There Aren't Enough Rich People To Pay For Medicare And Medicaid!

I hear more and more of my progressive friends arguing, in the context of deficit reduction, that we should be raising taxes before getting aggressive about reducing the cost of Medicare and Medicaid -- as well as Social Security.

To a point, I agree.

This country is in such a hole that it is senseless to deny that at least some new taxes will be needed to pay for all of the nation's bailouts and accumulated debts.

For instance, progressives would like to end the $1 trillion cost over ten years of the Bush tax cuts for those making more than $250,000 a year.

I also believe that ending those tax cuts is necessary.

But if you're looking to better understand the budget policy choices we face, I highly recommend the March 2011 Congressional Budget Office study, "Reducing the Deficit: Spending and Revenue Options." The CBO prices out about all of the budget options.

Here's a chart from that study:
















It says that federal revenue, as a percentage of gross domestic product , has averaged 18 percent since the 1970s -- a level that sustained both economic growth and a big government pretty well. At least, until entitlement costs, for which health care is one of the main drivers, started to skyrocket.

If you believe that it is appropriate to pay what we now pay for health care in this country, then yes, we will need lots more taxes. But, on the other hand, why would you raise taxes to pay for something everybody says has a cost that is unnecessarily sky-high? Wouldn't the solution be to fix the cost problem?

Raising taxes is not going to solve the problem of out-of-control entitlement costs. Even huge tax increases on the rich won't get the job done.

After the 1990s combination of the hot economy and President Bill Clinton’s tax increase, federal revenue as a percentage of GDP rose to about 21 percent -- high by historic standards. Then the policies of President George W. Bush came along and dropped that share to about 16 percent -- low by historic standards, and arguably either boosting the economy or helping to create the economic bubble and big deficits. The Great Recession then further pushed federal revenue to a modern-era low -- about 15 percent.

According to the CBO, federal revenue will again rise to the Clinton-era level of about 21 percent of GDP -- but that is when the two-year extension of the Bush tax cuts expires for everybody.

Looks to me like those who argue the Clinton-era taxes were too high are right. Looks to me like those who argue the Bush-era tax cuts are unsustainable are right. Looks to me like those who argue that our current deficit is partly driven by lower revenue because of the recession are right.

To keep federal revenue at the apparently reasonable historic level of about 18 percent of GDP, we probably do have to give back at least some of those Bush tax cuts -- but it should not be necessary to end the Bush reductions that benefitted the middle class. And, we should also expect that some part of this revenue shortfall would be solved when the economy gets back on track.

If all of these steps were taken, it appears that we would be on the way to striking the right balance.

But, for those who think the deficit problem can be solved by just taxing the rich, let me point out another piece of startling information backed up by the CBO's study of policy choices. Replacing the 10-year, $1 trillion Bush tax cut for those people making more than $250,000 a year with a combination of lower income and capital gains taxes would still be worth $1 trillion! As the CBO options paper points out, that works out to an average of about $100 billion a year during each of the next 10 years.

That is a lot of money -- but not compared to the 2011 deficit that is estimated to be $1.6 trillion. Or the many $1 trillion deficits still to come.

Even if we were to raise the top rate to 45 precent for people making at least $1 million a year, and 49 percent on incomes of $1 billion, we would raise only $900 billion over the next decade, according to Citizens for Tax Justice -- again only a small part of the projected deficits.

So, raising taxes on rich people, by itself, hardly makes a dent.

What is making a dent -- really a fiscal train wreck -- is the out-of-control cost of our entitlements, particularly the health care entitlements.

Here is another chart based upon CBO numbers (that appeared in the recent Ryan Budget proposal:























This chart shows the impact the entitlements -- particularly Medicare -- will have on the federal budget if federal revenue were to hold at the historic level of about 18 percent of GDP. Anything above the black line is a deficit.

Now, remember, this is just entitlement spending. The rest of the federal budget -- interest on the debt, defense spending and every other department and agency would have to get loaded on top of this mountain!

Folks, we can't tax our way out of this mess.

There aren't enough rich people to do it.

This column first appeared at Kaiser Health News.

The Budget Fight: It Will Be A Long Hot Summer, and Fall, and Winter…

The good news is that Democrats and Republicans are finally seriously engaged over the country’s fiscal crisis.

And, each side is presenting a starkly different course for the voters to choose from.

When it comes to the health care entitlements, Republicans want to cut the health care entitlement benefits and therefore ease the pressure on federal spending.

Obama wants to largely leave the programs in place and raise taxes--about $1 in tax increases for $2 every dollars in cuts.

Neither touches Social Security. Obama wants to make cuts to the Pentagon's budget—the Republicans don't.

The solution Republican House Budget Chair Paul Ryan (R-WI) has presented for controlling Medicare and Medicaid costs is almost entirely a cost shift strategy. While I would agree that means testing and defined contribution approaches to making health care consumers more cost conscious should be part of the solution, this is about all Ryan is proposing.

I worry that Ryan and the Republicans are just sticking future seniors with the problem—uncontrolled health care costs—without doing anywhere near enough to create a more cost effective health insurance and delivery system for them to have a chance of finding affordable health care.

I worry less about the Republican proposal to block grant Medicaid payments to the states. While this is just another cost shift strategy that limits federal spending at the expense of the states, at least the states have the ability (and then the incentive) to implement Medicaid cost containment policies--state by state--that give them the chance of actually reducing costs and delivering affordable care. States also have to balance their budgets every year--a real incentive the feds don't have!

The President said all of the right things about health care in his budget and debt speech yesterday. But this President has been saying the right things, while telling us we can’t kick the entitlement can down the road any longer, since he took office. And, then he just kicks the entitlement can down the road.

The only promising health care proposal I heard from the President yesterday was his proposal to strengthen the Medicare Cost Board (the IPAB), which the Affordability Act created last year. But even that was far more tepid a proposal than it needs to be. He would only sharpen the trigger—invoking the Board if spending began to exceed GDP growth by one-half a percent rather than the current one percent. What he really needed to do was expand the breadth of its powers, to include things like the benefit structure, and to get it working sooner—it now can’t impact health care spending before 2015—2020 for hospitals.

Neither the Republicans nor the President have done anything near enough in their proposals to counter the chronic unsustainable rise in health care spending that is just going to continue without systemic change to the way providers and insurers are paid.

Republicans pretty much just shift costs to seniors and the states. Obama pretty much just shifts the costs of these unaffordable programs to the “rich” through bigger taxes.

I doubt Ryan's Medicare cost shift strategy has much of a chance politically. The President will have all he can do to keep both Democrats and Republicans, under pressure from the provider special interests, from repealing the Medicare cost board as it now exists.

Whatever the political outlook for either side, we are about to see another budget and deficit showdown/crisis around Memorial Day—this one over raising the debt ceiling.

The two sides couldn’t have more different approaches to the problem—but neither really have solutions.

When the two sides get past what will quickly become the debt ceiling crisis—likely no more smoothly than they did the recent government shut-down crisis over the 2011 budget, then it will be on to the 2012 budget fight and the same stark differences and lack of real health care solutions.

This summer's debt limit, and the fall's 2012 budget confrontations, will be herculean fights.

Too bad these fights won’t be over how to solve the problem.


More on the Republican Health Care Proposal: The “Path to Prosperity”—Where’s the Health Care Cost Containment?

On controlling costs: What It Will Take to Bring America’s Health Care Costs Under Control––We Have to Change the Game

What It Will Take to Bring America’s Health Care Costs Under Control––We Have to Change the Game

Last week, I posted that I was disappointed in Paul Ryan’s health care budget proposal because it lacked cost containment ideas other than the usual conservative reliance upon the market and defined contribution health care.

In my last post, Why ACOs Won’t Work, I argued that the latest health care silver bullet solution, Accountable Care Organizations (ACOs), are just a tool in a big tool box of care and cost management tools. But, like all of the other tools over the years like HMOs and IPAs, they won’t be used as they were intended because everybody—providers and insurers—can make more money in the existing so far limitless fee-for-service system.

How do you make the American health care system efficient?

You change the game.

You can’t let the $2.5 trillion health care industrial complex any longer make money just getting bigger. The new game has to be one that only pays out a profit for results—better care for a budget the country can live with. There are lots of tools available to do that. ACOs, capitated HMOs, disease management, enormous data mines, electronic patient data systems, and so on.

How do you change the game?

Generally, it will have to be an unavoidable policy imperative that will have to make the giant and powerful health care industrial complex shift to a more efficient and sustainable platform. They gotta have a reason that is unavoidable.

There must be no other choice for them but to play the game differently with new rules that make profit possible only if they make quality care affordable for America.

And, it has to be a policy change. As I have said here before, the conservative notion that the market can, by itself, accomplish this is every bit as naive as the liberal argument we just need a government payer to make things instantly better. There is no evidence in the under-65 market or in Medicare Advantage that the market can do it by itself. There is also no evidence that the giant single payer system we now have—Medicare—has done it.

I also have no illusions about how hard this will be—that recent history is evidence that accomplishing such a game changing policy is all but impossible. The recent health care debate and the lack of cost containment in the Affordable Care Act (I wouldn’t have called it that), makes that clear. Even as this country faces annual deficits of over a trillion dollars and an accumulated $14 trillion dollar debt there is no appetite for real health care solutions—witness the Ryan plan and the Congress’ inability to tackle the Medicare doc payment mess.

Just look at the one thing in the Affordable Care Act that might at least begin to put us on a path to affordable care—the Medicare Independent Payment Advisory Board (IPAB). It would take policymaking for Medicare payments out of the hands of the Congress starting in 2015—2020 for hospitals—and put those decisions with an independent expert board.

But already one Republican and Democratic “deficit hawk” after another is trying to kill the IPAB before it even starts mostly because the health care industrial complex wants it dead. These politicians argue these are decisions that should be left to elected officials. You might also find it interesting to know that the Republican leading the charge for the repeal of the IPAB, Representative Phil Roe (R-TX), received $91,000 in campaign contributions from providers in the last election cycle—double that of the next category of givers on his list (contractors).

A couple of years ago, I suggested a way to get the attention of the health care industrial complex and change the game was to tie the tax deductibility of health insurance offerings to that network of insurers, doctors, hospitals, drug companies, and other providers’ ability to meet cost targets (the Affordability Model). Either control costs or lose the tax incentives for consumers and employers to buy your services and therefore your ability to compete for business. That would get their attention.

That would change the game.

So, if in the face of all of these recent failures to really tackle costs, is there any hope policymakers will be able to give us a game changer?

I will remind you of a post I did last fall. In it I quoted former Fed Chairman Alan Greenspan. When asked if he thought we could ever implement the kind of tough budget medicine called for by the Deficit Commission chairs he replied, “The only question is, is it before or after a bond market crisis.”

This country is headed for a health care budget. The only question is will it be forced on us just before or just after the bond crisis. Just before or just after the rest of the world tells us they aren’t going to subsidize this American fiscal mess—largely driven by our health care costs—any longer.

Then the question will be about whether we have the sense to rationally manage that health care budget with all of these tools we have been developing for 20 years or will the politicians, in the midst of a real crisis, just impose expedient and arbitrary (as in ration care) budget solutions?

I hope the path we will then take is to change the game in a rational way.

Why ACOs Won’t Work

First, I think Accountable Care Organizations (ACOs) are a great idea. Just like I thought HMOs were a good idea in 1988 and I thought IPAs were a good idea in 1994.
The whole notion of making providers accountable for balancing cost, medical necessity, appropriateness of care, and quality just has to be the answer.

But here’s the problem with ACOs: They are a tool in a big tool box of care and cost management tools but, like all of the other tools over the years like HMOs and IPAs, they won’t be used as they were intended because everybody—providers and insurers—can make more money in the existing so far limitless fee-for-service system.

I see the $2.5 trillion American health care system as a giant health care industrial complex. It just grows on itself and sucks in more and more money. Why not? The bigger it gets the more money we give it.

How do you make it efficient? You change the game. You can’t let it any longer make money just getting bigger. The new game has to be one that only pays out a profit for results—better care for a budget the country can live with. There are lots of tools available to do that. ACOs, capitated HMOs, IPAs, disease management, enormous data mines, Electronic Patient Data Systems, and so on.

But, here’s the rub. There isn’t a lot of incentive for payers and providers to do more than talk about these things and actually make these tools work. Right now they can just make lots more money off the fee-for-service system. They demand more money and employers and government and consumers are willing to just dump more money into the system. Sure they complain about it but they just keep doing it.

On the heels of the “Patients Rights Rebellion” (or maybe better titled the Provider Rights Rebellion) in the late 1990s, a CEO of one of the biggest health plans told me, “We’ve had it. We tried to manage care. Actually got results. Then consumers and employers and the politicians all sawed the limb off on us. Screw it. Back to fee-for-service. We can make more money doing that and not take all of this heat. They won’t admit it but that is what they [patients, employers, and politicians] really want.”

ACOs won’t succeed in the near term any more than capitated HMOs and IPAs accomplished anything in their day because there is no reason—no imperative—for the health care industrial complex to want them to succeed.

Here’s a flash for the policy wonks pushing ACOs: They only work if the provider gets paid less for the same patient population. Why would they be dumb enough to voluntarily accept that outcome?

Oh, there will be some providers—particularly hospital administrators—who can’t wait to build an ACO but probably more because they want another excuse to corner the primary care docs as a marketing channel for their growing system. But spend millions to develop an ACO so they can get less money? Only in the policy wonk netherland does that compute.

The only people on the ball when it comes to this ACO idea are the anti-trust lawyers and with good reason.

In my next post, I will talk more about how we might change the game so that these tools can work.

Update October 2012
POLITICO Pro Health Care's team leads an interactive conversation focusing on the role and future of ACOs and their impact on providers and patients featuring Dr. Donald Berwick, former President and CEO, Institute for Healthcare Improvement, and former administrator, Centers for Medicare and Medicaid Services; Joseph F. Damore, FACHE, Vice President, Premier Inc.; Bruce M. Fried, SNR Denton; Karen Ignagni, President and CEO, America's Health Insurance Plans; Robert Laszewski, Health Policy and Strategy Associates.
Link to the video here

The “Path to Prosperity”—Where’s the Health Care Cost Containment?

Paul Ryan’s overview of his proposed 2012 Budget Resolution contains an honest and compelling description of America’s debt and deficit spending dilemma.

Every American should read it.

As I read through his discussion of the huge hole we’re in and the imperative to fix it, he had me thinking that we finally have a politician willing and ready to deal with the problem. But when I got to the end of the document, I felt like there was a missing chapter—the one with the controversial and politically problematic but necessary bad news solutions.

In Ryan’s document, his proposed solutions for unsustainable entitlement spending in Medicare, Medicaid, and Social Security each get a few paragraphs with little in the way of detail. The Affordable Care Act gets fixed by simply repealing it.

Beyond his defined contribution market ideas for Medicare, he only mentions tort reform and eliminating the Medicare physician fee cuts (at a cost of $350 billion over ten years) without reforming the Medicare docs payment system.

From what I see, Ryan’s solution to the federal entitlement budget mess is to largely shift the problem to individuals and the states.

Let me be clear, I agree with much of the direction Ryan takes. None of this will be solved without doing things like raising eligibility ages (to 67 for Medicare), means-testing, giving Medicare and Medicaid beneficiaries incentives to spend theirs and taxpayer health care dollars more wisely and giving the states the Medicaid flexibility they need to master the biggest part of their budgets—as well as ending one unfunded federal Medicaid mandate imposed on the states after another.

Ryan deserves a lot of credit for putting these things on the table—where Democrats have already begun to demagogue them.

But the conservative notion that if we just create more robust health care markets and our health care funding challenges will just all painlessly go away, is naive. Just like it is naive for liberals to argue that all we need is a single-payer health care system--or a "public option"--to fix it all. Decades of a single-payer Medicare system have not proven that approach capable of solving the problem on its own any more than decades of a private insurance/managed care system for those under age-65 have proven the market on its own capable of solving the health care cost problem. Nor have private Medicaid insurance plans that have helped the states control costs proven to be, by themselves, the silver bullet.

And, Ryan ignores a huge “elephant in the room” when he argues that giving seniors “premium-support” to subsidize their private Medicare purchases will lead to a more cost effective program. If that were the standalone solution, why after 20-years aren’t private Medicare Advantage plans cheaper than the traditional Medicare program?

When it comes to health care, it looks to me like Ryan has done what the Democrats did last year when they passed the Affordable Care Act—he fell way short on the real issue: Controlling costs.

When Democrats and/or Republicans are willing to face the cost issue and fundamentally begin to change the financing system and the perverse incentives that payers, providers and consumers now deal with every day then we will finally begin to talk about solutions.

You will know it the minute they do. Those finally held responsible for controlling costs will be screaming about the dislocation real reform will cause.


You might also find David Whelan's Forbes article, on the topic of liberal objections to a voucher system, of interest: Paul Ryan's Medicare Plan Sounds Just Like Zeke Emanuel's Voucher System


What might cause Democrats and Republicans to finally face the health care cost issue head-on? Prior post: Will it Be the Bond Market That Finally Forces Serious Health Care Financing Change?