Rick Foster is the Chief Actuary of Medicare, and his office has just released a devastating critique of the Administration’s health reform law.

Before getting to details, let me say there is nothing in the report that is surprising to independent health economists. The conclusions are consistent with everything The Lewin Group and other private estimates have been saying for months. What is surprising is that one of the most respected agencies of the U.S. government is completely undermining the Alice-in-Wonderland fables being spun by the White House, on Capitol Hill and in the mainstream media. To wit:

• You cannot take close to one trillion dollars away from one group of people and spend it on another group of people and somehow leave those footing the bill better off.
• You cannot give millions of people large increases in medical care without creating any new doctors, new nurses or other paramedical personnel.
• You cannot arbitrarily reduce what you are paying providers by billions of dollars and still expect to get the same quantity and quality of care.
• You cannot give millions of patients and thousands of doctors new incentives to waste medical resources and then expect health care spending to go down.

In other words, the Chief Actuary is simply saying reality is reality. Economics is economics. A is A.

Convenient summaries of the Actuary’s report have been produced by the Republican staff of the House Ways and Means Committee and by the Senate Republican Policy Committee. Although these are partisan groups, the summaries appear to be quite faithful to the source. Here are the salient findings (with page numbers in the Actuary’s report):

• Health care costs will go up, not down. National health expenditures will increase from 17 percent of GDP now to 21 percent under the new law and will be higher than without the legislation. [Page 4] Net federal spending on health care will also increase.
• Health care shortages are “plausible and even probable.” Because of the increased demand for health care, “supply constraints might initially interfere with providing the services desired by the additional 34 million insured persons.” [Page 20]
• 14 million employees will lose their employer coverage. Employees of small firms are especially at risk (despite small employer tax credit subsidies). [Page 7]
• 2 million employees who lose coverage will have to enroll in Medicaid. [Page 3]
• A Medicaid insurance card is not a guarantee of care. An estimated 18 million people will be added to Medicaid. [Page 3] However, because there is no corresponding increase in the supply of caregivers, “it is reasonable to expect that a significant portion of the increased demand for Medicaid would be difficult to meet, particularly over the first few years.” [Page 20]
• One in ten insured workers will see their health benefits taxed. By 2019, more than 10% of insured workers will “be in employer plans with benefit values in excess of the thresholds (before changes to reduce benefits) and this percentage would increase rapidly thereafter.” [Page 13]
• Higher taxes will lead to higher premiums. The new taxes on medical devices, prescription drugs, and insurance plans “would generally be passed on through to health consumers in the form of higher drug and device prices and higher insurance premiums.” [Page 17]
• There are more than one-half trillion in Medicare cuts. The new health law cuts “$575 billion” from Medicare. [Page 4]
• Medicare cuts would threaten almost one in every seven hospitals. About “15 percent of Part A providers would become unprofitable within the 10-year projection period.” [Page 10]
• Overall access to care for seniors would go down. Because of the law’s payment reductions, “providers for whom Medicare constitutes a substantive portion of their business could find it difficult to remain profitable and, absent legislative intervention, might end their participation in the program. [Page 10]
• 7.4 million people will lose access to Medicare Advantage plans. Enrollment in MA plans will be cut in half (from its projected level of 14.8 million under the current law to 7.4 million under the new law). [Page 11]
• False advertising: The new “Medicare Tax” doesn’t go to Medicare. “Despite the title of this tax, this provision is unrelated to Medicare; in particular, the revenues generated by the tax on unearned income are not allocated to the Medicare trust funds.” [Page 9]
• False advertising: Budgetary double-counting does not improve Medicare’s solvency. Medicare cuts “cannot be simultaneously used to finance other federal outlays (such as the coverage expansions) and to extend the [life of the Medicare] trust fund, despite the appearance of this result from the respective accounting conventions.” [Page 9]
• The new long-term care insurance plan (CLASS Act) is unsound. The program faces “a significant risk of failure” because the high costs will attract sicker people and lead to low participation. [Page 15]
• The promise to those with pre-existing conditions is unfunded. “By 2011 and 2012 the initial $5 billion in Federal funding for [high risk pools] would be exhausted, resulting in substantial premium increases to sustain the program.” [Page 16]
• The law does almost nothing to limit actual fraud and abuse. The fraud provisions in the law will save only about two percent of $47 billion in suspect claims.

President Barack Obama’s new health-care legislation aims to raise $210 billion over 10 years to pay for the extensive new entitlements. How? By slapping a 3.8% “Medicare tax” on interest and rental income, dividends and capital gains of couples earning more than $250,000, or singles with more than $200,000.

The president also hopes to raise $364 billion over 10 years from the same taxpayers by raising the top two tax rates to 36%-39.6% from 33%-35%, plus another $105 billion by raising the tax on dividends and capital gains to 20% from 15%, and another $500 billion by capping and phasing out exemptions and deductions.

It won’t work. It never works.

The maximum tax rate fell to 28% in 1988-90 from 50% in 1986, yet individual income tax receipts rose to 8.3% of GDP in 1989 from 7.9% in 1986. The top tax rate rose to 31% in 1991 and revenue fell to 7.6% of GDP in 1992. The top tax rate was increased to 39.6% in 1993, along with numerous major revenue enhancers such as raising the taxable portion of Social Security to 85% of benefits from 50% for seniors who saved or kept working. Yet individual tax revenues were only 7.8% of GDP in 1993, 8.1% in 1994, and did not get back to the 1989 level until 1995.

Punitive tax rates on high-income individuals do not increase revenue. Successful people are not docile sheep just waiting to be shorn.

Read the rest of the column.

By William Tucer.  Two weeks ago we smashed the side view mirror on our car and had to take it to the shop. We paid $250 for a replacement.

This week I went to my dermatologist to see if I had developed any more skin cancers (red hair and all that). The doctor took a biopsy on one spot and sent if off to the lab. If it’s malignant, I’ll have to go back and have a bigger chunk of my cheek removed. The cost of all this? Zero.

This simple comparison illustrates why healthcare “reform,” as Congress has just adopted it, will probably bankrupt the country.

As far as auto insurance is concerned, we have it like almost everyone else. It covers major damage. A year ago I was in a fender-bender. The insurance paid a small portion of the repairs. Several years ago, we bought my son a car and — typically — he nearly totaled it within a week. The insurance company paid an astounding $8,000 in repairs but our premiums tripled and we spent several years paying the penalty. That’s what “underwriting” is about. After one accident you get moved into a higher risk category. It’s what you might call a “pre-existing condition.”

At the auto shop, the mechanics have high school backgrounds with two or three years of on-the-job training and use basic hydraulic lifts and wrenches. I pay them $250 for parts and an hour of labor. At the doctor’s office, the person who serves me has done four years of medical school plus another three or four years of hospital residency and uses sophisticated equipment. The lab that does the biopsy will have the latest technology. Yet because I have a part-time job with a major employer, I receive union “health benefits” that pay for everything. I would be happy to pay $80-100 for my visits to the dermatologist. After all, I pay a plumber $50 just to come to my house and look at my leaking sink. But because politicians like Nancy Pelosi have convinced people that even a $20 co-payment is an “insurance company rip-off,” I get my medical services for free.

Not that I am unaware of the dangers of falling out of this system and going uninsured. A few years ago I didn’t have coverage and was paying $500 apiece for these minor office procedures.       

As John Goodman and Robert Musgrave wrote in their brilliant analysis, Patient Power (written in 1994 and still the best critique around), what we are calling “health insurance” is not insurance at all. It is prepaid medical benefits. Insurance is a way of pooling the risk for major expenses — the kind you incur when you have an auto accident or suffer a serious illness. Prepaid benefit plans try to cover all medical expenses, no matter how small.

No insurance company could possibly provide auto insurance that paid the bills every time you changed a tire. The premiums would be impossibly expensive and people would abuse the system, running to the auto shop every time they felt they needed new windshield wipers or suffered a dent in their bumper. Likewise, no insurance company offers policies with 100 percent coverage of all medical bills. The premiums would be impossibly expensive and people would run to the doctor every time they had a sniffle or suffered a cut finger.

Instead, prepaid benefits plans were pioneered by the major corporations and their labor unions, plus federal, state and local governments and their labor unions, which are now the majority of union members and one of the principle players in this melodrama. Taking advantage of an IRS ruling that health and retirement benefits could not be taxed as income, major corporations and governments began funneling tax-free dollars to their employees as “greater take-home pay.” Instead of income, employees got first-dollar coverage of all medical bills with no co-payments and no deductibles. In other words, medical care was “free.” And of course people began to treat it that way. Writing in 1994, Goodman and Musgrave argued that it was all these people flooding into the system with cost-free health benefits that was driving up medical prices.

What corporations, governments and their unions had created was a mini-welfare state. We all know what happens to welfare states. When General Motors went under this year, it was lamenting that every car that came off the line had $1,500 in employee and retiree health benefits on board. When President Clinton tried to “reform” healthcare in the 1990s, one of the central initiatives was that the bloated healthcare commitments made by major corporations would be off-loaded onto the government.

Practically every state and local government in the country has the same unfunded employee pension and health benefits threatening them with bankruptcy. Medicaid is working the same way and now consumes 25 percent of state budgets. And of course the granddaddy of all is Medicare, which now has unfunded liabilities of $90 trillion over the next seventy years and will only be payable if the dollar loses about 80 percent of its value.

So what has Congress decided to do in order to “reform” this system? Instead of getting a grip benefits and substituting a policy of health insurance, the Democrats have decided to extend the same unrealistic benefits to everybody.

Read the rest of the column.

The Congressional Budget Office late Friday released some new figures pertaining to the health care reform bill that suggest Democrats were able to dodge creating a deficit by removing a section of the legislation that they will have to pass later.

The $940 billion health care bill excludes a provision that would prevent automatic, steep cuts in payments to doctors who treat Medicare patients. Such a provision would cost $208 billion over the next decade and if it were included in the Democratic health care plan, would end up increasing the deficit by $59 billion over ten years.

Democrats left the provision out of the health care bill in order to keep the plan from costing money instead of saving money. As currently written, the bill would save $138 billion over the first ten years, the CBO determined.

But Republicans argue this does not provide a true cost for the bill, since everyone knows the costly “doc fix” will have to be paid for somehow.

Rep. Paul Ryan, R-Wis., who is the top Republican on the House Budget Committee, sent a request to the CBO to provide the cost of the bill that includes the fix. Ryan asked the CBO to produce cost estimates for other scenarios as well, including one in which Congress fails to implement an excise tax on expensive insurance plans or create a special Medicare advisory panel aimed at cutting the programs costs. These scenarios would also produce a deficit, the CBO found.

As the U.S. Chamber has spelled out, and the Congressional Budget Office (CBO) has also made clear, there are many ideas out there to get health care costs under control. As you can see in the House- and Senate-passed bills, many in Congress believe the best way to control costs is to raise taxes on health care products and insurance, slash payments to doctors and hospitals, create and expand government-run programs for health insurance and long-term care, and force individuals and businesses to purchase what they don’t want or can’t afford. At the Chamber of Commerce, we prefer proposals that will actually increase choice, competition, and consumerism.

Real choice doesn’t come from a new government program. In fact, the “public option,” which might end up as the only option, would be just one more plan, and would cost more than private insurance. Why not break down state barriers, allow consumers to choose from thousands of insurance plans, instead of forcing them to stay in consolidated markets with burdensome coverage mandates? The CBO said that this option alone would both cut health care costs by 5% and save the federal government at least $12 billion. Allowing small businesses to pool together and purchase plans outside of state bureaucrats’ control would save billions more by getting people off of Medicaid and into new, more affordable employer plans.

If we want real competition in health care, we should let people and plans see the costs and quality of providers and procedures. That’s a big project and it will take time, but it could be jump-started by releasing patient-protected CMS claims data to quality reporting organizations. Overnight, we could have massive amounts of data on thousands of hospitals and doctors, and could let people truly see the costs of care. This used to be called the “Clinton-Gregg-Obama” bill.

Once people see the real costs of health care, those costs need to matter – which means a purely third-party-payer system needs some change. For starters, we need many more high-deductible health plan (HDHP) options to give people skin in the game. People often expect their health insurance to cover everything, because it costs so much; HDHPs have lower premiums but do not immediately kick in to cover all costs. But the plans need work – the accounts they are paired with should be able to pay the plan premiums, should have much higher contribution limits (especially for those with chronic conditions or low incomes), and they need to be tweaked to work better with innovative health programs like Patient-Centered Medical Homes and accountable care organizations.

Enact these changes, and we have already cut health care costs, insured more Americans, and created real competition between health plans and providers – while helping people be better health care consumers and giving them the tools to be smart shoppers. And we saved money for the government, without taxes and without infringing on individual or employer autonomy. These few items would not be a comprehensive reform plan, but they would certainly be a good way to start – and they could all garner bipartisan support.

And tidings of comfort and joy from Harry Reid too. The Senate Majority Leader has decided that the last few days before Christmas are the opportune moment for a narrow majority of Democrats to stuff ObamaCare through the Senate to meet an arbitrary White House deadline. Barring some extraordinary reversal, it now seems as if they have the 60 votes they need to jump off this cliff, with one-seventh of the economy in tow.

Mr. Obama promised a new era of transparent good government, yet on Saturday morning Mr. Reid threw out the 2,100-page bill that the world’s greatest deliberative body spent just 17 days debating and replaced it with a new “manager’s amendment” that was stapled together in covert partisan negotiations. Democrats are barely even bothering to pretend to care what’s in it, not that any Senator had the chance to digest it in the 38 hours before the first cloture vote at 1 a.m. this morning. After procedural motions that allow for no amendments, the final vote could come at 9 p.m. on December 24.

Even in World War I there was a Christmas truce.

The rushed, secretive way that a bill this destructive and unpopular is being forced on the country shows that “reform” has devolved into the raw exercise of political power for the single purpose of permanently expanding the American entitlement state. An increasing roll of leaders in health care and business are looking on aghast at a bill that is so large and convoluted that no one can truly understand it, as Finance Chairman Max Baucus admitted on the floor last week. The only goal is to ram it into law while the political window is still open, and clean up the mess later.

***

• Health costs. From the outset, the White House’s core claim was that reform would reduce health costs for individuals and businesses, and they’re sticking to that story. “Anyone who says otherwise simply hasn’t read the bills,” Mr. Obama said over the weekend. This is so utterly disingenuous that we doubt the President really believes it.

The best and most rigorous cost analysis was recently released by the insurer WellPoint, which mined its actuarial data in various regional markets to model the Senate bill. WellPoint found that a healthy 25-year-old in Milwaukee buying coverage on the individual market will see his costs rise by 178%. A small business based in Richmond with eight employees in average health will see a 23% increase. Insurance costs for a 40-year-old family with two kids living in Indianapolis will pay 106% more. And on and on.

These increases are solely the result of ObamaCare—above and far beyond the status quo—because its strict restrictions on underwriting and risk-pooling would distort insurance markets. All but a handful of states have rejected regulations like “community rating” because they encourage younger and healthier buyers to wait until they need expensive care, increasing costs for everyone. Benefits and pricing will now be determined by politics.

As for the White House’s line about cutting costs by eliminating supposed “waste,” even Victor Fuchs, an eminent economist generally supportive of ObamaCare, warned last week that these political theories are overly simplistic. “The oft-heard promise ‘we will find out what works and what does not’ scarcely does justice to the complexity of medical practice,” the Stanford professor wrote.

• Steep declines in choice and quality. This is all of a piece with the hubris of an Administration that thinks it can substitute government planning for market forces in determining where the $33 trillion the U.S. will spend on medicine over the next decade should go.

Unnoticed by the press corps, the Congressional Budget Office argued recently that the Senate bill would so “substantially reduce flexibility in terms of the types, prices, and number of private sellers of health insurance” that companies like WellPoint might need to “be considered part of the federal budget.”

With so large a chunk of the economy and medical practice itself in Washington’s hands, quality will decline. Ultimately, “our capacity to innovate and develop new therapies would suffer most of all,” as Harvard Medical School Dean Jeffrey Flier recently wrote in our pages. Take the $2 billion annual tax—rising to $3 billion in 2018—that will be leveled against medical device makers, among the most innovative U.S. industries. Democrats believe that more advanced health technologies like MRI machines and drug-coated stents are driving costs too high, though patients and their physicians might disagree.

“The Senate isn’t hearing those of us who are closest to the patient and work in the system every day,” Brent Eastman, the chairman of the American College of Surgeons, said in a statement for his organization and 18 other speciality societies opposing ObamaCare. For no other reason than ideological animus, doctor-owned hospitals will face harsh new limits on their growth and who they’re allowed to treat. Physician Hospitals of America says that ObamaCare will “destroy over 200 of America’s best and safest hospitals.”

• Blowing up the federal fisc. Even though Medicare’s unfunded liabilities are already about 2.6 times larger than the entire U.S. economy in 2008, Democrats are crowing that ObamaCare will cost “only” $871 billion over the next decade while fantastically reducing the deficit by $132 billion, according to CBO.

Yet some 98% of the total cost comes after 2014—remind us why there must absolutely be a vote this week—and most of the taxes start in 2010. That includes the payroll tax increase for individuals earning more than $200,000 that rose to 0.9 from 0.5 percentage points in Mr. Reid’s final machinations. Job creation, here we come.

Other deceptions include a new entitlement for long-term care that starts collecting premiums tomorrow but doesn’t start paying benefits until late in the decade. But the worst is not accounting for a formula that automatically slashes Medicare payments to doctors by 21.5% next year and deeper after that. Everyone knows the payment cuts won’t happen but they remain in the bill to make the cost look lower. The American Medical Association’s priority was eliminating this “sustainable growth rate” but all they got in return for their year of ObamaCare cheerleading was a two-month patch snuck into the defense bill that passed over the weekend.

The truth is that no one really knows how much ObamaCare will cost because its assumptions on paper are so unrealistic. To hide the cost increases created by other parts of the bill and transfer them onto the federal balance sheet, the Senate sets up government-run “exchanges” that will subsidize insurance for those earning up to 400% of the poverty level, or $96,000 for a family of four in 2016. Supposedly they would only be offered to those whose employers don’t provide insurance or work for small businesses.

As Eugene Steuerle of the left-leaning Urban Institute points out, this system would treat two workers with the same total compensation—whatever the mix of cash wages and benefits—very differently. Under the Senate bill, someone who earned $42,000 would get $5,749 from the current tax exclusion for employer-sponsored coverage but $12,750 in the exchange. A worker making $60,000 would get $8,310 in the exchanges but only $3,758 in the current system.

For this reason Mr. Steuerle concludes that the Senate bill is not just a new health system but also “a new welfare and tax system” that will warp the labor market. Given the incentives of these two-tier subsidies, employers with large numbers of lower-wage workers like Wal-Mart may well convert them into “contractors” or do more outsourcing. As more and more people flood into “free” health care, taxpayer costs will explode.

• Political intimidation. The experts who have pointed out such complications have been ignored or dismissed as “ideologues” by the White House. Those parts of the health-care industry that couldn’t be bribed outright, like Big Pharma, were coerced into acceding to this agenda. The White House was able to, er, persuade the likes of the AMA and the hospital lobbies because the federal government will control 55% of total U.S. health spending under ObamaCare, according to the Administration’s own Medicare actuaries.

Others got hush money, namely Nebraska’s Ben Nelson. Even liberal Governors have been howling for months about ObamaCare’s unfunded spending mandates: Other budget priorities like education will be crowded out when about 21% of the U.S. population is on Medicaid, the joint state-federal program intended for the poor. Nebraska Governor Dave Heineman calculates that ObamaCare will result in $2.5 billion in new costs for his state that “will be passed on to citizens through direct or indirect taxes and fees,” as he put it in a letter to his state’s junior Senator.

So in addition to abortion restrictions, Mr. Nelson won the concession that Congress will pay for 100% of Nebraska Medicaid expansions into perpetuity. His capitulation ought to cost him his political career, but more to the point, what about the other states that don’t have a Senator who’s the 60th vote for ObamaCare?

Read the rest of the column.

Your excellent editorial “The ‘Cost Control’ Bill of Goods” (Dec. 14) doesn’t emphasize a potential stealth cost-control aspect proposed in the bill. It will start pilot programs that would transfer the gatekeeper role to doctors at the bedside, a role currently held by “payers” (HMOs and government-agency insurers, including Medicare and Medicaid).

The transfer will be via capitation fee payments, making clinics “responsible” for the cost of care of “insured lives” for one year. Like the more powerful payers, such clinics must restrict orders for care—or go broke. The clinicians’ other choice is to be left out of the income stream, if they are not incorporated in a comprehensive “provider accountable care organization.” These will bid for capitation fee rates at payer population auctions of the insured lives to be serviced.

The illusion of many pundits and policy makers is that mini provider gatekeepers can control costs after the very powerful payer gatekeepers have failed for decades. The problem for patients is the dilemma of all managed-care gatekeepers: cost, quality, access; pick any two. It is not pleasant to think that one’s gatekeeper doctor will have to decide whether to order surgery for your painful hip or only to increase the dose of Ibuprofen—a choice that patients won’t know about, since managed-care corporations and capitated doctors rationing care are carefully hidden behind the Orwellian double-speak of “pay for quality, not quantity,” “well care, not sick care,” “responsibility,” “accountability,” “pay for outcomes,” and other artful illusions.

The economic reality is that no rationing of care supply will ever control costs, when the problem is demand inflation driven by popular insurance tax subsidies too sacred to repeal. Consider that when federal fiscal “necessity” overwhelms empty slogans, scores of new bureaucracies created in ObamaCare would be able to implement Draconian rationing in collusion with subservient insurance and “provider” corporations. The high costs, as well as the rationing powers included in the more than 2,000 pages of the Obama Care Senate legislation are very real.

Robert W Geist, M.D.
St. Paul, Minn.