Obama Hasn't Closed the Health-Care Sale

Wait until the voters figure out how Congress is proposing to pay for reform

By KARL ROVE

Now that the Senate Finance Committee has voted for the health-care bill drafted by Montana Democratic Sen. Max Baucus, negotiations over the real bill can begin in Senate Majority Leader Harry Reid's cozy Capitol hideaway. It won't be easy. Democrats now face a central problem for any governing party: How to pass a major piece of legislation when there are a lot of sharply different ideas about what should be in it. Trying to reconcile what Democrats in the House prefer with what Democrats in the Senate want is already opening up divisions among the party's supporters.

This week, for example, leaders of 30 labor unions called for Democrats to reject Mr. Baucus's bill because it doesn't include the government-run health insurance program better known as the public option. This only makes it more likely that Democrats will have a bloody fight over the public option.

Members of Congress have a tendency to take a hard stand on a particular portion of a controversial bill. That allows them to show a little independence and make a plausible claim to have influenced the eventual outcome.

The problem for Mr. Obama is that the Baucus bill is being sold on the strength of accounting tricks that make it appear that it won't add to the deficit. (This is true for the other health-reform bills, too). If fiscally conservative Democrats sign on to the bill now after publicly saying they are doing so because it doesn't add to the deficit, they may end up bailing once the tricks are revealed to the public.

One trick is easily explained. The bill imposes tax hikes and benefit cuts right away, including $121 billion of Medicare reductions between 2011 and 2015. But new spending really doesn't start until five years out (2015) and isn't fully operational until 2017. The bill uses 10 years worth of tax hikes and benefit cuts to fund a few years worth of benefits.

And that's just the start. For example, the Congressional Budget Office (CBO) released a report last week claiming the bill won't add to the deficit. But this assumes that employers who dump employee coverage under the Baucus bill will then increase worker paychecks by an amount equal to what they had spent on health care. This replaces a nontaxable event (providing health insurance) with a taxable one (increasing worker paychecks), magically producing $83 billion in revenues. Without this windfall, the Baucus bill adds billions of dollars to the federal deficit in the first decade.

Of course, why would a company drop employee coverage just so it could pay more (in fines, taxes and wages) than it did before?

The CBO report also estimates that receipts from the 40% excise tax the Baucus bill would levy on "Cadillac" insurance policies "would grow by roughly 10 percent to 15 percent" a year after 2019. That's nonsense. If you tax something heavily you'll get less of it. If this tax is enacted, there will be fewer Cadillac plans—and hence less revenue.

Under questioning at a Senate hearing Tuesday, CBO Director Douglas Elmendorf admitted that the $500 billion in tax hikes in the Baucus bill would be passed onto consumers, jacking up insurance premiums. That undercuts the argument that Democratic reforms will make health care more affordable.

Some governors are also figuring out that the proposal in the Baucus bill to expand Medicaid will shift a big chunk of the federal health-care tab to states. States, after all, pick up an average of 47% of Medicaid's costs —and expanding it will force states to spend more.

Then there are $400 billion in benefit cuts that are frightening seniors. Jeffrey H. Anderson of the Pacific Research Institute has pointed out that the Baucus bill cuts Medicare payments to physicians by 25% within two years and keeps payments at that level forever, without adjusting for inflation. If this becomes law, doctors who take Medicare patients will see their real income decline each year.

Democrats who support any final bill are at risk. They'll be held responsible for the mess that quickly emerges as premiums rise, taxes balloon, deficits soar, mandates expand, and government power grows. Mr. Obama's problem is that his Magic Kingdom Health Care World is colliding with reality. There is a big cost to any large government expansion—and the ways to cover the cost of Mr. Obama's plan are limited, unpopular, and sure to anger Americans once they are fully understood.

Ironically, the president who never stopped campaigning hasn't made the sale to Americans because he's forgotten a central rule of campaigning: Your arguments have to be clear and credible if voters are to believe them. His attempt to sell health care is neither. He still may win passage of a bill, but he's lost the public's enthusiastic backing.

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Senate health plan funding in doubt

A health care funding mechanism favored by Democratic leaders in the Senate -- a tax on costly health-insurance plans -- seems to be in big trouble as members balk at the idea.

But the tax pays for nearly a quarter of the $829 billion plan that provides the framework for the Democratic proposal and even a modest reduction would leave the plan billions of dollars short of being fully funded, which would be a deal breaker with moderate members. "It's a real problem, isn't it?" said Sen. Ben Nelson, D-Neb., a moderate who opposes the excise tax.

The tax on "Cadillac plans" is by far one of the biggest revenue raisers in the Senate health care bill from the Finance Committee. It would raise $201 billion over the decade beginning in 2013 by attaching 40 percent surcharge on health insurance plan that cost more than $8,000 for individuals and $21,000 for families. Democrats who initially balked at the tax last month were placated a bit when negotiators agreed to exclude policies for high-risk professions such as firefighters and coal miners, whose plans tend to cost more.

Democrats paid for that concession by raising excise the tax for other professions by 5 percent, angering members of labor unions whose deluxe coverage plans would be hit by the tax. Union officials had remained quiet on the issue at the behest of the White House but they broke their silence this week and began an advertising attack on the Finance Committee bill.

The unions are threatening to lobby lawmakers to vote against a bill that includes the excise tax and they may not have to work hard to convince them. In the House, 156 members have already sent a letter to Speaker Nancy Pelosi, D-Calif., telling them they oppose the Senate excise tax.

The $1 trillion-plus House bill is paid for in part by tax increases on the wealthy.

Senate Democratic leaders are well aware that the unpopular excise tax could sink their bill, so they are looking for ways to eliminate it or lessen its effect by increasing the threshold. "I think we are going to have to raise the level," Senate Majority Whip Richard Durbin, D-Ill., said. "But it costs money."

According to the Congressional Budget Office, the excise tax would bring in $46 billion in 2019 and that amount would increase by up to 15 percent each year in the following decade. That revenue would come from a growing number of policies getting caught by the tax as premiums continue to rise -- up to 40 percent of all plans by 2020, according to the Joint Committee on Taxation. Premiums will rise in part because Democratic reform proposals include a requirement that most people to buy comprehensive coverage, which is more costly.

"What they are basically doing is mandating Cadillac plans for everybody," said Diana Furchtgott-Roth, director of the Center for Employment Policy at the Hudson Institute.

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Redistributing health

Proponents of compulsory, government-designed health insurance can't seem to understand why others disagree. Perhaps the public is realizing that these proposals are fundamentally about redistributing health? Health-care "reform," that is, aims to shift costs and benefits of health insurance from some groups to others. And the losers are turning out to be less docile than politicians had hoped.

All the leading proposals involve massive redistribution from people with healthy lifestyles to those who take more risks. As the Congressional Budget Office explained, "Premiums in the new insurance exchanges would tend to be higher than the average premiums in the current-law individual market... because the new policies would have to cover pre-existing medical conditions and could not deny coverage to people with high expected costs for health care." That is, because the politicians want people who've already fallen ill to be able to buy insurance at the same rates as the healthy, rates would rise for everyone who has insurance now. That's why the bills would all force healthy people to buy this overpriced insurance, under threat of fines or prison.

There would also be redistribution from people with employer-paid insurance (particularly in risky jobs with high premiums) to those who would be induced to shun such benefits in order to qualify for taxpayer subsidies.

By far the largest redistribution, however, is from those on Medicare to those who'd become newly eligible for Medicaid or federal subsidies. The major proposals, the AARP Bulletin explains, "include around $500 billion in savings carved from future growth in Medicare spending over a 10-year period."

Even in the Obama era, $500 billion is a lot. Yet we're supposed to believe that less is somehow more — that seniors will benefit from these spending cuts. "The Obama administration and congressional leaders," intones a recent New York Times editorial, "are hoping to save hundreds of billions of dollars by slowing the growth of spending in the vast and inefficient Medicare system that serves 45 million older and disabled Americans. The savings would be used to help offset the costs of covering tens of millions of uninsured people."

President Obama, in an Aug. 16 Times op ed, made such redistribution seem easy and painless: "We'll cut hundreds of billions of dollars in waste and inefficiency in federal health programs like Medicare and Medicaid," he said.

Such efforts to appease seniors are not working because they are transparently dishonest. First of all, the Congressional Budget Office figures that cutting "waste, fraud and abuse" might save $200 million a year — that's millions, not billions. Second, the hundreds of billions in "savings" are to be carved out of the hides of Medicare providers and Medicare Advantage benefits, not Medicaid. In the Senate Finance Committee proposal, Medicaid gets $345 billion more money from 2014 to 2019.

Third, Medicare is already headed to insolvency. As its trustees openly warn, the program's trust fund will be empty in six to nine years, because its spending continues to grow far faster than the taxes that support it. That is, Medicare will undoubtedly be slashed again and again in the years ahead, and fees increased — simply to keep the program from eating into the general budget (which is already groaning under unprecedented deficits).

This harsh reality does not turn the insolvent Medicare mess into a congressional piggybank, so that cutting Medicare payments to doctors can be magically transformed into a newfound source of free money to lavish on Medicaid and health-insurance subsidies.

The Times claims the cuts should actually make Medicare better "for most beneficiaries," partly by "helping keep Medicare solvent." That is either a hoax or fraud. If "the savings would be used to help offset the costs of covering tens of millions of uninsured people," as the Times says, then the same savings can't also be used to shore up the Medicare trust fund.

In any case, the proposed Medicare cuts are unbelievably huge. As the CBO explains, the Senate Finance proposal "would increase payment rates for physicians' services for 2010, but those rates would be reduced by about 25 percent for 2011 and then remain at current-law levels... Under the proposal, increases in payment rates for many other providers would be held below the rate of inflation."

Amazingly, the AARP Bulletin describes these draconian cuts as "paying doctors more for practices that improve quality of care and save money; and paying providers (notably hospitals and home health agencies) a little less of an increase each year." Sorry: Slashing physician payments by about 25 percent in a single year (and 5.5 percent in later years) is not "a little less." And holding other fees below inflation translates to a perpetual drop in real wages for health-care employees.

Proponents of raiding Medicare to finance "reform" (redistribution) pretend that cutting Medicare payments for services, procedures, tests, devices and drugs is not at all the same as cutting benefits. Nonsense. If we pay health-care providers far less, then they will provide fewer services to Medicare patients. As President Obama suggested, just tell grandma to skip the hip surgery and pop pain pills instead.

The president and his allies in Congress believe they can use deep cuts in Medicare — plus steep new taxes on health insurance, drug and medical device companies — to pay for a vast expansion of Medicaid and new health-insurance subsidies. These grandiose redistribution schemes are grounded in lethal economics and suicidal politics. Because bad ideas are hard to sell, politicians and journalists have been peddling health redistribution with the rhetorical and statistical equivalent of waste, fraud and abuse.

American voters, particularly seniors, don't like to be lied to. They are just as leery of the political redistribution of health as they are of the redistribution of wealth.

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The inevitable Medicare cuts

One should never expect an overabundance of honesty in political debates. But in the current debate on health care reform, both Democrats and Republicans may well be setting new records for obfuscation.

Take Medicare, for example. The Democrats would have us believe that they can cut $500 billion from Medicare spending over the next 10 years without anyone getting less of anything. They are going to save that money, the president says, by eliminating "fraud, waste, and abuse." Undoubtedly that would be the same fraud, waste and abuse that presidents have been eliminating since at least, say, Ronald Reagan.

But, contrary to the president's rhetoric, the bills that Congress is currently debating do cut Medicare. For example, roughly 10.2 million seniors currently receive their health care through the Medicare Advantage program. That program offers many seniors benefits not included in traditional Medicare, including preventive-care services, coordinated care for chronic conditions, routine physical examinations, additional hospitalization, skilled nursing facility stays, routine eye and hearing examinations, and glasses and hearing aids. The bills currently making their way through Congress would cut payments to Medicare Advantage plans by $100 billion to $150 billion. In response, many insurers are expected to stop participating in the program, while others will probably increase the premiums they charge seniors. Millions of seniors will likely be forced off their current plans and back into traditional Medicare. The Congressional Budget Office makes it clear that, at the very least, the cuts "would reduce the extra benefits that would be made available to beneficiaries through Medicare Advantage plans."

The Democratic cuts also hit traditional Medicare. For example, the bills would reduce reimbursements for diagnostic imaging — things like CT scans, MRIs and X-rays — by as much as 25 percent. And the Senate Finance Committee's bill would penalize doctors who perform too many procedures or tests. Providers whose utilization is in the 90th percentile or above, compared to national averages, will have their Medicare reimbursements cut. The whole point of such provisions is to reduce services.

On top of that, the Senate Finance Committee assumes that there will be a 21 percent across-the-board reduction in what Medicare pays providers. This cut is scheduled under current law and is not technically part of the health care bill, but most observers had expected Congress to defer those cuts, as they have every year since 2001.

And the Republicans? They've reacted with the least-convincing outage since Inspector Renault discovered there was gambling going on at Rick's. Republican Party chairman Michael Steele issued a Seniors' Health Care Bill of Rights promising to "protect Medicare and not cut it." Hardly a day seems to pass without some House or Senate Republican vowing to save Medicare from the Democratic axe.

Having been on the receiving end of "Mediscare" politics so many times, it is probably comforting for Republicans to try turning the table for a change. But their outrage ignores the fact that back in February, these same Republicans proposed even bigger Medicare cuts as part of their alternative budget.

So who is really going to cut Medicare benefits? The truth is that, depending on which set of accounting measures is used, Medicare is facing unfunded liabilities of $50 trillion to $100 trillion. Yes, that's trillion, with a "T." As a percentage of GDP, Medicare costs are expected to rise from 2.7 percent today to 9.4 percent by 2050. We cannot and will not continue to pay all promised future Medicare benefits.

Of course, there are differences about how future cuts would be made and what we should do with the money. Democratic plans to simply plow the money back into a new government health care program, for example, would do nothing to help our long-term fiscal problems.

The fact is, no matter what they say, Democrats are going to cut Medicare and so are Republicans. Wouldn't it be nice if we had a politician, from either party, with the courage to tell us the truth?

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It’s not political, it’s personal

How one family would fare under the current health-care bills

By Joseph Coletti

I have spent a good part of the past few months reading and talking about health care. In the back of my mind is always the nagging question that many other Americans are asking themselves: “What about me? What will all this mean for my health care?”

I cannot answer these simple questions for my own family’s consumer-driven health plan. Complicating my job is the fact that the president has not endorsed or even summarized a specific policy or a plan. Which leaves us reading the bills or whatever is publicly available, though these items change on a daily basis.

Through all the obfuscation and dissimulation, the outlook for my family’s health insurance is not good. President Obama and Democrats in Congress still repeat the line, “If you like your insurance or your doctor, you can keep them.” But the clear effect of the House and Senate bills would be to take away my high-deductible plan and accompanying health savings account (HSA).

Start with the minimum requirements for health insurance under the House Democrats’ plan. Many of these are above and beyond my current level of coverage, meaning my insurance wouldn’t satisfy them — and I’d have to buy a more comprehensive (and expensive) policy. These requirements include medical equipment for the home, cost-free preventive services, limits on out-of-pocket expenses of $10,000 per family (my share of out-of-network services could be twice as much, so that’s a potential disqualifier), and oral-health and vision services for children under 21 (my children’s dentistry and vision care are not covered).

There’s also a minimum actuarial value of 70 percent, meaning that the insurance policy would have to cover 70 percent of my family’s expected cost of care (based on our demographics). Regulators would calculate my policy’s actuarial value without counting my Health Savings Account (HSA), which would guarantee a low actuarial value, and so mean my insurance does not cover enough.

The whole reason we chose the high-deductible policy and the HSA was to save money on premiums — with the full knowledge that the insurance policy would not cover our costs until we reached our deductible. Our preferences do not matter under the law, however, and my family would have to purchase a more expensive insurance policy deemed acceptable to the government.

We are not alone in this impending upside-down world of government protections. The Congressional Budget Office found that actuarial values for policies purchased in the individual market “range from 40 percent to 80 percent with an average value that is between 55 percent and 60 percent.” In other words, most of the 18 million of us who now purchase insurance on our own, and the millions without insurance who do not qualify for government programs, will either pay a fine for not having enough insurance or buy more expensive policies. (Obama has insisted this does not amount to a “tax,” even when confronted with dictionary definitions to the contrary.)

When Sen. Jon Kyl (R., Ariz.) offered an amendment that would stop the federal government from declaring my choice of health-care benefits insufficient, Democrats and Sen. Olympia Snowe (R., Maine) shot it down. Another amendment from Senator Kyl would have stopped the government from setting actuarial values for insurance plans, thereby providing protection for my insurance. Democrats killed that, too. Sen. Chuck Grassley (R., Iowa) offered an amendment that would have made HSAs count toward actuarial values. It died.

As the Finance Committee ended its work late in the evening of October 1, Sen. Max Baucus (D., Mont.) ruled Sen. Ron Wyden’s (D., Oreg.) Free Choice Act out of order. The Free Choice Act would have opened proposed state-run exchanges to businesses of any size as well as to individuals who, like me, choose not to take the coverage offered by their employers. Without the Free Choice Act, about two-thirds of workers would be ineligible to participate in the government-sanctioned exchanges the health-insurance bills would create.

If those bills pass, I will have less choice about insurance and care than I do today. My insurance policy and health savings account are not guaranteed. My family will pay more for insurance. We will be tied to my employer’s plan, which means that if I change jobs I will also have to change insurance providers.

Meanwhile, the evidence continues to build that HSAs and their cousins, flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs), provide a chance for real reform that lowers the cost of health care while improving quality. A review of the literature by the American Academy of Actuaries found that these plans lead to lower costs the first year they are implemented, have smaller premium increases than traditional PPO plans, are tied to more use of preventive services, and make patients more likely to follow evidence-based care guidance.

It may be difficult to read and understand the health-care bills before Congress, but the end result is clear enough: fewer choices and higher cost for my family and millions of others.

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Why Health Care Is So Expensive in New York

Mario Cuomo and Blue Cross destroyed the individual insurance market in the state. Now Congress wants to impose the same rules on 50 states

Back in the early 1990s, New York Gov. Mario Cuomo pushed reforms aimed at fixing the state's health-care system. Those reforms were supposed to reduce the ranks of the uninsured as well as prevent insurance companies from unfairly charging people with health problems more than others or dropping sick people from the insurance rolls. They were also supposed to spark greater insurance competition.

If that sounds like reforms being proposed in Washington today, it's not a coincidence. One of the biggest things Mr. Cuomo did was to impose government mandates called community rating (CR) and guaranteed issue (GI). The former prevents insurers from charging people more based on their health or age, and the latter forbids denying coverage to anyone who wants to buy it. These two mandates are now a central part of reforms advancing in Congress. In New York, enacting them has been a mistake.

One of the biggest proponents of community rating and guaranteed issue in the early 1990s was Empire Blue Cross and Blue Shield. With more than eight million customers, Empire was the state's largest insurer. It was also the state's "insurer of last resort" because, as a nonprofit organization, it already had to comply with both mandates. It lobbied to extend CR and GI to every insurer in the name of fair competition.

But New Yorkers didn't get a more competitive insurance market. Within months of the law going into effect in April 1993, Manhattan District Attorney Robert Morgenthau opened a criminal investigation into Empire. It had admitted to misleading regulators about losses it had suffered in 1989, 1990 and 1991. The company also went through two shake-ups of its top leadership —the executives who had led the company when accounting mistakes were made were ousted, and then executives brought in to clean up the mess stepped down under pressure from State Insurance Commissioner Salvatore R. Curiale. Within a few years, Empire and others stopped selling insurance in the individual market in the state.

A 2007 report by the respected Seattle-based actuarial consulting firm Milliman surveyed the damage. It noted that "by 1996 GI and CR requirements effectively eliminated the commercial individual indemnity market in New York." While the reforms were supposed to help keep insurance affordable, "premiums for the two [remaining] standard plans increased rapidly," with one researcher noting "insurers increased premium rates 35%-40% in this period."

Today, New York's private individual insurance market is among the nation's most expensive and highly regulated. New York City residents buying private, unsubsidized individual insurance coverage pay at least $9,036 a year for individual coverage and $26,460 for family coverage. New York's average premiums in the individual market are more than twice the national average, according to a 2007 eHealth Insurance survey.

Today, 14% of New York's population lacks coverage, essentially the same as the national average of 15%. Partly because of the high costs of private coverage, nearly one in four New Yorkers is enrolled in Medicaid. New York's Medicaid program is the nation's most expensive, requiring high local and state taxes to support it.

Policy makers rarely mention that state mandates such as CR and GI can drive up prices and drive millions of people away from private insurance. New York has 51 mandates dictating coverage for a wide range of things including hormone replacement therapy (one of four states with this mandate) and drug abuse counseling (one of seven states). Each adds to the cost of insurance. William Congdon at the Brookings Institution and Michael New from the Heritage Foundation have separately done studies that suggest that 40 of the costliest state mandates in the country add as much as 20% to the cost of basic insurance coverage.

In 1994, about 4.5% (10.45 million) of the U.S. non-elderly population was covered by individual insurance. Today, that number has grown to 5.5% (14.35 million), a 20% increase. In California, 8% of the non-elderly population has individual insurance. But New York's individual insurance market represents a paltry 0.2% of its non-elderly population. Before Mr. Cuomo's reforms it was 4.7%.

In a recent study conducted for the Manhattan Institute, we estimate that market-based reforms could make insurance much more affordable, especially if the CR and GI mandates were repealed. Doing that would reduce the number of uninsured by 18% and 19%, respectively (37% combined), and would lower premiums by 42%. We also found that if the state allowed New Yorkers to buy health insurance sold in Connecticut and Pennsylvania, as much as 26% of the uninsured would purchase private policies costing 25% less than similar policies in New York. Offering mandate-lite plans to those younger than 45 could reduce the uninsured by nearly 10%, with an 18% decline in premiums.

Market reforms won't provide affordable coverage to everyone, so we suggest creating guaranteed-access risk pools for those with chronic diseases. Currently, 35 states have such pools. They could be financed in New York with a modest assessment on policyholders in the individual insurance market of as little as $6 per member, per month.

President Obama has called for insurance market reforms. We agree they're needed. Based on New York's experience, Congress should concentrate on changes that make the individual insurance market as competitive and affordable as possible. The right reforms would reserve scarce tax dollars for those who really need help and encourage more healthy people to buy insurance.

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