Obama Health Plan’s Success Rides on Cost Curbs: Albert R. Hunt

As Democratic Senate and House leaders privately hammer out a final compromise on their competing versions of health-care legislation, the controversies focus on a government-run option and abortion. These are irrelevant to the important decisions that will affect the credibility and sustainability of the measure.

The House narrowly passed a public option, which, clearly lacking the necessary 60 votes to pass in the Senate, is dead. The differences in the anti-abortion language in the two versions are largely about semantics and placating those who see this issue in theological terms or as a vehicle to raise money.

By contrast, critical decisions will affect the sine qua non of this initiative: curbing costs of the most expensive health-care system.

In 1993, as President Bill Clinton launched the last overhaul effort, health-care spending was 13.7 percent of the nation’s gross domestic product. Last year, it was 16.2 percent, much higher than any major country in the world and rising at a faster clip.

The political environment for fashioning compromises in the days ahead is raw. Public support for a health-care overhaul has eroded, and Republicans months ago decided to stiff any serious effort. There is anger among both House and Senate leaders at President Barack Obama for refusing to get his hands dirty, as well as at each other; more than a few House Democrats are furious that they have to capitulate to the Senate on big issues.

Medicare Savings

In both the House and Senate bills about half the roughly $900 billion dollar cost of extending coverage to tens of millions of uninsured people over the next decade would be covered by savings in Medicare expenditures.

The measures take different tracks in raising revenue for the rest. The House relies principally on a 5.4 percent surcharge on millionaires. The Senate would increase Medicare taxes for wealthier Americans and would slap a tax on so-called Cadillac, or the most lavish, private insurance plans.

Given the current fiscal outlook, there may be a strong case for boosting income taxes on wealthier Americans. That, however, should be part of any deficit-reduction plan, not health care. It doesn’t, in the health-care parlance, bend the cost curve.

Cadillac Plans

By contrast, the tax on Cadillac plans, despite the opposition of labor unions and liberal House Democrats, would hold down costs, most health-care experts say. The White House is supporting the provision and the test will be whether it stays intact or is weakened.

Critics attack this as a tax on middle-class workers that violates candidate Obama’s pledge not to do so. More important, though, is that it provides a disincentive for gold-plated plans that often drive up costs without improving outcomes.

If Democrats approve a bill that guts provisions dealing with spiraling costs it not only will be bad policy but bad politics.

In other areas, the House version is preferable. A more generous provision expanding Medicaid would cover 5 million more Americans than the Senate’s legislation would.

This isn’t just do-gooder stuff. Without better subsidies more people may figure it’s advantageous to opt out of any health-care requirement by paying a penalty. The result would be a less healthy population, which would drive up premiums and shift more costs to the insured.

Insurance Exchanges

On the question of new insurance exchanges in which small businesses and people without employer-sponsored health insurance can shop for coverage, the House provision that creates a national exchange allowing states to opt out if they meet minimum requirements for their own exchanges is more effective than the Senate provision’s reliance on state-based exchanges.

The most constructive action lawmakers could take is to put some teeth back in the Obama proposal for a Medicare commission that would be empowered to set rates for hospitals, doctors and other providers, subject to congressional veto. The House killed the idea outright, and the Senate diluted it, exempting hospitals and doctors. House Speaker Nancy Pelosi and other liberals argue it infringes on congressional prerogatives. They also worry about a commission someday controlled by Bush or Reagan-type appointees.

Even then a congressional vote still could either block action or frame a political argument for the next elections.

Industry Provisions

The best case for infringing on congressional prerogatives may be the way this bill has been written. The hospitals, drug companies, doctors, insurance industry and device makers all carved out their special provisions. Everyone is for curbing health-care costs; just don’t make cuts that affect powerful interests, which is almost every sector of the health-care industry. History is clear: Congress will bow to those interests rather than make the tough decisions required to bend the cost curve.

Obama’s budget chief, and health-care expert, Peter Orszag, calls a commission one of the “game-changers” that “would make sure that there is someone always on the beat, looking for ways to bend that curve.”

The Democratic leaders, ideally with more effective pressure from the White House, have leeway in fashioning the final particulars. The measure would have a lot more credibility if this commission concept were strengthened, not diluted even more.

Spiraling Costs

U.S. health-care spending rose 4.4 percent in 2008, the government reported last week, the smallest increase since this tracking began in 1960. Whatever encouragement that offers is offset by three facts: Medicare spending continues to spiral upward at almost an 8 percent rate; the overall slower growth was due to the most severe economic downturn since the Depression, and America still spent $2.3 trillion on health care in 2008, or about $7,700 per capita.

If a health-care measure is enacted, it’ll be years before its effectiveness can be evaluated. There will be no better indicator than whether 15 years from now America spends one- fifth of its GDP on health care or the 16 percent to 17 percent spent today.

(Albert R. Hunt is the executive editor for Washington at Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Albert R. Hunt in Washington at ahunt1@bloomberg.net.

To contact the editor responsible for this column: Max Berley at mberley@bloomberg.net.

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