Taxpayers are in for sticker shock.
Key committees in the both the House and Senate are racing to
get health care reform bills to the floors of their respective
chambers over the coming weeks. According to press accounts,
however, a key, unresolved issue is how to pay for the expensive
insurance subsidies many in Congress want.
For instance, the Kennedy-Dodd legislation would provide new
insurance premium discounts to households with incomes below 500
percent of the federal poverty line. These subsidies would be
phased in slowly over a number of years. Total federal costs for
the program are expected to be near $1 trillion over 10 years, and
costs for the bill might go as high $1.5 trillion depending on
certain legislative specifications.
Even more troubling is the expectation that costs will rise
rapidly every year, even beyond the 10-year budget window. The
Congressional Budget Office (CBO) has estimated that the annual
cost of the insurance subsidy program in an early version of the
Kennedy-Dodd bill would rise 6.7 percent per year after it is fully
phased in. There is nothing in the legislation that would lead one
to expect that pace to slow after the first decade.
Rapid cost growth for a health care entitlement is nothing new,
of course. The federal government already runs two other health
entitlement programs--Medicare and Medicaid--and they have been
growing faster than per capita GDP growth virtually every year
since their enactment in 1965. CBO has estimated that between 1975
and 2005, average per capita Medicare spending exceeded average per
capita GDP growth by 2.4 percentage points, and Medicaid's "excess
cost growth" rate was nearly as high (2.2 percentage points).
The rising costs of these entitlement programs are expected to
push the federal government deep into dangerous levels of debt
under current law. CBO projects that between 2010 and 2040, federal
spending on Medicare and Medicaid alone will rise from 4.4 percent
of GDP to 10.2 percent. That jump in spending--5.8 percent of
GDP--exceeds the size of Social Security today. As matters stand,
the bills emerging in Congress would add yet a third unfinanced
health entitlement on top of the two already on the books.
Higher Future Costs
President Obama and his top health care policy advisors have
pledged to work on a health care bill that "bends the cost curve"
throughout the health sector. But the ideas that the Administration
has put forward to date would either do little to slow rising costs
or shift costs from public insurance to private premium payers.
First, the Administration has suggested a series of reforms that
might be called "efficiency through government engineering." The
idea is that the health care system can be made more productive
with government-led "investments" in health information technology,
comparative effectiveness research, and prevention and wellness
Some of these concepts may in fact be meritorious. However, as
CBO has stated on numerous occasions, absent more financial
incentives for consumers or suppliers of medical services, these
reforms alone are highly unlikely to produce much by way of
The Medicare Mess
Furthermore, the government has been running the Medicare
program for nearly half a century now, and it is clear from that
record that the government has little capacity to drive efficiency
in health care.
Medicare remains largely a fee-for-service insurance
arrangement, which pays any licensed provider of medical services
the same rate, regardless of the quality of the services delivered
to patients. Repeated efforts to steer patients and services toward
a higher-quality, lower-cost network of providers have failed. For
instance, a long-running effort to buy durable medical equipment
(DME) services for Medicare enrollees through a competitive bidding
process was blocked by Congress last year. In its place, Congress
passed an across-the-board payment cut for all DME suppliers to
meet a budget target.
Recently, in an effort to put more "scoreable" cost-cutting
ideas on the table, President Obama proposed to cut Medicare and
Medicaid reimbursement rates for various health care providers by
an additional $313 billion over 10 years. Those cuts come on top of
the $309 billion the President proposed in his 2010 budget
submission to Congress, for a total proposed reduction in Medicare
and Medicaid of $622 billion over 10 years.
These proposed reductions in Medicare's reimbursement rates,
many targeted at hospitals, are emblematic of how the government
runs a health insurance plan. After much talk of trying to pay for
value instead of quantity, the government is resorting to
arbitrary, across-the-board fee cuts--which generally hit all
providers, regardless of quality or cost--to meet budgetary
Furthermore, these fee cuts are not likely to change the
underlying cost structure in health care. In the past, when
Medicare has cut reimbursement rates, providers of medical services
have raised rates for private insurers to make up the difference.
There is every reason to believe President Obama's proposed payment
rate cuts would also lead to cost shifting.
The only reliable and lasting way to drive greater efficiency in
health care is with cost-conscious consumers in a reformed
marketplace. The Republicans' "Patients' Choice Act" would
implement the reforms needed to build just such a marketplace.
Americans would get fixed tax credits toward the purchase of
insurance. If they used those credits to buy a more expensive plan,
they would pay the cost difference. If, on the other hand, they
enrolled in less expensive coverage, they would keep all of the
That is the way to provide strong financial incentives to
insurers and the suppliers of medical services to reorganize
themselves to be more efficient and patient-focused.
Bending the Cost Curve
The government can and should play an effective oversight role
in such a marketplace, much as the Centers for Medicare and
Medicaid Services have done with the new Medicare prescription drug
benefit. But the government cannot bend the cost curve from
Washington without resorting to arbitrary caps and price controls
that always lead to a reduction in the willing suppliers of
services and waiting lists.
James C. Capretta served in the
Office of Management and Budget (OMB) during the Bush
Administration, and is a Fellow in the Economics and Ethics Program
of the Ethics and Public Policy Center.