working age Americans.

The president has said repeatedly that he would prefer to see the so-called “public option” included in the health-care bills under consideration in the House and Senate — but he also said it is not a deal breaker if the public option is left on the cutting room floor.

Not exactly a statement of firm conviction.

Still, even this lukewarm endorsement of another government-run insurance plan is hard to square with the president’s other statements and positions on health care reform.

From the moment he took office in January, the president has stressed the urgent need to tackle rapid health care cost growth. He has promised to “bend the cost curve” with better information, data, and research.

He has praised the kind of organized systems of care pioneered by the Mayo and Cleveland Clinics as well as other, heavily integrated models around the country.

And he has bemoaned the regional differences in Medicare spending that were highlighted in Atul Gawande’s New Yorker article, “The Cost Conundrum.”

In other words, the president has joined the chorus of those who say the solution to rapidly rising costs is “delivery system reform.” That is, real change in how hospitals and physicians are organized and the processes they employ when taking care of patients.

But pursuing sensible change requires a clear understanding of what’s driving the status quo. What explains today’s health care arrangements?

There are a number of factors. Medical practice has developed differently in different communities based on local cultural considerations.

In some markets, certain large employers have played outsized roles in shaping the medical landscape.

And certainly societal trends regarding chronic diseases have forced physicians and hospitals to adapt to the growing numbers of patients who need ongoing treatment and care.

But the most important explanation for hospital and physician organizational behavior is Medicare — more specifically the financial incentives embedded in Medicare’s traditional fee-for-service program.

In most markets, Medicare is the largest single payer for medical services. Few hospitals could survive without the program’s revenue, and even most physician offices are dependent on a steady stream of government payments for claims filed on behalf of elderly patients.

Gawande’s New Yorker article zeroed in on the problem of excessive use of diagnostic tests and surgical procedures in McAllen, Texas. But who paid for all of these services? Medicare is the largest, unmanaged fee-for-service insurance arrangement in the country.

If a beneficiary sees a licensed health-care practitioner and a legitimate medical service is provided, payment is made by Medicare, with virtually no questions asked.

The vast majority of Medicare fee-for-service enrollees pay nothing more when they use more services because they also have secondary insurance, and the only way physicians and others can boost their incomes is by billing for more care.

It is therefore entirely predictable that the volume of services used by Medicare enrollees will increase rapidly every year, which is exactly what has occurred for four decades.

Moreover, Medicare’s payment systems push against the kind of organized systems of care that the president says he wants to see in every community. With fee-for-service, hospitals, physician offices, labs, home health agencies, nursing homes and many others get paid directly by the program.

There is no need to form explicit, organizational partnerships with anyone else to boost revenue or garner greater market share. In effect, the nation’s largest existing “public option” is underwriting the fragmented, disorganized, and costly status quo that Obama says he wants to change.

It is in this context that many Democrats are now pushing for the creation of a “public option” for working age Americans, with some members, especially in the House, pushing to explicitly reference Medicare’s payment regulations as a basis for the new program’s promised coverage.

If they were to succeed in this effort, an even larger segment of the medical marketplace would be subject to the incentives embedded in current Medicare, which means more emphasis on volume, instead of quality and value, and the proliferation of independent, disconnected suppliers of medical services.

Senate Finance Committee Chairman Max Baucus believes his bill lays the foundation for running Medicare fee-for-service differently in the future than in the past. Among other things, the Baucus plan would establish accountable care organizations which are aimed at rewarding physicians and hospitals for holding spending below certain targets, much like a capitation payment would.

Baucus also wants to create a Medicare Commission with authority to continuously re-write provider payment rules. And his version of the “public option” — not-for-profit health-care cooperatives — wouldn’t rely on Medicare’s current fee-for-service payment structure, at least initially.

But it’s hard to have much confidence in this supposed new direction when the Baucus bill also relies heavily on the usual assortment of across-the-board payment rate reductions to hit budget targets.

Despite all of the talk of delivery system reform and paying for value, the Baucus bill would implement arbitrary cuts without regard to what they will mean for patient care. It is simply much easier for politicians to support these kinds of price controls than to sustain a hypothetical Medicare “preferred network” which steers patients away from some hospitals and physician groups.

A fundamental question in the health care debate is this: what process has the best chance of producing continuous improvement in the efficiency and value of patient care?

Obama and many Democrats believe new and improved versions of governmental control can do the job, despite nearly a half century of history that indicates otherwise.  A better bet is a functioning marketplace in which cost-conscious consumers drive the allocation of resources. The government, as with the Medicare prescription drug benefit, must provide important oversight. But the innovation and cost-cutting ideas needs to come from those supplying the services, not bureaucrats.

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.

This column was reprinted from kaiserhealthnews.org with permission from the Henry J. Kaiser Family Foundation. You can view the entire Kaiser Daily Health Policy Report, search the archives and sign up for email delivery. © Henry J. Kaiser Family Foundation. All rights reserved.

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Views: Where Things Stand

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Kaiser Logo BlackBy James Capretta

James CaprettaPresident Barack Obama’s op-ed in the Sunday New York Times is a revealing indicator of the state of the health care debate.

Gone is the emphasis on “health care reform” and “bending the cost-curve “and “changing the delivery system.”

As polls in July began showing public support dropping for sweeping health care legislation, the Obama White House decided that those early 2009 themes just weren’t working anymore, if they ever did.

So now, in their place, is “health insurance reform,” “basic consumer protections” and elimination of pre-existing condition clauses.

No doubt the new sales pitch works much better in focus groups. But does it really describe what’s under consideration in Congress?’

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