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The Obama Budget: So Far Just Kicking The Can Down The Road



March 3rd, 2009
by Robert Laszewski

Speaking about the imperative to bring America’s entitlement spending under control last December, Barack Obama said, “What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further. We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else’s.”

Right-on!

But in his first budget message, President Obama hasn’t made anywhere near the hard decisions that need to be made. In 2019, for example, when his proposals are all in, his budget would shave only about 3.5% off our Medicare and Medicaid bill, and half of his health care funding comes not from spending cuts but from new taxes—hardly examples of “seriousness” in making “hard decisions.”

To be sure, this President does not want to follow the model of past health care reform failure by sending the Congress too many details.

I applaud the President for outlining a list of health care reform principles and inviting the Congress to put the meat on the bones.

But when it comes to the budget, how we pay for entitlement reform, a President cannot afford to expect 535 disparate people to provide the leadership necessary to make the tough calls without the “bully pulpit” out front.

Facing up to the health cost reductions necessary to fix our economic system—whether through direct cuts to what providers and beneficiaries would have received otherwise or incentives with real teeth to force behavior changes toward smarter spending—cannot happen without presidential leadership.

What the President should have told us—and fell far short on—is just where and to what extent this President is willing to spend his political capital to take the money away from the stakeholders that will be necessary to balance America’s books.

The President’s principles to guide the Congress’ health care reform work are all consistent with his campaign health care plan and with the positions of many in the Congress. They are:

*Protect Families’ Financial Health
*Aim for Universality
*Provide Portability of Coverage
*Guarantee Choice
*Invest in Prevention and Wellness
*Improve Patient Safety and Quality Care
*Maintain Long-Term Fiscal Sustainability

That last one is particularly important. The President said, “The plan must pay for itself by reducing the level of cost growth, improving productivity, and dedicating additional sources of revenue.”

To finance health care reform, the President has outlined a short list of revenue and savings producing proposals. The total of these creates a $634 billion “down payment” on what reform will cost in its first ten years.

By comparison, the independent consulting firm Lewin last year estimated that the ten-year cost of the Obama campaign health reform plan was $1.2 trillion dollars. So, the Obama list comes up with perhaps half the money needed for a full-blown health care reform effort. It is also notable that Lewin estimated that for this money the Obama campaign health plan would eliminate only about half the number uninsured in America.

In President Obama’s first budget, the list of health care action items includes:

* Reducing Medicare Overpayments to Private Insurers – Through competitive bidding beginning in 2012, the administration estimates savings of $177 billion over ten years.

* Reducing Drug Prices – Accelerate access to generic biologic drugs, prohibiting manufacturers from reformulating existing products into new products to restart the exclusivity (“ever-greening”), and increasing the Medicaid drug rebate for brand-name drugs from 15.1 per-cent to 22.1 percent of the Average Manufacturer Price. Both are estimated to save $29 billion over ten years.

* Improving Medicare and Medicaid Payment Accuracy – “Waste fraud and abuse” savings of $2.9 billion over ten years.

* Improving Care after Hospitalizations and Reduce Hospital Readmission Rates – Hospitals would receive bundled payments that cover not just the hospitalization, but care from certain post-acute providers the 30 days after the hospitalization, and hospitals with high rates of readmission will be paid less if patients are re-admitted to the hospital within the same 30-day period with estimated savings of $26 billion.

* Expanding the Hospital Quality Improvement Program. Link a portion of Medicare payments for acute in-patient hospital services to hospitals’ performance on specific quality measures estimated to save $12 billion over 10 years.

* Reducing Medicare Home Health Expenditures – A savings of $37 billion over ten years.

* Reallocating Medicare and Medicaid Improvement Funds – A savings of $24 billion by taking money away that currently supports Quality Improvement Organizations.

* Requiring upper income seniors to pay higher Part D premiums – A projected increase in revenue of $8 billion over ten years.

In addition to these reductions in anticipated Medicare and Medicaid spending, the administration would raise half of their $634 billion health care fund with a tax increase. The budget includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions, including mortgages and charitable contributions, to 28 percent. This provision is estimated to raise $318 billion over 10 years.

What’s Not In the Budget

As important as what this budget includes is what it does not include. From the President’s budget message:

The Administration believes that the current physician payment system, while it has served to limit spending to a degree, needs to be reformed to give physicians incentives to improve quality and efficiency. Thus, while the baseline reflects our best estimate of what the Congress has done in recent years, we are not suggesting that should be the future policy. As part of health care reform, the Administration would support comprehensive, but fiscally responsible, reforms to the payment formula. The Administration believes Medicare and the country need to move toward a system in which doctors face better incentives for high-quality care rather than simply more care.

Bottom line: We need to reduce what we pay physicians but you the Congress tackle it.

The Congressional Budget Office (CBO) December report on health care reform options estimated that paying the Medicare physicians at current levels, plus annual Medicare Economic Index increases, would cost almost $600 billion more than we are paying at current levels. It is clear that one of the biggest moving parts in health care reform is how we pay the docs—and it is also the most politically problematic for all the clout the physician lobby has.

What All of This Means

1. The Obama administration has basically abrogated health care reform to the Congress. This plan has little in detail and, what detail there is, will ultimately be modified by the Congressional process. The plan only comes up with half the money needed for real reform and clearly avoids the most problematic choices—leaving the heavy lifting about where to reduce most costs to the Congress.

2. Not only will this plan face stiff health care stakeholder opposition, but the administration has also managed to take on the National Association of Realtors and organized religion by trying to reduce their sacrosanct tax deductions for mortgage interest and charitable contributions (I am not sure which of these has the more powerful lobby). With health care reform as hard as it is why would they muddy the waters with this and instead just propose a straightforward income tax increase on the highest earners?

3. The Obama administration has picked only relatively low-hanging fruit in trying to come up with savings in the system. The only big hit is to the HMO industry—hardly a risky and unexpected political call. In the CBO’s December report, issued while the President’s budget director was head of the CBO, the CBO said that the very cost reduction proposals in this plan (as well as the recent stimulus bill) would not have more than an incidental impact on reducing health care costs and pointed to meaningful reductions in what both providers and beneficiaries get as the real target for savings.

4. The problem with health care is its giant and growing costs. CMS said just this week that we will spend over $4 trillion and 20% of GDP on health care in ten years. Yet the Obama 10-year budget only reduces government spending by the Medicare Advantage “extra payments” of $177 billion and only another $139 billion from other provider payments. According to budget documents, the proposal would reduce Medicare and Medicaid spending by only 2% in 2012. In 2019—when the projected savings are all in—the plan saves $51 billion on a Medicare and Medicaid budget of $1.3 trillion, or 3.5% in savings from what it would have been.

5. Half of the $634 billion health care fund comes from tax increases—capping high-income people’s mortgage and charity deductions. Tax increases will almost certainly have to be part of paying for the huge upfront costs a big health care reform bill would cost. But the paramount issue in health care is high and unsustainable health care spending. To budget half of the “down payment” from tax increases “on the rich” before exhausting solutions from the real issue—hundreds of billions in excess health care costs—avoids the “hard choices.”

6. The $177 billion in Medicare Advantage cuts were expected. But I question the administration’s use of competitive bidding as a means to reduce private Medicare’s costs. While only sketchy details are available, the use of competitive bidding is really a Republican idea first offered when market forces were suggested as a means to control Medicare costs. If the new bidding system would develop reimbursement from the averaging of HMO bids, as the budget document states, why wouldn’t the bids just reflect the health plan’s current cost and profit model as opposed to reducing their payments to the level of the government-run Medicare plan—the stated objective of the change? It would seem the administration would have to cap a health plan’s reimbursement at the Medicare level in order to develop the savings.

While the administration’s cost reduction measures amount to the relatively low-hanging fruit from a budget perspective, I do not mean to suggest they will be easy politically. Cuts to home health care, drug company reimbursement, private Medicare, and hospitals all take on some of the most powerful lobbies in Washington, DC. It’s just that these cuts hardly amount to a “hill of beans.”

In the end, we are back to where we were the day before the President’s budget was released:

1. Unless the President steps up with leadership on the most politically problematic “hard decisions” the Congress will have to drive the heavy lifting in the health care reform process.

2. We still face the two big reasons why health care reform remains highly problematic during the next two years:

* The still growing financial crisis is sucking trillions of dollars out of the system leaving little for health care reform—with a lot more to come. If health care reform is about spending not saving there isn’t any money to spend.

* There is no agreement among the key stakeholders on what it is they are willing to give up to bring costs under control. The fact that the Obama administration all but punted on using its political capital to take them on—and I mean the big cuts we need—won’t help.

If the Obama health care budget did anything it just proved there is yet no clear path to health care reform in 2009.

The President has been saying all month that, when it comes to bringing our entitlement spending under control, “We can’t keep kicking this can down the road.” He has been arguing forcefully that there is no better time than now to finally get our entitlement costs under control and relieve their strain on the deficits and national debt.

This is the time, we have a crisis that demands it, and we have a President who has the political capital to do it.

What’s his opening shot? It is 97% of the out-of-control health care bill we would have had in ten years anyway, half the money in tax increases, and a request to Congress to figure the rest out.

Looks like kicking the can down the road to me.

Luckily this is the beginning of the process and not the end of it.

But we will need a lot more leadership from this White House.

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1 Response to “The Obama Budget: So Far Just Kicking The Can Down The Road”

  1. ddiloreto Says:

    Assuming that the US Congress’ efforts
    to provide effective solutions to the funding shortfalls
    succinctly described in this article are sufficiently
    inadequate, a potential remedy could be to create a Federal Reserve-like
    structure for making the crucial but time sensitive and politically sensitive
    decisions needed to stabilize and enhance a flawed health care system.

    Of course, the Federal Reserve model might still beg the question as to how you ultimately fund
    health care but meaningful remedies to make the system less expensive could be enacted far more quickly than through the legislative bodies.

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