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August 5, 2009

Democrats' Health Plan is 'Voodoo Economics'

By

Satirist P.J. O'Rourke once noted, "If you think health care is expensive now, wait until you see what it costs when it's free."

President Obama's health care reform is on life-support because it is premised on this very contradiction: It is not possible to simultaneously reduce government health spending and add millions of Americans to government health care rolls. After all, providing more health care costs more money.

Ironically, many of the same people who use "voodoo economics" to describe the idea that lower tax rates can increase revenues are effectively practicing their own voodoo economics by asserting that, in the words of Vice President Joseph R. Biden Jr., "We've got to spend money to keep from going bankrupt."

The White House is correct that government health care costs are trending toward bankruptcy. Since 1990, federal Medicare and Medicaid costs have doubled to 6.3 percent of the gross domestic product (GDP), and Medicaid also threatens to bankrupt states. Rising health care costs and 77 million retiring baby boomers are projected to push federal health spending to 16.6 percent of GDP by 2050. To put that in context, this 10.3 percent of GDP cost increase today would come to $1.44 trillion ($12,000 per household) annually.

Health reform must reduce these costs, Mr. Obama says.

Yet rather than restrain health spending, the Democratic health plans pour gasoline on the fire. The House plan would increase health spending by approximately $1 trillion in the first decade, and perhaps $2 trillion in the second decade. Millions of Americans would be moved into either a failed Medicaid system, or a government health plan that would likely receive taxpayer subsidies in order to undercut private health plans.

The Lewin Group estimates that 88 million Americans would lose their employer-based coverage and be forced into this government plan. This would add trillions more in federal costs, not necessarily all of which would be financed by employer "pay or play" premiums.

Nor would this increased government spending reduce private health care costs, which are expected to double to 21 percent of GDP by 2050. Despite the president's proclamation that "we can cut the average family's premium by about $2,500 per year," the Lewin Group calculates the House bill will add $460 annually to the average health plan as Washington shifts many of its own health costs onto private health plans.

Congressional Budget Office (CBO) Director Doug Elmendorf recently told the Senate Budget Committee, "The way I would put it is that the [health care cost] curve is being raised." He also noted that "the legislation significantly expands the federal responsibility for health care costs."

After abandoning the idea of scaling back runaway health care spending, Mr. Obama has shifted to arguing that health care reform should be deficit-neutral. This merely means raising taxes to feed the ever-growing health care beast.

The House bill would impose an income surtax of up to 5.4 percent on millions of upper-income families and small businesses even if the economy remains in recession.Combined with Mr. Obama's other proposed tax increases, as well as Medicare and state taxes, the top income-tax rate would reach 52 percent, higher than nearly all of Europe. Higher than France.

And it still wouldn't raise enough money to finance this new spending.

The CBO estimates the House plan would run a $239 billion deficit through 2019. Congress plans to make the bill appear deficit-neutral by reclassifying $250 billion in spending (for Medicare doctor payments) as part of the entitlement baseline. Only in Washington can one "cut" spending by deciding not to count spending that occurs.

Still, the plan is not truly deficit-neutral. By starting the tax increases in 2011 and the spending programs in 2013, the House bill runs a temporary surplus before falling into annual deficits that reach $65 billion by 2019. At that point, spending growth will far exceed dedicated revenue growth.

The CBO concludes that "in sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window." Simply projecting out the annual trends would put this second-decade deficit around $800 billion.

And for what? Higher health costs, lower quality, fewer choices, and 17 million remaining uninsured Americans.

While the House health plan is unacceptable, so is the status quo in health care. Better reforms would provide individual choice, competition between health plans, and a reduction in unsustainable health spending trends.

A better approach to health care reform would expand coverage based on choice and competition among private plans, as is approximated in the health plan that federal employees currently enjoy. Reform also should include tax and regulatory changes that provide individuals with more control over their health care dollars.

After rushing through a $787 billion "stimulus" package that has completely failed to rescue the economy, Mr. Obama was in a hurry to reorganize this one-sixth of the nation's economy before lawmakers go home for August recess and hear from their constituents.

Perhaps the president feared that some calculator-wielding constituents will point out that you cannot cut health spending by adding $1 trillion in health spending.

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

First Appeared in the Washington Times

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