Ethics & Public Policy Center

Obamacare's Political Future

Published in National Review on August 2, 2010


July 1 was a milestone of sorts for Obamacare: It was the 100th day since the president signed the sweeping legislation into law. The Democrats who pushed it through to enactment in the most polarizing debate in years are hoping that the passage of time will be their salvation. Memories are short, they surmise, and so perhaps voters won't dwell on the heavy-handed and highly partisan manner by which President Obama and the Democratic congressional leadership muscled the bill through its final legislative stages when they go to the polls this November. And if that's the case, perhaps Democratic candidates for the House and Senate won't get punished as severely as many now expect they will.

For its part, the Obama administration isn't just sitting by and hoping such a shift in public sentiment will occur all on its own. It plans to help the process along with a massive, $125 million public-relations campaign leading up to this year's midterm election, financed by big donors from the Democratic political orbit. In addition, the Department of Health and Human Services (HHS) has embarked on its own, taxpayer-financed advertising campaign aimed at convincing various segments of the population that the new law isn't so bad after all, starting first with seniors. The nation's Medicare beneficiaries recently received a mailer from HHS enumerating the supposed benefits of the new law for them — without mentioning that Obamacare will cut Medicare by nearly $500 billion over ten years.

Obamacare's supporters are also hoping that the law's “early benefits” — those that come into effect this year, including the requirement that insurance plans cover children up to age 26 on their parents' policies by this September — will begin to sway voters before November. Certainly the mainstream press has helped in this regard, by shamelessly hyping these relatively minor regulatory changes — without, however, noting their costs, or the very small number of Americans who will actually benefit from them.

There is precedent for increasing public acceptance of a previously controversial entitlement expansion. In November 2003, Congress passed a new prescription-drug benefit for Medicare, and most congressional Democrats viewed it with great disdain because of its private-insurance orientation, and because they thought of the benefit as too meager and the choices facing beneficiaries as too complex. The rancor with which it was enacted poisoned the well of public opinion, and polls showed that many Americans were greatly skeptical about the program immediately after enactment. By 2006, however, things had changed. Most seniors were enrolled in one of the new drug-coverage plans, and they liked what these plans were providing for them. The insurance protection was real, and the drug plans were securing such deep discounts in the prices paid for prescription medications that everyone, beneficiaries especially, was saving money. Public attitudes shifted quickly soon thereafter, followed inevitably by a shift in political tactics by national Democratic politicians. By the 2008 election, the prescription drug benefit was hardly mentioned by Democratic candidates on the campaign trail.

It is certainly possible that the same basic political dynamic could play out with Obamacare. But there are several reasons to think that the opposite is more likely to occur, and that opposition will not recede but intensify in coming months. While it is true that the program is a massive entitlement, specifically designed to get the American middle class fully hooked on another expansive government benefit, Obamacare also — unlike the Medicare drug benefit — creates millions of losers. Democrats riddled it with budget gimmicks and sleights of hand to create the illusion of a fully financed program; but what it really does is redistribute resources within the health sector away from those who have good coverage today. As millions of today's happily insured citizens begin to find out that their current arrangements have been disrupted, and, in some cases, terminated, to pay for the Obama administration's government-centric takeover, their views of Obama care will only sour further.

The problems will start this fall, well before the midterm elections, when millions of seniors enrolled in Medicare Advantage (MA) insurance plans start to get bad news in the mail about their coverage. The president and congressional Democrats despise the MA program because it is private, not government-run, insurance. They have wanted to cut it for years, and their supposed desire to find offsetting savings for another entitlement expansion provided the perfect cover to get out the axe. Over the next ten years, Obamacare's cuts to MA payment rates will reach nearly $120 billion, according to the Congressional Budget Office.

In 2009, about 10.6 million Medicare beneficiaries — nearly one in four — signed up for MA insurance. Prior to Obamacare, that number was set to rise to nearly 14 million later in this decade. But no longer. With the cuts, MA insurance plans will have no choice but to dramatically scale back their offerings and benefits. Enrollment will plummet, falling by 35 percent compared with where it would have been without Obamacare. About 2 million seniors who are now in MA will get pushed out of their current coverage. What's worse, all 10.6 million Medicare beneficiaries now enrolled in MA plans will face deep cuts in their benefits even if they get to stay in their plan, since virtually all MA plans, to stay in business, will be forced to charge higher premiums or cut back on what they offer. By 2019, the average cut in benefits will reach $800 per year per MA beneficiary.

The Democrats' antipathy toward MA is entirely ideological. They argue that MA plans are overpaid by today's formula, and claim to want only a fair competition between fee-for-service (the traditional Medicare model) and the private insurance approaches offered to Medicare enrollees — but that is plainly not the case. In 1999, the Clinton administration killed the recommendations of the bipartisan Medicare Commission to move Medicare toward a level playing field precisely because it feared that fee-for-service's expensive and bureaucratic structure could not compete with the more efficient models the private sector would develop. Indeed, every time a proposal has been floated for Medicare to include a truly competitive system of payment for private insurance and fee-for-service, the Democrats have attacked and killed the idea. They don't want genuine consumer choice, because that would mean an erosion of political control over the health system. They prefer instead Medicare fee-for-service's command-and-control payment regulations, which maximize power for politicians and regulators and artificially lower costs for fee-for-service coverage.

Their solution — embodied now in Obamacare — is to tie MA rates to fee-for-service's payment systems. The result will be a massive exodus of plans and enrollees from the MA program, and unjustified regional disparities in the incidence of the cuts. For nstance, high-cost and fraud-ridden South Florida has fee-for-service costs that are 70 percent higher than those of Portland, Ore., yet Portland would face a much steeper MA cut under the revised MA formula. Under Obamacare's perverse incentives, profligacy is rewarded and cost cutting is punished.

Obamacare's MA cuts will also hit low-income seniors disproportionately. Most retirees view the Medicare benefit as inadequate because its cost-sharing requirements can feel expensive to someone on a fixed income. Those who worked for large corporations and/or the government (at any level) tend to have additional insurance as a retirement benefit from their former employer. Those with relatively high incomes but without a retiree plan usually buy Medigap supplementary insurance. It's only low-income seniors who don't have that option — which is wh
y they often sign up with MA plans that have lower copayments and deductibles than fee-for-service. They will suffer the most in the coming MA bloodbath.

It's hard to imagine Medicare's beneficiaries accepting the loss of hundreds of dollars in their current benefits without a fight. The last time Congress embarked on an ideological crusade to kill private insurance in Medicare, in 1997, seniors who were facing large benefit cuts forced their elected representatives to reverse them in very short order. There's no reason to expect things will be different this time around. Indeed, the outrage is likely to be even more intense, because the purpose of the MA cuts is not to improve Medicare's financial outlook or to reduce the budget deficit, but to pay for an expensive new entitlement for others.

Of course, the Medicare cuts in Obamacare go well beyond MA. The new law also cuts payments to hospitals, nursing homes, clinics, and hospice facilities. The Democrats claim these reductions are part of a grand plan to reform the “delivery system” and force new efficiencies on those providing services. But this kind of top-down cost cutting has been tried many times before in Medicare, and has never worked. Sometimes, the cuts have been reversed in response to political pressure from groups that represent providers of health care to seniors. Other times, the cuts remained in force, but service providers found ways to work around them and get paid just as much as they were paid before, often by increasing the number of claims they filed.

On paper, the CBO estimates that Obamacare has cut Medicare's annual growth from about 4 percent per beneficiary (above economy-wide inflation) to about 2 percent. That's how the Democrats magically turn a trillion-dollar entitlement into a deficit-reduction plan. But there's no real change of direction for Medicare in the new law. It's just across-the-board cost cutting, using the very payment-rate regulations that have never worked before to “address” the problem of rising costs. When it turns out that the problem has not been addressed, and Medicare has in fact become more dysfunctional with the additional price distortions, the financial justification for Obamacare will have vanished.

The implementation of Obamacare is also going to be a rude awakening for many Americans now in employer-sponsored insurance — which happens to be most of the working-age population. The president promised repeatedly that his approach to reforming health care would “build upon” today's job-based system and leave those in employer plans alone. But the perverse incentives embedded in the legislation are likely to set in motion the unwinding of large parts of that system.

The problem is the parallel structure of insurance coverage provided through the so-called exchanges. Under Obamacare, states will be required to set up these exchanges for anyone not getting coverage through an employer. Workers with incomes below four times the federal poverty line will get federal assistance with their premium payments.

Douglas Holtz-Eakin, a former director of the CBO and now president of American Action Forum (AAF), and Cameron Smith, also of AAF, have analyzed the new law and found that it establishes strong incentives for employers to dump their current coverage, especially if they have a high proportion of low-wage workers. The law's architects think they have prevented such dumping by forcing employers to make an all-or-nothing choice: they provide either for everyone, or for no one, including their higher-salaried workforce. But firms can work their way around the bureaucratic rules by reorganizing themselves into multiple companies with independent health arrangements. One way or another, employers will find a way to maximize their bottom line, even if that means terminating their health-insurance offerings. Holtz-Eakin and Smith estimate that some 35 million people will get dumped by their employers into the government-managed insurance exchanges — which, in turn, would put the ten-year costs of Obamacare $500 billion above CBO's projection. More important, it would force millions of people into the government-managed program, whether they wanted to be there or not, and would signal the beginning of a slow march toward an entirely government-run insurance system.

Obamacare passed a second milestone of sorts in July: the 14th might be called the great Obamacare awakening. One year ago on that date, House Democratic leaders unveiled the actual legislative language they were planning to pass. Until then, the public debate hadn't gotten beyond the president's platitudes and generalities about coverage for everyone and a magical bending of the cost curve. But overnight the conversation changed, from the vague and meaningless to the concrete.

And it didn't take long for the public to size up and figure out what was going on. They had been promised a painless reform that would lower their costs and not disrupt what they already had. But the original House bill exposed a very different reality — a reality that carried through every version that was subsequently introduced in the legislative process. It was very plainly a liberal's dream, with massive tax hikes, costly and job-killing regulatory burdens, and runaway government spending. Voters concluded that the program the president and his congressional allies were pushing was more an ideological obsession with government-run health care than practical problem-solving, and that it was likely to cost them dearly for many years.

The result was a spontaneous nationwide uprising at last summer's town-hall meetings. Citizens confronted their elected leaders and demanded that they change course.The intensity of the public opposition was the only reason the Democrats didn't jam the bill through Congress sooner than they did, as most of the business interests in Washington had already raised the white flag of surrender.

The administration is now betting that the strength of the opposition will dissipate. But as Obamacare's onerous and rising costs are imposed on Medicare beneficiaries and taxpayers, and as employers begin signaling their plans to dump costs into the government's lap, all of the fears that were on display last August will be validated. Obamacare was destined to become a costly government takeover of American health care, and voters knew it as soon as they were given a chance to see it in black and white. Wishful thinking notwithstanding, they are all but certain to hold those responsible for imposing this colossal mistake on the country accountable for what they have done.

Mr. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director of the Office of Management and Budget from 2001 to 2004.

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