Open Wide: Here comes the change you thought would never happen

The morning after the election, I posted a speculative blog in Health Affairs on three possible scenarios for President-elect Obama’s implementing health reform: folding it into a bold, ambitious emergency legislative package (Complete the New Deal), carving funding out of the current $2.5 trillion national health spend (Braveheart), and postponing implementation until the economy recovers but taking steps now to prepare for it (Wait/Lay the Groundwork).

At the time, the Wait/Lay the Groundwork option seemed 70 percent likely. But with economic conditions worsening, I’m now convinced Obama will probably opt instead for the Complete the New Deal option, and try to implement health reform in the first 120 days of his Presidency, before the health care industry “dragon” can even stir from its cave.

Let’s call Obama’s program The Real Deal. We can already see its contours: an economic stimulus program including highway construction and other state-directed public works, a green energy spending initiative, emergency housing assistance including a foreclosure prevention measure, an auto industry bailout, labor law reform and income supports through tax credits for low income people.

The State Children’s Health Insurance Plan tie-over expires at the end of March 2009. Rather than merely extending SCHIP, I believe the new President will opt to include in the Real Deal legislative package his entire health reform program: a “play or pay” employer mandate, a federal health insurance exchange modeled on Massachusetts’ Connector, a new federal Medicare-like plan for the under 65 population, SCHIP re-authorization and expansion, a Comparative Effectiveness Institute, and Medicare Part B payment reforms.

Most of the President’s health reform ideas have been around for at least a decade, and have the advantage of having been tried once (in Massachusetts). There is no focused opposition to the President’s plan, other than from a Republican party now in full rout and the crews at the Cato Institute and the Wall Street Journal. Obama is under no obligation whatever to govern from the center. He ran to the left of most of his Democratic primary care opponents, and was elected on an overtly redistributionist, New Deal-esque campaign platform.

The fact that the new President takes office in the midst of an authentic national economic emergency gives him an opportunity to submerge the expected loud chorus of industry objections to the specifics of any health reform plan in a much larger societal cry for decisive government action to end the economic crisis.

The President-Elect has been preparing the public for a Big Bang legislative package by reminding people that this is the most serious economic crisis in our lifetimes. He has been materially aided by an epic stock market crash and continuing confusion from the outgoing administration about how to rescue the economy.

Obama’s new Chief of Staff designate, Rahm Emanuel, told a CEO Forum in Washington last week that it would be a shame to let a crisis go to waste, and that the administration intends to “go long” in January. Emanuel is, of course, a veteran of the Clinton White House, and watched helplessly in its Political Affairs office while Hillary, Ira Magaziner and the legendary Health Care Task Force “reinvented the marshmallow” (to use Pete Stark’s priceless phrase) and talked health reform to death in 1994-95. That won’t be permitted to happen again.

As the Wall Street Journal approvingly noted, Emanuel was the architect of the compromise with Newt Gingrich in 1997 that created the Balanced Budget Act. The health care industry should recall that BBA brought the most serious cut in Medicare spending we’ve seen since the program was enacted, courtesy of a Democratic President. Emanuel understands very well the logic of “Do It Now/Fix it Later.”

The new President is also under no obligation to be bipartisan. Although he will make the obligatory gestures; he is likely to be only one or two AEGIS Destroyers away (The USS Susan Collins or USS Olympia Snow, to be built at Maine’s Bath Iron Works) from the 60 votes he needs to enact his program without filibuster. Most ingredients of his plan were included in Senate Finance Chair Max Baucus’ health reform framework, signaling that the Senate Finance Committee is likely to support his proposals. And the powerful desire to enact something Ted Kennedy could see signed into law only adds to the urgency of the moment.

Divisions between the Clinton White House and Congressional Democratic leadership paralyzed the first two years of the Clinton Presidency. Under Emanuel’s guidance, Obama has moved skillfully and aggressively to co-opt or neutralize Congressional opposition within his own party with clever appointments and consultation. The result is a degree of party unity and excitement unseen by Democrats since Lyndon Johnson’s time.

There are legitimate macro-economic objections to the President’s health reform plan. The engine of the President’s health reform proposal is likely going to be a 6-8% payroll tax, which is in effect what “play or pay” employer mandate represents for businesses that presently do not cover their workers. By locking in a rich benefit package modeled on that offered federal workers, Obama could doom efforts to make the benefit itself more affordable, a serious problem for which the bill is now coming due in Massachusetts.

In addition, he promised other employer mandates: a $2 an hour increase in the minimum wage indexed to inflation, a week of paid sick leave, paid family leave, comparable worth pay standards for women, a 10% increase in the tax rate for businesses filing as Chapter S and a much easier path to unionization. To dramatically raise the cost of employment in the trough of a serious recession, and likely 10% unemployment, is a huge economic and political risk.

Obama can blame the outgoing Bush regime for the deepening recession for about nine months. Enacting the full spate of employment promises could defeat private-sector job creation not only next year but for many years. If the economy fails to rise from the trough by 2010, he could lose a lot of his new Congressional majority and will be blamed for the country’s continuing economic struggles.

There is also the fiscal risk. A trillion dollar FY2009 federal budget deficit looks like an opening bid, since it does not factor in a new stimulus plan, further financial system rescue costs or an economy that could continue to worsen through 2009.

The federal government will already issue $1.5 trillion in new debt in fiscal 2009, a 25% increase in total federal debt in a single year. The prospect of a federal deficit exceeding 7% of GDP looms larger with each passing week.

Obama’s health reform plan requires new federal revenues, principally to fund subsidies to small employers and the vouchers for individuals who are not covered by the employer mandate. Obama proposed to cover these with the repeal of the Bush tax cuts, something he has now apparently resolved to put off until recovery happens, and a “peace dividend” from quickly ending the Iraq War, which also isn’t going to happen in time to help health reform. If the 52 Blue Dog Democrats in the House insist on “pay as you go” financial rules, and Obama cannot find more realistic revenues to fund his plan, health reform could stall in the House.

Advocates of doing health reform now will point to the rapidly declining cost of federal borrowing, as frightened investors have piled into Treasury securities, pushing interest rates on federal securities down to record lows. They will also point to the strengthening dollar as evidence that global investors have thus far not been scared off by our deteriorating fiscal position.

However, finding new revenues to fund health reform could be challenging if economic conditions do not improve. Perhaps lowering the mortgage interest deduction to $750 thousand principal and/or the capping the employee tax exemption for health insurance for high-income individuals (e.g., people making more than a General Motors fork lift operator) could substitute for a general tax increase.   

A more cautious individual would choose the Wait/Lay the Groundwork Scenario. Were I President, that’s probably what I would do. And finding an alternative to the employer-based approach such as Zeke Emanuel’s idea of an individual voucher funded by a Value Added Tax would make a great deal more sense than the proposal Obama campaigned on. Explaining how Zeke’s plan works to voters and the industry, however, would take both time and skill. It might produce a better solution, but one that may not get implemented.

However, cautious people don’t run for President in the first place. The Clinton health reform debacle proved conclusively that, given time, the health care “dragon” will eventually awaken, and gum Obama’s proposal, or that of anyone else, to death. Time is the enemy of health reform. The Presidential stack of chips will certainly shrink as time passes; it will never be greater than it is at Inauguration in the midst of a scary economic crisis. 

Though I could be embarrassingly wrong and soon, I think the new Administration is going to try to get health reform done very quickly, and fix it later: The Real Deal Right Now. And rather than fighting health reform, the health care industry might better focus its energy on forestalling or watering down the Employee Free Choice Act, that would have a ruinous impact on health costs and on the re-engineering of healthcare.   It is going to be a very interesting next six months!

P.S. Other than voting for Obama twice (spring and fall), I had no ties to the Obama campaign and have none to the transition.

Originally published on The Health Care Blog.