The President's $634 billion "down payment" on health care
reform in his proposed budget depends on raising taxes and saving
money largely through administrative payment changes in existing
entitlement programs. That is not exactly fundamental reform.
Down Payment or Unknown Costs
President Barack Obama's budget sets aside $634 billion over 10
years in a health care reserve fund, which is earmarked for the
enactment of unspecified policies intended to bring down costs and
expand coverage. The President's budget outlines in broad terms the
methods his Administration will employ to secure the projected $634
billion "down payment," but its true costs are still unknown. The
budget narrative even says that "additional funding will be
needed."
According to media reports, experts believe that the actual cost
of his health plan is likely to be much higher, perhaps exceeding
$1 trillion over 10 years. This, unfortunately, follows a familiar
pattern: The actual costs of health care proposals are invariably
higher than the original government projections.
Key Provisions in the Health Care
Budget
Higher Taxes. The President is proposing tax increases on
those making over $250,000 annually, and this revenue is projected
to finance approximately half of the projected health care
spending, an estimated $318 billion. The mechanism would limit the
itemized tax deductions for these citizens, including mortgage
interest deductions and charitable contributions. This would
constitute a massive tax increase on these taxpayers, on top of the
soon-to-expire Bush tax cuts.
Tax policy is where health reform should start. It is therefore
disappointing that the Obama Administration neglects to reform the
most regressive feature of the federal tax code: the existing
federal tax exclusion for health insurance. This unlimited tax
break for persons enrolled in employer-based health care coverage
distorts health insurance markets, undercuts consumer choice and
competition, and fuels higher health care costs. In that respect,
the budget proposal ignores a fundamental area of tax policy where
there is an enormous intellectual consensus on the need for real
change, even among economists who have advised the President.
Medicare Private Plan Payment Changes. The Administration
proposes cutting payments to Medicare Advantage plans. These plans
are increasingly popular, enrolling one out of five senior
citizens, and they provide richer and more varied packages of
benefits than available under traditional Medicare. The
Administration's estimate of overpayment to these plans is based on
the inherently flawed payment formulas of the traditional Medicare
system.
The Administration would replace the current Medicare Advantage
payment with a new "competitive bidding" model for private health
plans to participate in Medicare. According to press reports,
private plans would submit bids and Medicare would pay the plans
based on some average of these bids.
Much depends on the details of the process. If the process is a
way for the government to pick "winners and losers" (like the
Defense Department procurement process) that would deny other
private options for Medicare beneficiaries, it would be a direct
assault on personal choice and market competition. If the plan is
designed as a way of establishing a more rational benchmark payment
and allowing beneficiaries to pick the plan of their choice-paying
extra for richer health plans or picking less expensive health
plans and keeping the savings-it would be an improvement. Even
better, the Administration could include traditional Medicare, with
appropriate modifications, in the competitive bidding process.
Medicare Prescription Drug Premiums. The Obama
Administration proposes to apply the same income-based subsidy
policy for physician and outpatient services to prescription drug
coverage. Under this proposal, higher-income seniors would pay
higher premiums than lower-income seniors for Medicare Part D
prescription drug coverage, just as they do under Medicare Part B.
Income-relating Medicare subsidies, as the President has proposed,
is sound policy and compatible with a broader structural change in
Medicare.
Medicaid Prescription Drug Payment. The Administration
proposes increasing and extending Medicaid rebates for prescription
drugs paid by the drug companies to the Medicaid programs. It
amounts to a tax on pharmaceutical companies who offer prescription
drugs in Medicaid, where drugs for the poor and the indigent are
already restricted by tough formularies. It will shift more costs
for drug purchases to private sector insurance. Changes in Medicaid
payment formulas do not amount to Medicaid reform.
Medicare Payment Changes. The Administration also calls
for a variety of other payment changes designed to promote
efficiency, accountability, and quality. Systemic delivery reforms,
such as "pay for performance" (where physician and hospital
reimbursement are tied to compliance with government practice
guidelines), are intended to result in securing better value for
dollars. That may not necessarily hold true, however, for some
patients, and it is sure to encourage "gaming" for bonuses at the
expense of others. Recalibrating the existing payment formulas for
providers and medical services, however, only perpetuates the false
notion that government officials can secure economic value outside
of the free market. Worse, continuing to consolidate such
decision-making in Washington will only exacerbate the political
manipulation of the Medicare system by health care lobbyists
working on behalf of special interests.
These administrative payment changes are minor and, in and of
themselves, do not amount to fundamental Medicare reform. That can
be accomplished only by changing Medicare financing from a defined
benefit to a defined contribution system, where consumers are
making decisions based on the performance of medical professionals
in providing them the personalized care they want and need.
Medicaid Family Planning. The Obama Administration's
budget would also expand the availability of Medicaid family
planning funding. These family planning provisions already
undermine parental authority by allowing children of any income
level to qualify for family planning benefits without parental
approval. Instead, Congress and the Administration should take
active steps to reduce the vulnerability of the $350 billion
Medicaid program to fraud and abuse.
Prescription Drug Re-Importation. The Obama
Administration also signaled new efforts to allow for the purchase
and importation of prescription drugs from other countries. This is
a flawed policy. Even if the federal government could guarantee the
safety of these drugs, the Congressional Research Service has
concluded that it would save less than 1 percent of America's
spending on prescription drugs.
Little Patient Empowerment
President Obama's health care budget proposal is large but
surprisingly unimaginative. It depends on old-fashioned, populist,
"soak the rich" tax hikes combined with technocratic tinkering with
administrative payment and new software in anticipation of program
savings. It does very little to change America's flawed public and
private third-party payment arrangements, where value is secured
for "payers," not individual patients. If the President wants to
affect real change-and secure value for individual patients rather
than third party payers-he should take concrete steps to transfer
direct control over health care dollars and decisions to
individuals and families.
Robert E. Moffit, Ph.D.,
is Director of, Nina
Owcharenko is Senior Policy Analyst in, and Dennis G. Smith is Senior
Fellow in the Center for Health Policy Studies at The Heritage
Foundation.