Ethics & Public Policy Center

An Entitlement Certain to Grow In Spite Of 'Firewalls'

Published in Kaiser Health News on January 7, 2010


One of the main arguments President Barack Obama and other Democrats have made on behalf of the health care bills that have passed the House and the Senate is that they would reduce the federal budget deficit in the coming decade and in the years following as well. Their claim is backed up by the official cost estimates provided by the Congressional Budget Office that show modest improvements in the budget outlook through 2019 if the bills become law. But there are important reasons to be very skeptical that a final health care bill will improve the nation's budget outlook, both in the short and the long term.

For starters, neither bill addresses the impending cut in the fees paid to physicians under the Medicare program. There is bipartisan opposition to these cuts, but the cost of fixing the problem would exceed $200 billion over 10 years. Consequently, congressional Democrats aren't providing a permanent solution in the health care bills; they are in effect understating the cost of the reform program they have promised to deliver. If the so-called “doc fix” were included in the accounting, the health care reform effort would no longer be a deficit reducer at all.

In addition, CBO expects the financing provisions of the bill to produce revenue and spending reductions that more than offset the growing cost of the new health entitlement expansions contemplated in the legislation. That would be no small feat, because the entitlement spending is expected to increase at a very rapid rate indeed, just as Medicare and Medicaid spending have for more than four decades. By 2019, the Medicaid expansion and the subsidies for health-insurance premiums in the exchanges are expected to cost about $200 billion annually, and grow at an eight percent rate every year thereafter.

On paper, of course, CBO is right. The “pay fors” would grow at an equally rapid rate, as they are currently written in the bills. But that's only because they assume key indexing provisions that function like a tightening of the vise over time.

The House bill includes a new surtax for upper income taxpayers, while the Senate passed an increase in the Medicare payroll tax for high earners as well as a new excise tax on high-cost insurance plans. In all instances, the thresholds used to determine tax liability would be set in ways that capture more taxpayers over time. The threshold for application of the Medicare payroll tax hike — $200,000 for individuals — would not be indexed at all to keep up with inflation. Nor would the House-passed income-tax surtax.

Meanwhile, the threshold for what constitutes a “high-cost” insurance plan would be indexed below expected medical inflation. Consequently, in 10 or 15 years' time, many more Americans would find themselves in plans deemed to be unacceptably costly.

CBO also gives both the House and Senate bills credit for substantial savings in the Medicare program. A large part of that would come from shaving off a half percentage point every year from the normal Medicare inflation update for hospitals and other service providers; that annual cut assumes improvements in productivity.

Both the Chief Actuary of the Department of Health and Human Services, as well as CBO, have essentially raised serious doubts about whether such a perpetual cut in payment rates can be sustained without leading large numbers of hospitals and other service suppliers to drop out of the Medicare program, and thus harm beneficiary access to timely care. Nonetheless, that's what the House and Senate sponsors of the health legislation are relying on when they claim their bills will improve the nation's fiscal standing.

But even if all of the offsets work out as planned, which is not likely, the House and Senate bills would still create substantial budgetary risks because of the pressures for entitlement expansion they would unleash.

Both bills assume the new entitlement spending can be held down with the so-called “firewall” provisions. These are the rules that essentially preclude individuals from gaining access to premium subsidies available in the exchanges. If an employer offers “qualified” insurance coverage to a worker, the employee really has no choice but to take it if he wants to avoid paying the penalty for going uninsured. But these rules would create large disparities in the federal subsidies made available to workers inside and outside the exchanges.

Gene Steuerle of the Urban Institute has calculated that, under the Senate bill, a family of four with an income of $60,000 with employer-sponsored health care would get $4,500 less in federal support outside of the exchange than a similar family inside the exchange would get in 2016. And there would be many tens of millions more families outside the exchange than in it, according to CBO. Today, there are about 127 million Americans under the age of 65 with incomes between 100 and 400 percent of the federal poverty line, but CBO expects only about 18 million people will be getting exchange subsidies in 2016.

If enacted as currently written, it's entirely predictable what would happen next. Pressure would build to treat all Americans fairly, regardless of where they get their insurance. One way or another, the subsidies provided to those in the exchanges would be made more widely available, driving the costs of reform well above the $900 billion limit the administration has set for the initiative.

The president has said that he wants a health reform bill in large part because it's necessary to get better control of the federal budget. But the bills that have been developed in Congress fall far short of his stated objective. The new entitlement expansions are certain to occur, followed quickly by irresistible pressure to make them even more widely available and generous. Meanwhile, Congress would have to show heroic restraint to allow the tax increases and spending cuts to play out as written. That's a recipe for another unfunded federal program.

James C. Capretta is a fellow at the Ethics and Public Policy Center in Washington, D.C.

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