Issues to Be Resolved Between Pelosi and Reid Health Care Bills

The New Year has seen Democrats once again retreat behind closed doors to finalize a single version of their government takeover of health care (H.R. 3962; H.R. 3590). The Republican Conference has compiled background on several of the major issues that must be reconciled between the two versions.

Taxes: The Pelosi bill includes over $700 billion in job-killing tax increases, including nearly half a trillion dollars from a surtax on high-income filers—many of whom are small businesses—that would, according to a model developed by Christina Romer, the Chair of President Obama’s Council of Economic Advisers, demolish or destroy up to 5 million jobs. Conversely, the Reid bill is funded largely through an increase in the Medicare payroll tax on individuals with incomes over $200,000 and couples with incomes over $250,000—a “marriage penalty” that could prove cumbersome to administer—and taxes imposed on the health sector, most notably a 40 percent tax on “high-cost” health plans (those above $8,500 for an individual and $23,000 for a family). The Administration has expressed support for the Senate approach, even though the excise tax would break two central Obama campaign promises—not to raise taxes on those with incomes under $250,000, and not to tax employer-provided health insurance policies.

Government-Run Health Plan: The Pelosi bill includes a government-run health plan that independent actuaries at the Lewin Group found could cause as many as 114 million individuals to lose their current coverage, as many employers would drop their current plan offerings. On the other hand, the Reid bill contains $6 billion in federal funding for new co-op insurance plans, and requires the Office of Personnel Management (OPM) to “offer at least two multi-State qualified plans” in each State. Despite press reports implying that “moderate” Democrats managed to eliminate a government-run health plan from the Senate bill, many may be concerned that both the OPM federally sanctioned plans and cooperatives funded through federal start-up grants would in time require ongoing federal subsidies, and that a “Fannie Med” co-op would do for health care what Fannie Mae and Freddie Mac have done for the housing sector.

Abortion Coverage: Thanks to an amendment adopted on the House floor by the strong bipartisan vote of 240-194, the Pelosi bill would not allow federal funds to flow to private insurance plans that cover elective abortion, nor fund elective abortion in the proposed new government-run health plan. However, provisions in the Reid bill would undermine both protections inserted into the House bill—the Senate measure would permit funds to flow to private plans that cover elective abortion, and create new national health plans administered by the Office of Personnel Management (OPM) that would cover elective abortions. Such provisions violate the long-standing policy of the insurance coverage offered to Members of Congress—which provides a choice of private plans, none of which may cover elective abortions.

Undocumented Immigrants: The Pelosi bill would permit undocumented immigrants to buy health coverage through the insurance Exchange; such individuals may not receive federal insurance subsidies, but would purchase their policies through a federally-funded Exchange mechanism. The Reid bill includes a nominal prohibition on the undocumented accessing the Exchanges. However, as both the Pelosi and Reid bills do not require applicants to verify their identity when confirming eligibility for subsidies, some may be concerned that both bill’s inadequate verification provisions could result in the undocumented accessing taxpayer-subsidized benefits, regardless of the specific provisions.

Affordability: In exchange for removing the government-run health plan, House Democrats have discussed further increasing subsidies above the levels in the Senate bill, particularly for those just above the threshold for Medicaid eligibility. These rises would come after changes made during Senate consideration that increased the level of subsidies provided from $93 billion in 2019 under the original Finance Committee mark to $109 billion under the Reid bill—an increase of more than 17 percent.

Exchanges/Insurance Regulations: The Reid bill would force States to establish insurance Exchanges, and includes a variety of new mandates on health plans—that will according to CBO raise the cost of individual health insurance by up to $2,100 per year. The Pelosi bill would go even further, creating a single, national, government-run Exchange that eliminates State flexibility—and abolishing the private market for individual health insurance entirely. Regardless of the specific details adopted, many may view these provisions—along with myriad other federal regulations, bureaucracies, and price controls included in both bills—as indicative of the true nature of the government takeover of health care proposed in the legislation.

Medicare Advantage Cuts: Both bills would cut well over $100 billion from Medicare Advantage (MA) plans; however, the two bills would impose those cuts in significantly different ways. The Pelosi bill would reduce MA benchmarks to traditional Medicare fee-for-service levels over a three year period; MA plans in rural areas with low Medicare costs would be most affected by this change, whereas plans in urban areas like New York and Miami would be somewhat less impacted. Conversely, the Reid bill would phase in over three years a new system whereby MA plans would bid against each other—but not against government-run Medicare—to offer services to seniors; this change would have less of an impact on rural areas than it would in urban centers with many MA plans and higher costs. (Florida seniors would be exempt from many of the changes under an agreement Sen. Bill Nelson (D-FL) negotiated with Reid.)

Federal Health Board: The Reid bill, unlike the Pelosi bill, contains provisions to create a new board of unelected bureaucrats required to submit recommendations to Congress to keep Medicare spending below targeted levels—and such recommendations would be legally binding absent legislative action by Congress. The White House has expressed support for this concept. However, several senior House Democrats have expressed concerns about unelected bureaucrats deciding Medicare policy; Ways and Means Health Subcommittee Chairman Pete Stark called the concept “stupid at best, childish, unworkable, idiotic.” Moreover, many may be concerned the commission could lead to government-imposed rationing of life-saving treatments solely on cost grounds.

Medicaid and Related Earmarks: Democrats will work to determine whether to shackle States with more than $20 billion in unfunded mandates associated with the Medicaid expansion—or to preserve or expand the special earmark provided to Nebraska under the Senate bill, which exempts that State alone from any increased Medicaid costs in perpetuity.

Medicare Prescription Drugs: Despite protestations by industry leaders to the contrary, multiple press reports indicate that the “rock-solid deal” negotiated by the pharmaceutical industry this summer will be changed, so that the industry can “voluntarily” contribute more towards the cost of lowering the Medicare prescription drug doughnut hole—a change which the Congressional Budget Office previously estimated could raise seniors’ Part D premiums by 50 percent.

Effective Date: While the Congressional Budget Office estimated that the coverage provisions of the Reid bill spent “only” $871 billion within the 10-year budget window, this score was only achieved by delaying the implementation date to January 2014. By contrast, the Pelosi bill—which according to CBO spent $1.055 trillion on coverage expansions, and nearly $1.3 trillion overall—would begin imposing government-run health care one year earlier, in January 2013. Given this dynamic, any bill starting “only” three years from now would cost over $1 trillion—well above the President’s promised price tag of $900 billion, despite the various budgetary gimmicks deployed in both bills to minimize the bill’s true costs.

Census Uninsured Data

The Republican Conference has prepared the following summary and analysis of the annual report by the Census bureau on the number of uninsured Americans in 2008.

Summary: The Census Bureau found that as of 2008, there were 46.3 million uninsured Americans—an increase of 682,000 uninsured from the 2007 number of 45.7 million. The overall uninsured rate rose only slightly, from 15.3 percent to 15.4 percent. Among various demographic groups, the number of uninsured children declined by more than 800,000, while rising slightly for other age groups, most significantly those aged 45-64 (increase of 571,000). Also of note, the number of uninsured Americans in households with incomes of over $75,000—many of whom could afford to purchase their own private coverage—rose by more than 600,000, to more than 9.7 million.

Cohorts of the Uninsured: Former National Economic Council Director Keith Hennessey has analyzed the various groups within the uninsured population to ascertain who might need assistance to purchase health coverage:

  • Medicaid Undercount: 6.4 million (14 percent of the 45.7 million uninsured in 2007) were enrolled in Medicaid or SCHIP, but did not report such coverage to the Census Bureau.
  • Eligible for But Not Enrolled in Government Coverage: An additional 4.3 million (9.4 percent) were eligible for public programs like Medicaid and SCHIP but not enrolled in them. As a 2003 CBO report noted, “Some policy-makers…believe that such people should be regarded as insured, because they can apply for Medicaid when they require care and receive retroactive coverage for their expenses.”
  • NonCitizens: This figure of 9.3 million (20.3 percent of the uninsured) includes both legal aliens—many of whom are not eligible for federally-subsidized coverage for five years after their arrival—and undocumented immigrants.
  • Over Three Times Poverty: Many of these 10.1 million individuals (22.1 percent of the uninsured) may be able to afford coverage, as their incomes are above 300 percent of the federal poverty level ($66,150 for a family of four in 2009), but choose not to purchase such coverage.
  • “Young Invincibles:” An additional 5 million uninsured (10.9 percent of the total) are aged between 18 and 34; while many likely could purchase coverage at affordable rates, some may choose not to do so—because they feel they do not need it, and/or do not perceive it to be of value to them.

Presuming that at least some of the above categories may not need federal assistance leaves a residual uninsured population of 10.6 million—23.2 percent of the 45.7 million total for 2007, and approximately 3-5 percent of the American population as a whole—who do not fit into any of the above categories.

The President, in his address to Congress last night, gave a tacit admission that the number of uninsured Americans is overstated, by citing a statistic that “there are now more than 30 million Americans without health coverage”—a much lower figure than the Census data report. According to the Politico, White House aides admit that as many as 10 million of the uninsured are undocumented, and another 5-7 million are eligible for, but not enrolled in, public programs like Medicare and Medicaid.

Uninsured Number vs. Rate: While the number of uninsured Americans in absolute terms has risen in recent years, the rate of uninsurance has remained relatively constant within a range of 14-15 percent for at least two decades, according to the Census data. When compared to the public concentration on the number of uninsured Americans, economists tend to focus on the unemployment rate—and not the total number of unemployed workers—as the most accurate picture of economic health, as the former reduces the impact of population growth. For instance, while the number of currently unemployed workers exceeds levels in the 1982-83 recession by more than 2.8 million, the unemployment rate has yet to hit levels reached during that downturn because the size of the American workforce has grown significantly in the past 25 years. Some may therefore argue that the uninsured rate, as opposed to the number of uninsured overall, may present a more accurate picture of the health insurance system.

In that same vein, the most recent employment numbers released last Friday found a total unemployment rate—including discouraged workers who have left the workforce and part-time workers who cannot find full-time employment—of 16.8 percent. With the uninsured rate rising only slightly to 15.4 percent, this marks the first year in at least two decades that the percentage of individuals seeking full-time work who cannot find it exceeds the percentage of individuals without health coverage. This dynamic may cause many to question the logic of passing more than $800 billion in tax increases—as the House Democrat bill would do—which, according to a model developed by President Obama’s senior economic advisor, would demolish or destroy as many as 5.5 million additional jobs.

Survey Methodology: While the Census Bureau figure of uninsured Americans is among the most widely reported, it is far from the only measure used—or the most accurate. Many indicators confirm that the Census survey represents a “point-in-time” snapshot of the uninsured population at any given moment, and does not reflect the number of individuals without insurance for long periods of time—those in most need of assistance. For instance, while last year’s Census Bureau report found just under 46 million uninsured, a separate study by the Centers for Disease Control found that 31.1 million Americans were uninsured for one year or longer in 2008, and a survey of health spending conducted by the Department of Health and Human Services found 37 million Americans lacked coverage for all of 2006.

In addition, the Census survey relies on individuals to self-report their insurance status, and some individuals may not remember periods of health insurance coverage. Adding a “residual” question to the Census survey in 2000—to confirm that those without employer, individual, or government coverage were in fact uninsured—reduced the number of uninsured Americans by 8 percent. One survey conducted for the Department of Health and Human Services in 2005 adjusted for the number of individuals which the Centers for Medicare and Medicaid Services (CMS) reported were enrolled in Medicaid, but who did not report insurance coverage for the Census survey. As discussed above, such adjustments for the Medicaid undercount reduced the number of uninsured by about 9 million—or one-fifth of the total uninsured—and the number of uninsured children by half. For these reasons, the Census Bureau report itself admits that “health insurance coverage is underreported [in the Census data] for a variety of reasons.”

Conclusion: The increase in the number of uninsured is not entirely surprising, given the economic downturn that began in 2008 and its effects on jobs and therefore individuals’ health coverage. However, it remains a different question entirely whether such an increase in the uninsured population warrants a government takeover of health care as proposed by Congressional Democrats. Given that the targeted number of uninsured Americans who may need government intervention to purchase coverage remains at 3-5 percent of the total population, spending $1.6 trillion and creating a new government-run health plan without making health care more affordable—as the House Democrat bill (H.R. 3200) would do—may seem particularly unwise.

CBO Analysis of Kennedy/Dodd Legislation: The Trillion Dollar Bill–And Counting


The Congressional Budget Office (CBO) preliminary analysis of the Affordable Health Choices Act introduced by Senators Dodd (D-CT) and Kennedy (D-MA) estimates that their bill would increase the federal deficit by $1 trillion over ten years.  However, the preliminary nature of the estimates—coupled with provisions not included in the bill’s initial draft—mean that the true cost of the so-called “affordable” bill could well grow to more than double the initial estimate.


The CBO estimate includes only certain sections of the bill’s first title dealing with expanded coverage and insurance rating.  Specifically, the preliminary score includes:

  • The establishment of health Gateways for the purchase of insurance;
  • Guaranteed issue and community rating provisions requiring carriers to accept all applicants and price policies the same regardless of health status;
  • Standardization of insurance policies into three broad tiers;
  • An individual mandate to purchase coverage, subject to government-imposed taxation;
  • Subsidies to individuals making under 500 percent of the Federal Poverty Level ($110,250 for a family of four) to purchase health insurance; and
  • Tax credits to small businesses who pay at least 60 percent of the cost of their employees’ policies.

Based on these provisions—and these provisions alone—federal spending would total $1.34 trillion over ten years, with all but $60 billion of that spending (for the small business tax credits) directed to subsidies for individuals to purchase coverage through the Gateways.


The CBO score presumes $297 billion in offsetting savings, most of which would be derived from tax increases.  CBO estimates that some states will change their Medicaid programs to shift beneficiaries into Gateway-subsidized coverage, saving $38 billion from the current Medicaid baseline.  The Joint Committee on Taxation estimates that $2 billion in taxes would be generated from individuals failing to comply with the individual mandate to purchase insurance; while JCT estimates that the Treasury Department would impose only a $100 tax on individuals not buying coverage that meets federal bureaucrats’ standards.

Most of the additional revenue generated—$257 billion total—would come from individuals moving out of their current employer-based coverage and into subsidized plans through the Gateways.  As a result, some individuals would exclude less of their income from payroll and income taxes, resulting in net tax increases.  Note that this particular estimate not only means that individuals will not keep their current employer-based coverage under the Kennedy bill; it also represents a tax increase on individuals with incomes of under $250,000—which President Obama pledged to avoid.


The CBO score issued is preliminary in nature, and does not include important information regarding the bill’s effects—for instance, whether premiums directed through the Gateways would be considered “on-budget,” which would confirm the federal government’s takeover of private insurance, as well as the extent to which the bill makes good on its promises to reduce health insurance premiums and overall health spending.  In addition, many of the bill’s most costly provisions and mandates are excluded from the CBO scoring estimate, including:

  • Creation of a government-run health plan;
  • Medicaid expansion to cover all individuals making under 150 percent FPL ($33,075 for a family of four);
  • Establishment of a new long-term care entitlement;
  • Higher taxes on businesses in the form of “pay-or-play” employer mandates;
  • A $10 billion reinsurance trust fund to pay catastrophic claims for retirees aged 55 to 64 covered under their previous employers’ coverage;
  • A $100 billion prevention trust fund to finance grants for jungle gyms, healthy groceries, and other wellness-related programs;
  • A new “Right Choices” entitlement program costing $5 billion per year;
  • Administrative costs for establishing the bureaucracy necessary to create Gateways and approve all new health insurance offerings, likely to run in the tens of billions of dollars; and
  • Mandates on insurance carriers to cover dependents under 27 years of age, and mandates imposed by the Medical Advisory Council in the form of minimum benefit standards—if these mandates raised the total cost of insurance, as most mandates do, total costs for federal insurance subsidies would likely be higher.

The plain text of the bill indicates that these provisions will cost hundreds of billions of dollars—and could well more than double the bill’s current $1 trillion cost.  Members will also note that, per budgetary scoring guidelines, the CBO estimate excludes the servicing cost of the more than $1 trillion in debt the Kennedy bill would create.


While the bill’s $1 trillion cost is spread out over the ten year scoring window, CBO assumes that many of the key provisions regarding establishment of Gateways, and subsidies provided through them, will not be fully implemented until 2014.  Thus only $108 billion (just over 8 percent) of the bill’s more than $1.3 trillion in spending occurs in the first four years after enactment—meaning that the bulk of spending occurs in the final six years of the budget window.  During these six years—from 2014 through 2019—the total deficit spend increases from $116 billion to $189 billion, meaning that the total cost of the provisions scored for the ten years following full implementation would likely exceed $1.5 trillion.


Based on the provisions examined, CBO estimates that the health Gateways would enroll a total of 40 million individuals by 2019—less than half of whom (17 million) would have otherwise been uninsured.  Most of the other enrollees would have lost their current insurance, either from employer-sponsored plans (15 million) or from individual coverage (6 million), with a further 2 million transferring to the Gateways from Medicaid and SCHIP.  Note however that these “crowd-out” numbers exclude the impact of a government-run plan—which could result in many millions more Americans losing their current coverage.


Press commentators have dubbed the Kennedy legislation “the most liberal approach to health reform being discussed in Washington”—and even the CBO’s preliminary estimates confirm the bill’s scope and cost.  The bill’s rich subsidies would result in a fiscal monstrosity increasing the deficit by $189 billion in 2019—without including the Medicaid expansions and other new entitlements in the bill.  Moreover, some Members may note that the bill’s provisions would force more currently insured individuals into the bureaucrat-run Gateways than they would actually reduce the number of uninsured.  While many Members may support enactment of comprehensive health reform legislation that would actually slow the growth of health care costs, some Members—responding to the Kennedy bill’s enormous federal spending—may consider this particular piece of legislation change that America can ill afford.

Senior Administration Official Admits: Government-Run Plan Will Ration Care

“The chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here….There is going to have to be a very difficult democratic conversation that takes place.”

— President Obama, interview with The New York Times

President Obama recently nominated Sherry Glied to the post of Assistant Secretary for Planning and Evaluation within the Department of Health and Human Services. In this position, she will serve as the chief policy advisor to Secretary Sebelius and the President regarding implementation of health reform. The Republican Conference has compiled a series of quotes from Dr. Glied’s 1997 work Chronic Condition: Why Health Reform Fails that highlight her thoughts on health reform—many of which directly contradict the President’s assertions about the ramifications of his plan.

Government Attempts at Cost Containment Will Never Work

“Most Americans will grumble about the increase in costs but they will pay for more care, just as they have for the past 65 years.  People who see well will gladly work more hours to fund better eyesight, when medical advances enable them to do so.  People who cannot walk will willingly move to smaller dwellings if doctors offer them a chance to purchase physical mobility in exchange.  More people will undergo screening tests—and costly treatment—for cancer when those tests become less uncomfortable.  People at risk of strokes will skip vacations to buy artery cleaning that promises to diminish those risks. People in pain will sacrifice much of their other consumption for respite.  People whose incomes rise will buy more health care without giving up anything they have today.  Simply put, health costs will continue to rise.” (213-14)

Government-Run Health Care Will Lead to Rationing

“If government sets the overall level of spending, the gap between that level and privately desired spending will increase as innovations occur.  The system will appear “underfunded” and those who can afford it will seek ways around prohibitions on private care.  A two-tiered system will emerge, complete with disparities between private and public care…” (216)

“With health care spending rising more rapidly than incomes or economic output, a broad-based tax—which is a tax on overall economic activity—will over time fall short.  The government can, for a time, broaden the tax base, as it did in funding the Medicare trust fund, or it can raise rates; but ultimately, increasing costs will require the government to take an active hand in forcing costs down.  Any public program thus raises the specter of more and more government cost containment—with government regulation eventually intruding into the private health care sector.” (230)

Rationing Health Care Leads to Delays in Treatment

“In health care, waiting lines have a more complex role. To the extent that they are used to generate pre-production inventories, they can reduce the average cost of health capital, even while raising patient costs in terms of time and inconvenience. Health care waiting lines represent a trade-off between patient costs and capital costs.” (99)

“[Other countries] achieve [lower costs] by slowing the introduction and diffusion of new technologies, concentrating costly procedures at a limited number of centers, delaying access to expensive care, and using more generalists and fewer specialists. It is important to recognize that the costs of these strategies are real ones. As recent studies comparing Canada and the United States suggest, patients in cost-contained systems may experience more discomforts and delays that patients who spend more money. Delays in access to high-technology care will, in some instances, lead to worse health for particular patients than might have been achieved through speedier treatment. Most evidence, however, suggests that on average these differences in access to costly services have minimal effects on overall physiological health.” (227)

Fully Taxing Health Benefits Does Not Increase Taxes Enough to Pay for Health Reform

“Unfortunately, simply abolishing the tax treatment of employer-provided health insurance…would reduce the effects on government budgets of increases in private health costs, but it would not generate a stream of new revenues to offset the costs of those who require subsidies.  Eliminating the tax treatment is an important step toward developing a sustainable financing system, but it does not take us far enough.” (223)

Given these series of quotes, many Members may have additional questions about health care reform under the Democrat majority:

  • Do President Obama and Democrats in Congress agree with President Obama’s nominee that government attempts to control health costs are inherently futile?
  • Do President Obama and Democrats in Congress agree with President Obama’s nominee that a government-run plan will always be under-funded, leading to a two-tiered health care system?
  • Do President Obama and Democrats in Congress agree with President Obama’s nominee that health care “waiting lines” constitute an acceptable “trade-off between patient costs and capital costs?”
  • Do President Obama and Democrats in Congress agree with President Obama’s nominee that delays in care will result in “worse health for particular patients”—but that rationing through waiting times and delays imposed by federal bureaucrats should be pursued because “on average” patients will be better off?
  • Do President Obama and Democrats in Congress agree with President Obama’s nominee that, in addition to taxing all health benefits fully, Congress should impose even more tax increases in order to finance government-run health care?

Given President Obama’s nomination of an individual who supports explicit rationing of health care services, some Members may be concerned that spending more than $1 trillion on a government-run health plan will increase federal bureaucrats’ role in making patients’ personal health decisions—and lead to unacceptable delays in life-saving treatments for many Americans.

Glossary of Key Health Care Terms

In anticipation of a debate on comprehensive health reform later this year, we have prepared a list of important terms surrounding the debate.

Administrative Pricing:  Reimbursement mechanisms for doctors and hospitals determined by legislative or regulatory fiat, rather than through the free market.  Critics of administrative pricing note that the “take it or leave it” philosophy imposed by Medicare and Medicaid results in numerous distortions within the health system—the price paid by the federal government has only a notional relation to the cost borne by the provider, often leading to cost shifting whereby individuals with private insurance end up offsetting the shortfalls in providers’ federal reimbursement levels.

Adverse Selection:  A phenomenon caused by a high proportion of sicker individuals enrolling in a particular insurance pool, often leading to higher premiums for all participants in the pool.  In extreme cases, a “death spiral” can result, whereby high premiums encourage healthy individuals to drop coverage—resulting in higher overall costs, yet more premium increases, and further lost coverage.  Economists have argued that guaranteed issue and community rating regulations—either without an individual mandate to purchase insurance, or with a poorly-enforced one—could result in significant adverse selection increasing the cost of coverage for healthy individuals.

Capitation:  A form of reimbursement that bases payment levels on a flat, regular (often monthly) payment, often risk-adjusted to reflect an individual’s health status.  Payments to Medicare Advantage plans are made on a capitated basis.  Supporters of capitation believe that it removes the perverse incentives present in fee-for-service reimbursement to over-bill for care, while critics voice concerns that capitation could encourage doctors and hospitals to under-provide care to save costs.

Comparative Effectiveness:  Research comparing the relative merits of two drugs or methods of treating an illness.  Of particular concern is the distinction between clinical effectiveness—which examines the merits of various treatment options without respect to their cost—and cost-effectiveness research.  Critics of government-sponsored effectiveness research have voiced concern that cost-effectiveness judgments could be used to determine reimbursement for government-funded health plans—leading to federal bureaucrats denying treatment options on cost grounds.

Cost Shift:  In health care, cost shift refers to two related phenomena—doctors and hospitals charging patients with health insurance to pay for uncompensated care provided to those without coverage, and providers charging those with private coverage more to pay for below-cost reimbursement by government programs.  With respect to the former issue, the Congressional Budget Office has testified that uncompensated care represents a minor fraction of total health spending, and its impact “appears to be limited.”  With respect to cost-shifting from public to private payers, CBO notes that reimbursement rates in Medicare and Medicaid are anywhere from 20-40% lower than rates paid by private payers.  One study estimates that, as a result of the low rates paid by government programs, families with private insurance pay approximately $1,800 per year more for their health coverage.

Crowd Out:  A phenomenon whereby individuals drop their private health insurance to enroll in government programs.  One recent example of crowd out occurred in Hawaii, where Governor Linda Lingle ended the Keiki Care program for children’s health coverage because, in the words of one official, “People who were already able to afford health care began to stop paying for it so they could get it for free.”  Due in large part to its expansion of government-run health insurance to higher-income families, the Congressional Budget Office found that the recent State Children’s Health Insurance Program legislation signed by President Obama would result in more than one-third of those children who would obtain government-run coverage—2.4 million of the 6.5 million newly enrolled—would drop private health insurance to enroll in the government program.

Delivery System Reform:  A general term for efforts to slow the growth of health costs by reforming the way health care is delivered in order to generate efficiencies.  Many of these proposals would leverage the federal government’s role in financing Medicare and Medicaid by linking hospital and physician reimbursement to certain behaviors or practices.  Critics of these proposals caution that they may not generate significant savings to the federal government, but will further entangle federal bureaucrats in the practice of medicine.

Employee Exclusion:  Dating from an Internal Revenue Service ruling during World War II, all health and related fringe benefits provided by an employer are excluded from income for purposes of both payroll and income taxes without limit. (Note however that for the employer, both wages and health benefits are tax-deductible business expenses.)  The Joint Committee on Taxation estimates that in 2007, the exclusion resulted in more than $246 billion in foregone income and payroll tax revenue to the federal government.  Many economists of varying political stripes argue that—because a marginal dollar of cash income is taxable to employees, while a marginal dollar of health insurance is completely tax-free—the exclusion encourages the purchase of overly generous insurance policies, and in turn leads to the over-consumption of health care.

ERISA:  Acronym describing the Employee Retirement Income Security Act of 1974, which enacted rules regarding employee benefit plans.  Section 514 of ERISA pre-empts “any and all State laws insofar as they…relate to any employee benefit plan,” permitting employers who self-insure their group health plans from complying with (potentially conflicting) State benefit mandates and other regulatory requirements.  Small employers who “fully insure”—that is, purchase coverage from another company without assuming insurance risk—remain subject to State regulatory requirements.

Exchange:  Also called a “Connector,” any of a variety of proposals designed to provide comparison shopping of health insurance products for individuals.  President Obama and Democrats in Congress have further proposed empowering an Exchange to serve as a “watchdog” on consumers’ behalf.  Supporters of Exchanges argue that they could enhance individuals’ plan choice as well as portability of insurance coverage from job to job.  While Exchanges can allow free markets for health insurance to flourish, they could also be used to impose price controls or other regulations, by restricting access to the Exchange for those companies who do not comply with bureaucratic mandates.

Fee-for-service:  A method of reimbursement that bases payment levels on a discrete episode of care—for instance, a single office visit or procedure performed.  Traditional Medicare and many forms of private insurance bill on a fee-for-service basis.  Critics of fee-for-service medicine argue that reimbursement policies discourage doctors to provide more efficient care—since physicians generally receive none of the savings resulting from procedures they did not perform.

Group Insurance:  Health coverage provided by employers—the largest source of coverage nationwide, with approximately 160 million individuals (more than 60% of the non-elderly population) enrolled.  Coverage is offered to all eligible employees within a given classification and can be self-insured or fully-insured by an employer—in the latter instance, the employer purchases coverage from a carrier and assumes no insurance risk.  States and the federal government also divide the group market into small and large groups, with the small groups classified as those with 2-50 employees.

Guaranteed Issue:  A requirement that insurance carriers accept all applicants, regardless of health status.  Generally coupled with community rating—a further requirement that carriers charge all individuals the same rates, with few variations.  Critics argue that the two policies, particularly when enacted in concert, encourage individuals not to purchase health insurance until they encounter significant medical expenses, and likewise—by raising premiums for all individuals—discourage young and healthy individuals from buying insurance.

High-Risk Pools:  A form of coverage for the medically uninsurable, currently offered in 34 States.  Coverage is generally extended to those rejected for coverage on the individual market.  Premiums are higher than rates for healthy individuals, but lower than the actual cost of most participants’ health care—State general fund appropriations, grants from the federal government, and/or surtaxes on insurance premiums finance the pools’ operating losses.  Supporters of these mechanisms believe that a more robust system of State-based risk pools could offer coverage to all medically uninsurable individuals, without the adverse market effects connected with a requirement that insurance companies accept all applicants (see Guaranteed Issue above).

Individual Insurance:  Health coverage purchased for an individual (or family) outside the group setting.  Individual insurance is subject to State regulation (including benefit mandates), and must generally be purchased with after-tax dollars.

Mandates, Benefit:  Laws requiring all insurance policies sold to offer coverage for a particular treatment (e.g., in vitro fertilization, hair prostheses) or access to a particular type of medical provider (e.g., dentists, massage therapists).  One survey found that as of 2008, States had enacted nearly 2,000 discrete benefit mandates.  Critics of benefit mandates argue that mandates both individually and collectively raise the cost of health insurance, making coverage less accessible to individuals.  Federal group policies regulated under ERISA are exempt from State benefit mandates.

Mandates, Employer:  Proposals requiring employers to provide health insurance benefits to their employees, and/or pay a tax to finance their workers’ health coverage.  Also commonly called “pay-or-play,” after a requirement instituted as part of the Massachusetts health reforms that employers must “play” by offering health coverage to their workers or “pay” a tax to cover the costs of their employees’ uncompensated care.  Critics cite an NFIB study that an employer mandate could result in 1.6 million jobs lost as evidence that mandates would negatively impact the American economy.

Mandates, Individual:  A requirement that all individuals have health insurance, subject to some type of enforcement by the State.  Massachusetts’ health reform law required individuals to purchase health insurance or face penalties on their tax returns.  Critics argue that mandates are not easily enforced, could result in interest groups lobbying for an overly generous definition of “insurance” for purposes of compliance with the mandate, and may penalize individuals who cannot afford health insurance by taxing them for not buying it.

Medicaid:  A State-federal partnership providing health coverage to certain vulnerable populations.  Eligibility requirements vary by State, but often include low-income women and children as well as elderly and disabled populations.  The federal government finances Medicaid through the Federal Medical Assistance Percentage (FMAP), a match rate linked to States’ relative income level that has averaged 57% of total Medicaid spending in recent years.  While low-income individuals and children constitute the majority of Medicaid beneficiaries, most Medicaid spending funds long-term and related care to elderly and disabled enrollees.

Medical Loss Ratio:  A requirement that insurance carriers dedicate a minimum percentage of premiums to paying medical claims, in an attempt to restrict “excessive” administrative costs or profits by insurance companies.  However, the Government Accountability Office has noted that “there is no definitive standard for what a medical loss ratio should be,” and White House adviser Ezekiel Emanuel has previously written that “some administrative costs are not only necessary but beneficial.”  Critics of this approach argue that imposing de facto price controls on insurance companies will only exacerbate problems in the health sector, by discouraging carriers from monitoring their patients outside a hospital or physician’s office.

Medicare:  A single-payer (i.e. government-funded) health insurance plan that offers coverage to seniors over age 65, Social Security disability recipients (after a two-year waiting period) and individuals with end-stage renal disease.  Part A (hospital services) is mandatory for all seniors, while Part B (physician and outpatient services) and Part D (prescription drug coverage) are voluntary. (Medicare Part C is Medicare Advantage, an alternative to traditional Medicare described below.)  Medicare generally pays doctors and hospitals on a fee-for-service basis, reimbursing based on a discrete office visit, procedure performed, or hospital stay.

Medicare Advantage:  Health coverage provided by private insurance companies and regulated by the federal government, in lieu of the traditional Medicare benefit.  Plans receive capitated (per-beneficiary) payments from the federal government that are adjusted according to enrollees’ risk and based on their bids against a statutorily-defined benchmark.  Plans which bid below the benchmark may use the savings to provide extra benefits—reduced cost-sharing, lower premiums, and/or vision and dental coverage—to beneficiaries.

Medigap:  Insurance products designed to supplement the traditional Medicare benefit, offered by private companies according to standardized benefit designs implemented and regulated by the federal government.  Many economic analysts—including the Congressional Budget Office—have concluded that, by insulating beneficiaries from financial exposure to deductibles and co-payments, Medigap policies encourage seniors to over-consume health care, resulting in higher costs for the Medicare program.

Pay-for-Performance:  Proposals designed to increase or decrease Medicare or Medicaid reimbursement levels to quality outcomes.  Several programs exist linking incentive payments to reporting of selected quality measures, but reimbursement has yet to be directly linked with outcomes.  Critics of this approach argue that pay-for-performance could discourage providers from accepting patients with complications that could lead to poor outcomes.

“Public Option”:  An insurance plan run and/or funded by a governmental entity.  Democrats have proposed several different ideas as to how such a plan may be structured—a Medicare-like insurance plan operated by the Department of Health and Human Services, a more independent entity where a third-party administrator makes operational decisions, or State-based governmental plans, perhaps including a buy-in to State employee health insurance offerings.  Independent actuaries at the non-partisan Lewin Group found that a government-run plan reimbursing at Medicare rates would cause about 120 million Americans to lose their current health coverage.  Regardless of the particulars of its structure, opponents may echo the concerns of CBO Director Elmendorf, who testified that it would be “extremely difficult” to have a “public plan compete on a level playing field,” such that Democrats would create inherent biases in favor of the government-run plan.  Some may also be concerned that such a plan could exercise increasing control over patients’ health decisions, leading to delays in obtaining critical treatments or outright denials of care.

Sustainable Growth Rate:  A mechanism instituted as part of the Balanced Budget Act of 1997 regarding physician reimbursements, which calls for reductions in future years’ reimbursement levels if physician spending exceeds the SGR target.  Critics note that, because the target applies to aggregate levels of spending, individual physicians have a micro-level incentive to increase the number of services they perform in order to overcome a lower per-service payment under the SGR.  On the other hand, supporters of entitlement reform argue that while imperfect, the mechanism has forced Congress to find offsets to finance increases in the SGR, resulting in a higher level of scrutiny of the Medicare program than would otherwise have been the case.

Tax Treatment of Health Insurance:  Health insurance provided through an employer is not taxable, while health insurance outside the employer group market generally must be purchased with after-tax dollars.  Three exceptions to this rule exist: 1) self-employed individuals may deduct health insurance premiums from their income (but not payroll) taxes; 2) Health Savings Account contributions may be deducted from income (but not payroll) taxes; and 3) health insurance expenses may be taken as an itemized deduction for income tax purposes, but only to the extent that total health expenses exceed 7.5% of adjusted gross income.  Critics of the current policy argue that individuals without access to employer-sponsored insurance have to pay 30-50% more for their coverage, resulting in more uninsured individuals.

2009 Medicare Trustees Report

“The real problem with our long-term deficit actually has to do with our entitlement obligations…The big problem is Medicare, which is unsustainable.”

—President Obama, Interview with Washington Post editorial board, January 15, 2009

The following brief summarizes the annual Medicare trustees report on the state of the program’s financing.

Insolvency Date:  The trustees project that the Medicare Hospital Insurance (Part A) Trust Fund will become insolvent by 2017—two years earlier than last year.  This deterioration in the program’s financing is due largely to the economic slowdown, and a concurrent reduction in payroll tax revenues, during calendar year 2008.

Funding Warning:  For the fourth straight year, the trustees have issued a general revenue funding warning, noting that general revenue spending on Medicare—that is, Medicare spending not funded by payroll taxes or beneficiary premiums and co-payments—is expected to exceed 45% of all Medicare spending within the next seven fiscal years.  As a result, “trigger” provisions enacted as part of Title VIII of the Medicare Modernization Act require the President to submit, and Congress to consider, legislation remedying the funding warning on an expedited basis.  Note that while the rules package for the 111th Congress turned off the expedited parliamentary procedures in the House, that action did not repeal the requirement on the President to submit Medicare reform legislation to the House and Senate.

Unfunded Liabilities:  Medicare’s overall unfunded liabilities also increased when compared to last year’s report, using both the 75-year budget window and “infinite horizon” projections.  Note however that while unfunded obligations for the government-run Parts A and B have increased in both dollar terms and as a percentage of economic GDP, projected liabilities for the privately-provided Part D prescription drug benefit continue to decline:

 Unfunded Obligation Projections for 75-Year Budget Window (2009-2083)

2008 Trustees’ Report

(in trillions of dollars)

2009 Trustees’ Report

(in trillions of dollars)

Part A (Hospital Insurance) $12.4 (1.6% of GDP) $13.4 (1.7% of GDP)
Part B (Obligations less beneficiary premiums) $15.7 (2.0% of GDP) $17.2 (2.2% of GDP)
Part D (Obligations less beneficiary premiums and state “clawback” payments) $7.9 (1.0% of GDP) $7.2 (0.9% of GDP)
TOTAL $36.0 (4.6% of GDP) $37.8 (4.8% of GDP)

Unfunded Obligation Projections for Infinite Horizon

  2008 Trustees’ Report

(in trillions of dollars)

2009 Trustees’ Report

(in trillions of dollars)

Part A (Hospital Insurance) $34.4 (2.6% of GDP) $36.4 (2.8% of GDP)
Part B (Obligations less beneficiary premiums) $34.0 (2.6% of GDP) $37.0 (2.8% of GDP)
Part D (Obligations less beneficiary premiums and state “clawback” payments) $17.2 (1.3% of GDP) $15.5 (1.2% of GDP)
TOTAL $85.6 (6.5% of GDP) $88.9 (6.8% of GDP)

Recent Events Not Included:  The economic “stimulus” legislation included more than $30 billion in incentive payments to medical providers designed to encourage adoption of electronic health records.  Some of these payments include incentives to hospitals provided through the Medicare Part A Trust Fund.  Informal staff conversations with actuaries at the Centers for Medicare and Medicaid Services (CMS) indicate that this spending would accelerate the insolvency date of the Part A Trust Fund by about six months.  However, as the “stimulus” passed during calendar year 2009, it is not reflected in the insolvency projections included in this year’s report—thus the short-term funding problems facing the Part A Trust Fund are in reality more serious than even the trustees report indicates.

Unfunded Obligations Understated:  In arriving at their long-term projections, the Medicare trustees may actually be underestimating the program’s shortfalls, for two prime reasons.  The Medicare trustees’ report admits that the unfunded obligation projections “are understated as a result of the substantial reductions in physician payments that would be required under current law.”  One estimate found that reversing those current-law reductions would increase Medicare’s 75-year unfunded obligations by as much as $3 trillion.[1]  Second, in arriving at their estimate of unfunded obligations, the Medicare trustees assume that cost growth will decline much more rapidly than the Congressional Budget Office predicts; using the CBO model, former Medicare public trustee Tom Saving obtained a 75-year estimate more than 25% greater than the official trustee’s estimates ($36 trillion vs. $43.8 trillion in 2008).[2]

Cost of Reform:  Two projections made in recent years have attempted to quantify the amount of revenue needed to fill Medicare’s shortfall given its current course.  In 2005, the Heritage Foundation projected that the Medicare payroll tax would need to nearly quintuple, increasing from 2.9% to 13.4%, where it would remain for 75 years—lowering real GDP by nearly $200 billion per year, and reducing total employment by 2.3 million during the first decade of the tax increase alone.[3]  Likewise, Tom Saving found that, were seniors’ Medicare premiums used to fund the full share of the shortfall, these premiums would need to rise to between $3,100-$5,600 per month in year 2008 dollars.[4]

Conclusion:  Given the dire long-term projections for the Medicare program—and this year’s news that the near-term situation has deteriorated appreciably—many Members may agree with President Obama on the need to reform “unsustainable” entitlements.  However, some Members may also believe that in the current discussion surrounding health reform, action to slow the growth of current entitlement programs should receive precedence over creating a new government-run health plan resulting in as many as 120 million Americans losing access to their current coverage.


[1] J.D. Foster, “Medicare’s Financial Woes: Bigger than Official Estimates,” (Heritage Foundation Backgrounder #2174, September 2, 2008),, Footnote 10.

[2] Andrew Rettenmaier and Tom Saving, “Medicare’s Future Burden: Trustees versus CBO Estimates,” (College Station, TX, Private Enterprise Research Center, Texas A&M University),, pp. 16-17.

[3] Tracy Foertsch and Joe Antos, “The Economic and Fiscal Effects of Financing Medicare’s Unfunded Liabilities,” (Washington, DC, Heritage Foundation Center for Data Analysis Paper CDA05-06, October 11, 2005),, Table 1, p. 12.

[4] Rettenmaier and Saving, “Medicare’s Future Burden,” p. 8.

What Happens When Bureaucrats Make Health Care Decisions

In light of comments by many Democrats—including President Obama—that a government-run health plan may end up controlling the ability to limit access to life-saving treatments, we have compiled anecdotes from other countries showing the effects of government bureaucrats making personalized health decisions on patients’ behalf.

“The chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here….There is going to have to be a very difficult democratic conversation that takes place.”

 — President Obama, interview with The New York Times

Patients Cannot Obtain Life-Saving Treatments

  • Bruce Hardy, a patient living outside London, suffers from kidney and lung cancer, for which his physician prescribed the new drug Sutent.  But as a profile in the New York Times pointed out, “If the Hardys lived in the United States or just about any European country other than Britain, Mr. Hardy would most likely get the drug.”  However, in Britain, Sutent’s $54,000 price means “Mr. Hardy’s life is not worth prolonging.”  As his wife stated, “It’s hard to know that there is something out there that could help but they’re saying you can’t have it because of cost.  What price is life?”
  • Sarah Anderson, an ophthalmologist who works for Britain’s National Health Service (NHS), published an article last spring titled “How the NHS Is Letting My Father Die.”  Her father’s kidney tumor could be treated by a new drug—but while the pharmaceutical has been approved for use in Europe for two years, Britain’s National Institute for Clinical Effectiveness (NICE) delayed its assessment of the drug’s usefulness.  Until NICE renders its judgment, local NHS branches can refuse to provide the drug, leaving Anderson’s family to pay for their father’s treatment on their own, or face the inevitable consequences that will follow if he cannot obtain it.  Anderson’s ultimate verdict on her family’s dilemma is a sobering one: “If Dad should lose his life to cancer, it would be devastating—but to lose his life to bureaucracy would be far, far worse.”
  • Ian Dobbin, a patient in Yorkshire, faced a difficult dilemma—because the NHS wouldn’t pay for his life-saving cancer treatment, he needed to pay £25,000 to obtain the treatment and survive.  He said the NHS’ decision “is a death sentence for me. I feel absolutely gutted because there is no way I can find that sort of money.  My life is dependent on getting this drug and without it I will die. I am totally devastated.  I’ve been paying my national insurance all my life and when it comes to the point that I need it to keep me alive, they are not prepared to help. I don’t really know what to do. My consultant is appealing the decision and I’m just praying that they change their minds.”
  • In 2006, Ann Marie Rogers filed a ground-breaking lawsuit in Britain, seeking to force her local NHS bureaucracy to pay for the breast cancer drug Herceptin—“which has been shown to halt the spread of the cancer.”  In a public interview, she expressed her outrage at the bureaucracy that forced her to file a lawsuit in order to access a life-saving treatment: “It makes me so angry that these trusts are playing God, saying ‘you can’t have this, you can’t have that.’ They’ve got no right to decide who can have this life-saving drug. This is not a poor country, after all. I have worked all my life and paid my taxes. It makes me sick to think a lot of women are in my position.”
  • Pamela Smith, a patient with advanced bowel cancer, had her appeal for treatment denied by her local NHS trust in 2007—the drug (Erbitux) is widely available in the United States, but in Britain, the government refused to pay for the treatment.  As a result, Ms. Smith had to spend her life savings to obtain the drug privately.  Her son expressed anger at the NHS’ decision to deny care: “My mum now has no money left so she will have to rely on the family.  What makes the appeal result a disgrace is that she is responding to the treatment.”
  • In Alberta, Bill Murray was denied hip resurfacing surgery that generates better results than a traditional hip replacement—because the Canadian government said the 57-year-old was “too old” to benefit from the state-of-the-art procedure.

Physicians Cannot Treat their Patients

  • A study released last August found that one quarter of cancer specialists are deliberately keeping their patients “in the dark” about available treatment options—in order to avoid upsetting those patients when they find out the NHS will not pay for their treatments.
  • Warpreet Husan, a colon cancer specialist, stated that bureaucracy compels his colleagues’ silence: “A lot of my colleagues also face pressure from managers not to tell patients about new drugs. There is nothing in writing, but telling patients opens up a Pandora’s box for a health service trying to contain costs.”
  • One cancer patient undergoing treatment confirmed that doctors are keeping their patients uninformed about potentially life-saving—but overly costly—treatments: “My consultant never told me about the latest treatments. I don’t know why he hasn’t said anything. I’m a little concerned.”
  • Another physician, Dr. Sarah Jarvis, wrote an anguished op-ed condemning government-run health bureaucracy entitled “Sentenced to Death by NICE.”  “Recently I was left feeling furious and frustrated after a visit from a patient called Peter. He’d just had a serious heart attack and my job as a GP [general practitioner] was to reduce his very high risk of having another.  I knew what the latest research told me was the best way, but I had just basically been forbidden to use it by an official email from the Department of Health.”

Patients Cannot Use their Own Money to Pay for Care

  • Until last November, patients in Britain who paid for unapproved drugs out-of-pocket had to renounce all future NHS care—an effective prohibition on patients using their own money to pay for care.  The Government reversed its position on “top-up payments” within the NHS, but not before stakeholders called the policy “despicable,” “appalling,” “uncivilised,” “spiteful,” “cruel,” “abhorrent,” “perverse,” “inhuman,” and “unjust”—even though most stakeholders agreed that some form of rationing within the NHS was inevitable.
  • In Canada, Lindsay McCreith filed suit against Ontario’s government-run health care system, claiming that the Canadian government’s ban on patients paying for private care violates his fundamental freedoms.  Mr. McCreith was forced to travel to the United States for an MRI to diagnose a malignant growth in his brain—and then, when the Canadian government offered him a months-long wait to treat his brain tumor, to travel back to Buffalo for life-saving surgery, as patients cannot pay for treatments with their own money in much of Canada.

Why Doctors, Hospitals, and Patients Will Lose Under a Government-Run Health Plan

Summary:  While President Obama and many Democrats have advocated for a government-run health insurance plan, the ramifications of its creation would be significant and far-reaching.  Independent estimates suggest that such a plan could provide a strong incentive for employers to “dump” their current health insurance offerings—not because the government plan is more efficient per se, but because the government’s “take it or leave it” philosophy of reimbursement negotiation with providers will raise costs for private insurers who remain.  Congressional Budget Office Director Elmendorf recently confirmed this notion, testifying before the Energy and Commerce Committee that it would be “extremely difficult” to create “a system where a public plan could compete on a level playing field” against private coverage.[1]  Creating a “public health option” could result in more than 100 million Americans losing access to their current health insurance—breaking a central promise of then-Senator Obama’s campaign—while placing them in a government-run plan that could become a de facto single payer health insurance system.

Proposals:  During his presidential campaign, then-Senator Obama proposed creating a new government-run insurance plan.  While his initial plan stated the government-run plan would be open only to small businesses or those without an offer of employer-sponsored health insurance, later documents proposed opening the plan to all Americans.  In either case, the plan would not deny access or raise premiums based on health status and would include a benefits package similar to that provided under the Federal Employees Health Benefits Program (FEHBP).  Low-income individuals not eligible for Medicaid or the State Children’s Health Insurance Program (SCHIP) would receive subsidies to help finance coverage, either for the government-run plan or private coverage through a national exchange.

Similarly, in November, Senate Finance Committee Chairman Max Baucus released a white paper outlining his vision for a reformed health care system.  His agenda also would create a new government-run plan that would “abide by the same rules as private health insurance plans participating in the Exchange” with respect to benefits and premiums.  Sen. Baucus’ language leaves unclear the issue of whether the government-run plan would pay providers at Medicare reimbursement rates or the higher levels most private carriers pay, noting only that reimbursement would be determined “by balancing the goals of increasing competition and ensuring access for patients.”

Current Status of “Competition” in Medicare:  President Obama’s budget includes a proposal to create “competitive bidding” for privately-run Medicare Advantage (MA) plans that offer benefits to seniors.  However, an examination of both the Obama proposal and current law reveals that the playing field between MA plans and government-run traditional Medicare is far from level:

  • The proposal requires MA plans to bid against each other—but traditional Medicare will not be required to compete.
  • The proposal does nothing to modify traditional Medicare’s in-built bias under current law, whereby seniors are automatically enrolled in traditional Medicare unless they choose otherwise—even if a higher quality and more affordable MA plan exists.
  • The proposal does not permit supplemental benefits offered to low-income seniors to “wrap-around” an MA plan offering—to obtain those extra benefits, seniors must enroll in the government-run plan.

Some Members may also view the double standards set by the Obama budget as evidence to oppose a government-run health plan, because Democrats are unlikely to create a truly level playing field for MA plans to compete against government-run Medicare.

Administrative Pricing and Cost Shifts:  Traditional Medicare’s other built-in bias lies in its administrative pricing structure, whereby reimbursement levels are set through legislative and bureaucratic formulae, where providers (both doctors and hospitals) may either accept or reject the government’s price.  This “take it or leave it” philosophy differs appreciably from private health insurance plans—and results in reimbursement rates to physicians and hospitals significantly lower than market norms.  Testifying before the Senate Finance Committee, CBO Director Elmendorf noted that in 2006, Medicare physician reimbursement rates averaged 20% less than private insurance levels; for hospitals, the disparity was 30%.  In Medicaid, the variation was even greater: a 40% gap in physician payment levels, and 35% for hospitals.[2]

The result of this lower reimbursement structure within government-run plans has been a rise in private health insurance premiums—as physicians and hospitals shift their costs from public payers to private ones.  A recent study by the consulting firm Milliman found a total of nearly $89 billion in cost-shifting from Medicare and Medicaid on to commercial payers.  As a result, families with private health insurance spend nearly $1,800 more per year—$1,512 in higher premiums (paid by both employers and employees) and $276 in increased beneficiary cost-sharing—to cover the below-market reimbursement levels paid by Medicare and Medicaid.[3]  The study reveals the broad extent of the perverse cross-subsidization present between the private and government-run health insurance markets, which may lead many Members to be concerned about the implications of broadening such cost-shifting even further through creation of a government-run health insurance plan.

In addition, most Members believe that Medicare does not appropriately price all physician and hospital services—as both Democrats and Republicans have been quick to propose alterations to Medicare’s pricing structure.  For instance, the “stimulus” bill placed a moratorium on proposed changes to hospice reimbursement, and legislation last July delayed a scheduled reduction in physician reimbursement levels—while providing for a 21% cut in January 2010.  If Members believe that physicians should not receive a 21% pay cut next January, then they may believe that traditional Medicare’s pricing mechanisms serve as an inappropriate mechanism to compare the “efficiencies” of government-run plans, or to serve as the foundation for a new government-run health insurance plan.

Enrollment in a Government-run Plan:  Actuaries at the Lewin Group compiled estimates for the potential enrollees in a government-run plan—coupled with the number of individuals who would drop and/or lose access to their current private health insurance.  The scenarios vary based on whether the government-run plan would be open solely to small businesses of under 25 workers, the self-employed, and the residual insurance market (i.e. those without access to employer-sponsored coverage), as then-Senator Obama first proposed, or whether the plan would be open to all Americans, as both he and Chairman Baucus later suggested.  Lewin also factored in the potential reimbursement levels such plans may offer, and developed three scenarios based on Medicare payment rates, reimbursement rates paid by private insurance, or a blend between the two.

According to the Lewin model, enrollment in private insurance would drop by at least 10 million individuals in all cases—and in the event of a government-run plan open to all, and offering Medicare-level reimbursement rates, would result in 118.5 million individuals dropping their private coverage.[4]  Enrollment in the government-run plan would range from 17 million in the low estimate (limited eligibility, private reimbursement rates) to over 130 million—more than half the under-65 population—in the high estimate (open eligibility, Medicare reimbursement rates).  Notably, in the scenarios where the government-run plan paid below-market reimbursement levels (either Medicare rates, or a blend of Medicare and private rates), total enrollment in the government-run plan exceeded the reduction in uninsured populations—suggesting that such a plan would focus primarily on cannibalizing enrollees by encouraging employers to drop their current health insurance offerings.[5]

Impact on Providers:  The Lewin study also analyzed the impact of various reimbursement levels on providers’ overall revenues.  In cases where a government-run plan open to all reimbursed at Medicare payment rates, the reduction in uncompensated care costs caused by fewer uninsured Americans was outweighed by the tens of millions of individuals previously with private insurance switching (voluntarily or otherwise) to a government-run plan with much lower reimbursement levels.  As a result, hospitals’ total revenue plunged by nearly 5% ($36.5 billion), and physicians’ total revenue declined by nearly 7% ($36.4 billion).  Even if a government-run health plan reimbursed at a blend of private and Medicare payment rates, physicians’ total revenue would decline by more than 3%—this despite tens of millions of newly insured patients lowering uncompensated care totals.[6]

While supporters of government-run health insurance may argue that the crowd-out figures showing vast movement from private health insurance to a government-run plan would represent the government’s “efficiency” in delivering health care, many Members would cite the revenue impact on providers as evidence of the government’s harmful and distortionary effects.  Any scenario whereby provider revenues are reduced after an increase in the number of insured patients would by definition reflect a perverse intervention by government into the marketplace, and cause many Members concern that such developments could result in patients losing access to providers and/or poorer quality care.

Implications of Government-run Plan:  A government-run health plan enrolling as many as 130 million Americans could have significant implications for the entire health sector, particularly given the market distortions the insertion of a government-run plan would create on existing insurance markets.  Some of the adverse effects that could cause many Members concern include the following:

Employers Dropping Coverage and a Potential “Death Spiral”:  As noted above, the introduction of a government-run plan—particularly one that reimbursed at below-market rates—would result in significant dislocation of individuals currently covered under employer-sponsored or other insurance on to the government-run plan.  As a result, higher cost increases could be passed on to those private insurance plans that remain—as providers attempt to shift even larger reimbursement disparities on to the remaining private payers—eventually driving all or most private health insurance plans out of the market.  Specifically, the Lewin Group’s analysis of a Commonwealth Fund proposal to establish a government-run plan noted hundreds of billions in savings for employers, largely “resulting from the shift of employers to the public plan”—in other words, businesses who currently offer coverage “dumping” their insurance plans and placing their employees on the government-run program.[7]  Such a scenario would not only represent a break from then-Senator Obama’s promise that “If you like the health insurance you have, you can keep it,” but could transform the United States into a de facto single payer health care system similar to Canada and Britain.

Poorer Coverage and Access to Care:  While some Democrats have touted “Medicare for All” as a possible avenue to achieve comprehensive health reform, many Members—and many Americans—might be concerned by the relatively paltry level of health insurance benefits that a government-run health plan would provide.  Medicare has only provided full prescription drug benefits for three years—and still contains no caps on catastrophic out-of-pocket spending, unlike most employer plans and all plans associated with Health Savings Accounts (HSAs).  Testifying before the Finance Committee, CBO Director Elmendorf noted that the Medicare benefit has an actuarial level of coverage about 15% lower than the standard employer-provided plan—one reason why only 17% of Medicare beneficiaries rely solely on Medicare coverage.[8]  These statistics led one reporter to highlight the extra benefits Medicare Advantage plans provide “relative to bare-bones government plans”—meaning traditional Medicare.[9]

In most states, Medicaid plans provide even less attractive coverage to beneficiaries, as low provider payment rates, even when compared to Medicare plans, result in significant beneficiary access problems, particularly with respect to medical specialists.  For instance, a recent Centers for Disease Control study found that Medicaid patients visit the emergency room at nearly twice the rate of uninsured patients—suggesting that a Medicaid card does not mean that beneficiaries are receiving adequate primary care.[10]  Poorer Americans often prefer other forms of health insurance when compared to Medicaid; a study by the liberal Commonwealth Fund found that among individuals earning less than twice the poverty level, private insurance outnumbered Medicaid as the preferred method of health coverage by more than two-to-one.[11]  Even Energy and Commerce Committee Chairman Waxman recently admitted that “it is highly unlikely that you are going to find any millionaires who would like to go on Medicaid”—raising the question of why a plan so unattractive to wealthy individuals constitutes an acceptable health insurance plan for millions of less affluent Americans who may have no alternative coverage option.[12]

Given the current state of Medicare and Medicaid, many Members therefore may be concerned that the creation of a government-run plan would result in as many as 118 million Americans losing coverage they have—and like—because their employers decide to “dump” their workers into an inferior, though much less costly, form of government coverage.

Fraud:  Waste, abuse, and outright fraud have been endemic to government health programs for decades—a fact Chairman Baucus acknowledged in his November white paper, even as he advocated for a government-run health insurance plan.  One former New York state investigator has asserted that as much as 40% of the state’s Medicaid spending consisted of questionable or outright fraudulent claims.[13]  For instance, the New York Post recently highlighted an investigation into a single provider who billed $1.2 million in allegedly fraudulent claims providing prosthetic eyes to individuals with normal eyesight—whereas the billing and claims systems of most private insurance plans would have prevented such claims from ever being paid.[14]

Similarly, a recent series of articles in CQ Weekly highlighted persistent problems with wasteful and fraudulent spending in the Medicare program.  Official estimates place the amount of Medicare fraud in the tens of billions per year—but officials admit that the amount could be higher, reflecting frauds never detected.[15]  As the head of the Justice Department’s Miami anti-fraud task force notes, “Once you—or someone who wants to commit fraud—have patients with Medicare numbers, and those patients are willing to cooperate with you, you can commit any kind of fraud you want.”[16]  Some Members may be concerned that a government-run health care plan would be ripe for similar incidence of widespread fraud—which would represent a waste of taxpayer dollars, while undermining the argument that government plans are more “efficient” than private health insurance.

Government Care Means Government Control:  Government programs constitute nearly half of all health care spending, and increasing government’s market clout still further may well lead to rationing of procedures as a way to contain costs.  Such actions would be entirely consistent with the philosophy of OMB Director Peter Orszag, who as head of the Congressional Budget Office prepared a report supporting the use of cost effectiveness research to determine reimbursement levels in government plans, while admitting that “patients who might benefit from more-expensive treatments might be made worse off” as a result of policy changes that tie insurance reimbursement to cost-effectiveness criteria.[17]  The federal government already imposes price controls on doctors, hospitals, and pharmaceutical companies—leading some Members to wonder when controls on patient procedures will follow.

Funding and the Status of Current Entitlements:  According to last year’s trustees report, Medicare currently faces unfunded obligations of nearly $86 trillion.  That number will likely grow this year—and the projected exhaustion date for the Hospital Insurance (Part A) Trust Fund could be accelerated by as much as three years, to 2016.  While the Administration asserts that Medicare’s spiraling debt levels require comprehensive health reform in order to slow the growth of health costs, the Obama budget actually increases health spending—which many Members may be concerned would only exacerbate the current problem.  Therefore, some Members may support resolving the long-term sustainability of current entitlements—saving Medicare first, while also reforming Medicaid, as models for the way to slow the growth in health costs—before creating any new government programs.

Conclusion:  Many Members may be strongly concerned about the implications of creating a government-run health plan to “compete” against current insurance plans.  While such a competition may sound appealing in theory, Members may be highly skeptical that a truly level playing field could ever exist between a government-run plan and other options—particularly when the government’s prime efficiency consists of shifting costs on to private payers.  The estimates of the more than 100 million Americans who could be placed into such a government-run plan would represent not government’s “success” in a “competition” but the eradication of private health insurance by a government able to spend unlimited sums to compete against employers unable to bear the costs shifted upon them.  Some Members may therefore view a government-run plan as the first step towards creating a government-run health care system where all Americans have access to a mediocre system—and therefore oppose its creation as both antithetical to our current system of government and likely to result in poor health care for millions of Americans.

Instead, many Members may support reforms to the current tax code that would equalize the tax treatment of health insurance to provide greater incentives for individuals to purchase coverage.  Members may also support reforms permitting greater variety in insurance plans—encouraging innovation and allowing individuals to choose for themselves the plan that best meets their needs—as well as voluntary “premium support” offerings in current government-run programs like Medicaid that allow beneficiaries to use government dollars to purchase private health insurance.  Through these and other similar proposals, Members may offer alternatives that provide choice of quality, affordable health insurance—while ensuring that doctors and patients, rather than government bureaucrats, determine treatment options for all Americans.

[1] Testimony of Douglas Elmendorf, Congressional Budget Office Director, before House Energy and Commerce Committee hearing on “Making Health Care Work for American Families,” March 10, 2009.

[2] Testimony of Doug Elmendorf, Congressional Budget Office Director, before Senate Finance Committee on “Options for Expanding Health Insurance Coverage and Controlling Costs,”  February 25, 2009, available at (accessed March 2, 2009), p. 23.

[3] Will Fox and John Pickering, “Hospital and Physician Cost Shift: Payment Level Comparison of Medicare, Medicaid, and Commercial Payers,” (Milliman, December 2008), available online at (accessed March 2, 2009).

[4] Lewin Group, “A Buy-in to a Public Plan,” Presentation to Senate Finance Committee Republican Staff, December 5, 2008, available online at (accessed March 21, 2009).

[5] Ibid.

[6] Ibid.

[7] Lewin Group, “A Path to a High Performance U.S. Health System: Technical Documentation,” (Prepared for Commonwealth Fund, February 19, 2009), available online at (accessed March 21, 2009), p. 25.

[8] Elmendorf Finance Committee Testimony; America’s Health Insurance Plans, “Low-Income and Rural Beneficiaries with Medigap Coverage,” (February 2007), available online at (accessed March 21, 2009), Figure 1, p. 4.

[9] Vanessa Fuhrmans, “Cuts Await Medicare Insurers,” Wall Street Journal February 26, 2009, available online at (accessed March 4, 2009).

[10] National Hospital Ambulatory Medical Care Survey: 2006 Emergency Department Summary (Hyattsville, MD, National Center for Health Statistics, August 2008), available online at (accessed September 13, 2008), Figure 3, p. 3.

[11] Jennifer Edwards et al., “The Erosion of Employer-Based Health Coverage and the Threat to Workers’ Health Care,” (New York, Commonwealth Fund, August 2002), available online at (accessed March 4, 2009), Table 3, p. 7.

[12] Transcript of House Energy and Commerce Committee markup, January 22, 2009, lines 10251-52.

[13] Clifford Levy and Michael Luo, “New York Medicaid Fraud May Reach into Billions,” New York Times July 18, 2005, available online at (accessed March 4, 2009).

[14] Carl Campanile, “Medicaid Cops Bare Eye-Popping ‘Scams,’” New York Post February 23, 2009, available online at (accessed March 4, 2009).

[15] Alex Wayne, “Elusive, Expensive Target,” CQ Weekly February 16, 2009, p. 349.

[16] Alex Wayne, “Getting in Front of Health Fraud,” CQ Weekly February 16, 2009, p. 344.

[17] Congressional Budget Office, “Research on the Comparative Effectiveness of Medical Treatments,” (Washington, December 2007), available online at (accessed March 5, 2009), p. 15.


Question and Answer: Comparative Effectiveness Research Overseas

What is comparative effectiveness research?

Broadly speaking, comparative effectiveness research evaluates the relative merits of various medical treatments, in the hopes of arriving at a set of best practices for treatment of a condition.  Of critical importance is the distinction between clinical effectiveness—i.e., which treatments work best irrespective of cost—and cost effectiveness—where the most effective treatments could be deemed inappropriate because their costs outweigh the perceived benefits in the government’s eyes.

Have other countries’ use of effectiveness research caused delays in treatment?

Yes.  One of the examples cited as a model for American comparative effectiveness research is Britain’s National Institute for Clinical Excellence (NICE), established in 1999 as part of the National Health Service (NHS).  The first decade of experience with NICE has exposed difficulties in the comparative effectiveness model, including delays in the evaluation of treatments.  A June 2007 Government report found that “it has sometimes taken too long for NICE appraisal guidance to be made available on newly licensed drugs,” resulting in years-long delays for patients to access drugs already approved safe for use but not evaluated on cost-effectiveness grounds.

Does government rationing of health care affect physicians’ practice of medicine?

Yes.  In Britain, a recent study found that one quarter of cancer specialists are keeping their patients “in the dark” about available treatment options—in order to avoid upsetting those patients when they find out the NHS will not pay for their treatments.  Some Members may be concerned at the implications of this form of “self-censorship” significantly altering the doctor-patient relationship, particularly when it results in patients not receiving access to potentially effective care.

Are individuals permitted to pay for unapproved treatments using their own funds?

Not always.  Until recently, British patients who wished to obtain treatments not approved by NICE could do so—but only if they agreed to pay all follow-up costs and renounce their right to follow-up NHS care.  The effective prohibition on patients receiving NHS care from using their own money to fund treatments deemed not cost-effective sparked a massive public outcry.  Stakeholders viewed the prohibition as “despicable,” “appalling,” “uncivilised,” “spiteful,” “cruel,” “abhorrent,” “perverse,” “inhuman,” and “unjust”—even though most stakeholders agreed that some form of rationing within the NHS was inevitable.  As a result, a November 2008 report reversed the ban on so-called top-up payments, allowing patients to pay for drug therapies not deemed cost-effective by NICE while retaining access to NHS care.

If patients in the American system may supplement their Medicare or other government coverage with private funds, Members may be concerned that this “two-tier” health system would have a disproportionate impact on poorer individuals, who will not have the resources to purchase supplemental care.  Conversely, if “top-up” payments are prohibited, Members may strongly oppose an effective ban on patients using their own money to obtain care.

Has comparative effectiveness research generated significant budgetary savings?

Only to the extent that government entities are willing to ration health care based on the research.  A December 2007 CBO report admits that such decisions “could be difficult and controversial,” and further notes studies suggesting that “patients who might benefit from more-expensive treatments might be made worse off” as a result of changes in reimbursement patterns.

The British experience suggests that political considerations may mitigate any perceived savings.  For instance, in August 2008, NICE adopted a policy of refusing to pay for four kidney cancer drugs, even though the pharmaceuticals made “significant gains” in survival times, because NICE did not believe the drugs were cost-effective.  However, public outrage culminated in a policy shift, whereby NICE in January 2009 relaxed its cost-effectiveness criteria for patients in their final months of life on compassionate grounds.  Members may believe that such political pressure in the United Kingdom—a country with a consensus supporting government-rationed care—should serve as a cautionary tale to those who believe that comparative effectiveness research provides a painless solution to slowing the growth of health care costs.

Do many Democrats believe that comparative effectiveness research should be used to ration health care?

Yes.  Democrat press releases trumpeting $1.1 billion in “stimulus” funding for comparative effectiveness research cited CBO data that comparative effectiveness could generate billions in budgetary savings.  In addition, a draft Committee report describing the research funding stated that “more expensive [treatments] will no longer be prescribed” as a result of the “stimulus” funding.

In addition, the liberal Commonwealth Fund recently released its own report proposing $634 billion in savings over ten years from comparative effectiveness research and subsequent rationing of care.  The report asserts that “merely making information available” about the relative merits of treatments “is unlikely to produce” outcomes yielding sufficient savings—and therefore recommends that the new comparative effectiveness center help “to create financial incentives for patients and physicians to avoid high-cost treatments.”  Among other recommendations, the Commonwealth study presumes that the government “would specify circumstances where coverage of procedures and services is restricted on the basis of evidence on the potential benefit to patients” and double co-payments “for people who agree to receive higher cost procedures in cases where a less costly procedure is at least as effective”—which could result in patients who would benefit from more-costly treatments not having access to effective care based on government bureaucrats’ decisions.

For further information on this issue see:


Question and Answer: “Competitive Bidding” in Medicare Advantage

In light of President Obama’s plan for “competitive bidding” within Medicare Advantage (MA), we have compiled a document providing background on the issue.

Does the President’s proposal create competitive bidding within Medicare?

No.  The proposal requires MA plans to bid against each other—but not traditional Medicare will not be required to be competitive.

Does the President’s proposal create a “level playing field” for MA plans to compete against traditional Medicare?

No.  Current law provides a significant bias in favor of traditional Medicare, including its role as the “default” setting for seniors—patients must affirmatively enroll in an MA plan, while those taking no action will receive government-run insurance through traditional Medicare.  Some Members may question why those purportedly interested in a “level playing field” have not proposed changing the current policy of auto-enrolling beneficiaries in traditional Medicare—particularly when it comes to those MA plans with costs below traditional Medicare spending.  Some Members may also view the double standards set by the Obama budget as further evidence to oppose a nationalized health plan, because Democrats will never create a truly level playing field for MA plans to compete against government-run Medicare.

Do seniors participating in Medicare Advantage plans receive extra benefits?

Yes.  Current law requires most MA plans to provide beneficiaries lower premiums, extra benefits, or reduced cost-sharing.  A May 2008 Government Accountability Office report found that MA beneficiaries saved an average of $804 per year in reduced cost-sharing and premiums by enrolling in Medicare Advantage.  Plans also use their rebates to provide extra benefits not covered by traditional Medicare, such as dental, vision, and hearing coverage.

Is a comparison between MA plan spending and traditional Medicare costs appropriate?

No.  Most Members believe that Medicare does not appropriately price all physician and hospital services—and Democrats’ recent actions demonstrate they do not support Medicare’s current pricing structure.  For instance, the “stimulus” bill placed a moratorium on proposed changes to hospice reimbursement, and legislation last July delayed a scheduled reduction in physician reimbursement levels—while providing for a 21% cut in January 2010.  If Members believe that physicians should not receive a 21% pay cut next January, then they may believe that traditional Medicare’s pricing mechanisms serve as an inappropriate benchmark to judge MA plan spending.

Isn’t traditional Medicare more efficient than Medicare Advantage plans?

No.  While some Democrats claim traditional Medicare’s administrative costs run as low as 3%, these costs exclude building maintenance, staff salaries, and collection of premiums that are borne by other federal agencies.  Traditional Medicare also suffers from fraud and abuse—a January Government Accountability Office report found that estimates of $10.4 billion in improper payments annually could actually understate the level of Medicare fraud—due to a lack of adequate administrative oversight.

Conversely, MA plans provide additional disease management and chronic care initiatives that traditional Medicare does not.  As Ezekiel Emanuel of the National Institutes of Health wrote in November, “Some administrative costs are not only necessary but beneficial.  Following heart attack or cancer patients to see which interventions work best is an administrative costs, but it’s also invaluable if you want to improve care.”

Do low-income seniors and minorities disproportionately benefit from Medicare Advantage?

Yes.  A 2007 study conducted by Ken Thorpe—a former Clinton Administration official—found that more than half of the millions of seniors who would lose MA coverage as a result of proposed cuts would have incomes between $10,000 and $30,000.  The same study included findings that minorities make up 27% of MA enrollment, compared with only 20% in traditional Medicare.  For these reasons, the National Association for the Advancement of Colored People and the League of United Latin American Citizens have previously opposed Democrat-led efforts to cut MA payments.[1]

Do all seniors benefit from the competition Medicare Advantage plans create?

Yes.  According to the Medicare Payment Advisory Commission, MA plans with a prescription drug benefit bid $11 per month less for prescription drug coverage than stand-alone Part D plans.  Because bids from both stand-alone plans and MA plans are averaged together to determine federal spending on the prescription drug benefit, MA plans’ lower bids have helped result in Part D spending much lower than originally projected.

[1] “Minority Groups Oppose Proposed Reduction in Funds for Medicare Advantage Plans,” Kaiser Daily Health Policy Report March 16, 2007 (Washington, DC: Henry J. Kaiser Family Foundation), available online at (accessed February 21, 2009).