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Obama Shows Us the Money on Medicare and Health Care

money-by-tw-collins.thumbnail.jpgWhile billed as a health care reform project, the bulk of the details on the health plan concern Medicare: who is going to pay for it, how it is going to be restructured. There are three key components. The first is changing the bidding process on Medicare Advantage plans, which the Administration estimates will generate 175 Billion dollars over 10 years. The second is to force costs lower on services to Medicare, particularly the drug rebates that companies now must give. The third is tighter management of practitioners and health providers. Obama has signaled a willingness to work on the "details" of the plan, but has laid down how much he is willing to pay. The amount is 100 billion a year over the next ten years by high end estimates, but has budgeted an average of 63.4 Billion a year.

What is in here is upper income tax increases in the form of tightened deduction rules. This is half of the fund, estimated on average to be 31 billion a year in additional revenue. It is also clear that Obama’s target is Medicare costs, not a general health care reform. Indeed, by focusing on give backs on Medicare, he invites companies to attempt to make up the lost revenue on other parts of the health care system. It’s a variation on "starve the beast" tactics, because part of the problem of Medicare is that it takes much of the most unprofitable health services off the books of insurance companies, while still providing for profits for the services to health care providers. By pushing costs back on to the insurerers and providers, they will either have to eat some of the profits, or they will have to charge more to their private customers, or both. This could work, or it could back fire badly, by creating a large wave of uninsured, the way mandates have in Massachusetts. Trying to get people to pay who have falling real wages is trying to get blood from a stone.

It isn’t that there are not inefficiencies in the system One study reports on how regional differences can double the cost of Medicare treatment without improving outcomes.

This is then, a technocrat’s first draft of tightening the screws on the current system. It starts with Medicare, which is currently the most efficient cost for outcome part of the system, but which is 500 billion out of a total of 2.2 trillion for all of US health care spending. As America ages, that number is expected to more than double, peaking around 12% of GDP as people live longer, and interventions become more common late in life. It takes profits out of one sector of health care, and expects to use that money to provide universality of health care. But the promise of universality was couched in "should" and "could" not "would."

The best paradigm to understand Obama is "Clintonomics Part II" – work on balancing the budget, cut costs around the corners, contain run away segments of the economy by compression – but with an even greater commitment to gradualism than the Clinton administrations. Clinton’s health care plan did not pass, but the threat of passage hung over health care companies, who restrained cost increases for much of the decades. Absent the pressure to reform under Bush, health inflation exploded. Insurers dropped in the market, with the belief that "cost cutting" would hit profits, even as they hoped that mandates would broaden the base of payers into the system. But where insurers see risk and peril other industry groups see the chance to break in with cheaper treatments and potential profit. While segments of the health industry fret about their current revenue, many others see controlling health costs as key to controlling employment costs. The take away is that investors believe that this plan will hurt insurers, the health payor index was down 5.2% today, but biotechnology stocks moved with the broader market.

The other takeaway from the Clinton experience is to leave plans vague, and let Congress fill in the details, as Peter Oszag stated: "We’re going to try to avoid the mistakes of the past and not lay down a fully detailed plan, rather work constructively with Congress." This may well mean dropping the plan into the house, and then working it back to the right in the Senate, as was done with the Stimulus bill and TARP.

Obama has said that "entitlement reform" is a top priority, and with this plan he makes absolutely concrete that entitlement reform is his number one budget priority, and after getting past the current crisis, his number one economic priority. His plan is to increase taxes on upper incomes, push down costs, but retain the current system in almost every detail, and then use some of that savings to fund access. Single payor? No. Patient driven? No. In fact, oversight driven. Universal? Perhaps. It’s most important virtue however, is that the price tag is fixed, and interests in Congress will have to fight within a very tight range, limiting the chances for cost over runs. It’s most important defect is that it neither is, nor leads to, significant savings. To underline the essential point. The plan offers savings of roughly 33 billion a year, when, by best estimates, the amount of over charging in the US health care system is 700 billion. The plan then addresses roughly 5% of the current problem. That is enough to contain costs, and enough to keep the system going longer, but not enough to put the system on a sustainable footing. The cost reductions envisioned by Obama’s plan shave, at best, 1.2% of GDP off the future peak of 12% of GDP of Medicare expenses. When combined with a potential Health IT program, the ground work being put in the budget by Obama, this could produce further savings of another 1% of GDP in the rest of health care, but in his incarnation at CBO, OMB Director Orszag cautioned against rosy estimates from computer systems.

The take away is that this plan reflects a belief that the problem with the health care system is about 5% of the costs of the total system, that it lies in process problems which can be addressed by going into the weeds and resting inefficiencies out, and that oversight and containment will be enough, because that is the amount budgeted for "comprehensive" reform, and that is the method given to achieve the results desired.

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