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Eye on the News

Paul Howard
Obamacare, the Day After
With repeal unlikely, reforms of the reform may be the Right’s best bet.
24 March 2010

Let’s offer this concession to President Obama and Speaker of the House Nancy Pelosi: if everything in the health-care reform legislation plays out exactly as they claim over the next 20 years, the U.S. health-care sector will become a beacon of productivity, cost increases will slow, the deficit will shrink, and health-care stakeholders—doctors, hospitals, pharmaceutical companies, and patients—will live together happily ever after.

That’s unlikely in the extreme. The historic legislation passed by the House Sunday night builds exploding costs and deficit spending into its structure via a system of subsidies and budget gimmicks. After campaigning for a year to get health-care costs under control, President Obama will sign a law that spends trillions to expand coverage but does little to contain costs. As a result, we’ve created yet another entitlement program that the country can ill afford.

Middle-class families who don’t get health-care insurance through their employers will receive generous taxpayer-provided subsidies, starting in 2014, to buy health insurance through the bill’s insurance exchanges. Currently, employees who do get insurance at work pay for it out of their own compensation (through reduced salaries and pensions). The subsidies will eventually create enormous political pressure to move more people into the exchanges, driving up government spending.

The legislation imposes draconian mandates on insurers: “guaranteed issue,” which forces insurers to sell to any applicant, and “community rating,” which requires them to offer cheaper coverage to older, sicker applicants by charging younger ones more (the bill mandates a maximum 3-to-1 ratio for age-adjusted premiums). It bans lifetime limits on coverage by insurers while placing caps on individuals’ out-of-pocket spending. All of these measures will help drive up insurance costs in the individual market. (The Congressional Budget Office estimates that insurance premiums will rise 10 percent to 13 percent in this market, but many analysts think that figure is low.) Since federal regulations on insurance will operate in addition to existing state mandates, provider groups will continuously lobby Washington to add new mandates, boosting insurance costs still higher.

The legislation’s funding is Madoffian in structure. The CBO estimated that the new law would slash the federal deficit by about $138 billion in its first decade. But this is true only if you think that you can rob Peter to pay Paul. For instance, the “savings” includes $53 billion in new Social Security revenues—but those revenues should be earmarked for Social Security, not a new entitlement. Scratch that out.

The purported savings also include $70 billion in premiums for a new voluntary long-term care program, called CLASS. But CLASS is an insurance scheme. Premiums must be held in reserve to cover future payments. Scratch that out, too.

Further, the savings estimates ignore as much as $114 billion in appropriations needed to get Obamacare up and running. Taken together, these three charges are more than enough to wipe out any expected deficit reduction in the first decade.

And all this is on top of the program’s biggest gimmick: close to $500 billion in cuts to Medicare reimbursements. Democrats claim that the reductions both shore up the Medicare program and help fund new coverage expansions, but they can’t do both. Medicare faces a staggering $38 trillion long-term deficit. Putting the program on solid financial footing should be the top priority. Instead, Democrats are using Medicare savings to fund a new entitlement program.

Obamacare’s defenders argue that reimbursement cuts and a new Medicare super-committee empowered to drive Medicare reforms from the top down will usher in productivity savings, as hospitals and doctors become more efficient to make up for lost revenue. In a market environment, where firms compete for consumer dollars based on price and quality, this might actually happen. But in Obama’s post-reform world, the competition will be fought most fiercely on K Street, as interest groups lobby Congress, the Department of Health and Human Services, and Medicare officials to tilt the rules (and spending) in their favor.

At the end of the day, President Obama has won the biggest expansion of the government since Medicare’s creation in 1965. What should conservatives do next? While repeal sounds like an attractive line of attack, it would be extremely difficult—requiring a supermajority in Congress—especially once the subsidy spigot opens in 2014. Moreover, America’s health-care woes would still need to be addressed. The more sensible approach might be to reform the reforms: to take the shell of Obamacare and make it market-friendly.

Conservative policymakers could replace the sliding-scale subsidies (which discourage work with high marginal tax rates) with a single flat-tax deduction or tax credit, funded by phasing out the employer tax deduction. Risk pools can be expanded with federal dollars and made permanent to cover the highest-cost patients who can’t afford to buy their own insurance without help. Real interstate competition would help lower insurance costs. Exchanges are a sound idea but should be lightly regulated to hold down prices. The federal government should also concentrate on creating transparency in health care so that consumers can easily compare price and quality. Finally, medical malpractice reform would help reduce the practice of defensive medicine, saving billions every year.

Further, Medicare reform must be separated out from health-care reform. The temptation to squeeze one entitlement to fund another is just too powerful. Instead, we should gradually transform Medicare into a premium-support initiative for private insurance, in which seniors choose their own private plans based on price and coverage. Medicare’s Part D already operates this way.

The battle over Obamacare has been fierce, bitter, and highly partisan. It’s not likely to end now; on the contrary, the legislation’s design guarantees fights for years to come. Conservatives should strive not just to fix its worst features, but more broadly to make health care better for all Americans.

Paul Howard is director of the Manhattan Institute’s Center for Medical Progress.

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