Health Care Costs and ObamaCare

Published July 31, 2012


Christina D. Romer, the former chairwoman of President Obama’s Council of Economic Advisers, has penned the latest in a long series of columns by ObamaCare apologists touting the supposed cost-control virtues of the new law.

Her argument is that ObamaCare was a good start, but its provisions need to be strengthened and tightened by Congress to slow the pace of rising costs even more in coming years.

Romer is right that rapidly rising health costs is the most serious threat to the nation’s long-term prosperity. Already, the rapid run-up in federal health entitlement spending is putting tremendous pressure on the federal budget. Between 1972 and 2011, federal spending on Medicare and Medicaid rose from 1.1 percent of GDP to 5.5 percent, according to the Congressional Budget Office (CBO). CBO’s latest projections indicate that spending on these programs, plus ObamaCare’s new entitlement spending, will push total health entitlement spending up to at least 8.4 percent of GDP by 2030. That’s a jump in spending of nearly 3 percentage points of GDP compared to today’s level—or the equivalent of another $500 billion in budget outlays.

But although Romer is right about the severity of the problem, she is dead wrong about ObamaCare’s role in addressing it. ObamaCare did not lay the foundation for sensible cost control, and did not partially ease budgetary pressures, as she asserts. Quite the contrary, ObamaCare will pour an ocean of gasoline on the health entitlement fire, and the supposed cost-control mechanisms are a mirage.

Let’s start with Romer’s assertion that CBO has confirmed that ObamaCare will reduce the deficit by “$1 trillion” in its second decade. For starters, what CBO has said is that the law would reduce the projected federal budget deficit in the “broad range” of one-half of one percent of GDP. There’s no mention of $1 trillion in CBO’s analyses for the very reason that the number implies an entirely false precision.

More importantly, CBO only came to the tentative conclusion that the law would reduce future deficits because of provisions that provide an entirely artificial sense of budget discipline. First, the law imposes a massive tax hike that will grow over time because of “bracket creep.” The new tax hikes associated with the Medicare payroll tax—a new tax on earnings and capital income for certain households—was supposedly limited to individuals with incomes above $200,000 per year and families with incomes above $250,000 per year. But those income thresholds are not indexed for inflation. So, as wages rise in future years with consumer prices, more and more families will cross these thresholds and pay the taxes. Indeed, contrary to the president’s assertions, these taxes represent a major financial burden on the middle class. CBO projects that ObamaCare’s revenue hikes will add just under one percentage point in revenue in 2037 compared to 2012, largely because of this “bracket creep.” It’s obvious that this kind of tax hike has nothing to do with slowing down health care cost inflation. Moreover, these taxes are terrible tax policy as they collect increasing amounts of revenue from working Americans without forcing Congress ever having to take a vote.

Similarly, ObamaCare imposes what is called a “productivity adjustment factor” in the Medicare program. This productivity factor reduces the annual inflation updates for paying a large number of medical service providers, including inpatient hospital facilities. So, for instance, instead of getting a 3 percent increase in Medicare payments for services, these providers will get a 2.6 percent increase. And not just once. This type of cut will occur every year in perpetuity. Over time, the compounding effect of piling new cuts each year on the savings occurring from prior years’ cuts is substantial. On paper at least, this kind of cut is enough to eliminate trillions of dollars in Medicare liabilities.

The problem of course is that these kinds of across-the-board cuts do not produce greater efficiency in the health sector, nor do they reward the higher-quality providers. All providers are cut equally, regardless of how well or badly they treat their patients. In time, these cuts will drive Medicare’s reimbursement rates so low that they will fall below what Medicaid pays, which is so low that Medicaid patients often have trouble accessing care. By 2030, some 25 percent of all hospitals would be forced to stop admitting Medicare patients to limit their red ink. This is why the Chief Actuary for the program considers the “productivity adjustment factor” completely unrealistic over the medium and longer term.

Without the “bracket creep” in the tax provisions and the unrealistic Medicare cuts from artificial cuts in reimbursement rates, even CBO would have found ObamaCare to be a major budget buster.

It gets worse. The authors of ObamaCare not only used dubious cuts in Medicare to grease the way for a massive new entitlement program, they also double-counted the savings. The same cuts in Medicare that are supposedly paying for ObamaCare are also used to replenish the Medicare trust fund and pay future Medicare claims. As Charles Blahous has explained, when this double-counting is removed from ObamaCare’s accounting, the law adds at least $340 billion to the deficit over its first ten years, and trillions more over the long-term.

Like other defenders of ObamaCare, Romer tries to create the impression that the law has set in motion other changes to improve the efficiency of American medical care. This is nothing more than wishful thinking, with zero evidence to support it. For instance, Romer points to the new office in HHS that is charged with testing out new cost-savings ideas in Medicare. But CBO has already issued a report documenting that years and years of previous efforts by the bureaucracy to engineer more cost-effective health care failed to produce any significant savings. Accordingly, CBO assigned almost no cost savings to the provisions in ObamaCare that Romer suggests hold so much hope for slowing down escalation.

Romer also touts ObamaCare’s Independent Payment Advisory Board (IPAB) as an effective cost-cutting tool. The IPAB is the unaccountable and unelected fifteen-member board that is charged with enforcing a new spending cap on the Medicare program. IPAB’s authority, however, is limited to imposing even deeper cuts in reimbursement rates, which will only exacerbate the quality and access problems imposed by ObamaCare’s other Medicare cuts.

Romer’s enthusiasm for IPAB betrays the kind of thinking that animated the drafting and passage of ObamaCare in Congress. The supporters of the law believe that the federal government, perhaps embodied in a bureaucratic panel like IPAB, has the knowledge and capacity to re-engineer American health care for the better. This belief is dangerous and completely misguided. The federal government has demonstrated in its management of Medicare and Medicaid over the past half century that it has no capacity whatsoever to make prudent resource-allocation decisions in health care. Instead, to hit budget targets, the federal government always resorts to blunt, across-the-board cost cutting that harms the quality of patient care and reduces medical innovation.

To control costs, as Romer rightly says is necessary, what’s needed in American health care is the discipline and accountability that comes with a functioning marketplace. That means empowering consumers, not bureaucrats, to make sound decisions for themselves. With consumers in the driver’s seat, those providing medical services to them will have strong incentives to reorganize their business practices to deliver better care at less cost.

That’s the only way to slow the pace of rising costs while maintaining or even improving the quality of care provided to patients. And moving in this direction will of course require repealing and replacing ObamaCare, not building upon it as Romer suggests.

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

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