Some Vaguely Heretical Thoughts on Health-Care Reform
With the publication of H.R. 3962, the House Democrats’ mammoth, 1,990-page proposal to restructure the health-care system (the outlines of which can be found in this detailed summary), decision time is fast approaching in the big reform debate. Paul Krugman, in his usual forthright style, says, “History is about to be made—and everyone has to decide which side they’re on.” Democrats and progressives can line up behind the reform legislation that House Speaker Nancy Pelosi put forward last week, or they can help to kill reform for another generation by aligning with hard-line conservatives.
As political analysis, there’s something to be said for Krugman’s Manichean view of the world. But Krugman is also an economist—a very good one—and the economics of what is proposed bear inspection. The President is on the verge of fulfilling his campaign pledge to extend health-care coverage to many of the uninsured. He is doing this, however, not by transforming the existing system of private insurance, which gave rise to many of the current problems, but by extending it. The White House has reached a deal with the big health insurers, such as Aetna and CIGNA. In return for the industry’s agreeing to cover people with preëxisting health conditions, and making various other more minor concessions, the government will force more than twenty million new customers into its arms.
I regard an expansion of the government safety net as ethically essential, economically justified, and long overdue. It is indefensible for a country as rich as the United States to fail to provide adequate health care for many of its citizens. In extending our health-care system, all we are doing is catching up with Otto Von Bismarck’s Germany, which recognized a hundred and twenty-five years ago that universal health and disability coverage, along with old age pensions and a system of public education, were essential elements of a modern society. Moreover, given the reluctance of “Blue Dog” Democrats, such as Nebraska Senator Ben Nelson, to support anything that smacks of big government, and President Obama’s determination to coöperate with moderate Republicans, the proposed reform may be the most that can be accomplished today. But we will be dealing with its consequences for decades to come, and I think it’s important to be clear about what the reform amounts to.
Let’s remind ourselves of the basics. There are two big (and linked) problems with the current health-care system. It excludes 46.3 million Americans, according to the Census Bureau, and it is inordinately expensive. The proposed reform purports to tackle both of these problems; in fact, it only addresses the first one in any systematic manner. The future cost savings that the Administration and its congressional allies are promising to deliver are based on wishful thinking and sleight of hand. Over time, the reform, as proposed, would almost certainly add substantially to the budget deficit, thereby worsening the long-term fiscal crisis that the country faces. Financing this measure alone wouldn’t break the U.S. Treasury. Other elements of the fiscal picture, such as the looming increases in interest payments on the national debt and an explosive growth in Medicare spending as the baby boomers retire—are far larger. But the numbers involved in health-care reform are still significant—perhaps one per cent of annual G.D.P.
The Pelosi bill, in particular, wouldn’t do much, if anything, to address the overall escalation in health-care costs, much of which is rooted in the nature of insurance, where individuals consume costly health services, and different people—the other members of their risk pool—pay for them. This is the “moral hazard” problem that the economist Kenneth Arrow identified as long ago as 1963. (For an easy-to-understand account of Arrow’s argument, see this riveting new book on market failure.) In the past twenty years, many ideas have been tried in the effort to restrict the growth of spending within a private insurance system, the most notable of which was the creation of H.M.O.s. Some have enjoyed temporary success. None have worked for long.
If you read through the briefing papers provided by the House Ways and Means Committee, the fiscal implications of the proposed reform are pretty obvious. Under the proposed legislation, people whose employers don’t offer health coverage will receive “affordability credits” that fall with income, tapering off at about eighty-five thousand dollars a year. A lower-middle-class family of four earning, say, forty-five thousand dollars a year would be entitled to a subsidy of, say, seventy-five hundred dollars a year, to enable them to buy a basic health insurance plan that would cost them, say, eleven thousand dollars a year on the proposed Health Insurance Exchange, These estimates are based on a table on page 3 of the summary document I referred to earlier, which says that families that earn between two hundred and two hundred and fifty per cent of the federal poverty level would have to pay a maximum of eight per cent of their income in insurance premiums. Some poorer families that couldn’t afford to buy coverage even with the generous new tax breaks and subsidies would become eligible for an expanded Medicaid program. Individuals and families that failed to obtain coverage despite these inducements would be subject to a fine of seven hundred and fifty dollars for each uninsured adult.
By any standards, the subsidies in the plan are big ones. For example, they dwarf the Earned Income Tax Credits for poor and middle-income working families, which have been steadily expanded since George H. W. Bush first introduced them. From an egalitarian perspective, the establishment of these generous subsidies would be an important moment in U.S. history. But two practical questions immediately arise. Who would police the new system, and how much would it cost?
The answer to the first question is the Internal Revenue Service. If you couldn’t prove to the I.R.S. that you hadn’t obtained coverage, it would add the seven-hundred-and-fifty-dollar fine to your tax bill. A healthy, single, self-employed person in his twenties would have the choice of buying an individual insurance plan for, say, five to six thousand dollars a year (considerably less than that if he were eligible for a subsidy) or paying the fine. Undoubtedly, some people will choose to pay the fine and go uninsured. According to a Congressional Budget Office analysis of Pelosi’s plan, in 2019 there would still be about eighteen million uninsured adults. (In percentage terms, the share of legal nonelderly Americans with health coverage would rise from about eighty-three per cent today to about ninety-six per cent.)
According to the C.B.O., in summary, many more people will, with government assistance, buy private insurance coverage (some twenty-one million) and many others (about fifteen million) will become newly eligible for Medicaid, which is wholly financed by the taxpayer. Surely, this will cost considerable sums of money and add to the deficit. Or will it? The Democrat-controlled C.B.O. says that the Pelosi plan will actually reduce the deficit by a hundred and four billion dollars between 2010 and 2019, thereby satisfying President Obama’s claim that the reform will be deficit neutral. Furthermore, the C.B.O. suggests that the legislation’s impact on the deficit will continue to be negative in the following decade, from 2019 to 2029. I wish I could believe these figures, but I don’t.
Two large items underpin the Administration’s math: five hundred and seventy-two billion dollars of tax increases over ten years, and roughly the same amount of cost savings on Medicare and other existing government health programs. Most of the revenue increase would come from levying a 5.4 per cent surcharge on Americans individuals who earn more than five hundred thousand dollars a year and joint filers that earn more than a million dollars. I am a big supporter of progressive taxation, but at some point it becomes politically unsustainable. If health-care reform goes through, and the Bush tax cuts expire in 2011, top earners will face a marginal tax rate of forty-five per cent at the federal level. Add in state and local taxes, plus Social Security and Medicare payments, and wealthy people in New York, say, would be facing tax rates of about sixty per cent. As sure as night follows day, this would generate more tax evasion and a political backlash. Without a doubt, the next Republican-controlled Congress would reverse the changes.
If it decides to forgo soaking the rich, the Administration could return to its earlier proposal, which was included in a Senate Finance Committee bill that Senator Max Baucus put forward, to tax firms that provide their employees with costly “Cadillac” health-care plans. “A policy such as this is probably the number one item that health economists across the ideological spectrum believe is likely to stem the explosion of health-care costs,” Christine Romer, the chair of the White House Council of Economic Advisers, said in a recent speech. But this idea wouldn’t work politically, either. To raise enough revenue, the tax on swanky insurance plans would have to be set as high as forty per cent. When labor unions, some of whose members enjoy coverage in these plans, learned about this punitive levy they objected loudly, prompting Pelosi to drop the idea, which, broadly speaking, amounts to taxing the upper middle class to provide benefits for the lower middle class.
What about the proposed cost savings? They, too, are questionable. Most of them consist of reductions in Medicare outlays, which, according to this C.B.O. analysis, would save four hundred and twenty-six billion dollars between 2010 and 2019 compared with current plans. Look a bit more closely, and you find that more than half of the Medicare savings (two hundred and twenty-nine billion dollars) come from cutting payments to providers of services under the regular program; most of the rest (a hundred and seventy billion dollars) come from changing the way payments are set in the Medicare Advantage program. Does anybody really believe that these savings will materialize? For decades now, Congress has been promising to reduce the growth of Medicare outlays, and yet every year they continue to go up. The reasons are straightforward: the population is aging; seniors are politically active; and health-care treatments, particularly for the aging, continue to evolve in complex and costly ways.
To be fair, contained in its reform plan, the White House does have a proposal to address these issues: the establishment of an Independent Medicare Advisory Council (IMAC), which would provide Congress each year with cost-saving recommendations. “By removing some of the political pressure around such reforms,” Romer said in the same speech, “the IMAC would make it easier for improvements to be made year after year.” This statement can only be described as wishful thinking. I hope it will be proved right, but Washington is replete with now-defunct independent bodies and commissions that toiled dutifully, did good work, and made little difference.
So what does it all add up to? The U.S. government is making a costly and open-ended commitment to help provide health coverage for the vast majority of its citizens. I support this commitment, and I think the federal government’s spending priorities should be altered to make it happen. But let’s not pretend that it isn’t a big deal, or that it will be self-financing, or that it will work out exactly as planned. It won’t.
Many Democratic insiders know all this, or most of it. What is really unfolding, I suspect, is the scenario that many conservatives feared. The Obama Administration, like the Bush Administration before it (and many other Administrations before that) is creating a new entitlement program, which, once established, will be virtually impossible to rescind. At some point in the future, the fiscal consequences of the reform will have to be dealt with in a more meaningful way, but by then the principle of (near) universal coverage will be well established. Even a twenty-first-century Ronald Reagan will have great difficult overturning it.
That takes me back to where I began. Both in terms of the political calculus of the Democratic Party, and in terms of making the United States a more equitable society, expanding health-care coverage now and worrying later about its long-term consequences is an eminently defensible strategy. Putting on my amateur historian’s cap, I might even claim that some subterfuge is historically necessary to get great reforms enacted. But as an economics reporter and commentator, I feel obliged to put on my green eyeshade and count the dollars
John Cassidy
The New Yorker
Supporter of Obamacare
Apparently at any cost
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