The Leaning Tower of Jello: Why No-one Believes Health Reform will be Deficit Neutral

President Obama has promised not to sign any health reform legislation that increases the federal deficit. This promise recognized rising public concern about an Argentinean fiscal trend that, unchecked, could leave us with $19 trillion in federal debt in a decade.

Without that pledge, given the current economic climate, health reform would be one dead mackerel.

Some clarifications are essential here. I’m a Democrat and fervent Obama supporter. I voted for him twice (and that was just in the Virginia primary). I’m proud of our President. He has first class economic and healthcare teams. He deserves credit for not postponing health reform. He’s right: it’s simply not tolerable, morally or economically, for a wealthy nation to continue having close to 50 million uninsured people.

The problem is, despite his great personal popularity, the vast majority of Americans do not believe his deficit pledge. A mid November Quinnipiac poll found that only 19% of Americans and 35% of his own political party believe health reform will not add to the deficit. The problem isn’t the President; it’s our sorry fiscal history, and his partnership with an increasingly discredited Congress.

Americans are having trouble understanding how, if it’s unhealthy for their households to have too much debt- the reason why we’re in so much economic trouble- it is prudent to cure our economic and social problems by plunging even more deeply into public debt. It’s kind of hard to swallow that the solution to a terrible economic hangover is drinking another case of Jack Daniels. America is on an epic fiscal bender, and the world’s collective tolerance for our drunkard’s excuses is wearing thin.

The reason almost no one believes health reform will be deficit neutral is our political system’s lavishly demonstrated inability to say no to anyone. American health care is a vast enterprise: we’ll spend more in 2014 on healthcare in the US than the entire GDP of Germany! Powerful political interests intersect in the health benefit: organized labor, capital markets, major manufacturers, doctors, lawyers, hospitals, pharmaceutical companies, health insurers, state governments, employers large and small. Have I left anybody out?

It is, in other words, a not-so-micro-cosm of the whole economy. Logically, if each one of the above named constituencies pitched in a little bit, we could cobble together $900 billion over a decade to accomplish an important social goal. Some have thrown in- pharmaceutical companies and hospitals willingly, insurers reluctantly but still significantly. A lot of other wealthy interests- technology manufacturers, physicians, the plaintiff’s bar and the unions most notably- don’t want to contribute anything and may skate away clean.

Exhibit A for the prosecution’s case about the inability of our political system to demand sacrifice is the so-called Doctor Fix problem. This is a legacy of an otherwise successful effort to balance the federal budget twelve years ago. In the Balanced Budget Act of 1997, Congress imposed what was, in effect, a global budget on the fastest growing part of Medicare- Part B, which covers physician care, home care, hospital outpatient care and a lot of new technology like medical imaging. If Part B spending grew faster than the nation’s economic output, the BBA required both beneficiary premium increases and across the board cuts on doctor fees.

This spending cap was a well meaning but comprehensive failure. After a couple of remarkably docile years, medical costs simply resumed rising as they had for the past thirty plus years. Every year except once (2002), Congress has declined to cut physician fees. The result is a fiscal crater more than $300 billion deep- the equivalent of a huge bad mortgage on the federal balance sheet. To substitute a ten-year fee freeze (an equally absurd solution) for the mandated cuts would “cost” about $318 billion in fictitious savings.

To let fees grow at the rate of medical inflation, a more realistic constraint give past history, would “cost” $439 billion, and to do that, and exempt beneficiaries from increases in their premiums would “cost” a magnificent $556 billion. What we’re doing now with Medicare spending is practicing a public sector form of Enron accounting, booking “savings” that do not exist. There’s an unfortunate amount of Enron accounting in the CBO “deficit neutrality” analyses, because CBO is required blindly to assume in its analyses that laws are, in fact, enforced, politics be damned.

Health reform adds a heap of new cost saving political obligations on Congress. A partial list:

1)that Congress not extend the five-year shelter for states from their share of the cost of a 15 million person Medicaid expansion (e.g. more than a 30% increase). Presently, states are sheltered from Medicaid cost sharing for this expansion until 2014, but then have to find $34 billion in new money to pay their share. States, who are drowning in Medicaid costs already, will press hard to have their existing matching requirements reduced, as they have been for S/CHIP in the two bills.

2)that any “public option” health plan be self-supporting after an initial start up investment, which must be repaid. Recent CBO analysis suggested that because it will attract a ton of sick people, public plan premiums may end up costing more than private insurance unless they are either heavily subsidized or else impose Medicare rates unilaterally. Who will sign up if it’s so expensive?

3)that premium subsidies to help support a 21 million-person expansion in private insurance coverage not rise if health insurance premium growth exceeds present estimates. The premium subsidies are a huge new entitlement- $574 billion over a decade in the more generous House bill. Neither Congress nor the CBO have the faintest idea how health insurers’ costs will be affected by all the proposed restrictions on their underwriting practices. The subsidy cost estimates are, therefore, a Jules Verne moon shot. What happens if, as seems likely, they are way too low?

4)that Congress let stand recommendations of the proposed (by the Senate anyway) “independent” Medicare Commission that would reduce spending below a target (and not fiddle with the deficit neutrality rule which requires them to find offsetting revenues if the cuts are not implemented). This Commission was forbidden by Senate charter from affecting hospital payments (45.5% of the program’s cost in 2007!), not an auspicious beginning. The House has thus far predictably refused to let go of Medicare’s reins.

5)that Congress not tamper with the health benefit package employers are mandated to provide or individuals are mandated to carry. In both bills, the relatively restrained “opening” benefit package is left under the (political) control of the Secretary of Health and Human Services. If there is benefit creep (chiropractic, podiatry, in vitro fertilization, massage therapy, reiki, you name it), the required premium subsidies will have to increase apace.

How confident are you that Congress will bite all these bullets and exercise fiscal restraint when confronted with organized advocacy? The CBO kabuki dance on health reform’s deficit neutrality has pivoted around the risible assumption that Congress will actually enforce laws, like the Part B cap, that require, at some future point, fiscal discipline.

So thank you, Thomas Jefferson (the patron saint of the town I live in- Charlottesville)! You wanted to forestall tyranny by designing a weak and divided central government. Little did Jefferson realize that 220 years later, we’d be trying to manage a $14 trillion economy or a $2.5 trillion health system with our founding fathers’ deliberately crippled political system.

Add to the mix a bitterly polarized and poorly informed electorate and weak Congressional leadership and you have a recipe for fiscal incontinence on a grand scale.

Appointing a Deficit Commission, as some have recently advocated, seems like an entirely predictable substitute for actually demanding sacrifice. This is how great civilizations end- not with foreign invasion, but rather creeping internal rot, not with a bang, but with pandering to factions and to the mob.

The capacity to execute a fiscally responsible health reform rests in sweaty, shaky hands. Lyndon Johnson once famously said of the special interests: “If you can’t take their money, drink their liquor, sleep with their women and then vote against them when you need to, you don’t belong in Congress.” No Johnsons or Rayburns, or for that matter, Mitchells or Tip O’Neills presently wield the gavel. The Republicans, of course did no better when they ran things, and have made a truly pathetic contribution to the present health reform debate. It is a bipartisan failure we have here. Against powerful focused economic interests, the American political system is a leaning tower of jello. Let’s hope it’s not strawberry, because the odds are we’re going to be swimming in it!

Originally published on  The Health Care Blog.