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Health Care and Fiscal Policy – Flawed Reasoning

Editor’s note: You can read more at:


The Administration’s flawed health care argument threatens their fiscal policy strategy


The President’s fiscal policy is based upon a flawed health care premise, and the flaws are becoming apparent to a wider audience.

The Administration’s fiscal strategy is to increase short-term spending (and not just on health care) and more than offset those spending increases through long-term reductions in federal health care spending.

In theory this strategy could work, but by ducking painful policy choices on health care reform that would actually reduce long-term health care spending, the President and his team have placed their health care and fiscal policy strategies in jeopardy.

Flaw 1: The arithmetic is nearly impossible.  These bills start by increasing federal health spending 10-15% by creating a new entitlement.  That digs a huge hole before beginning to address the existing fiscal problem.

Flaw 2: As it becomes increasingly more difficult to pass health care reform legislation, the Administration is lowering the bar to say such legislation must not increase the long-term deficit (rather than must reduce it).  But to make their fiscal policy case, the Administration needs to be able to demonstrate that health care reform will reduce long-term deficits.

Flaw 3: The Administration has not recommended policies that would actually reduce long-term federal health spending.  When experts (like CBO) point this out, the Administration misrepresents the analysis and repeats their claims of long-term savings.

As CBO has dismantled this argument, it has placed health care legislation in jeopardy.  In addition, the lynchpin of the President’s fiscal policy case is buckling.

Flaw 4: The Administration says the long-term savings will exist, but the savings are too nebulous to be precisely scored.  What, then, do they plan to display in next year’s President’s budget if they are successful?  At some point someone would have to attribute specific long-term budgetary effects to an enacted health care reform bill.  You can’t just hand-wave past this problem forever.  It will catch up to you.

Challenge 1: I challenge the Administration to publish their own estimate of long-term budgetary savings from any of their long-term proposals.  (They can’t because their professional estimators agree with CBO.)

Let’s watch how NEC Director Dr. Larry Summers struggled with these flaws yesterday on NBC’s Meet the Press with host David Gregory.

SUMMERS:  That’s why the president has made health care a central issue in long-term deficit reduction.  It’s going to be the largest part of the federal, the federal budget.  … So we’re going right at the deficit, but we’re going at the issue that’s measured in the hundreds of billions of dollars, federal dollars, which is federal health care spending.  And that’s the big fight the President’s committed to.

GREGORY:  The difficulty of deadlines being missed and more public opposition to health care leads to the question of whether or not the president is losing the economic argument, that is the argument that health care is essential as an economic fix.

SUMMERS: It is essential as an economic fix. It’s essential because of how much of the federal budget health care represents. It’s essential because it’s so important for the competitiveness of American businesses. You know, for some of the automobile companies, the health insurance companies are actually their largest supplier. And it’s essential to slow the growth of health costs if American families are going to see rising wages that rise ahead of inflation. So it is essential.

Flaw 5: CBO says the House bill would increase the budget deficit over the next ten years.  They’re $239 B short.

Flaw 6: CBO says the House bill will result in bigger and ever-increasing deficits in the long run.  This is because the bill starts with a huge spending increase, and then offsets fast-growing health spending increases with slow-growing tax increases.

Flaw 7: While health cost growth is a huge and growing federal budget problem today, it’s actually not the largest source of growth for the next 15-20 years.  Demographics and aging of the population is.  To address this one needs to change the demographic parameters of Medicare, Medicaid, and Social Security.  By ignoring demographics, the Administration can punt on Social Security reform (which Speaker Pelosi definitely does not want to do.)  But even if health reform legislation achieved the President’s stated goals, the benefits would build very slowly over time.  We would still have to address the medium-term demographic cost driver.

Flaw 8: Dr. Summers is right that we need to slow health cost growth “if American families are going to see rising wages that rise ahead of inflation.”  That is why rising health costs do not harm the competitiveness of American businesses.  They hurt the workers at those businesses.  In addition, the health insurance mandates now trumpeted by the President and Speaker would raise premiums costs for most Americans.

Let’s return to Mr. Gregory and Dr. Summers:

GREGORY: That’s a very important point, and yet the CBO, the Congressional Budget Office, has looked at this, a nonpartisan actor in this debate, and has said there is a shortfall in paying for it even over the first decade, and that shortfall grows in subsequent decades.

As you look at these health care plans, do there have to be fundamental changes if you’re going to avoid adding to the deficit down the line?

SUMMERS: CBO said that about one of the bills that’s passed, one of the committees. This is why the discussions are continuing. No bill is going to move forward that is not over the first 10 years scored by the CBO as budget neutral.

But the President’s — in addition to insisting on budget neutrality, which we didn’t use to do, the President’s doing another important thing. It’s what we’ve called a belt-and-suspenders approach. There’s some things — how we pay drug companies, for example — where you can do the accounting very accurately and you can see what happens to the deficit.

There are other things, encouraging — encouraging preventive care, taking the whole reimbursement system out of politics — where it’s much more difficult to do the exact calculation.

And so the CBO doesn’t give us any credit for them even though most people would say that, over time, they’re likely to have some benefit. And so we’re doing both sets of things. And so I think we’ve got a lot of basis for being optimistic that, whatever the CBO says, it’s going to end up better. But we’re being very conservative. That’s why it’s belt-and-suspenders. We’re not taking any account of that second set of changes, the preventive care and all of that.

This is the most fiscally responsible approach to introducing a major structural change in the economy that’s ever been pursued. If you look at what happened with Medicare; if you look at what happened with prescription drugs; if you look at what happened when food stamps was introduced, there has never been this degree of careful scrutiny of long-run — long-run cost impacts.

And it’s right because the center of this has to be containing health care costs, otherwise it’s not going to work for most families.

Flaw 9: CBO did not say that it’s difficult to calculate how much the President’s “IMAC” Medicare commission would save.  CBO said, “enacting the proposal, as drafted, would yield savings of $2 billion over the 2010-2019 period … in CBO’s judgment, the probability is high that no savings would be realized … Looking beyond the 10-year budget window, CBO expects that this proposal would generate larger but still modest savings on the same probabilistic basis.”

Challenge 2: I challenge the Administration to produce three experts who would say that the specific IMAC legislative language offered by the Administration would produce significant long-term budget savings.

Flaw 10: While the Administration asserts that providing more information by itself would significantly slow the growth of health spending, most (all?) health experts say you also have to change incentives.  Here’s CBO:

Other approaches – such as the wider adoption of health information technology or greater use of preventive medical care – could improve people’s health but would probably generate either modest reductions in the overall costs of health care or increases in such spending within a 10-year budgetary time frame.  Significantly reducing the level or slowing the growth of health care spending would require substantial changes in those incentives.

The Administration’s health care reform and fiscal policy strategies are based on flawed premises.  When neutral and non-partisan referees like CBO point out these flaws, both strategies collapse.  The damage to the President’s health care reform effort is evident.  I think the damage to his fiscal policy strategy will soon become apparent as well.


August 3, 2009 - Posted by | Federal Government, healthcare | , ,

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