CBO: Light Regulation of Private Market Reduces Budget Impact

Whether comprehensive health care reform is enacted this year rests to a substantial extent on its impact on the federal budget. To be sure, federal lawmakers can do what they want to the budget. Unlike families, businesses and state governments, the feds can literally print money. But there’s an economic and political cost to this. For example, President Barack Obama’s economic recovery efforts are already hampered by the deficit spending involved.  Opponents to his health care reform would seize any negative budgetary impacts stemming from his reform as a heavy club useful for bashing the Administration’s plan.

Even the Administration’s allies are concerned about the impact of health care reform on the government’s finances. In an email I received from Senator Diane Feinstein she writes, “I believe that there is much room for improvement in our nation’s healthcare system. However, I believe that health care reform should not increase the federal deficit.”

Which is why what the Congressional Budget Office considers “in the budget” or “outside” of it is so critical. The Clinton Administration’s health care plan was dealt a serious blow when, in 1994, the CBO determined that the employer mandate and the purchasing pools, both central  to the reform package, be considered a form of taxation, expanding the federal government. As the Washington Post notes, the “decision was one of several by the CBO that fueled Republican attacks and helped torpedo [the Clinton] reform efforts.” As a result, lawmakers this time around are “treading carefully around the role of government.”

Which makes a recent issues brief published by the CBO especially important. Entitled The Budgetary Treatment of Proposals to Change the Nation’s Health Insurance System especially important. The brief  provide guidance to the careful treading of legislators. At this stage the CBO is reacting to health care reform concepts, not legislation. As with most things, especially things issuing from Washington, D.C., the devil parties in the details.  Nonetheless, the CBO laid out very clearly what factors it would consider in making a determination.

For example, it noted that some determinations will be fairly straightforward. These are items involving cash moving in and out of federal coffers or of entities acting on behalf of the government. “Such transactions include the provision of subsidies for some people and businesses; the income and expenditures of a public health insurance plan; the gov­ernment’s receipts from “play-or-pay” requirements and from penalties imposed on individuals who fail to comply with a health insurance mandate; and “risk adjustment” transactions of the government that shift funds from insurers with lower-risk enrollees to those with higher-risk enrollees.”

Other provisions, for instance those related to requiring individuals to purchase health insurance coverage or the operation of health insurance exchanges through which individuals, small businesses and maybe larger corporations could purchase coverage, are more nuanced. Much will depend on how they are structured.

For example, concerning the individual mandate, the CBO’s determination will hinge on three factors:

  • Is the consumer likely to be able to choose among a number of insurance plans with differing degrees of comprehensiveness?
  • If there are plans with different levels of coverage, will they cover a broad enough range to offer consumers a meaningful choice?
  • Is the consumer likely to be able to choose among several different insurance companies competing on price?

It’s easy to see how complicated this can get. How many choices must consumers have for it to be meaingful choice? What if the minimum benefit package is so rich there’s no meaningful range of benefits? The mere existence of a mandate nor the imposition of federal oversight on the market will not be enough to require resulting premiums and subsidies to be considered part of the federal budget. Instead, it is “a combination of the two—a mandate and tight federal control over how that mandate can be met—[that] is necessary and sufficient to justify recording the affected private-sector transactions in the federal budget.”

How premiums (and expenses) flowing through health insurance exchanges are treated in relation to the federal budget is also far from clear-cut. Factors taken into account will be the nature of the exchange: is it a purchaser of coverage on behalf of its members or simply an information clearinghouse? To what extent are exchanges federal entities under government control? What it comes down to is the degree of federal government control of the exchanges, their powers, and their purpose.

 Douglas Elmendorf, the Director of the Congressional Budget Office, in his blog summarizes the CBO’s guidance to Congress:

  • “Premium income—for a public plan (or plans) and for insurance purchased through exchanges or in the private market—should be classified as federal revenues if there is an individual mandate and tight government control of the insurance market. The corresponding expenditures should also be recorded as outlays in the budget. Similarly, if there is an individual mandate and a dominant public plan available to some segments of the insurance market, premiums and outlays for those segments of the market should appear in the budget and the premium income should be classified as revenues.
  • Premium income should be classified as an offset on the outlay side of the budget—along with the corresponding spending counted as outlays—if:
    • Premiums are collected for a public plan but there is no mandate, or
    • There is an individual mandate in conjunction with an active, loosely restricted private market, and premiums are collected for a public plan or by governmental exchanges. 
  • Outlays for premiums and income from the receipt of those premiums should not appear in the federal budget if:
    • There is no mandate and no public plan, or
    • There is an individual mandate and an active, loosely restricted private market, and if premiums are paid through nongovernmental exchanges or directly to insurers. “

The Obama Administration and Democrats in Congress will try their best to keep revenue and expenses related to health care reform off the budget. They’ll only go so far, however. At some point the calculation as whether the public policy benefit of a provision (in their view) outweighs the political cost comes out on the side of the public policy.

Yet President Obama has made crystal clear his desire for bi-partisan health care reform. For Republicans to sign on to a package they’ll need the political cover keeping as much of the financial impact of the package off the budget as possible.  This, in turn, inserts the CBO guidelines squarely into the debate. And the message is clear: the looser government’s hand grips the new health care system the smaller its budgetary impact.

Making Health Care Cost Reduction Promises Real

Representatives from insurance companies, doctor groups, hospital organizations and the pharmaceutical industry had their moment in the presidential sun on May 11th promising to slow down how quickly medical care costs increase. Their promise: $2 trillion in savings over 10 years. That would not only make it more affordable to provide coverage for the uninsured, it would be a huge boost the economy and to the financial condition of state governments.

In a letter signed by, among others, the American Medical Association, the American Hospital Association, the Pharmaceutical Research and Manufacturers of America, America’s Health Insurance Plans and the Service Employees International Union, which, as the Los Angeles Times described it “shepherded the agreement.” The unprecedented agreement among these health care stakeholders is meaningful for two reasons. First, these organizations were among the leading opponents of the Clinton Administration’s failed health care reform effort in the 1990s. Second, if it’s real, we’re talking about serious money.

And there’s the rub: is it real? President Obama is trying to find out. He’s instructed the organizations to come back to White House with specifics on how it will make this pledge real. As the Administration has demonstrated with the business plans demanded of the auto industry, the White House will hold these interest groups to a high standard. Which it should. The political stakes are high. If the cost cutting plans lack credibility President Obama will look, as the Associated Press noted, he “will be seen as naive for entertaining such promises.”  By holding them to a high standard, however, President Obama also has the power to undercut the industries’ opposition to his health care reform plan. Accusing them of insincere promises and inadequate commitment to cost cutting would bolster those who seek a bigger role for government in any new health care system.

The stakeholders have an equally important political task. By coming forward with voluntary, credible proposals for cutting costs, they provide political cover for those opposing the expansion of the government’s involvement in the system. If their proposals pass muster they will have gone a long way toward morphing from being a target of reform to being a part of the solution.  Their specifics for cutting costs will be part of the health care reform legislation Congress will produce this summer, which means they’ll have to live with them. But if that means the forthcoming legislation is a bit friendlier to their interests, that’s a reasonable price to pay.

Fortunately, the target, while a stretch, is eminently doable. Researchers at Dartmouth University have done several studies over the years that demonstrate that high costs for medical care do not correlate with better outcomes. As the Associated Press reports, they found that “as much as 30 cents of the U.S. health care dollar could be going for tests and procedures of little or no value to patients.”

One person who paid attention to this finding is Peter Orszag, Director of the Office of Management and Budget. As I wrote in 2007, when he was Director of the Congressional Budget Office, Mr. Orszag was “pushing for more evidence based assessments of new technologies and the need to expand research on comparative effectiveness. They key, Mr. Orszag indicated, is to provide new incentives in the system aimed at changing provider and consumer behavior.” His goal: to eliminate the $600 billion in “wasteful or low-value services” currently in the system.

If health care reform is going to work, squeezing this $600 billion out of the system is crucial. The associations’ efforts are an important first step. According to the Associated Press article, the groups are focusing on different aspects of the problem. Insurers, for example, are looking at reducing administrative costs by, among other initiatives, establishing a common, shared on-line claim form doctors and patients could use. Doctors are looking at establishing guidelines for medical practice. Improving information on drug interactions and reducing hospital readmissions are also part of the mix.

Most experts agree that the savings are there to be found. Identifying the savings will require political will and a willingness to change “business as usual” in the medical, pharmaceutical and insurance industries. Whether they pass the test will be determined by President Obama. Having shared the stage with him to make the promise, the price of failure will be extremely high.

Obama Health Care Reform Strategy Sidesteps Clinton’s Missteps

The number of mistakes made by the Clinton Administration in pushing for health care reform in 1993 are embarrassingly numerous.  One of the most damning was their heavy handed approach with Congress. Instead of engaging with lawmakers from the beginning, the task force led by then First Lady Hillary Clinton worked behind closed doors. Democratic Congressional Members were pushed out of the loop and expected, I assume, to fall in line with their Democratic President because, well, he was their Democratic President. Oh, and of course because the health care reform package developed by the task force was so obviously wonderful.

Leaving aside the lack of wonderfulness in the plan they developed, this approach was nothing short of political malpractice. The president may propose, but it’s Congress that enacts legislation. Any effort to dramatically change something as expensive and personal as health care will generate opposition. Some of that opposition is based on sincere differences of opinion concerning public policy. Some emerges from economic or political agendas threatened by the changes. In either event, it’s important to have a strong base with a unified message to withstand the inevitable attacks. The Clinton Administration’s approach — imposing their viewpoint on Congress — meant they had few supporters when and where they needed them most. The result was a political rout that helped open the way to a Republican takeover of Congress in 1994.

Whether based on temperament or wisdom earned at the Clinton presidency’s expense, President Barack Obama and his team are approaching health care reform in a far different manner. Their outreach to Congress has been extraordinary. They are not only working with Congressional leaders to design the plan, but are helping to create a unified message as well.

The Associated Press reported on a meeting today between several Democratic Senators and White House political advisor David Axelrod. Their goal, according to Senator Dick Durbin, was to “coordinate our messaging so we present a health care reform effort that the American people trust.”

The meeting was, in part, a response to advice circulated among Republicans by Dr. Frank Luntz outlining ways to attack the Democratic proposal. Dr. Luntz is a highly regarded GOP consultant and an expert on political messaging, the author of Words That Work: It’s Not What You Say, It’s What People Hear. He urged Republicans to be “on the side of reform.” while attacking the Administration’s proposal as leading “to the government setting standards of care, instead of doctors” and “to the government rationing care.”

The 26-page report has caused quite a stir on Capital Hill. Democrats in Congress wanted to make sure they were prepared to withstand the suggested assault. The meeting today with Senators and with House Leaders yesterday were designed to do just that. It was reinforced by a message to the grass roots following President Obama developed during the campaign that now operates as Organizing for America.

What was agreed to was a three-pronged message: medical costs must be lowered, people must have choice in their health care coverage, and care must be affordable for everyone. How these principles are put into action has yet to be determined. No legislation has yet emerged from the numerous Congressional hearings underway.

It’s the lack of explicit information that makes framing the reform effort so important. Until there’s actual legislation to read, all the public has to go on is the general policy positions pronounced by various parties. Eventually, we’ll see a bill, but how the public reacts to it will be influenced to some degree by the spinning that occurs before its release.

By involving Democrats in Congress early in the process of developing the legislative language and working with them to shape a unified message, the Obama Administration is sidestepping one of the most damaging missteps of the Clinton Administration. Ultimately what will matter is the legislation itself. But the mere fact that President Obama and his team are avoiding the mistakes made 16 years ago, is an indication of how different the battle will be this time.

Health Care Reform is Coming, But it Won’t Be Easy

Personally, I think health care reform is inevitable. The need for change is simply too great. Too many people go without coverage, too many are insecure about the coverage they have. Controlling medical costs is a critical part of fixing the economy: businesses and state and local governments need relief. Political pressure for a solution — from across the ideological spectrum — has reached critical mass.

The reform process is well underway. President Barack Obama held a health care summit at the White House earlier this month. Several proposals are making the rounds. Senate Finance Committee Chair Max Baucus has one.  Senate Health, Education, Labor and Pensions Committee Chair Ted Kennedy and his staff have been actively meeting with stakeholders. Democratic Senator Ron Wyden and Republican Senator Bob Bennett have introduced the Health Americans Act, which is supported by several colleagues from both sides of the aisle. There’s the proposal put forward by President Obama during the campaign and embellished somewhat since his inauguration. Republicans have their plans and think tanks have theirs.

We’ve seen this before. In 1993 it looked like President Bill Clinton’s spent enormous political capital seeking health care reform. He failed. A recent Newsweek article by Katie Connolly outlined several reasons why the health care reform debate now is likely to be much different than the battles in 1993. The Clinton Administration failed in large part because their efforts were politically inept and inflexible. President Obama’s approach is much more open, inclusive and savvy.

Of course, at this stage we’re still dealing with generalities. The specifics, which is where the devil receives his mail, have yet to emerge.  When they do the hard part of the process begins. And that could be any week now.   The Washington Post’s Lori Montgomery and Ceci Connolly reported today that “House Democrats, in consultation with the White House, will give Republican lawmakers until September to reach a compromise on president Obama’s signature health-care initiative ….”  Currently, several committees in both houses of Congress are holding hearings on health care reform. These, however, are more educational in nature, allowing interested parties to provide input and begin staking out positions. With little legislation before them the hard negotiations have yet to begin. Those discussions will have to start sooner than later if Congress is to meet the House Leadership’s September deadline. Given the complexity of health care reform it will require months of negotiations to find common ground. 

Finding that common ground won’t be easy. Already Republican Leaders are identifying deal killers. A National Association of Health Underwriters’ newsletter quotes Senator Chuck Grassley, the ranking Republican on the Senate Finance Committee as identifying the Obama Administration’s call for a national health coverage exchange to compete with the private market as extremely problematic. The GOP won’t accept such a program, according to Senator Grassley, and Democrats are likely to insist on one. There may be a way to create an exchange that satisfies both parties, but that requires a lot more specifics than have emerged yet. 

(Note added 3/20/09 at 7:45 pm: the rift between Senator Grassley’s position and those favoring a government insurance plan is growing wider — and nastier. Carrie Budoff Brown, writing in Politico today, reports on “a four-day ad buy aimed at Iowa Sen. Charles Grassley, the ranking Republican on the Senate Finance Committee who is increasingly vocal in his opposition to the government insurance option.” Health Care for America Now is leading the charge against Senator Grassley. At the White House Forum on Health Care the ranking Republican on the Senate Finance Committee told President Obama that such exchanges were “‘an unfair competitor’ and could run private insurers out of business,” according to the Politico story. The article also notes that Senator Wyden found no Republican Senators willing support his bipartisan legislation if it included a government run health plan. “From a raw political standpoint, having talked to a lot of senators, I wouldn’t have any Republicans on the Health Americans Act as cosponsors if we had a public option,” he told Politico.)

There is a way for Democrats to pass health care reform without Republican votes. If a compromise fails to emerge by September, the House Leadership is pushing for a legislative process that would allow passage with simple majorities in both chambers. This would be accomplished through a process called “budget reconciliation.” Under the reconciliation rules, filibusters are not permitted enabling the Senate to move legislation forward with a simple majority of 51 votes instead of the 60 needed to end a filibuster. Democrats currently hold 58 seats in the Senate (including those of two independents who caucus with them) with one more likely to arrive from Minnesota. (Filibusters don’t exist in the House, making passage by majority vote the norm in that chamber).

But Democrats may have a tough time pulling together even 51 votes in the Senate. Senator Evan Bayh announced on MSNBC on Wednesdaythat 16 moderates in the Senate (15 Democrats and one independent who caucuses with the party) have come together to provide a united, centrist voice to issues such as health care reform. As noted in the press release announcing the group’s formation, their goal is “to pursue pragmatic, fiscally sustainable policies across a range of issues, such as deficit containment, health care reform …” and others. With 16 members, this caucus, currently dubbed the “Moderate Dems Working Group” represents more than a quarter of the Democrats serving in the Senate. If even 10 0f these centrists stick together they’ll need to be a part of any deal struck on health care reform.  (A list of the 16 Senators in the group is below).

At the same time there are liberals in Congress who would just assume have government take over the health insurance industry and create a single payer system similar to that in place in Canada and many Western European countries. At the very least they look to a greater role for the government in providing health care coverage to middle class Americans (the government is already the primary insurer for older and low income citizens).  They won’t go quietly along with a solution they feel fails to assure universal and comprehensive  coverage.

What this means is that while health care reform is coming, getting there won’t be easy. But there is a way. President Obama has long talked of the need to focus on core principles and the desired outcome instead of on how we get there. He has even said that his campaign proposal for a federal health insurance exchange (the deal breaker identified by Senator Grassley) is negotiable. As noted in the Newsweek article, the president said at  the White House summit, “If all Americans could be insured at ‘an affordable rate and have choice of doctor, have flexibility in terms of their plans, and do that entirely through market, I’d be happy to do it that way.'”

This is the approach all lawmakers and interest groups — whether liberal, moderate and conservative — need to bring to the table. The health care reform debate will be heated, passionate and difficult. But if all participants focus on the goals, the means of getting there can be found.  Given the need, it better be.

***************

The 16 members of the Moderate Dems Working Group (who, hopefully, will work on coming up with a better name) are:

  • Evan Bayh (Indiana) – co-chair
  • Mark Begich (Alaska)
  • Michael Bennet (Colorado)
  • Tom Carper (Delaware) – co-chiar and a member of the Senate Finance Committee*
  • Kay Hagan (North Carolina) — a member of the Senate H.E.L.P. Committee*
  • Herb Kohl (Wisconsin)
  • Mary Landrieu (Louisiana)
  • Joe Lieberman (Connecticut)
  • Blanche Lincoln (Arkansas) – co-chair and a member of the Senate Finance Committee*
  • Clare McCaskill (Missouri)
  • Ben Nelson (Nebraska)
  • Bill Nelson (Florida) — a member of the Senate Finance Committee*
  • Mark Pryor (Arkansas)
  • Jeanne Shaheen (New Hampshire)
  • Mark Udall (Colorado)
  • Mark Warner (Virginia)

* The Senate Finance Committee and the Senate Health, Education, Labor, and Pensions (H.E.L.P.) Committee have primary jurisdiction over health care reform legislation.

President Obama and Health Care Reform Expectations

Senator Barack Obama remains a Senator for another 77 days. Then he becomes President of the United States. His is a remarkable story heightened by his ability to both symoblize and articulate hope. The challenges he will face upon assuming office are daunting, to say the least. Then there’s the expectations.

Every political campaign is about expectations. Candidates make promises because voters want to know what to expect. Democrats and Republicans, Mavericks and Insiders, they all make promises, which means they all create expectations. In this election, both candidates raised expectations that the nation’s “broken health care system” would, at least, be fixed.

I believe there will be comprehensive national health care reform in the next four years. There’s clearly pent-up demand in Congress for change. A bi-partisan group of Senators led by Democratic Senator Ron Wyden and Republican Senator Bob Bennett already have introduced a comprehensive health care reform package, the “Healthy Americans Act.” Senator Edward Kennedy is looking to cap his historic tenure in Congress with health care reform. While battling brain cancer he and his aides have been meeting (both personally and by video conference) lawmakers and advocacy groups to create a framework for health care reform. Many in Washington believe that the Clinton Administration squandered a unique opportunity for reforms that would have greatly benefited the nation over the past 14 years. They do not intend to let another chance go by.

Health Access outlined several reasons for progressives to be optimistic that meaningful reform is coming from Washington, D.C. They note the starring role health care reform played in Senator Obama’s campaign and the Obama/Biden ticket’s endorsement of Health Care for America Now!’s principles. They point out Senator Obama’s resounding victory will give him the political muscle, and his campaign theme and image gives him the credibility, to push through meaningful reforms.

I believe Health Access’ analysis is correct. There’s another reason health care reform is likely: the Obama Administration will take a far different approach than that taken by the Clinton Administration in 1993. They’ll learn from President Clinton’s mistakes. They’ll be far more inclusive and more accepting of input from Congress. They’ll be more willing to compromise on specifics to achieve their principles.  President Obama will bring to health care reform the same superb organization and discipline he brought to his campaign. All of this bodes well for some kind of significant reform coming out of Washington in the next four years.

The Obama Administration will face two challenges in fulfilling the health care reform expectations. First is the complex nature of the problem. A great deal of the upcoming debate will be spent on market reforms (should insurers be required to sell coverage to all applicants?) and access (should all Americans be required to have health care coverage?). These questions alone have brought down many a reform proposal. Yet they’re the relatively easy challenges. Too little attention will be spent on the most vexing problem facing every health care system in the world: the skyrocketing cost of medical care.

Someone has to pay for health care and there are only three sources: taxes, premiums or charity (some people pick up the tab for other people). Medical care inflation historically outpaces general inflation and there’s no reason to believe that will change. Which means it’s only a matter of time before the burden of paying for care crushes every and all of those sources.

This isn’t news. Last year the Henrey J. Kaiser Family Foundation released a study, Health Care Costs: A Primer, that put the discrepancy between inflation rates in perspective. There have been sporadic attempts in Washington to draw attention to the cost issue. In November 2007 the Congressional Budget Office identified the need for policy makers to focus on restraining health care costs. There are a lot of suggestions for controlling medical cost problem floating around. Few of them are easy to implement, especially since numerous interest groups will work hard to defend their current share of the health care dollar. And in the end, for better or worse, health care reform comes down to dollars.

Which leads to the second problem facing President Obama’s health care reform efforts. The nation’s economic house is in disorder. Can the nation afford expensive health care reform during a time of financial crisis?

Well, it depends. If health care reform is viewed as a line item expense on the government’s ledger, the answer is no. Even a liberal Congress is going to be hesitant to run up ever greater deficits by increasing government spending. And it’s not yet clear this Congress will be more liberal than the last. After all, a lot of its newer members came from relatively conservative districts or states. Especially when it comes to budget matters like deficits and taxes, the new Congress may have swing toward the middle.

But spending money on the health care system need not be viewed as a simple expense. By repositioning health care reform as part of a public works-like stimulus package the huge costs involved may be more palatable to the public and fiscal hawks in Washington. President-elect Obama has already declared his desire to increase spending on the nation’s infrastructure in order to create jobs and bolster the economy. Infrastructure is usually defined as roads, bridges and buildings. That doesn’t mean the definition can’t be expanded to encompass the health of its work force. In this context, health care reform is not a cost, it’s an investment.

President-elect Obama has promised voters health care reform during his first term. Upon taking office, however, he’ll face wars abroad and economic crisis at home. Dealing with the latter does not require him to ignore the former issue. By positioning health care reform as part of his plan to rebuild America, he might actually be able to fulfill the great expectations he’s created.