Healthcare reform on the up-and-up

To ease concern over costs of healthcare reform, politicians point to Congressional Budget Office reports that label the legislation as “deficit-reducing.” But the cost estimates presented by CBO camouflage the true costs. The CBO cost estimates provide measures of costs and revenues over the next decade, as required by Congress. However, while revenues in the Senate bill begin in the first year, costs do not kick in until 2014, resulting in 10 years of revenues and six years of costs. Once you look past this accounting gimmick, the gross cost of the Senate bill over a full 10 years of implementation is in excess of $2 trillion, more than twice the current estimate. And even those costs are low-balled because CBO does not score discretionary costs that are appropriated on an annual basis.

And while Congress has specified deep cuts in Medicare reimbursements for medical service providers, if implemented as intended, the cuts in physician payments will induce more doctors to treat fewer Medicare-funded patients. Conversely, if the cuts in doctor pay are rescinded, the new law will provide another huge addition to the national debt. And many of the proposed tax increases may also prove politically infeasible, such as the hike in the Medicare payroll tax, and an array of taxes on medical devices, prescription brand drugs and insurance companies which will only inflate insurance premiums.

Some optimistic analysts point to the sharp decline in Medicare spending in 1998 and 1999 as evidence of the effectiveness of the cuts legislated in the 1997 Balanced Budget Amendment. But that cost slowdown mainly resulted from a drive by the Clinton administration to root out Medicare fraud and abuse using the FBI as audit investigators. During the audit, the average time for processing claims rose dramatically and payments lagged. But once the audit was ended, processing time picked up and Medicare cost increases accelerated.

It is undeniable that health reform is needed. The funding of Medicare and Medicaid is at near-crisis levels and the programs in their current form are unsustainable. But the proposed Senate and House bills make no useful structural changes that would put either of these programs on a healthy course. In fact, Medicare will continue to be run primarily as a single-payer program which, confronted with the coming surge of retiring baby boomers, would have to choose between rationing what services will be paid for, and reduced levels of provider reimbursements, or paying the fare by sharply hiking the taxes of the working population. A more sensible way to increase the efficiency of Medicare resources would be to convert Medicare into a defined contribution plan, providing vouchers to beneficiaries to purchase approved private plans similar to the popular Medicare Advantage plans that are also now facing the chopping block.

With respect to reducing medical cost increases, the one provision with a germ of potential to promote more efficient choices — and it is only in the Senate bill — is the 40 percent excise tax on insurance plans that exceed $23,000 a year for a family and $8,500 for an individual. This provision is a backdoor way to reduce the value of the tax exemption granted to the health fringe benefit provided by employers. Because that tax exemption brings with it a substantial discount to the purchase of health insurance premiums it effectively promotes greater spending on healthcare. If adopted the tax would, in time, spread to lower-cost policies because the thresholds are not fully indexed for cost inflation and eventually would lead to more careful spending on insurance.

More immediate and direct help would come from elimination of the tax exemption for employer-provided health insurance combined with income-related vouchers to buy insurance premiums. It would raise real money and increase incentives to consumers to seek value for their money. But such a proposal is the centerpiece of many Republican plans, making it a non-starter for the Democrat-controlled Congress.

The health reform plans proposed by both houses of Congress try to reconstruct healthcare in the U.S. according to the divergent wish lists of the 300 majority members and the White House. The costs are huge in part because subsidies normally confined to the poor will be granted to those well up the income ladder. In addition, all plans are required to accept all comers including those who pay a modest penalty until they actually need coverage. These mandates will boost the costs of private insurance. CBO estimates that the total cost of mandates on the private sector would increase costs to a point in which they “greatly exceed” the threshold for an unfunded mandate.

It should be apparent that despite the president's pledge, these plans will be adding much more than “one dime” to our national debt. And many Americans will realize that if you want to keep the plan you have, you won’t be able to. There is much to be gained by the reform process. But Democrats and Republicans must, as Dorothy Fields would say, “start all over again.”

June O'Neill is professor of economics at Baruch College, CUNY and former director of the Congressional Budget Office.