In this week’s New England Journal of Medicine, MIT health economist and Obama administration consultant Jonathan Gruber responds to claims that ObamaCare will increase health care costs.  Gruber acknowledges the Obama administration’s estimates that ObamaCare will increase health care spending, but compares that to the administration’s estimate that 34 million otherwise uninsured U.S. residents will obtain coverage under the law:

[B]y 2019, the United States will be spending $46 billion more on medical care than we do today. In 2010 dollars, this amounts to only $800 per newly insured person — quite a low cost as compared (for example) with the $5,000 average single premium for employer-sponsored insurance.

What a bargain!  Of course, Gruber is being sneaky.  The cost per newly insured person is not $800.  It will be higher than $5,000.  But only $800 of that cost will appear as new health care spending.  The rest of that cost will be borne largely by people who already had coverage, but find their access to care reduced.  These include Medicare enrollees who will receive fewer benefits through (or who will be ousted from) their private Medicare plans; Medicare enrollees who will have a harder time accessing care because some hospitals, skilled nursing facilities, home health agencies and other providers “might end their participation in the program,” according to the Obama administration; and maybe even some (currently) privately insured people who find themselves in Medicaid.  (The administration itself says it is “probable” that ObamaCare “could result…in some of this demand being unsatisfied.”)  Other costs include the economic growth and opportunity that is destroyed by ObamaCare’s tax increases, and the costs associated with trapping workers in low-wage jobs.

And that’s if everything goes as planned.  Gruber remains convinced that future Congresses will not undo ObamaCare’s tax increases or downward adjustments to Medicare’s price controls, as Congress has consistently undone scheduled reductions in the prices that Medicare pays physicians.  Gruber’s sometime employer — the Obama administration — itself contradicts his argument when it writes that the bulk of those reductions in Medicare spending are “doubtful” and “unrealistic.”  Gruber inadvertently shows why critics are right to be skeptical about the tax increases and spending reductions when he writes:

The cuts in spending and increases in taxes are actually “back-loaded,” with the revenue increases rising faster over time than the spending increases, so that this legislation improves our nation’s fiscal health more and more over time.

The fact that the austerity measures had to be backloaded is a sign of their implausibility.  If they were popular, they could take full effect tomorrow.  But their implementation had to be delayed to head off significant political resistance — resistance that will express itself between now and when those austerity measures take effect.

On the broader issue of reducing the growth of health care spending, Gruber claims that ObamaCare “cautiously pursue[s] many different approaches toward cost control and stud[ies] them to see which ones work best.” Yet each approach is all but guaranteed to fail. The tax on high-cost health plans? Unlikely to survive. (But at least Gruber now admits it is a tax.)  The rationing board designed to curtail each congresscritter’s ability to keep the money flowing to health care providers in their districts? Also unlikely to survive, for obvious reasons.  Pilot programs experimenting with different government price and exchange controls? Even successful pilot programs get nixed.  Comparative-effectiveness research?  A pipe dream that fails every time the government tries it.

To the extent that these spending cuts fail to materialize, health care spending will rise, and deficits will deepen. Congress will need to impose additional tax increases, and/or find sneakier ways to ration medical care curb health care spending.  Gruber’s Massachusetts enacted ObamaCare four years ago, and that’s exactly what state officials are doing.

Since President Obama signed this law, the Congressional Budget Office has announced that its cost, including the so-called “doc fix” and spending subject to appropriations, is already about $200 billion higher than previously believed.  As I’ve written elsewhere:

ObamaCare would create new constituencies for government spending, hook existing constituencies on even more government spending, and promise implausible cuts in existing subsidies to constituencies that are highly organized and vocal.

Gruber gets chutzpah points for arguing that the same law would actually contain health care costs.

A Response to Jonathan Gruber on ObamaCare & Health Care Costs is a post from Cato @ Liberty - Cato Institute Blog

Noting that premium increases, such as Anthem’s proposed 39-percent hike in California, have caused individuals and employers to purchase less coverage, Kaiser Family Foundation president Drew Altman writes:

Rising health care costs and insurance company practices are leading not just to more expensive premiums, but to skimpier, less comprehensive coverage as well; slowly redefining what we have known as health insurance. To be sure, some economists argue that this is precisely what should happen…But this is not likely how regular people see it. Appropriate cost sharing is one thing, but we may be reaching the point in the individual market where the policies many people have simply cannot be considered meaningful coverage.

Of course, this is the whole idea behind President Obama’s proposed tax on high-cost health plans: higher prices will cause people to purchase less coverage, which will temper health care spending.

But whether Altman is correct depends on what the meaning of “meaningful” is.  When individuals pare back the amount of insurance they purchase, they are revealing what they consider to be meaningful coverage.  (The same is true when employers opt for less-comprehensive coverage, though employers’ revealed preferences are obviously a poor proxy for what their workers value.)

If Altman thinks the coverage that individuals are choosing “cannot be considered meaningful coverage” (note the passive voice), he is implicitly stating that individuals are not the best judges of their own welfare.  And the only way to devise an alternative definition of meaningful coverage is through the political process.

It is difficult to argue that the political process does a better job of selecting meaningful coverage.  That process forces many consumers to purchase coverage that they don’t find meaningful (e.g., chiropractic, acupuncture, circumcision), that they find offensive (e.g., abortion, contraception, in-vitro fertilization), or for treatments that are downright harmful (e.g., high-dose chemotherapy combined with autologous bone-marrow transplant for late-stage breast cancer).

Letting consumers reveal their preferences is possibly the worst way to define “meaningful coverage.”  Except for all the others.

What Is ‘Meaningful’ Health Insurance? Who Decides?’ is a post from Cato @ Liberty - Cato Institute Blog

Congressman Paul Ryan (R-WI) takes the President to task for cooking the books on projected health care costs, most egregiously with the “doc fix” — namely, assuming Medicare slashes physician payments by 21.3% this year and subsequently lets them fall continuously in real terms.

What nobody seems to have noticed is that the same phony “doc fix” taints the new “Health Spending Projections Through 2019” from Centers for Medicare and Medicaid Services (CMS).

Drew Altman, president and CEO of the Kaiser Family Foundation, tries to downplay the CMS forecast “that the public sector will start paying more than half of the nation’s health care bill starting in 2012, and that government spending will grow faster than private spending from 2009 to 2019 (an average of 7.0% per year vs. 5.2%).”

Worrying about such spending trends is a foolish “ideological battle over the role of government,” says Altman, because rapid increases in government health spending is “just the byproduct of economic and demographic trends” (recession and an aging population).   “Is government health spending out of control?” he asks; answering “NO” in capital letters.  “The report simply underscores the need to control health care costs in the public and the private sectors alike.”

On the contrary, the reason government health care spending is projected to slow down to 7% a year is, the CMS explains, “due principally to the 21.3% reduction in physician payment rates . . . mandated in current law.”

Putting aside such “doctored” projections, “health spending by public payers ($1.2 trillion) is projected to have grown much faster in 2009 (8.7 percent) than that of private payers (3.0 percent).”

That was not because of high inflation in costs of medical goods and services (which should not differ much between government and private payers), but because the government has only in recent years been heavily subsidizing health insurance for the unemployed and drug insurance for seniors, and actively expanding the enrollment of Medicaid programs which (being “free”) often lure people out of employer-sponsored plans.

What Congressional Democrats call “reform” is, in fact, much more of the same—more non-poor people getting Medicaid and other subsidies that are yanked away if you work too hard.

No, It’s Not Health Inflation

Describing  runaway entitlement spending as “health inflation” is terribly misleading (even when Rep. Ryan does it), because doing so confuses rising prices with rising utilization of medical goods and services by people who are insulated from actual costs by taxpayer-financed subsidies.

Government subsidies also raise costs to those using private insurance.  The CMS notes that 2009’s 4.6% increase “private health insurance premium spending per employee . . . resulted in part from an increase in the proportion of high-cost claims—many of whom have temporary COBRA coverage” [emphasis added], which is 65% financed by taxpayers.

By contrast, health inflation per se is projected to be 2.8% this year — comparable to other labor-intensive service industries and also down from 3.2% in 2009 and 3% in 2008.     Morevoer, “out-of-pocket spending is projected to have grown 2.1 percent in 2009, down from 2.8% in 2008.”

What about all the uninformed media fuss about health insurance companies supposedly “asking for” premium increases of “up to” 39%?

If President Obama really wanted to find out how quickly typical health insurance premiums have been increasing, he could have a staffer call the Bureau of Labor Statistics and ask for Table 3A of the “Consumer Price Index Detailed Report Tables Annual Averages 2009.”  It turns out the consumer price index for health insurance premiums fell by 3.2% in 2009.

Health Cost Projections to 2019: The Doc Fix Trick Again is a post from Cato @ Liberty - Cato Institute Blog

Hoping to revive his increasingly unpopular health care overhaul, President Obama has invited Republicans to a bipartisan summit this Thursday and plans to introduce a new reform blueprint in advance of the summit.  On Sunday, the White House announced that a key feature of that blueprint will be premium caps, a form of government price control that helped kill the Clinton health plan when even New Democrats rejected it.

The New York Times reports on President Obama’s blueprint:

The president’s bill would grant the federal health and human services secretary new authority to review, and to block, premium increases by private insurers, potentially superseding state insurance regulators.

It bears repeating what Obama’s top economic advisor Larry Summers thinks about price controls:

Price and exchange controls inevitably create harmful economic distortions. Both the distortions and the economic damage get worse with time.

For example, as I have written elsewhere, artificially limiting premium growth allows the government to curtail spending while leaving the dirty work of withholding medical care to private insurers: “Premium caps, which Massachusetts governor Deval Patrick is currently threatening to impose, force private insurers to manage care more tightly — i.e., to deny coverage for more services.”  No doubt the Obama administration would lay the blame for coverage denials on private insurers and claim that such denials demonstrate the need for a so-called “public option.”

As the Progressive Policy Institute’s David Kendall explained in a 1994 paper, the Clinton health plan contained similar price controls.  Kendall explains why they would be a disaster:

In spite of the late hour in the health care debate, Congress has not yet decided how to restrain runaway health care costs. The essential choices are a top- down strategy of government limits on health care spending enforced by price controls or a bottom-up strategy of consumer choice and market competition. History clarifies that choice: Previous government efforts to regulate prices in peacetime have invariably failed. Moreover, government attempts to control prices in the health care sector would undermine concurrent efforts to restructure the marketplace…

The idea of controlling costs by government fiat is seductively simple. But it rests on a conceit as persistent as it is damaging: that government bureaucracies can allocate resources more wisely and efficiently than millions of consumers and providers pursuing their interests in the marketplace. The alternative — one rooted in America’s progressive tradition of individual responsibility and free enterprise — is to improve the market’s ground rules in order to decentralize decision-making, spur innovation, reward efficiency, and respect personal choice.

As centrally planned economies crumble around the world, many in the United States seem bent on erecting a command and control economy in health care. This policy briefing examines the reasons why government price regulation would fail to constrain health care costs and create many adverse side effects…

Ultimately, government price regulation will always fail because it does not change the underlying economic forces driving up prices. If we are serious about slowing the growth of health care costs, we have to change the ways we consume and provide medical care. Price controls evade the hard but essential work of structural reform in health care markets: They are a quintessentially political response to an economic problem. The alternative is to allow well-functioning markets to set prices and allocate resources, while ensuring that all Americans have access to affordable health care coverage. The market-oriented approach leaves decisions to cost-conscious consumers and health care providers rather than bureaucrats.

Any of that sound familiar?  It’s worth reading the whole thing.

This is not hope.  This is not change.  (Much less a game-changer.)  It is, to pinch a phrase, a return to “the failed theories that helped lead us into this crisis.”

Obama’s ‘Best’ Idea? Rationing Care via Clinton-esque Price Controls is a post from Cato @ Liberty - Cato Institute Blog

During the runaway inflations of 1974 and 1979, Presidents Ford and Carter suggested that inflation was caused by the profligacy of American households. President Ford’s infamous “Whip Inflation Now” speech, for example, said, “Here is what we must do, what each and every one of you can do: To help increase food and lower prices, grow more and waste less; to help save scarce fuel in the energy crisis, drive less, heat less.”

Much of the recent discussion of health care costs likewise treats this as a problem caused by a demonic private insurance industry, and therefore requiring such “reforms” as expanding Medicaid to the non-poor and Medicare to the non-old.

The facts are quite different, as shown in “The Evolution of Medical Spending Risk” by Jonathan Gruber of MIT and Helen Levy of the University of Michigan, in the latest Journal of Economic Perspectives.

Gruber and Levy calculate that real private health care spending per person (in 2007 dollars) “increased from about $700 to $3,500 between 1960 and 2007, a five-fold increase.” They note that “private out-of-pocket spending has not quite doubled.” Yet “government health spending over the same period . . . increased from about $250 to $3,5000, a 13-fold increase.”

In fairness, the quality of health care has been hugely improved since 1960. And prices of physician services (which are often incorrectly compared with the overall consumer price index) have risen no faster than prices of non-medical services.

In any case, President Obama’s claim that the pace of total public and private spending on health care could somehow be “contained” by greatly increasing government spending clearly flunks 3rd grade arithmetic.

Unless the hidden agenda is to impose draconian wage and price controls and political rationing on health care providers, all the rhetorical pretense about proposed health care legislation being a way to hold down overall spending on health care is like saying the solution to chronic drunkeness is more booze.

Whip (Health Care) Inflation Now? is a post from Cato @ Liberty - Cato Institute Blog

President Obama gave what seems like his thousandth exclusive health care interview last night, this one to ABC News’s Charles Gibson.  In trying to sell his health care plan, the president warned that if Congress does not pass legislation controlling health care costs, the federal government “will go bankrupt.”  He also warned that unless health care is reformed, “your premiums will go up.”

 The president is absolutely correct about that.  The only problem is that, according to the president’s own chief health care actuary, the bills that Congress is now considering do nothing to restrain either federal health care spending or total health care costs.  In fact, Rick Foster, chief actuary at the Center for Medicare and Medicaid Services (CMS) says that if Congress passes the bill now before the Senate, health care spending will actually increase by $234 billion more over the next 10 years than if we did nothing. 

And, according to the Congressional Budget Office, the congressional bills do little or nothing to reduce the growth in insurance premiums. Even if a bill passes, premiums will roughly double by 2016, and keep rising after that.   But for millions of Americans the bill will actually make things worse.  According to CBO, the Senate bill would actually increase insurance premiums by 10-13 percent for Americans who buy their insurance through the non-group market, that is those who don’t receive insurance from their employer.  Those 10-13 percent increases are over and above the increases that would occur if we did nothing.    

On the other hand, if the president were really serious about controlling health care costs and lowering premiums, he wouldn’t need to spend trillions of dollars and take over one-sixth of the US economy; he could try some of the ideas written about here, and here, and here.

Obama on Health Care: Half Right is a post from Cato @ Liberty - Cato Institute Blog

Here’s a poor, unsuccessful letter to the editor I sent to The Washington Post:

“Like Car Insurance, Health Coverage May Be Mandated” [July 22, page A1] paints a misleading picture of proposals to require Americans to purchase health insurance – i.e., an “individual mandate.”

First, the article lacks balance.  It cites three politicians who support an individual mandate but none who oppose it, a group that includes a majority of Republicans.  The article claims an individual mandate “has its roots in the conservative philosophy of self-reliance,” even though most conservatives, including the movement’s flagship magazine National Review, oppose the idea.  The closest the article comes to offering an opposing perspective is one conservative who has supported an individual mandate in the past and may yet again, just not yet.

Second, the article makes the demonstrably inaccurate claims that an individual mandate “lowers overall costs” and “help[s] keep premiums down” by adding more young and healthy people to the insurance market.  Forcing healthy people to purchase insurance does not affect premiums for sicker purchasers, because insurers set premiums according to each purchaser’s health risk.  The article confuses a mandate with price controls, which force low risks to pay more so that high risks can pay less.

Finally, if an individual mandate reduced overall costs, then health care spending would be falling in Massachusetts, which enacted the nation’s only individual mandate in 2006.  Instead, overall health spending is rising, and the rate of growth has accelerated under the mandate.  Rising health spending implies rising health insurance premiums, which has also been the Massachusetts experience.

Washington Post Misrepresents Individual Mandates is a post from Cato @ Liberty - Cato Institute Blog

As Washington debates a big increase in federal health care spending, I came across these two articles on what a splendid job the government is doing managing its current health programs.

Harvard professor Malcolm Sparrow recently testified that roughly $100 billion or more of Medicare and Medicaid dollars go down the drain each year due to fraud. It’s easy to rip these programs off because of their vast size and electronic claims processing. Medicare processes more than 1 billion of claims each year. 

This Washington Post article last year described one particular example of the fraud. A high-school drop-out managed to bilk Medicare out of $105 million by submitting a 140,000 false claims from her laptop computer.

So we’ve got $100 billion or so of taxpayer’s hard-earned money being stolen each year from our current public health care plans. You would think that with today’s giant budget deficit that the highest priority of policymakers would be to reform these programs to reduce the unbelievable and disgusting amounts of graft. But no, many in Congress and President Obama have decided that current government health care works so well that they want to expand it.

President Obama wants to create a new “public health option” to “keep insurance companies honest.” Hey Mr. President,  you should do something about the $100 billion of dishonesty in current public health plans, instead of hitting up taxpayers to fund an even more bloated health care budget.

Health Care Priorities is a post from Cato @ Liberty - Cato Institute Blog

Former Clinton administration adviser Stanley Greenberg has an illuminating article in The New Republic.  Greenberg compared the polls he did during the Clinton health care debate to his recent polling on President Obama’s proposed reforms:

Perhaps I should know better than to have sensed any profound changes in the country. And, when I got the results for the new survey, I looked at each question warily, remembering how it all went badly wrong. As I reached the last of the questions, I exclaimed: “Oh no. It can’t be. Nothing’s changed.”…

The country divides evenly on whether the greater risk is an unchanged status quo or government reforms that “create new problems.” And, finally, Obama might want to pay attention to how closely his situation echoes Clinton’s. Then and now, more people favor the president’s health care plan than oppose it, but the supporters make up less than a majority.

If anything, I found on most of these questions that the desire for change and support for reform was slightly stronger 16 years ago, underscoring the importance of learning some lessons from that history…

Our inability to talk credibly about how we would reduce health care spending or costs for individuals and the country built a contradiction into all our efforts–the more we talked about the comprehensiveness of our plans, the more voters worried this would yield higher premiums or higher taxes. Very quickly, voters came to conclude that their families would face higher costs.

And those dynamics are still in play. In my recent polling, I found that voters are skeptical about claims that reform will reduce costs and personal health outlays. Claims about simplicity, information-technology modernization, and best practices don’t seem to be enough to persuade them otherwise…

It may surprise you that Obama has already lost seniors, according to our current survey–only one-third approve of his plan. It doesn’t take a rocket scientist to see there isn’t much in it for them. There is already talk of carving out major savings from Medicare and, unlike during Clinton’s battle, no offer of a new drug benefit. Clearly, they need to see health care gains for themselves too…

With few illusions about the old system, union households are strong supporters of Obama’s proposal. Yet the members will ultimately judge whether the plan is good for their families–and I’m certain that all the talk about taxing insurance contributions has not gone unnoticed…

[W]hile voters have great confidence in Obama and his administration, they are worried about the deficits and spending and the government bailouts of the irresponsible. So, while voters want to see a rebalancing away from greed and toward the public good, almost half the citizenry is worried the government may get it wrong.Ross Perot is a distant memory, but his more libertarian, blue-collar male voters are very much alive. They are pretty certain government will mess this up–and only about 30 percent support Obama’s health care plan right now. With Republicans reciting their mantra about no “government takeover” of health care, the plan’s opponents have found a common text…

Most are not at all satisfied with a system that has forced them to trade higher wages for continued health insurance coverage and other compromises. But those personal compromises to get satisfactory coverage will mean people can live a little longer with the status quo and want to make sure the proposed changes really will make things better for their families.

Those who support real health care reform should take note.

“Why Health Care Reform Could Fail Again” is a post from Cato @ Liberty - Cato Institute Blog

Will Obama Raise Middle-Class Taxes to Fund Health Care?

President Obama is promoting an expansion in federal health care spending, and Democratic leaders are scrambling to find ways to pay for it. The plan is expected to cost about $1.5 trillion over the next decade, but the administration has promised that health care legislation won’t add to already huge federal budget deficits. In a new paper, Cato scholars Michael D. Tanner and Chris Edwards argue that expanding government health care will likely involve huge tax increases on the middle class.

Tanner warns of “Obamacare” to come, saying that Obama’s new health care plan will give “government control over one-sixth of the U.S. economy, and over some of the most important, personal, and private decisions in Americans’ lives.” Don’t miss Tanner’s in-depth analysis of the new health care plan that is making its way through Congress, which “would dramatically transform the American health care system in a way that would harm taxpayers, health care providers, and — most importantly — the quality and range of care given to patients.”

A part of the plan would include “public option” (read: government-run) health care, which would allow the government to compete against private health care providers. Tanner says it would be the first step toward wiping out the private insurance market as we know it:

Regardless of how it is structured or administered, such a plan would have an inherent advantage in the marketplace because it would ultimately be subsidized by taxpayers. It could, for instance, keep its premiums artificially low or offer extra benefits, then turn to the U.S. Treasury to cover any shortfalls. Consumers would naturally be attracted to the lower-cost, higher-benefit government program.

…It is unlikely that any significant private insurance market could continue to exist under such circumstances. America would be firmly on the road to a single-payer health care system with all the dangers that presents. That would be a disaster for American taxpayers, physicians, and—most importantly—patients.

Treasury Seeks to Control Executive Pay Across the Private Sector

Fox Business reports, “The Treasury Department on Wednesday took new steps to rein in executive compensation, saying the Obama Administration would introduce legislation that could create stricter limits on pay; it also appointed an official to head up efforts on the issue.”

In a 2008 Policy Analysis Ira T. Kay and Steven Van Putten explain the misconceptions many people have about executive pay, and why the market is a better arbiter than any bureaucrat in Washington:

Such populist sentiments are often based on misunderstandings about the role of corporate executives in the economy and the vigorous competition that exists for these highly skilled leaders. In the past, federal regulatory efforts based on such misunderstandings have generated unintended consequences, which have damaged the economy and hurt the ability of the market for executives to self-regulate over time.

The labor market for executives and the associated pay levels are already subject to high levels of regulation. Indeed, U.S. corporations are subject to more stringent executive pay disclosure requirements than corporations anywhere else in the world. Before additional regulatory and legislative efforts are unleashed, policymakers should examine the rationale for current pay structures and the strong links between executive pay and corporate performance.

In a Washington Times op-ed, Alan Reynolds says efforts to cap executive pay are wholly misguided:

Congressional hearings to barbecue Wall Street executives are as fun as a circus, but with more clowns. Presidential politics is now taking such political distractions to a lower level.

…Most top executives who were actually in charge during the craze of overinvestment in mortgage-backed securities have been fired. Executives who are fired are not in a position to be “giving themselves” anything.

In reality, top executives are mainly paid by accumulating a big stockpile of company stock and stock options. Estimates of annual CEO pay that Congress and the press have been focusing on look as high as they do only because of the high value of restricted stock or stock options at the time.

Writing in 2007 (before the first round of major bailouts), Cato scholars Jerry Taylor and Jagadeesh Gokhale took it a step further: “Pay Bosses More!”:

Excessive executive compensation harms no one but perhaps the stockholders who put up with it. And stockholders put up with it because there’s good reason to believe that sizable CEO compensation packages help — not harm — corporate performance, which redounds to their benefit, and that of the firms’ workers.

Companies pay workers what they must to deliver their products and services to the market, and supply and demand establishes executive compensation packages the same way it establishes consumer prices. Any overcompensation comes out of the firm’s bottom line — at a loss to the shareholders, not the workers.

North Korea Sentences Two U.S. Journalists to 12 Years Hard Labor

Two American journalists were convicted of entering North Korea illegally while on assignment, and exhibiting “hostility toward the Korean people.” This week, a North Korean court sentenced them to 12 years in a labor prison.

Cato scholar Doug Bandow comments:

Washington should publicly downplay the controversy and present the issue to the Kim regime as a humanitarian matter. The Obama administration should indicate its willingness to open a broader dialogue with North Korea, but indicate that positive results will be possible only if Pyongyang responds with cooperation instead of confrontation. Releasing the two journalists obviously would provide evidence of the former.

Regrettably, Laura Ling and Euna Lee are political pawns. As such, Washington’s best strategy to achieve their release is to simultaneously reduce their perceived value to Pyongyang and ease tensions between the U.S. and North Korea. Patience may be the Obama administration’s highest virtue and Ling’s and Lee’s greatest hope.

In a Cato Daily Podcast, Bandow discusses what can be done for the American prisoners, and how the U.S. government should react.

Week in Review: Health Care Battles, Pay Caps and North Korean Prisoners is a post from Cato @ Liberty - Cato Institute Blog

There’s an old Yiddish saying that, “If my bubba had wheels she’d be a trolley.” So goes the logic of the Obama administration in their paper released yesterday, “The Economic Case for Health Care Reform.” Their claim is that reducing health care costs would help the economy. Yes, if health care costs were reduced it would likely help the economy, though we should remember that the health care industry is part of the economy.

There is nothing in Obamacare, however, that will reduce costs. In fact, expanding coverage may cause costs to rise. One study by MIT’s Amy Finkelstein suggests that the prevalence of insurance itself has roughly doubled the cost of health care. So, if Obama succeeds in expanding insurance coverage, it’s very likely to increase the cost of care.

Take Massachusetts for example. Three years ago, Massachusetts governor Mitt Romney signed into law one of the most far-reaching experiments in health care reform since President Bill Clinton’s ill-fated attempt at national health care. Proponents promised the reforms would reduce health care costs, suggesting the price of individual insurance policies would be reduced by 25-40 percent. In reality, however, insurance premiums rose by 7.4 percent in 2007, 8-12 percent in 2008, and are expected to rise 9 percent this year. This is compared to a nationwide average increase of 5.7 percent over the same three years. Nationally, on average, health insurance for a family of four costs $12,700; in Massachusetts, coverage for the same family costs an average of $16,897.

In fact, since the bill was signed, health care spending in the state has increased by 23 percent. Thus, despite individual and employer mandates, the creation of an insurance connector and other measures that increase insurance regulations, Massachusetts has failed to bring costs down.

President Obama and Congressional leaders have endorsed expanding coverage in similar ways to Massachusetts. The proposals would undoubtedly make it easier for some people to get coverage, but would also raise insurance costs for the young and healthy, making it more likely they would go without coverage. This leaves two choices: revert to the individual mandate (President Obama opposed the mandate as a candidate) or increase subsidies to try to cut costs to young and healthy individuals, thereby adding to the already substantial cost of the proposed plans.

Ultimately, controlling costs requires someone to say “no,” whether the government (as in single-payer systems with global budgets), insurers (managed care) or health care consumers themselves (by desire or ability to pay). In reality, any health care reform will have to confront the fact that the biggest single reason costs keep rising is that the American people keep buying more and more health care.

The Economic Case for Health Care Reform is a post from Cato @ Liberty - Cato Institute Blog

Last Monday, when lobbyists for the six biggest health care industry groups joined President Obama to announce their support for reducing health care spending by $2 trillion over 10 years, I penned and voiced my suspicion that the real motivation was to pressure the Congressional Budget Office to assume that Democrats’ health care reforms would reduce spending, despite the lack of evidence.  My wife said that hypothesis sounded a little . . . conspiratorial.

Last Thursday, when it was revealed that there was no actual agreement and that the White House basically manipulated the industry to get a week’s worth of good health care press, I started to doubt whether strong-arming the CBO was really the goal of that media stunt.  Then Jonathan Cohn set me straight.

In an article for The New Republic aptly titled, “Numbers Racket,” Cohn acknowledges that the biggest problem facing Democrats is that the $2 trillion cost of universal coverage has to come from somewhere.  Cohn, like many Democrats, complains that the “curmudgeonly” CBO isn’t letting reformers off the hook by assuming that universal coverage will (partly) pay for itself.  Cohn also acknowledges that pressuring the CBO was a likely purpose of last week’s media stunt:

The CBO took nearly the same positions back in 1994 — a fact not lost on either the White House or congressional leaders, who have communicated their concerns publicly and privately. One apparent purpose of bringing industry leaders to meet Obama this week was to showcase the potential for cutting costs; see, the administration seemed to be signaling, even the health care industry thinks it can save money by becoming more efficient.

Democrats have set their sights on legislation that would give government enormous power over Americans’ earnings and medical decisions.  The main political obstacle to those reforms is their cost, thus Democrats are pressuring the CBO to pretend that those costs don’t exist.  The CBO (and everybody else) should resist the Democrats’ effort to make truth yield to power.

Church of Universal Coverage Begins Its Campaign against that Pesky CBO is a post from Cato @ Liberty - Cato Institute Blog

On Monday, the Obama administration held a well-publicized love-fest with lobbyists for the health care industry.  It turns out that rather than a “game-changer,” the event was a fraud.  And the industry got burned.

At the time, President Obama called it a “a watershed event in the long and elusive quest for health care reform“:

Over the next 10 years — from 2010 to 2019 — [these industry lobbyists] are pledging to cut the rate of growth of national health care spending by 1.5 percentage points each year — an amount that’s equal to over $2 trillion.

By an amazing coincidence, $2 trillion is just enough to pay for Obama’s proposed government takeover of the health care sector.

Yet The New York Times reports that isn’t the magnitude of spending reductions the lobbyists thought they were supporting:

Hospitals and insurance companies said Thursday that President Obama had substantially overstated their promise earlier this week to reduce the growth of health spending… [C]onfusion swirled in Washington as the companies’ trade associations raced to tamp down angst among members around the country.

Health care leaders who attended the meeting…say they agreed to slow health spending in a more gradual way and did not pledge specific year-by-year cuts…

My initial reaction to Monday’s fairly transparent media stunt was: “I smell a rat.  Lobbyists never advocate less revenue for their members.  Ever.” The lobbyists are proving me right, albeit slowly.  (Take your time, guys.  I don’t mind.)

The Obama administration seems a little less clear on that rule.  Again, The New York Times:

Nancy-Ann DeParle, director of the White House Office of Health Reform, said “the president misspoke” on Monday and again on Wednesday when he described the industry’s commitment in similar terms. After providing that account, Ms. DeParle called back about an hour later on Thursday and said: “I don’t think the president misspoke. His remarks correctly and accurately described the industry’s commitment.”

How did the industry find itself in this position? Politico reports:

The group of six organizations with a major stake in health care…had been working in secret for several weeks on a savings plan.

But they learned late last week that the White House wanted to go public with the coalition. One health care insider said: “It came together more quickly than it should have.” A health-care lobbyist said the participants weren’t prepared to go live with the news over the weekend, when the news of a deal, including the $2 trillion savings claim, was announced by White House officials to reporters.

Gosh, it’s almost like the White House strong-armed the lobbyists in order to create a false sense of agreement and momentum.  Pay no attention to that discord behind the curtain!

At the time, I also hypothesized that this “agreement” was a clever ploy by all parties to pressure a recalcitrant Congressional Budget Office to assume that the Democrat’s reforms would produce budgetary savings.  “Otherwise, health care reform is in jeopardy,” says Senate Finance Committee chairman Max Baucus (D-MT).  Turns out there was no agreement, and the industry was just being used.

American Hospital Association president Richard Umbdenstock was more right than he knew when he told that group’s 230 members:

There has been a tremendous amount of confusion and frankly a lot of political spin.

Merriam-Webster lists “to engage in spin control (as in politics)” as its seventh definition of the word “spin.”  Its second definition is “to form a thread by extruding a viscous rapidly hardening fluid — used especially of a spider or insect.” Which reminds me…

CORRECTION: My initial reaction to Monday’s media stunt — “I smell a rat” — was transcribed incorrectly.  It should have read, “I smell arachnid.”

(HT: Joe Guarino for the pointers.)

How Does It Feel to Be at the Table Now? is a post from Cato @ Liberty - Cato Institute Blog

Today’s Washington Post has a terrific editorial cartoon about this week’s announcement by President Obama and health care industry lobbyists that they’re all willing to reduce health care spending growth by 1.5 percentage points.

Toles on Obama/Health-Care-Lobbyist Media Stunt is a post from Cato @ Liberty - Cato Institute Blog

Three years ago yesterday, then-Governor Mitt Romney signed into law the most far reaching state health care reform plan to date.  At the time, we warned that the plan, with its individual and employer mandates, new regulatory bureaucracy (the Connector), and middle-class subsidies would result in “a slow but steady spiral downward toward a government-run health care system.” Sadly, three years later, those predictions appear to be coming true.

• While the state has reduced the number of residents without health insurance, some 200,000 people remain uninsured. Moreover, the increase in the number of insured is primarily due to the state’s generous subsidies, not the celebrated individual mandate.
• Health care costs continue to rise much faster than the nationally. Since the program became law, total state health care spending has increased by 23 percent. Insurance premiums have been increasing by 10-12 percent per year, nearly double the national average.
• New regulation and bureaucracy is limiting consumer choice and adding to costs.
• Program costs have skyrocketed. Despite tax increases, the program faces huge deficits in the future. As a result, the state is considering caps on insurance premiums, cuts in reimbursements to providers, and even the possibility of a “global budget” on health care spending.
• A shortage of providers, combined with increased demand, is increasing waiting times to see a physician, especially primary care providers.

With the “Massachusetts model” being frequently cited as a blueprint for state or national health care reform, it is important to recognize that giving the government greater control over our health care system will have grave consequences for taxpayers, providers, and health care consumers. That is the lesson of the Massachusetts model.

A Not So Happy Anniversary for the “Massachusetts Model” is a post from Cato @ Liberty - Cato Institute Blog

My colleague, Michael Cannon, makes several good points about comparative effectiveness research (CER), both in his letter to USA Today and in his excellent paper on the subject. I strongly agree with him that we should not reflexively oppose CER—much of health care spending is wasteful or unnecessary, and it makes sense, therefore, to test and develop information on the effectiveness of various treatments and technology, giving consumers tools to evaluate the value of the care they receive. There is also a case for the use of CER in taxpayer-funded programs like Medicare and Medicaid. Taxpayers should not have to subsidize health care that has not proven effective, nor can Medicare and Medicaid pay for every possible treatment regardless of cost-effectiveness.

However, I am more skeptical in general about CER than he is for several reasons.

• First, “quality” and “value” are not unidimensional terms. In fact, such concepts are highly idiosyncratic with every individual having different ideas of what “quality” and “value” means to them, based on such things as a person’s pain tolerance, lifestyle, feeling about hospitalization, desire to return to work, and so forth. For example, a surgeon may tell you that the only way to ensure a cure for prostate cancer is a radical prostectomy. But that procedure’s side-effects can severely impact quality of life – so some people prefer a procedure with a lower survival rate, but fewer side effects. Who is better suited to determine which of those procedures represents “quality” and “value,” a government board or the person directly affected?
• Second, comparative effectiveness research too often has a tendency to gear its results toward the “average” patient. But many patients are outliers, whose response to any particular treatment, for either good or ill, can vary significantly from the average. This matters little when the research is simply informative. However, if the research becomes the basis for more prescriptive requirements, for example prohibiting reimbursements for some types of treatment, the impact on patient outliers could be severe.
• Third, comparative effectiveness research can create a time lag for the introduction of new technologies, drugs, and procedures. The FDA, for example, has already caused delays in introducing drugs that have resulted in unnecessary deaths. Depending on how the final program is structured, comparative effectiveness research could create another layer of bureaucracy and testing between the development of a new drug, for example, and its introduction into the health care system. One only has to look at the difficulty in expanding Medicaid drug formularies to see how this could become a problem.

The advocates of government-sponsored CER clearly intend for it to be used as a basis for rationing care, not just in government programs, but for private insurance as well.

Cannon points out that government-sponsored CER is likely to be corrupted under pressure from special interest lobbies and politicians. I couldn’t agree more. Government-sponsored CER, therefore, is liable to yield the worst of all possible worlds, not only rationing, but rationing that is based on special interest lobbying rather than science.

Health care, is of course, a finite good. Therefore, it will always be rationed in some fashion. But, it is far better if the rationing agent is the consumer himself, rather than the government or any other arbitrary agent. The private sector is already undertaking CER. To the degree that consumers, insurers, and providers make use of this information, that is a good thing. If consumers don’t like how an insurance company, for example, uses CER in determining its reimbursement policy, he or she can choose a different insurer.

Government-imposed fiat rationing allows for no such choice. Therefore, we should oppose any government involvement in CER, and any efforts by the government to use CER to restrict reimbursement, especially in private insurance plans.

CER: A (Slightly) Different Perspective is a post from Cato @ Liberty - Cato Institute Blog