Written on June 11, 2010 - illustrating that the Romney campaign’s claims about Medicare are not at all new.
Farewell, Medicare Advantage
Democrats strike up the funeral parade for private insurance options.
- The White House is launching its latest Willy Loman campaign to resell ObamaCare, helped by $125 million that unions and other interest groups say they’ll spend to make Americans love their new entitlement. Seniors in particular should curb their enthusiasm.
"First and foremost," President Obama told seniors on Tuesday in Wheaton, Maryland, "what you need to know is that the guaranteed Medicare benefits that you’ve earned will not change, regardless of whether you receive them through Medicare or Medicare Advantage." First and foremost, nothing about that sentence is true.
Advantage gives almost one of four seniors private insurance options, and Democrats are about to cut its funding by some $136 billion over the next decade even as health costs rise. The Congressional Budget Office says these cuts will cause enrollment to drop by 35%, the Administration’s own Medicare actuaries predict 50%, and both outfits take for granted that benefits will also decline.
The President knows this, so he and his fellow Democrats are gearing up to blame these cuts on … insurers, rather than on their own policies. In a letter last week, Democratic Congressional leaders Henry Waxman, Pete Stark, Max Baucus and Jay Rockefeller demanded that the Health and Human Services Department reject “any effort” by insurers to “reduce benefits next year.”
Secretary Kathleen Sebelius followed up by warning insurers to “focus on price and quality rather than asking seniors who need health care the most to pay more for it.” The Medicare regulator, CMS, is also reshuffling staff so Advantage is run by actively hostile bureaucrats.
The politics here is that Democrats loathe Medicare Advantage because it sanctions the private choices that might eventually liberate the U.S. health market from government price controls. They also wanted to raid Advantage to finance their new subsidies. But now they desperately want to dodge any near-term blame when seniors who use Advantage start to lose its benefits. Ergo, blame insurers first.
All of this is a replay of what Democrats did in the 1990s to a similar program called Medicare+Choice, which was created in 1997 but starved of funds by the Clinton Administration. “Dozens of HMOs Quit Medicare, Patients Face Upheaval,” ran one Washington Post headline in 1998. The insurers served as political spear-catchers then too.
The larger debate is about how best to organize the health-care market. In an important new paper for the National Bureau of Economic Research, David Cutler explores entrepreneurial spirits in health care, or rather their peculiar absence in a $2.6 trillion industry. The Harvard economist notes annual productivity growth of minus-0.2 in the official data—”almost surely an underestimate”—and asks why there has been so little organizational innovation akin to Wal-Mart’s supply-chain or Toyota’s quality control.
Mr. Cutler, a close White House ally, cites many dysfunctional incentives, though one he singles out is “the stagnant compensation system of public insurance plans.” In most markets, he observes, “higher quality is associated with higher prices. That is not true in medical care, however, largely because of the public sector.” Original Medicare—about 25% of hospital and physician income—pays fixed fees to any provider a patient visits, regardless of the quality of the services rendered. “A less good job earns as much as a better job,” Mr. Cutler writes.
Mr. Cutler is convinced that Medicare’s dysfunctions will end with ObamaCare’s multiple pilot programs—even though the current system was designed by the last generation of technocrats to solve the problems created by the previous generation. Such people have faith in ObamaCare on the theory that they are the ones they’ve been waiting for.
Yet no planner had to tell Wal-Mart how to revolutionize the retail industry. In the same way, Advantage offers the flexibility necessary for decentralized innovation, market pricing and competition that might rationalize the entitlement state. The program isn’t a miracle worker, and some plans are far better than others. According to the Medicare Payment Advisory Commission, the Advantage HMOs that serve 15% of all seniors in Medicare cost on average two percentage points less for the same benefits than the traditional program, without fiat pricing.
Using government data, the insurer trade group AHIP estimates that Advantage beneficiaries in California spend 30% fewer days in the hospital than fee for service, 23% fewer days in Nevada. These successes and others have come about because Advantage allowed insurers and providers to collaborate, pay for value and coordinate care.
These successes are threatening to politicians because they are a model for true Medicare reform, which would reduce the health-care powers that Congress has exercised for nearly a half-century and let patients decide. This terror explains why Democrats are so intent on killing Medicare Advantage, and on blaming someone else for destroying a program that millions of seniors prefer.
Another budget ruse that disguises ObamaCare’s real costs.
One detail revealed by Tuesday’s debt forecast is that there’s another budget gimmick that makes it seem as if ObamaCare costs less than it really will, and the ruse deserves more scrutiny than it’s received. Who was it who said we need to pass the bill to find out what’s in it?
The Congressional Budget Office explained clearly for the first time that the Affordable Care Act’s subsidies aren’t indexed over the long term. Indexation is the standard practice that adjusts policies so they are constant over time as the value of the dollar and the cost of living change.
Social Security payments, for example, rise automatically to preserve their purchasing power. When Congress created the Alternative Minimum Tax (AMT) in 1969 to target 21 millionaires, it didn’t index its income brackets, which is why it now hits the middle class.
ObamaCare’s insurance subsidies are like an AMT in reverse. People making up to 400% of the poverty line—or about $96,000 for a family of four in 2016—are eligible for refundable tax credits to offset the premiums and cost-sharing of their government-approved health plans. The system is insanely complicated, but the amounts of the tax credits vary by how much people earn and rise over time so that people never contribute more than a certain share of their paycheck to health care.
Through 2018, the subsidies are indexed to grow in tandem with incomes and health-care costs. When premiums follow their historical pattern of rising faster than income, the subsidies grow by more too so that the individual out-of-pocket percentage is constant year to year. So far, so routine.
But then in 2019, ObamaCare’s drafters slip in what they euphemize as “additional indexing.” According to this new technical formula, the government is never allowed to spend more than 0.504% of the economy on subsidies. If normal indexing applied, CBO expects that the subsidies would blow through the GDP cap in 2022 and keep climbing. But as a result of the additional indexing, and as more and more people flood into ObamaCare, every individual will get a smaller piece of the subsidy pie, which will offset less and less of premiums.
It sounds like great news for taxpayers—the incredible shrinking entitlement. The problem is that CBO doesn’t think Congress will make the benefits less generous as scheduled, and the pity is that’s probably right. Washington rarely if ever takes away entitlements (e.g., the political firedrill when seniors decide Social Security’s cost-of-living increases are too small). CBO’s euphemism is that the additional indexing “might be difficult to sustain over a long period.”
Therefore in its alternative fiscal scenario, CBO assumes that Congress will suspend the indexing change every year, just as it passes an annual “patch” to prevent AMT bracket creep. The upshot is that billions of dollars are not counted as part of the formal budget—one more reason that, after ObamaCare, federal bookkeeping is a worthless guide to future spending.
On paper, Medicare, Medicaid, the Affordable Care Act and other government health programs will consume 9.6% of GDP in 25 years, up from 5.4% today. But then count the indexing ruse, other ObamaCare budget gimmicks like Medicare “cuts” to hospitals that CBO doesn’t think will happen, and the Medicare formula that says doctor payments will plunge next year by 27%, which President Obama promised to fix but didn’t. In that case government health care will hit 10.4% of GDP in 2037.
Almost 1% of the economy is a lot of money. And it’s part of the epic deception that was necessary to pass this not-so-shrinking entitlement, as Americans continue to discover.