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Health Care Reform Special

By March 27, 2010Commentary

Well, the bill is passed and signed and now we all will have to live with it, at least for the time being.  One lesson to be learned from many years in health care is to listen to the actuaries.  They have the most familiarity with the numbers–the cost of health services, the number of services utilized, the effect on people’s behavior of benefit design, new coverage, premium changes, etc.  The Administration has done everything it can to keep the views of its own Chief Actuary at CMS from being heard.  Based on what the actuaries, including the Chief Actuary, have told us, and based on what we all can see happening in Massachusetts in the wake of a similar “reform” bill, here are some very safe predictions to which we are very willing to be held.

National health expenditures will not go or even trend down.  The bill, if there are no other changes, does nothing to control utilization and only reduces cost by brute force reductions in some Medicare payments.  The bill, again if unchanged, once it is fully implemented will add $50-100 billion a year to the federal deficit and an amount in a similar range to state budgets.  Part of this comes from the SGR physician payment fix, which everyone knows will be made, and part from greater health utilization, health costs, health premiums and therefore health subsidies than projected.  Part of the deficit also comes from the phony double-counting of Medicare savings to both shore up Medicare and pay for the cost of expansion subsidies.  On a cash basis, over $400 billion in new deficits is created.  Fewer people will gain coverage than projected, largely because when it finally hits healthy young people that they are being to forced to buy relatively expensive health insurance, they will choose to pay the penalty instead. Its just a sensible economic decision.  The healthiest will be the first to make that decision, which is part of what will drive health costs higher than projected.  Insurance premiums will grow much more than projected.  President Obama is promising every family their premiums will go down by at least $2500; the change will be in the opposite direction.  In the next couple of years, everyone–providers, drug and device companies and insurers–will raise prices as much as they can because of uncertainty.  The drug companies have already been doing this.

This bill will not be unchanged, however, and the changes will make the financial consequences worse.  Other Medicare providers will successfully lobby to have their payment reductions undone.  When the seniors currently in Medicare Advantage, several million of them, realize that their benefits are being reduced and they are being forced to pay more or go back to fee-for-service Medicare, they will force rescission of the cuts scheduled to MA plans.  When individuals see what happens with their choice of either paying a lot for health coverage or paying a penalty, the penalty will either be eliminated or reduced.  When employees see employers cutting benefits or shifting even more costs to them, they won’t be happy.  States cannot afford the Medicaid expansion, the federal government will likely have to pick up all the costs of that expansion eventually.

The bill will add to an already impossible federal deficit and debt situation, creating even more of a vicious negative feedback cycle.  This health bill will add ever larger deficits, which have to be funded by more debt issuance, which eventually will require higher and higher interest rates to attract buyers, which adds even more to the deficit.  At the end of the day, if this bill is ever fully implemented, its financial consequences will be so overwhelmingly that it will be pulled back–Medicaid will be severely cut back and there will be few if any subsidies for individual insurance purchase.  The country simply won’t be able to afford anything else.  Most people will end up worse off than they are today.

Its a shame, because there are sensible, real reforms that are needed in the health system and those could be made in an affordable manner.  None of them are in this bill.  It perpetuates, indeed worsens, the core economic problem of disassociation of user, purchaser and provider of health care.  It does nothing to ameliorate provider market power, which all the current research reveals to be the true source of health care cost increases.

But the Administration and the Congressional leadership don’t really want to fix those problems, they have a different agenda, one revealed in the attacks on private health insurers.  They want costs to continue to get worse so they can justify first a public option and then a single-payer system.  They have all, including the President, been relatively open about this objective.  And the more government involvement in health care there is, the more providers should be fearful, because they are the only target left after that.  Watch Massachusetts.  Once coverage has supposedly been solved, the increasing cost will be addressed by reducing provider payments; it is all the government programs have ever done for cost control and all they know how to do.  They really have no other option because by law they have now even further severed the economic connection between user and provider that needs to be there to provide real utilization and unit price control.

That the bill has such untoward consequences should not be a surprise, when the process to passage was so ugly, the result is bound to be a disaster.  The only thing bipartisan about the process was the opposition to the act.  Its passage was secured by demagoguery deceit, manipulation, bribery and threats.  Who knows what the political future will bring, but the country will be best served if the law is repealed in whole or at least in most of its parts and if true health reform which creates an affordable system is enacted.

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