The President’s Latest Health Care Proposals Don’t Constitute Entitlement Reform

Published September 26, 2011


Last week, the president unveiled yet another budgetary proposal (his third of the year!). Officially at least, this latest offering is supposed to be aimed at influencing the Joint Select Committee on Deficit Reduction. The twelve-member Joint Committee was created in the August legislation lifting the debt ceiling and is charged with drawing up a plan to cut at least $1.2 trillion from the expected ten-year budget deficit.

But, truthfully, the president’s latest proposal is far more likely to undermine the Joint Committee than help it. The twelve-person committee, which is composed of six Democrats and six Republicans, can only advance a deficit reduction proposal to the House and Senate for legislative consideration if seven committee members support it. That’s means any plan recommended by the Joint Committee must have some level of bipartisan support behind it.

But the president’s plan wasn’t aimed at building bipartisan momentum for a deficit-cutting plan. That was evident from the president’s speech unveiling it, in which he threatened to veto any deficit-cutting legislation that included entitlement reforms but no tax hikes on the rich. And it is also evident from the president’s total reliance on tax increases to narrow future budget deficits. As Keith Hennessey has explained, the administration’s contention that the president’s proposal would cut the budget deficit by $3.0 trillion over ten years is based on gimmicks and sleight of hand. When those are stripped away, all that’s really left is a massive, ten-year $1.5 trillion tax hike on upper income households, many of whom own small businesses that are supposed to bethe engine of job creation.

So this plan wasn’t aimed at building bridges to the GOP or helping the Joint Committee come to an agreement. It was aimed at drawing sharp contrasts between the parties and positioning the president going into the 2012 presidential campaign. In that regard, it seems to have worked. The already very wide partisan divide now prevalent in Congress only widened further in the last week. In this highly charged environment, the odds that the Joint Committee will come to a grand tax-entitlement bargain are exceedingly low.

But perhaps that is just as well. Because it is also quite clear from the president’s latest health care proposals that serious entitlement reforms—the kind that would actually make a difference and would be worth striking a “grand bargain” to achieve—aren’t in the cards before the November 2012 election.

Among the health care proposals the Obama administration is now advancing in its budget plan are cuts in Medicare’s reimbursement rates for rural hospitals, reductions in how Medicare pays for graduate medical education costs, regulatory changes in how Medicare reimburses nursing homes for post-acute care, new restrictions on how states use provider taxes to generate their share of the federal-state funding for the Medicaid program, and modest adjustments in Medicare’s premiums, deductibles, and Medigap rules.

This package of proposals is notable first for the utter lack of budgetary ambition. The administration says that these changes will cut costs by $320 billion over ten years. That’s an astonishingly insignificant sum given the size of the problem and the size of the programs in question. CBO estimates that spending on Medicare, Medicaid, and other assorted health entitlements (including those created in the health law) will reach $12.5 trillion over the coming decade. The administration’s “cuts” would reduce that sum by just 2.5 percent

Moreover, even if achieved, the cuts would barely cover the added expense associated with avoiding pending cuts in Medicare physician fees (the so-called “doc fix”), which the administration wants to assume away by including in the “budget baseline.” The net effect of the president’s health proposals, therefore, is not really a cut at all but maintenance of the status quo, including the $1 trillion added to the budget by the health law. That’s stunning given the widespread agreement, including by the president, that there is no way to get the federal budget deficit under control without reining in health entitlement spending.

Perhaps such a modest budgetary effort might be defensible if the proposed reforms could be described as a “down payment” on genuine entitlement reform. But that’s not at all the case with what the president has proposed for Medicare and Medicaid. In the main, the president’s ideas amount to nothing more than tinkering with the same failed regulatory model that hasn’t worked over the past four decades.

The fundamental problem in American health care, and in the government’s health entitlement programs, is that there is no cost discipline from the normal competitive pressures of a functioning marketplace. Real entitlement reform would begin to correct this problem by converting today’s open-ended entitlements into defined contribution support programs.

But that’s exactly the kind of reform the president and his allies resist the most. Indeed, the most consequential reform in the president’s latest offering (although it will produce no budgetary savings over the next ten years) is the proposal to give the unaccountable Independent Payment Advisory Board (IPAB) more power to impose price controls in the Medicare program. The IPAB was created in the health law and given the authority to hit Medicare spending targets with regulatory controls that need not be approved by Congress. The president’s new proposal doubles down on the IPAB concept by lowering the spending targets it is supposed to achieve.

The IPAB is the embodiment of the technocratic solution to health care costs, and the antithesis of a decentralized competitive marketplace. The fact that the president has again pushed the concept as the solution to long-term cost control is one more piece of evidence that what he wants from his budget plan isn’t legislative success but a full-scale national debate on health care and the budget as part of the presidential campaign.

All signs indicate he is going to get his wish.

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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