August 5, 2009
By Brian M. Riedl
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
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)
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
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
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
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
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.
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
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."
Brian M. Riedl
Grover Hermann Fellow in Federal Budgetary Affairs
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