Orszag on Health Costs

Peter Orszag, the director of the White House Office of Management and Budget, pitched the Obama administrations health care reforms as budget makers ("Health Costs Are the Real Deficit Threat," Wall Street Journal, May 15, 2009).  Rather than using the egalitarian and humane argument that health care should be expanded to cover all, including the poor, Orszag argues that health care can be reformed to lower costs without compromising the quality of care.  In fact, he doesn't mention  that the plan expands coverage (see "The Obama Medical Plan").  Expanding coverage will expand the taxpayers bill.

Orszag asserts that cost lowering, quality enhancing reforms can be achieved because,

In health care, unlike in other sectors, higher quality currently seems to be associated with lower cost -- not the opposite.

This assertion if simply not true. Goods and services that have a lasting place in the market provide consumers the most satisfaction per dollar.  The 2010 Toyota Prius, costing approximately $25,000, will not have a successful competitor offering lower quality at $32,500.  Rather than argue for more government intervention in highly regulated health care markets the Obama administration should begin by asking why health care markets fail to achieve the common outcome of less regulated markets.  Could it be that the tax code and insurance market regulation contributes to a decoupling of price and quality?
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The Obama Medical Plan

Scott Gottlieb, a former official at the Centers for Medicare and Medicaid Services, a fellow at the American Enterprise Institute and a practicing internist, has written an interesting article in the Wall Street Journal ("How ObamaCare Will Affect Your Doctor," May 12, 2009).

The new plan will be modeled on Medicare, which, according to government projections, will run out of funding in eight short years (Kenneth Bazinet. "Medicare's in critical condition, cries report," Daily News, May 13, 2009).

At the heart of President Barack Obama's health-care plan is an insurance program funded by taxpayers, administered by Washington, and open to everyone. Modeled on Medicare, this "public option" will soon become the single dominant health plan, which is its political purpose. It will restructure the practice of medicine in the process.

The government will use market power, the ability to alter a competitive market price, and political leverage to negotiate lower prices. The government program will crowd out private plans meaning that your employer may push you into the government plan.

Like Medicare, the "public option" will control spending by using its purchasing clout and political leverage to dictate low prices to doctors. (Medicare pays doctors 20% to 30% less than private plans, on average.) While the public option is meant for the uninsured, employers will realize it's easier -- and cheaper -- to move employees into the government plan than continue workplace coverage.

The Lewin Group, a health-care policy research and consulting firm, estimates that enrollment in the public option will reach 131 million people if it's open to everyone and pays Medicare rates, as many expect. Fully two-thirds of the privately insured will move out of or lose coverage. As patients shift to a lower-paying government plan, doctors' incomes will decline by as much as 15% to 20% depending on their specialty.

Ironically, the Obama administration believes that tactics the government will use to reduce costs are illegal when used by private firms. Christine A. Varney, the new head of the Justice Department's antitrust division said (Brent Kendall. "UPDATE: DOJ Antitrust Chief Withdraws Bush Monopoly Law Report," Wall Street Journal, May 11, 2009)

Some dominant firms may need reminding that their right to compete aggressively remains qualified. When their conduct becomes predatory or unjustifiably exclusionary, the division will take action.

Doctors will earn less, an unfair outcome given the time and effort needed to earn a medical degree, and the quality of service will decline.

Physician income declines will be accompanied by regulations that will make practicing medicine more costly, creating a double whammy of lower revenue and higher practice costs, especially for primary-care doctors who generally operate busy practices and work on thinner margins. For example, doctors will face expenses to deploy pricey electronic prescribing tools and computerized health records that are mandated under the Obama plan. For most doctors these capital costs won't be fully covered by the subsidies provided by the plan...

Doctors will consolidate into larger practices to spread overhead costs, and they'll cram more patients into tight schedules to make up in volume what's lost in margin. Visits will be shortened and new appointments harder to secure. It already takes on average 18 days to get an initial appointment with an internist, according to the American Medical Association, and as many as 30 days for specialists like obstetricians and neurologists.

The private sector is creative. The government sector is not. Rather than come up with an innovative product, the Obama administration will structure its new program after Medicare. To illustrate that government is neither innovative nor creative, and in other ways, a bad supplier of goods and services, I ask my students if they would like the government to pick their music. They demur, concluding that they would be listening to classical music or polkas, yet we are about to let the government provide our medicine.
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What Did You Think Would Happen?

Lori Montgomery and Ceci Connolly of the Washington Post reported yesterday in "Obama's First Budget Seeks To Trim Deficit," that the Obama administration is seeking to improve the budget process, and to close a budget deficit estimate at $1.2 trillion.

The improvement in the budget process would come through "honest" reporting and forecasting of revenues and expenditures. This is not a new goal. The party out of the White House decries the expenditures swept under the political rug, and the exaggerated projections of future revenues reached through rosy economic assumptions as every administration attempts to claim progress in battling out-of-control expenditures while doling out pork to allies. The Obama administration should receive good karma and tons of accolades if they reach this goal. Montgomery and Connolly report on the administration's view of the Bush administration's budgeting process.

For years, budget analysts complained that former president George W. Bush tried to make his deficits look smaller by excluding cost estimates for the war in Iraq and domestic disasters, minimizing the cost of payments to Medicare doctors and assuming that millions more families would pay the costly alternative minimum tax.

Closing the estimated $1.2 trillion deficit, in part a result of the new administration's stimulus bill is a daunting task. The authors state,

President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said.

Reducing spending on the wars in Iraq and Afghanistan, given that President Obama is sending 17,000 more troops to Afghanistan will come exclusively by cutting expenditures in Iraq. Given the timetable for withdrawal, and the reduced role of the U.S. military in Iraq, that would have happened anyway.

The administration also hopes to reduce expenditures on Medicare and Medicaid by modernizing record keeping and improving incentives doctors face, rewarding outcomes not procedures. The biggest target may be the Bush-era Medicare Advantage program.

by reducing spending on some health programs so the administration would have money to devote to initiatives to expand coverage. The biggest target is bonus payments to insurance companies that run managed-care programs under Medicare, known as Medicare Advantage.

The Bush-era program has attracted nearly a quarter of Medicare beneficiaries to private health insurance plans that cover a package of services such as doctor visits, prescription drugs and eyeglasses. But the government pays the plans 13 to 17 percent more than it pays for traditional fee-for-service coverage, according to the Medicare Payment Advisory Commission, which advises Congress on Medicare financing issues.

Eliminating this program will be unpopular with participants if they were attracted to the program rather than pushed into it.

Revenue will be raised by allowing Bush-era temporary tax cuts on the rich, those earning more than $250,000 annually, to expire.

Obama also seeks to increase tax collections, mainly by making good on his promise to eliminate some of the temporary tax cuts enacted in 2001 and 2003. While the budget would keep the breaks that benefit middle-income families, it would eliminate them for wealthy taxpayers, defined as families earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule in 2011. That means the top tax rate would rise from 35 percent to 39.6 percent, the tax on capital gains would jump to 20 percent from 15 percent for wealthy filers and the tax on estates worth more than $3.5 million would be maintained at the current rate of 45 percent.

Obama also proposes "a fairly aggressive effort on tax enforcement" that would target corporate loopholes, the official said. And Obama's budget seeks to tax the earnings of hedge fund managers as normal income rather than at the lower 15 percent capital gains rate.

Two hundred and fifty thousand is a very low threshold for rich. I doubt that taxpayers in New York, Boston, San Francisco, Seattle or Los Angeles would consider themselves rich with that income. Nor do I like the segregation of the rich into a socially undesirable group. If the administration would have talked of raising taxes on blacks or Jews, people would have properly been offended, why are we not? People respond to incentives. If you want less of something, you tax it. In this case, the something is investment and wealth creation.

The Dow responded to the proposal Monday by shedding another 250 points (3.4%). Sure, part of the fall might be connected to other concerns, but investors cannot be happy knowing that the firms they own and the dividends they are paid will be taxed at higher rates.

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