Other CRFB Papers

Health Reform's Savings Myth

Washington Post| May 31, 2009


"Health-care reform is entitlement reform" has become a mantra of the Obama administration. The idea is that Congress can add a massive health-care program this year -- covering the uninsured -- and use the same measures that pay for the health reform to fix the broader budget problems. If that sounds too good to be true, there's a reason.

Expanding insurance to cover the 46 million Americans who are uninsured would probably cost more than $100 billion a year -- more than the federal government spends on education, training, employment and social services combined. It is an immense undertaking at a time when the budget is under terrible strain. So it's no surprise that Democrats and the Obama administration do not want to portray it simply as another big entitlement program.

Some argue that universal coverage would decrease costs by expanding the risk pool (bringing healthy young people into the system) and by decreasing emergency room costs, because more people would get care before their illnesses become acute. There's truth to both, but the savings are vastly outweighed by the costs of treating so many people who today get little or no care. Expanding insurance coverage would increase health-care spending by those who acquire insurance and add to overall health cost inflation.

Well, then, perhaps expanding coverage can be justified as the necessary "sweetener" in a package of tough measures to control costs? It's true that Congress doesn't much like all-pain-and-no-gain policies. But the administration's proposal, even before Congress gets to work, is to spend $100 billion more on coverage while finding cost-saving measures worth only about a third as much. Another third would be paid for by tax increases. The last third, so far, isn't paid for at all. That's three times as much sweetener as medicine, in other words -- and Congress will be tempted to jettison some of the savings and all of the tax increases.

You doubt Congress would pass a bill that isn't fully paid for and that would make the fiscal situation drastically worse? Just remember the Medicare prescription drug bill, for which Congress and the Bush administration teamed up to add a huge new entitlement without fixing any existing problems in the Medicare system. Even if Congress paid fully for this latest entitlement, it seems exceedingly unlikely that it would do much to improve the longer-term deficit situation. Health-care costs grow at a faster rate than the economy by two percentage points per year. So it's true that if we could get them back in line with overall economic growth, government spending on health care would be so much lower than projected over time that long-term budget woes would ease.

Unfortunately, though many ideas are tossed around, no one really knows how to slow that cost growth. Health information technology, better disease management and preventive care are all good ideas that would almost certainly improve the quality of health care, but they are less certain to slow cost growth. In fact, the Congressional Budget Office has pointed out that each of these would either drive up government costs or have to be paired with other policy changes to create any federal savings.

Two cost-saving measures hold the most promise. First, what's known as comparative effectiveness research, which tracks what works and what doesn't, would also require outside boards directing doctors and hospitals about what procedures they could and couldn't use. Policymakers have tended to dance around the second part of the equation. Second, eliminating the tax break for employer-provided health care could generate a good deal of savings and help bring down health-care inflation. But, again, there's a political challenge; President Obama would have to admit that Sen. John McCain, his GOP opponent in the presidential campaign, was right on this idea.

Here is the bottom line: Most health-care inflation is the result of new technologies. Bending the curve enough to help balance the budget means walking away from some of the new technologies and devices that people want when they are sick. It also means improving consumer cost-consciousness through insurance reform and higher deductibles and co-payments. For most of us, that means paying more, not less. Even then, it is unlikely to be enough to get costs under control.

Health-care reform will have to be an incremental process: Try some things now, and try more in a few years. Maybe we will choose to spend a good deal more on health care, but if so, even more will have to be done to fix the rest of the budget. As much as we might wish it were so, creating an expensive plan to expand coverage, with some measures to get us started on bringing down costs, will not be sufficient to improve America's fiscal health anytime soon -- let alone fix the federal budget.

Copyright 2009, Washington Post

$4 Trillion in Exaggerated Savings

Washington Post | May 20, 2009


On two separate issues -- health-care and the budget -- the president has promised savings of $2 trillion. A total of $4 trillion dollars -- now that's real money. Unfortunately, the claims are completely exaggerated.

First, take health care. Recently, a collection of industry groups came to Washington for a meeting and photo-op with the president. News headlines trumpeted their pledge to save $2 trillion over the next decade -- headlines that were not surprising given that President Obama said, "over the next 10 years -- from 2010 to 2019 -- they are pledging to cut the rate of growth of national health care spending by 1.5 percentage point each year -- an amount that's equal to over $2 trillion. Two trillion dollars."

Turns out that's not what the groups said at all. In their letter to Obama, they promised to "do our part to achieve your Administration's goal of decreasing by 1.5 percentage points annual health-care spending growth rate -- saving $2 trillion or more." Of course, their part of that savings may be significantly less than the full $2 trillion. The groups offered no further specifics. And, anyway, there would be no way to enforce such a hazy commitment. The administration, I'm told, understood this, but the president and others apparently chose to convey a much more optimistic message.

And then there's the budget. Administration officials have argued that they recognize the importance of getting an unsustainable situation back to a manageable level once the economy has recovered. How do they propose doing this? They would cut $2 trillion out of the budget -- a promise that has become one of their favorite talking points.

But in budgeting, "savings" all depends on where you begin. In order to come up with $2 trillion savings, the Office of Management and Budget makes a lot of assumptions that don't reflect the real world or standard budget conventions.

They assume that all of President Bush's tax cuts -- slated to expire at the end of 2010 -- would continue indefinitely. They then factor in a repeal of the tax cuts going to families making over $250,000. And voila: $600 billion in savings. Except that extending a law only to repeal it doesn't really help the bottom line.

They also assume that the war in Iraq would continue at a greater intensity than the president supports (or even President Bush supported). And then they make a show of deflating the pumped up Iraq spending for a "savings" of more than $1 trillion.

Another $300 billion of OMB's "savings" comes from interest payments that are little more than accounting gimmicks.

The frustrating thing here is that I believe Obama is truly concerned about the country's fiscal situation. He has surrounded himself with brilliant economic thinkers who share his concerns about excessive deficit spending. And he takes every opportunity to remind us of the importance of balancing the books. Just last week, he pivoted from a question about increasing Social Security benefits to say:

But what is true about the budget -- is absolutely true -- is that we can cut programs, we can eliminate waste, we can eliminate abuse, we can eliminate earmarks; we could do all that stuff, and we're still going to have a major problem, because Social Security, Medicare, Medicaid, interest on the national debt. And so I have said before and I will repeat again that my administration is going to seek to work with Congress to execute serious entitlement reform that preserves a safety net for our seniors, for people with disabilities, but also puts it on a firmer, stable footing so that people's retirements are going to be secure not just for this generation, but also for the next generation. And that's going to be hard work. It's going to require some tough choices, but I'm going to need support of the American people to get that done.

That response, emphasizing the need to cut entitlement spending instead of expanding it, is exactly the right point to make. (Though, at the same time, he's creating a huge new health-care entitlement.)

It's easy to understand the bind Obama is in. Being more direct about the policies required to fix the budget is politically perilous. But meaningful deficit reduction will involve real sacrifices -- of the sort you can't spring on the public all of a sudden. The president should be laying the foundation for what's to come.

Maya MacGuineas is director of the New America Foundation's Fiscal Policy Program and a visiting fellow in the Post opinions section.


Copyright 2009, Washington Post

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