The Costs of Overturning the Presidents Health Care Reforms

The Costs of Overturning the Presidents Health Care Reforms

March 29, 2012

Partisan politics and constitutional principles received equal billing in this weeks showdown over health care at the Supreme Court. Much of the commentary tried to interpret the questions, gestures and tone of the Justices, in hopes of divining which party and vision of government will likely prevail. Such divinations are notoriously unreliable in such controversial cases. But whatever the Justices decide, the decision will have enormous long-term economic effects on how much medical care average Americans receive and how much they pay for it.

It has been clear for some time that without major reforms, the U.S. health care system will soon impose unmanageable burdens on millions of middle-class Americans. By 2016, the average family is expected to earn about $54,000. In that year, moderately-priced, family health-care insurance coverage will cost about $14,700. Employers will pick up much of that tab for most middle-class families. But all of those employer payments come out of peoples wages and salaries. So, adding the value of that coverage to the average familys income in 2012 $54,000 + $14,700 = $68,700 we see that the cost of the health care insurance alone will soon claim more than 21 percent of an average familys annual resources.

On top of that, by 2016, the average familys co-payments and other uninsured expenses are expected to come to another $5,100. Our average family also will pay taxes to help cover other peoples health care 2.9 percent of their wages for Medicare ($1,566), plus perhaps $1,000 more in federal and state taxes for Medicaid and Medicare costs not covered by the payroll tax. Add all of that to the cost of their insurance, and health care will claim $22,366 from an average family in 2016, or 32.5 percent of their adjusted income of $68,700.

Why should the average American family have to pay nearly 33 percent of its income for a health care system which by 2016 should claim about 18 percent of GDP? Part of the answer is that the average worker earning $68,700, a manager making $150,000, and the CEO earning $5 million all pay roughly the same $14,700 for their family coverage. The result is that middle class families spend a much larger share of their income on health care than wealthier families.

One of the reasons why health insurance costs middle-class families so much, however, is that their bill includes a good share of the costs of treating those without insurance. The tab for treating the injuries and illnesses of more than 50 million Americans with no public or private coverage will come to about $68 billion this year. Government picks up some of those uncompensated costs, and doctors and hospitals eat some of their costs. But most of the rest is passed along in lower payments to insurers, who in turn pass along those losses to their customers in higher premiums or reduced coverage which drives up out-of-pocket costs. A reasonable estimate of the costs of treating the uninsured which are passed along to average policyholders is about $300 per-person, or some $1,200 for an average family.

The Presidents plan to end those pass-along costs by mandating universal coverage was, of course, the central issue in this weeks arguments at the Supreme Court. And behind the high-minded debates over principle lies the harsh politics of who is to pay for it. The Presidents reforms shift most of the costs of the uninsured to the government by expanding Medicaid and providing subsidies to uninsured people and families mandated to get coverage. These costs ultimately will be financed through non-payroll taxes the personal and corporate income tax which in turn fall disproportionately on higher-income Americans. That is the choice, and it helps explain the vehemence of the partisan battle over the mandate: The Presidents reforms will shifts tens of billions of dollars in annual costs from middle-class families with private insurance to more affluent taxpayers.

The good news for the well-to-do if the President prevails is that the new reforms also include measures to contain the future costs of covering those without easy access to insurance. To begin, covering the uninsured should reduce the cost of their care, at least over the long-term. Uninsured people are much more likely to suffer strokes, for example, because they are much more likely to have undiagnosed hypertension, diabetes and high cholesterol. Or, among people with cancer, the uninsured today are much more likely to be diagnosed later, and so require the most expensive interventions. Uninsured people also are less likely to fully recover from many injuries, making them more likely to suffer subsequent medical problems that require more treatment. Ensuring that everyone has insurance, therefore, should reduce those costs.

The reforms also include a package of measures that may begin to slow the health-care inflation which for years has been eating away at everyones insurance coverage. These measures range from the push to establish uniform electronic medical records, to a more results-based reimbursement process for doctors and hospitals, and steps to encourage them to adopt more cost-efficient medical protocols and practices. To be sure, the reforms do not include the most controversial and partisan cost-saving measures, including tough medical malpractice reforms and an option for public insurance in places where competition among private insurers is weak. Still, they are a beginning.

After Bill and Hillary Clintons push to reform health care failed in 1994, it was 15 years before another President and Congress took up the issue again. If the Supreme Court unravels what they did, it almost certainly will be many more years before anyone tries again. The economic consequences of that scenario would be inescapable. The number of uninsured people and families will continue to grow. The costs of their treatment will continue to squeeze coverage and increase the costs of private insurance for most middle-class families. And without measures to bend the curve of medical cost increases, average families will find themselves forced to spend one-third or more of their real incomes on their health care.

A Modest Proposal to Help the U.S. Avoid an Economic Train Wreck

March 20, 2012

The United States is headed for an economic version of a Wall Street triple witching hour. In finance, a triple witching house comes along four times a year, when options contracts on stocks, options contracts on stock indexes, and futures contracts of those indexes all expire at the same time on the same day. Washingtons own version will unfold at midnight, December 31, 2012. That is the moment when, at once, all of George W. Bushs tax cuts expire, President Obamas payroll tax relief ends, and the grace period before $1.2 trillion in across-the-board cuts runs out. If the President, Congress and the two parties cannot finally agree on what to do about spending and revenues, their doing nothing will actually solve most of the U.S. deficit problem. But all of that austerity coming at once would also shut down the U.S. economy.

We actually face something close to a quadruple witching hour, because sometime in late-December or early-January, within days or weeks of everything else, the U.S. debt limit will run out again. The irony is that if the lame duck Congress and possibly a lame duck President cannot resolve these matters, the United States could face a technical sovereign debt default even as its political gridlock carves out a sustainable path for its government debt. Given how tortuously difficult it has been to resolve any one of these issues thus far, on even a temporary basis, the health of the American economy demands some new political thinking.

The range of scenarios for the post-election period is mind-boggling. For example, conservatives might be tempted to trade a multi-year extension of payroll tax relief for permanent status for all of the Bush tax cuts. A newly-reelected President Obama might consider agreeing if, say, the Republicans also would agree to find some new revenues from other sources and fold in a multi-year extension for the debt limit. (Good luck with that.) And if Romney wins the White House, congressional Democrats could call his bluff, let him enter office with a sinking economy, and then force him to negotiate with a Senate Democratic caucus able to block whatever a GOP House passes. Or, in what would pass for a rosy scenario here, everyone may be so exhausted from the years of political trench warfare that all sides agree to extend everything for several more months, so the new Congress and whoever is President can try to work it all out.

Whatever the election results, the debate over taxes and the budget will dominate our politics and government through at least the first half of 2013. In fact, that happens nearly every four years. Since Ronald Reagans first term, most Presidents have figured out that they can use their initial budget and tax initiatives to carry most of their agenda and that their sway with Congress will likely only erode with time. To be sure, this initial focus on budget and taxes made more sense when Washington still knew how to forge bipartisan compromises. The question today is, can any president get the current crop of Republicans to sign on to any plan that includes new taxes? And without that concession, could any president persuade congressional Democrats to reform Medicare and Social Security?

If taxes and entitlement remain off-the-table, there can be no grand bargain and no resolution. For the short-term, the United States instead will face auto-pilot austerity. More important, the patience of global investors with our stumbling political process could run out, which would mean rising long-term interest rates. If that happens, the U.S. expansion will end before it can generate any benefits at all for most Americans.

The next president needs a game changer, one that might entice each side to make painful concessions, say, in exchange for control over the impact of those concessions. As president, Bill Clinton could intuit the terms of such mutual concessions. We will have to settle for a new process or for putting an old one to new use.

For many years, certain aspects of taxation have been seen as too complex and esoteric for even the professional tax mavens at the Senate Finance and House Ways and Means committees. The taxation of mutual and stock life insurance companies is an example. So when Ronald Reagan raised corporate taxes, the tax writing committees parceled out several billions of dollars in new revenues to the life insurers and told them to figure out how to raise it in ways that would be least disruptive economically. Those were simpler times politically, to be sure, but the same model could be adapted to our current problem.

Lets assume that the lame duck gives the President and Congress a few more months to work out everything. Next January, the President and the leaders of both parties in both houses agree on how to broadly allocate another $4 trillion in budget savings over 10 years, under new rules. Say, for example, that $1 trillion would come from new revenues, $2 trillion from entitlement reforms, $200 billion from discretionary defense spending, $300 billion from additional discretionary non-defense programs, and the rest from interest savings.

By agreeing to $1 trillion in new revenues, Republicans get the right to design whatever reforms they deem best to achieve the target. Similarly, by agreeing to $2 trillion in entitlement savings, Democrats gain the right to fashion whatever Medicare and Social Security changes they deem best. Similarly, Republicans could allocate the additional defense cuts, and Democrats would parcel out the additional, discretionary non-defense cuts. And the looming threats from the expiration of everything, combined with the knowledge that each party would control the terms of the changes it fears most, might just be enough to get both sides to agree to the underlying allocation of pain.