Lessons of the AHCA Collapse

Like the British evacuation of Dunkirk more than seven decades ago, Friday’s abrupt decision to halt proceedings on the American Health Care Act (AHCA) prior to a House vote represented victory only in that it averted an even costlier defeat—an embarrassing floor vote seemingly destined to fail, or passage of a bill unloved by wide swathes of the public and lawmakers alike.

Whether that decision is ultimately viewed as a “deliverance”—as Winston Churchill dubbed the 1940 Dunkirk evacuation—will depend in no small part on whether lawmakers can, both individually and collectively, learn the right lessons from an entirely predictable defeat.

Republicans Need to Remember How to Govern

Leadership outlined its strategy—such as it was—in a February 27 Wall Street Journal article: “Republican leaders are betting that the only way for Congress to repeal the Affordable Care Act is to set a bill in motion and gamble that fellow GOP lawmakers won’t dare to block it.”

Irrespective of what one thinks of the bill’s policy particulars—whether the bill represents a positive, coherent governing document and vision for the health care system—this thinking demonstrates that Republicans have to re-learn not just how to govern, but also how to legislate.

As a legislative strategy, the House’s gambit represented a puerile cross between the “chickie run” in “Rebel Without a Cause” and Hans Christen Andersen’s “The Emperor’s New Clothes.” Daring lawmakers to challenge the process, and attempting to bully and browbeat them into submission—“testosterone can get you in trouble,” as Rep. Mark Sanford (R-SC) reportedly noted during one meeting—does not a durable process make. Unsurprisingly, that process broke down after a mere 18 days.

In circumstances such as these, there is a fine line between learning lessons and pointing fingers. Focusing on the personalities behind the legislative failure would only further enflame tensions, while serving little productive purpose. On the other hand, understanding the reasons the legislation was in many ways doomed from the start can help prevent future calamities. Of the flawed premises that lay behind the legislative strategy, three seem particularly problematic.

1. Starting with the House

The House’s decision to consider the legislation first seemed ill-considered at the time, given the difficulties the chamber encountered the last time it moved first on repealing Obamacare. In the fall 2015, Congress considered and passed, but President Obama vetoed, repeal legislation under special budget reconciliation procedures. Passing the bill represented a “dry run” testing what a Republican Congress could do to dismantle Obamacare, but for the Democratic president who remained in the White House.

But as I noted the week after last November’s election, the House’s 2015 repeal reconciliation bill suffered from numerous procedural flaws. That legislation originally repealed Obamacare’s Independent Payment Advisory Board (IPAB), even though such Senate procedures meant that this provision, with an incidental fiscal impact, could not remain on a budget reconciliation bill. The House-reported legislation also increased the deficit in the years beyond the 10-year budget window, subjecting it to a potentially fatal point-of-order in the Senate.

Given that near-death experience fewer than 18 months ago, it made much more sense for the Senate to take the lead in crafting a reconciliation measure. At minimum, House staff needed to solicit greater feedback from the Senate regarding that chamber’s procedures during the drafting process, to ensure they wrote the bill consistent with the Senate’s budget reconciliation rules. Neither happened.

House leadership claimed they wrote their bill to comply with the Senate’s reconciliation rules. But experts in Senate procedure could readily see that AHCA as released suffered from multiple procedural flaws, several potentially fatal to the entire bill. Last week, days before its scheduled floor consideration, the relevant House committees released a managers amendment re-drafting the measure’s tax credit, precisely because of the procedural flaws in the initial version.

All of which makes one wonder why the House insisted on initiating action. The Senate not only has more detailed and arcane procedures to follow than the House, Republicans also hold a narrower majority in the upper chamber. While no more than 21 of 237  House Republicans (8.9 percent) can defect on a bill passing solely with Republican votes, no more than two of 52 Senate Republicans can defect in the upper chamber, a much narrower (3.9 percent) margin.

2. The Unrealistic Timetable

The day before House leadership released a document outlining their vision for what became AHCA, I published a lengthy analysis of the legislative environment. I concluded that any legislation featuring either comprehensive changes to Medicaid or a refundable tax credit—the former I generally favored, the latter I did not—just could not pass in the timetable allotted for it:

The likelihood that House Republicans can get a comprehensive “repeal-and-replace” bill—defined as one with either tax credits, Medicaid reform, or both—1) drafted; 2) cleared by the Senate parliamentarian; 3) scored favorably by CBO [the Congressional Budget Office]; and 4) with enough Member support to ensure it passes in time for a mark-up on March 1—two weeks from now—is a nice round number: Zero-point-zero percent.

Likewise the chances of enacting a comprehensive ‘repeal-and-replace’ bill by Congress’ Easter recess. It just won’t happen. For a bill signing ceremony for a comprehensive ‘repeal-and-replace’ bill, August recess seems a likelier, albeit still ambitious, target.

Nothing in the above passage proved inaccurate. House leadership even skipped steps in the process I outlined—going forward with markups without a CBO score, and not writing the bill to comply with Senate procedure until just before a scheduled House vote—yet still couldn’t meet their targets. This would lead most people to believe those targets were just too ambitious.

Two vignettes show the problems caused by the sheer haste of the process. First, the managers amendments released last Monday night had to be re-written on Tuesday night. In both cases, the House committees had to submit second-degree amendments “to address drafting issues,” because the original managers amendments had no fewer than ten separate drafting errors among them.

Second, the managers amendment included an extra pot of funds to increase the refundable tax credits given to those near retirement age. However, the legislation created that pot of money not by increasing the refundable credits, but by lowering thresholds for a deduction available to those who itemize medical expenses on their tax returns.

The decision to provide the additional funds through a deduction, rather than by adjusting the credits themselves, was almost certainly driven by the mechanics of budgetary scoring, and ultimately the bill’s timetable. While the Joint Committee on Taxation (JCT) could estimate the relatively straightforward financial effects of a deduction quickly, altering the tax credit levels for individuals aged 50-64 would create knock-on effects—would more individuals take the credit, would more individuals retire early and drop employer-sponsored coverage, etc.—taking CBO staff a week or more to model.

So, rather than “wasting” time coming up with a policy and finding out the effects of said policy, prior to House passage, congressional staff instead created a $90 billion “slush fund” and pledged to sort the details out later.

Just before Obamacare’s passage in March 2010, former House Speaker Nancy Pelosi infamously said “we have to pass the bill so that you can find out what is in it.” House Republicans took her multiple steps further: By including a “slush fund” designed to change later in the process, and proceeding to both committee markups and a vote on House passage without a final CBO score, congressional leadership guaranteed that anyone who voted for AHCA would not by definition have known what was intended to be in the bill, let alone the fiscal effects of such policies.

The end result was a group of members in vulnerable districts who voted for the bill in committee without a CBO score—and could suffer serious, if not fatal, political consequences for having done so. Some of these moderates hold substantial disagreements with conservatives on how to structure an Obamacare repeal. But it was not conservatives that compelled the moderates to cast a tough vote for the legislation in committee without a CBO score analyzing the bill’s fiscal and coverage impacts—it was the hyper-aggressive timetable.

3. Unproductive White House Coordination

While publicly President Trump and others made statements insisting that his administration was “100 percent behind” the House Republican plan, the divisions within the administration were an open secret on Capitol Hill. From staff to officials, many had misgivings about the policy behind the bill, the legislative tactics and strategy, or both.

Those differences helped affect the ultimate outcome. Ryan attempted to turn his legislation into a “binary choice”—either support this bill, or support Obamacare—granting conservatives some concessions during the drafting process, but few thereafter. By contrast, factions within the administration attempted to woo conservatives and fought House leadership, which resisted making changes.

Ironically, had the administration halted negotiations sooner, and demanded an immediate vote earlier last week, they might have had a better chance of winning that tally. (Whether that victory would have ultimately proved Pyrrhic is another story, but they might have eked out a victory nonetheless.) But because the White House and congressional leadership weren’t on the same page, the former’s negotiations with conservatives left moderates to slowly trickle away from the bill, such that by Friday, it was virtually impossible to find a coalition to reach 216 votes whichever way leadership turned.

Even as the momentum slowly sapped from the bill, the administration and Capitol Hill leaders remained at odds on tactics. The New York Times reported on Saturday that some in the administration wanted to hold a House vote, even an unsuccessful one, to find out who opposed President Trump. But making such a demand misunderstands the dynamic nature of votes in the House of Representatives.

While AHCA might have passed narrowly, it would not have failed narrowly. Once a critical mass of 30 or so Republican “noes” signaled the bill’s clear failure, members would have abandoned the politically unpopular legislation en masse—likely with the implicit or explicit support of House leadership. Having witnessed these “jailbreak” votes in the House, it’s possible that, had the White House forced the issue, the bottom could have fallen out on support for the bill. As a tactic to snuff out disloyal behavior, calling a vote on a doomed bill would have yielded little in the way of political intelligence—only more political damage.

Underneath Tactical Errors Is Philosophical Disagreement

Beneath the obvious tactical errors lie some fundamental disagreements within the Republican party and the conservative movement about Obamacare, the future of our health-care system, and even the role of government. As I have written elsewhere, those differences do not represent mere window-dressing. They are as sizable as they are substantive.

That divide between ‘repealers’ and ‘replacers’ represents a proxy for the debate between reducing costs and maximizing coverage.

On the one hand, the conservative wing of the party has focused on repealing Obamacare, and lowering health costs—namely, the premiums that have risen substantially under the law. By contrast, moderates and centrists remain focused on its replacement, and ensuring that those who benefited from the law continue to have coverage under the new regime.

That divide between “repealers” and “replacers” represents a proxy for the debate between reducing costs and maximizing coverage, a debate that precedes Obamacare by several decades, if not several generations. Some have argued that facts on the ground—the individuals gaining coverage as a result of Obamacare—necessitate an approach focused on maintaining coverage numbers.

Others believe that “repeal means repeal,” that Republicans ran, and won, elections on repealing the law—including as recently as five months ago—and that breaking such a deeply ingrained pledge to voters would represent political malpractice of the highest order.

The drafters of the House bill attempted to split the ideological divide, in part by retaining the popular parts of Obamacare while minimizing the law’s drawbacks. Both the House bill and the Better Way plan that preceded it maintained Obamacare’s restrictions on pre-existing conditions, its requirement that insurers cover dependents under age 26, and its prohibition on annual and lifetime limits for health insurance.

But policy decisions come with trade-offs, and in health care in particular those trade-offs can prove troublesome. Barack Obama did not wish to impose a mandate to purchase health insurance, having fought against one during his 2008 primary campaign; but CBO scoring considerations forced him to endorse one in the bill that became Obamacare. Similarly, the “popular” insurance regulations that Republican leadership maintained in its bill were the same ones that raised premiums so appreciably when Obamacare went into effect.

The AHCA approach of repealing Obamacare’s mandates and subsidies while retaining most of its insurance regulations created what Yuval Levin, a policy wonk close to Ryan, called a “twisted, fun-house mirror approach” to prior conservative health policy that yielded “substantive incoherence.” Dropping the individual mandate while retaining most of the insurance regulations created a CBO score that showed substantial coverage losses while failing to lower premiums appreciably—the worst of all possible policy outcomes.

The ideological divisions within the Republican Party, and the incoherent muddle of legislation that attempted to bridge the two, may have been overcome had the House released its bill the morning after the election, on November 9. But it did not release the bill on November 9, or on December 9, or on January 9, or even on February 9. The House introduced its bill on March 6, with the goal of passing legislation through both chambers by April 6. That timetable didn’t envision reconciling ideological differences so much as it hoped to steamroll them. It was all-but-guaranteed not to end well.

Lessons For the Future

What then of the future? One can only but hope that Republicans follow the example of Kipling’s poem “The Lesson,” written during the Boer War: “Let us admit it fairly, as a business people should; We have had no end of a lesson: It will do us no end of good.”

But what are those lessons, and what good might result from heeding them? While the policy differences within factions of the Republican Party are sizable, the only way to bridge them lies through an open, transparent, and deliberative process—negotiating outcomes among all sides from the start, rather than imposing them from on high through fiat.

If, as President Reagan famously noted, “personnel is policy,” so too then process provides a key to optimal policy making. A good process by itself cannot create good policy, but bad process will almost assuredly result in bad policy outcomes. In the short- and long-term, five principles can provide the initial glimmer of a path forward from last Friday’s dark outcome.

1. Let the Senate Lead

The procedural details surrounding budget reconciliation, and the narrower margins in the upper chamber, both augur toward the Senate re-starting any action on health care. As a practical matter, tensions remain far too high—with tempers short, friendships among members and staff frayed, and patience thin—for the House to initiate any legislative action for at least the next few weeks.

On upcoming legislation ranging from appropriations to tax reform to additional action regarding Obamacare, the “world’s greatest deliberative body” will have to exercise its deliberative powers. The ideological gaps are no less narrow in the House than in the Senate—can Mike Lee and Susan Collins reach consensus on a path forward regarding Obamacare?—but the recriminations and scars of the past month smaller.

If the Senate, with its smaller margins and arcane procedures, can deliver a quality policy product, the House, having seen its legislation sink in mere weeks, might be much more inclined to adopt it as its own.

2. Listen

House leadership rightfully notes AHCA had its origins in the Better Way policy white paper released last June. Prior to that document’s release, leadership staff spent significant time and effort reaching out to members, interest groups, the think-tank community, and others to gain thoughts and feedback on their proposals.

But actual legislation is orders of magnitude more complex than a white paper. Moreover, Better Way and AHCA deviate from each other in multiple important respects. The Better Way proposal includes numerous provisions—incentives for wellness, conscience protections for health care professionals, and proposals to repeal sections of Obamacare regarding Medicare, and Medicare Advantage—never included in AHCA, or mentioned in any great detail as part of the House’s “three-phase” approach.

Meanwhile, AHCA doubles the funding for grants to states when compared to the Better Way proposal, and uses significantly different parameters for the state grants than the 2009 House Republican alternative to Obamacare referenced in the Better Way document.

It’s possible to speculate on why House leadership made all these changes, but leadership itself made very little attempt to communicate exactly why they made them, or even that they were making them at all. Saying that Better Way led to AHCA is like saying the Model T led to the DeLorean. The former are both health-care proposals just as the latter are both cars, but each differ in significant ways.

The process that led from Better Way to AHCA was almost as significant as the process that led from the Model T to the DeLorean, but was opaque to all but a few closely held staff. Even lawmakers who understood and supported every single element of the Better Way plan could rightfully feel whipsawed when presented with AHCA, told it was a “binary choice,” and they had to publicly support it within a few weeks of its introduction, or otherwise they would be voting to keep Obamacare in place and undermine a new president.

When the Republican Study Committee unveiled its health-care legislation in 2013, its public release culminated a months-long process of consultation and scrutiny of the legislative text itself. RSC staff reached out to dozens of policy experts (myself included), and spent hours going through the bill line-by-line to make sure the legislation would accomplish its intended goals, while keeping unintended consequences to a minimum.

AHCA would have benefited immensely from this type of under-the-radar analysis, rather than subjecting legislation not yet ready for prime time to the intense scrutiny that came with a white-hot political debate and a hyper-accelerated timeline.

3. Trust Experts

A note at the bottom of page 25 of a leaked draft of AHCA provides an important hint toward a larger issue. The bracketed note, in a passage regarding per capita cap reforms to Medicaid, calls for staff to “review with CMS [the Centers for Medicare and Medicaid Services] any conforming amendments required.”

Congressional staff I spoke with over the past few weeks questioned whether anyone within the relevant agencies had in fact reviewed the legislation, to provide the technical expertise necessary to ensure that AHCA could be implemented as written, and would actually result in a workable health-care system.

Games of legislative hide-and-seek and talk of ‘binary choices’ preclude the received wisdom of all but the select few participating in the policy-making.

At the time the legislative process began, the Department of Health and Human Services (HHS) had relatively few political appointees—no more than a few dozen out of about 150 total spots filled, and a CMS administrator not confirmed until the week prior to the scheduled House vote. The combination of a stretched staff and mistrust between political and career appointees within the agencies could well have limited the exchange of critically important details regarding how to draft, and implement, the legislation.

In addition to working with career personnel at the agencies, congressional staff should also utilize the institutional knowledge of their predecessors. While working for the House Republican Conference in 2009, I made it a point to start the Obamacare debate by finding out what I didn’t know, reaching out to those who had gone through the “Hillarycare” debate 15 years prior. My idea came from an unlikely source—former senator Tom Daschle, who in his 2008 book “Critical” described how lawmakers went through a “Health Care University” of policy seminars in 1993. In trying to replicate those seminars for both members and staff, I hoped we could obtain some of the collective wisdom of the past that I knew I lacked.

As I had previously noted in November, most of the senior Republican health-care staff working on Capitol Hill during the Obamacare debate in 2009-10 have moved on to other posts. But they, and others like them, are not far removed from the process. Based on my experience, most would gladly offer technical guidance and expertise; in many cases, even the lobbyists would do so with “client hats” removed, in the hopes of arriving at the best possible product.

But reaching out in such a manner requires a deliberative and inclusive process; games of legislative hide-and-seek and talk of “binary choices” preclude the received wisdom of all but the select few participating in the policy-making.

4. Be Honest

The House Ways and Means Committee’s section-by-section summary of AHCA illustrates the dilemma lawmakers faced. Page three of the document, discussing verification of eligibility for the new tax credit, states that “the Secretary of the Treasury is empowered to create a system—building upon already developed systems—to deliver the credit.”

There’s just one minor detail missing: The “already developed systems” for verifying eligibility Ways and Means referenced are Obamacare eligibility systems. This goes a long way toward explaining the omission: If the House is using an Obamacare eligibility system to deliver a refundable tax credit (also included in Obamacare), how much of the law is it really repealing?

Capitol Hill leadership could never reconcile the inherent contradictions in their product. On MSNBC, Ways and Means Chairman Kevin Brady (R-TX) called AHCA “the best opportunity to deliver on our promise to repeal the awful law of Obamacare”—eliding the fact that the bill explicitly retains and utilizes portions of that “awful law.” When pressed, leadership staff relied upon absurd, legalistically parsed statements, afraid to admit that the bill retained portions of Obamacare’s infrastructure.

These Clintonian definitions—“It depends upon what the meaning of the word ‘repeal’ is”—do nothing but build mistrust among members and staff alike. At least some in the policy community felt that House leaders were relying upon Elizabeth MacDonough, the Senate’s parliamentarian, as a de facto human shield—claiming the House couldn’t repeal portions of Obamacare under budget reconciliation, when in fact leadership wouldn’t, for policy or political reasons.

The fact that House leaders claimed their bill comported with reconciliation requirements, yet had to re-write major portions of AHCA at the last minute because it did not, gives added credence to this theory.

Whenever “repeal-and-replace” legislation comes back before Congress, the leaders and committees preparing the legislation should include a list of all the major provisions of Obamacare not repealed by the measure, along with clear reasons why. Even if some members want a more robust repeal than that offered, transparency would at least prevent the corrosive mistrust—“You’re not being up-front about this, so what other things are you hiding?”—that comes from an opaque process.

5. Be Humble

More than perhaps any bill in recent memory, AHCA represented a feat of legislative hubris. As a policy matter, Obamacare imposed a more sweeping scope on the nation’s health-care system. But the tactics used to “sell” AHCA—“We’re doing this now, and in this way. Get on board, or get out of the way”—were far more brutal, and resulted in a brutal outcome, an outcome easily predicted, but the one its authors did not intend.

There is a different approach, one I’ve seen on display. Some job interviews are thoroughly unremarkable, but two during my tenure on Capitol Hill stand out—the chief of staff who described himself as a “servant leader,” one who ensures all the members of the team have the tools they need to succeed; and the legislative director who told me, “We want to make sure you have a voice.” Of course I took both jobs, and felt myself privileged to work in such inclusive and empowering environments.

In some ways, the process that led to AHCA represents the antithesis of servant leadership, with members being given a virtual ultimatum to support legislation many neither liked nor understood. But in its purest form, public service should be just that—service—to one’s constituents, and, in the case of elected congressional leaders, to the members who chose them.

A more humble, inclusive, open, and transparent process will not guarantee success. The policy differences among the disparate Republican factions are real, and may not ultimately be bridgeable. But an opaque, authoritarian, and rushed process will almost certainly guarantee failure, as it did in the case of AHCA.

Listening Is Crucial

Ultimately, the failure to legislate on AHCA lay in a failure to listen to the policy concerns of Members, and to the warning signs present from the start. One can only hope that Republicans learn from this proverbial mule-kick, and start listening to each other more carefully and more closely. That process can yield the wisdom and judgment that comes from understanding, which can only help to heal the many breaches within the party following the events of recent weeks.

On November 8, Republicans received an important gift from voters—the chance to serve the country. Recovering from last week’s setback will require leaders of a humbled party to recommit themselves to service, both to the American people and to each other, in service of a common good. The chance to serve the American people is solely within the public’s gift. That gift, if and when squandered, will likely not be renewed for a long time.

This post was originally published at The Federalist.

Medicare’s Sustainable Growth Rate: Principles for Reform

A PDF of this Backgrounder can be found on the Heritage Foundation website.

Congress may soon revisit the issue of Medicare physician reimbursement payment. Much of the legislative discussion will focus on the sustainable growth rate (SGR) formula. The SGR was enacted as part of the Balanced Budget Act in 1997 as a mechanism to update yearly Medicare physician reimbursements. Under that formula, the federal government computes an annual target for Medicare physician spending based in large part on annual changes in economic growth as measured by gross domestic product (GDP). Physician spending exceeding the growth in GDP in any given year will result in a proportional and automatic cut in Medicare physician reimbursement the following year.

In theory, the SGR was a major improvement over the volume control updates that Congress enacted in 1989. In practice, the SGR mandated deep and politically unacceptable cuts in future years’ Medicare payments. The reason: Physician spending routinely exceeded annual targets. It was quickly becoming clear that the SGR was unworkable. Since 2003, majorities in Congress have routinely blocked the fundamentally flawed SGR formula from going into effect because the applicable cuts would threaten seniors’ access to care. For 2014, the formula calls for a Medicare physician reimbursement cut of almost 25 percent. Not surprisingly, many policymakers have concluded that the SGR must be repealed or replaced.

A Chance for Real Reform. The House Energy and Commerce Committee recently released a revised discussion draft of legislation regarding physician payment,[1] on the heels of a statement of principles initially released by the House Ways and Means and the Energy and Commerce Committees in February.[2] Likewise, the chair and Ranking Member of the Senate Finance Committee recently issued a request for “stakeholder” comment about the future of physician payment.[3]

While Congress’s immediate focus on the SGR is right and proper, it should not be shortsighted. The SGR is merely representative of a much larger problem: Medicare’s outdated system of administrative pricing, price controls, and inefficient central planning. This system both underpays and overpays doctors and other medical professionals, encourages cost shifting and gaming among providers, distorts the medical market, and undercuts the delivery of efficient and effective care. The overriding policy issue is whether Congress will view the SGR narrowly, as something to be “fixed”; or whether the debate can be the platform for a broader discussion of the need for a much better Medicare future, where administrative pricing is replaced by price competition, central planning is replaced by market-driven innovation, and the delivery of high-quality patient care is the product of the best professional judgment of members of the medical profession.

The ultimate policy objective, therefore, should be to transform Medicare into a defined-contribution (“premium support”) system, based on the free-market principles of consumer choice and competition—a system where medical services are priced through private negotiations between plans and providers, reflecting the true market conditions of supply and demand. In the meantime, as part of a transition to such a program, Medicare physician payment should be frozen at current levels for three to five years. Any additional costs to the taxpayer should be offset by savings from well-vetted reforms of the current program, plus a lifting of existing payment caps, a requirement for transparent pricing, and expanded options for doctors and patients.

A Crude and Clumsy Attempt to Break Spending

The SGR mechanism, as noted, links aggregate Medicare payment to changes in the general economy as measured by GDP. If spending exceeds the GDP target, the SGR adjusts physician reimbursements downward; if spending remains below target, the SGR increases physician reimbursements accordingly.[4]

By linking specific Medicare payments to the general performance of the economy, Congress established a fiscal target bearing little resemblance to the actual cost of medical goods and services. Other targets, such as the consumer price index (CPI) or the medical economic index, provide a clearer link to price inflation and general health cost growth. Moreover, the SGR’s explicit link to the size of the economy means that in economic downturns, the target—and thus physician reimbursement levels—will actually decline.

The fact that the SGR remains an aggregate spending target also presents a collective action problem for the Medicare program. Because the SGR targets physician spending as a whole, and not the spending patterns of individual physicians or physician practices, individual doctors have a strong incentive to maximize their own volume of services performed, and thus their own reimbursement levels.[5]

For all these reasons, Congress has consistently modified the SGR targets over the past decade. While the slowdown in health costs surrounding the move to managed care plans in the late 1990s prevented the SGR targets from being hit in the program’s first few years, spending soon exceeded the statutory targets. Although Congress allowed the SGR’s reimbursement cuts to take effect in 2002, in 2003 (and each year since) Congress overrode the statutory reductions with a series of freezes, or modest payment increases, in SGR target levels.[6]

The annual, albeit temporary, payment increases mandated by Congress since 2003 have resulted in a series of fiscal cliffs for physicians and the Medicare program. Because prior Congresses overrode the SGR targets only for short periods, doctors have faced the prospect of increasingly large reimbursement cuts should Congress not forestall the reimbursement cuts.[7] For instance, should Congress not act before January 1, 2014, the SGR will reset at its lower, statutory target, resulting in an immediate reduction in reimbursement levels of over 24 percent, with additional cuts in succeeding years.[8] According to the Congressional Budget Office (CBO), permanently freezing SGR target levels would cost $139.1 billion over 10 years[9]—a significant sum, but about half the $273.3 billion that the CBO estimated an SGR freeze would cost in July 2012.[10]

As a mechanism to contain costs, therefore, the SGR has fallen short. While physicians have received below-inflation updates in Medicare payment levels since 2003, evidence strongly suggests that doctors have compensated for these lower reimbursement levels by increasing the volume of services provided. According to data from the Medicare Payment Advisory Commission, while physician updates grew by less than 10 percent between 2000 and 2011, overall physician spending per beneficiary grew by more than 70 percent over the same period, largely because the volume of services provided to beneficiaries rose rapidly.[11]

However, as a mechanism to control overall spending on Medicare, the SGR has provided an impetus for re-examining spending priorities within other portions of the Medicare program. While generally ineffective at controlling physician spending, the annual SGR target has nonetheless forced Washington policymakers continually to re-examine overall Medicare spending, and encouraged continued debate on structural Medicare reform as well as generated intense discussion on incremental but meaningful reforms in the current program.

Members of Congress have generally insisted on paying for the annual “fixes” to the SGR, as such legislation would otherwise raise Medicare spending and increase the deficit. In 2009, the Senate considered legislation that would have permanently increased Medicare physician reimbursements without offsetting spending reductions.[12] When confronted with an unpaid “doc fix,” a bipartisan majority of 53 Senators rejected this legislation,[13] which would have increased federal deficits by $247 billion over 10 years,[14] and up to $1.9 trillion over 75 years.[15]

Over and above the basic principle that Congress should not increase Medicare spending at a time of record deficits, the SGR has provided a vehicle to enact modest reforms to the Medicare program on an annual basis. For instance, legislation addressing the “fiscal cliff” expanded Medicare competitive bidding to diabetes supplies, and enacted new anti-fraud measures, to help finance a one-year “doc fix” for 2013.[16]

When considering SGR legislation this year, Congress must balance the competing interests of the physician community and the Medicare program as a whole. While the SGR has not slowed cost growth, and the annual “doc fix” exercise has caused uncertainty for physicians, the Medicare program as a whole faces massive deficits—the Medicare trust fund lost $105.6 billion over the past five years, deficits that are expected to continue and accelerate as the baby-boom generation retires.[17] Simply repealing the SGR without fundamentally reforming Medicare would have significant unintended consequences for future taxpayers and beneficiaries alike.

More or Less Government Control Over Medical Practice?

Designing a replacement for the SGR formula brings with it many of its own problems. Proposals to replace the SGR with a system of reimbursing doctors based on quality measures—“pay for performance,” for example —will necessitate an even stronger role for the Medicare bureaucracy in dictating physician behaviors than the current flawed system.

Well before the creation of the SGR mechanism for updating reimbursement, Medicare physician payment has, over the past 25 years, been defined by the heavy hand of bureaucratic micromanagement. In 1989, Congress enacted a resource-based relative value system (RBRVS) for determining physician payments, which focused on determining the “right” payment for a particular service by calculating the cost of performing that service when compared to other services.[18]

Based on a “social science” measurement, the RBRVS attempted to quantify the “value units” of providing medical services, such as the time, energy, and effort that goes into providing a medical service, adjusted by geographic costs and malpractice expenses. A patient with a simple ear infection would require different amounts of a physician’s time than a patient with chronic heart failure, for example, and the RBRVS intended to compensate doctors “fairly” for each service. Organized medicine, particularly the American Medical Association, initially endorsed the new fee schedule as a way of redistributing income from high-priced specialists to lower-paid general practitioners.

In theory, the RBRVS was widely hailed by its proponents as a “scientific” answer to the perennial problem of physician payment.[19] In practice, the result has been a highly politicized process of rent-seeking, as lobbyists of different provider groups feverishly scrambled to secure higher reimbursements through the political process. However well-intentioned, the past quarter century has demonstrated the failure of the RBRVS as an accurate method of compensating physicians who participate in Medicare. Even as the federal government attempts to find the “right” price of every physician service, it has seemingly failed to remember the value of any of them. Unsurprisingly, the creation of more than 7,000 separate procedure codes has not ensured that nearly 850,000 Medicare providers are being compensated fairly for their services.[20] Indeed, the RBRVS has failed in one of its central goals: Created 25 years ago to help increase the relative value of allegedly underpriced primary care services, the RBRVS system has only exacerbated price disparities between primary and specialist care.[21]

In the aftermath of this failure, some in Congress have proposed a new system no less audacious—and no less reliant on the hand of government. Instead of the RBRVS method of pricing services partially based on the archaic labor theory of value—that compensation for physician services should be determined by the amount of time and resources put into the work—the new proposals attempt to quantify the “value” to patients of a particular service by measuring its “effectiveness.”

Pay for Performance or Compliance? Generally speaking, the new theory of pay-for-performance medicine attempts to determine physicians’ “value” and thus reimbursement through compliance with, and performance on, a series of metrics and guidelines determined by federal bureaucrats, medical societies, or a combination of the two. For instance, the House’s discussion draft discusses an “update incentive program” under which the Secretary of Health and Human Services (HHS) would be required to publish a “competency measure set” of quality measures, and then “develop and apply…appropriate methodologies for assessing the performance of fee schedule providers” on those measures.[22]

The language in the House discussion draft—linking Medicare physician pay to compliance with government-established guidelines—accelerates a troubling trend reinforced by Obamacare itself. The national health care law, with 165 provisions affecting Medicare,[23] not only retains the SGR, but, like the SGR, it also imposes a hard cap on the growth of all Medicare spending. It creates an Independent Payment Advisory Board (IPAB), which will have the power to enforce the cap, and recommend even more Medicare reimbursement cuts for physicians and other medical professionals. It creates new institutions to change Medicare payment and delivery through administrative action, such as the Center for Medicare and Medicaid Innovation, with demonstration programs designed to end traditional fee-for-service (FFS) payments. Beyond these new institutions, the health law creates new Medicare “quality” programs and extends the Physician Quality Reporting Initiative (PQRI), which will enforce new bonus and penalty payments for physician compliance. As the Congressional Research Service (CRS) reported in its first evaluation of the statute, the new law “makes several changes to the Medicare program that have the potential to affect physicians and how they practice in ways both small and large, immediately and over time.”[24]

For example, Obamacare mandates a 2 percent reduction in Medicare physician payments for doctors that do “not satisfactorily submit data” to Washington officials,[25] and a 1 percent reduction for physicians who fail to follow bureaucrat-defined “cost” metrics.[26] In separate legislation also signed by President Obama, the Administration received the authority to reduce payments to physicians by a further 3 percent if they do not follow Washington-imposed guidelines for electronic health records.[27]

To their credit, the authors of the House discussion draft emphasize the role of medical specialty societies in determining quality metrics, thereby hoping to assuage concerns about federal bureaucrats’ direct involvement in the practice of medicine. This does not, however, solve the fundamental problem. The entire premise of a Medicare pay-for-performance regime—which is really a payment for compliance—directly contradicts the opening verbiage of the original Medicare statute:

Nothing in this title shall be construed to authorize any federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided, or over the selection, tenure, or compensation of any officer or employee of any institution, agency, or person providing health services; or to exercise any supervision or control over the administration or operation of any such institution, agency, or person.[28]

The threshold question is this: Should government officials “exercise any supervision or control” over the practice of medicine? It matters not whether some physicians choose to comply with Washington’s mandates on their practices, or whether some leaders of some specialty societies see value in serving as arbiters of some new Medicare pay-for-performance structure. Under the original Medicare statute, all physicians should have the freedom to practice medicine using their own professional judgment in treating a patient, without meddling—whether in the form of new federal mandates, “quality” metrics, or other bureaucratic criteria—from either the federal government or its intermediaries.

The flaws in Medicare’s pay-for-performance approach have been well defined elsewhere.[29] The myriad regulations and mandates that such criteria spawn interfere in the practice of medicine, placing an invisible barrier amid the already attenuated relationship between doctor and patient. Worse, the one-size-fits-all methodologies imposed by Washington-enforced mandates directly contradict the great promise of the growing movement toward personalized medicine.[30]

Despite its inherent flaws, a bureaucracy-driven compliance regime remains a shibboleth of leftist health policy analysts who believe that a new system of federal micromanagement can fix the flaws of the old one. Former Senator Tom Daschle (D–SD), President Obama’s first choice for Secretary of HHS, wrote in 2008 that government interference in medical care was not the problem, it was the solution:

We won’t be able to make a significant dent in health-care spending without getting into the nitty-gritty of which treatments are the most clinically valuable and cost effective. That means taking a harder look at the real costs and benefits of new drugs and procedures.[31]

Obamacare epitomizes this governing philosophy of administrative control, giving the Secretary almost 2,000 separate orders with which to micromanage the health care system.[32] Members of Congress who rightly criticized Obamacare for granting the Secretary nearly unprecedented discretionary authority over the financing and delivery of medical care should be greatly concerned with enacting SGR replacement legislation that would further expand the Secretary’s control.[33]

Principles for Congressional Action

As it has since 2003, Congress likely will consider legislation later this year addressing the deep cut mandated by the SGR formula. Absent changes in current law, a cut of nearly 25 percent will take effect on January 1, 2014.

Based on the proposals released to date, leaders on key committees intend to use this year’s legislation to construct a permanent replacement for the SGR, with a new reimbursement model heavily focused on quality metrics. The goal of securing a higher quality of services for taxpayer dollars is clearly laudable. But Congress should remain mindful of the consequences of additional intrusion in the doctor–patient relationship, and of the fact that the SGR constitutes merely one piece of a larger entitlement structure in need of fundamental reform.

When considering Medicare physician payment legislation, Congress should:

  • Reject any provisions that micromanage the doctor–patient relationship. Whether under the name of pay-for-performance, clinical guidelines, or quality metrics, programs emphasizing physician compliance with government-imposed standards are inconsistent with the original intent of the Medicare statute, which safeguards the professional independence and integrity of the medical profession and sacrosanct character of the doctor–patient relationship. Placing additional authority in the hands of government bureaucrats to dictate the practice of physicians undermines these principles as well as patient trust.
  • Restore balance billing and the right to private contracting. Consistent with a return to free-market principles, Congress should remove the current statutory prohibitions on balance billing—when doctors bill patients for the part of the health-service charge not reimbursed by Medicare—while also repealing the oppressive restriction that prohibits doctors who engage in any transactions with beneficiaries outside Medicare’s parameters from receiving Medicare reimbursements for two years.[34] Keeping the heavy hand of government out of the doctor–patient relationship requires removing regulatory restrictions that prevent senior citizens from engaging physicians on financial terms that both find fair and advantageous. When coupled with transparency guidelines ensuring that seniors clearly understand the prices and the terms of these contractual arrangements, balance billing and private contracting can remove many of the financial pressures imposed by Medicare’s top-down, government-dictated pricing system.
  • Insist that fundamental, long-term SGR reform be paired with fundamental, long-term Medicare reform. Experts on all sides of the political spectrum agree that the flawed SGR mechanism should be replaced. The best replacement for the SGR and the entire system of current Medicare financing lies in a defined-contribution (premium support) system that fundamentally reforms and enhances the entire Medicare program. In the short term, Congress can take several important incremental steps to re-structure the traditional Medicare program as part of a transition to a premium support system.[35] However, Congress should not attempt to enact a fundamental change to the SGR coupled solely with incremental reforms to the larger Medicare program. To do so would remove an impetus for the major structural reforms that Medicare needs in order to ensure its solvency for future generations.

Conclusion

Congress once again appears poised to grapple with a problem of its own making—namely, the SGR formula for physician reimbursement. Members in both the House and Senate have solicited proposals for alternatives, and have committed to considering SGR proposals this year.

However, when constructing alternatives to the SGR, Congress should heed the lessons of experience. The system of administrative pricing for Medicare physician payment, in effect for nearly 25 years, has proven cumbersome, bureaucratic, and unworkable. Moving further in the direction of pay-for-performance medicine, as some proposals have suggested, would merely substitute medical societies for the role currently played by omnipotent government bureaucrats, attempting to impose one-size-fits-all medical care from Washington.

Conversely, while the SGR has not succeeded in its initial goal of containing Medicare physician spending, the perennial “doc fix” bills have forced Congress to enact changes in the Medicare program, many of which constituted real progress in reforming entitlement spending. Completely repealing or replacing the SGR, without first ensuring fundamental reform of the entire Medicare program, would actively subvert attempts to make the program sustainable for future generations.

The SGR debate presents Members of Congress with both an opportunity and a challenge. The opportunity lies in enacting reforms that can expand market forces in Medicare and enhance the program’s viability. The challenge lies in resisting the siren call that yet another form of federally micromanaged health care can succeed when all past iterations have failed. Seniors and future generations should hope that Congress chooses to embrace the opportunity and rise to the challenge.

 



[1] House Energy and Commerce Committee discussion draft of Medicare physician payment legislation, June 28, 2013, http://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/BILLS-113hr-PIH-SGRreform.pdf (accessed July 11, 2013).

[2] House Energy and Commerce Committee and Ways and Means Committee joint framework for Medicare physician payment reform, “Overview of SGR Repeal and Reform Proposal,” February 7, 2013, http://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/20130207SGRReform.pdf (accessed July 11 2013).

[3] News release, “Baucus, Hatch Call on Health Care Providers to Pitch in and Provide Ideas to Improve Medicare Physician Payment System,” U.S. Senate Committee on Finance, May 10, 2013, http://www.finance.senate.gov/newsroom/chairman/release/?id=fba99c75-981f-4917-9836-ae49d47453a1 (accessed July 11, 2013).

[4] Mark Miller, “Moving Forward from the Sustainable Growth Rate (SGR) System,” testimony before the Finance Committee, U.S. Senate, at a hearing on “Advancing Reform: Medicare Physician Payments,” May 14, 2013, p. 2, http://www.finance.senate.gov/imo/media/doc/MedPAC%20SGR%20testimony%20with%20attachments_SFC_5%2014%202013.pdf (accessed July 11, 2013).

[5] Ibid., p. 3.

[6] The full list of statutory adjustments to the SGR conversion factor enacted by Congress since 2003 can be found in amendments to the United States Code, 42 U.S.C. 1395w-4(d)(5) et seq.

[7] Beginning with the Tax Relief and Health Care Act of 2006 (P.L. 109–432), Congress provided that temporary payment increases overriding the SGR cuts would not be used in setting the SGR targets for future years—thus ensuring a “cliff” when the target re-sets at the lower level.

[8] The Centers for Medicare and Medicaid Services has estimated a preliminary SGR conversion factor update of 24.4 percent for calendar year 2014. Centers for Medicare and Medicaid Services, “Estimated Sustainable Growth Rate and Conversion Factor for Medicare Payments to Physicians in 2014,” April 2013, p. 8, Table 5, http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/SustainableGRatesConFact/Downloads/sgr2014p.pdf (accessed July 11, 2013).

[9] Congressional Budget Office, “Medicare’s Payments to Physicians: The Budgetary Impact of Alternative Policies Relative to CBO’s May 2013 Baseline,” May 14, 2013, http://cbo.gov/sites/default/files/cbofiles/attachments/44184_May_2013_SGR.pdf (accessed July 11, 2013).

[10] Congressional Budget Office, “Medicare’s Payments to Physicians: The Budgetary Impact of Alternative Policies Relative to CBO’s March 2012 Baseline,” July 31, 2012, http://cbo.gov/sites/default/files/cbofiles/attachments/43502-SGR%20Options2012.pdf (accessed July 11, 2013).

[11] Miller, testimony before Finance Committee, U.S. Senate, Figures 1 and 2, p. 4.

[12] Medicare Physician Fairness Act of 2009, S. 1776 (111th Congress).

[13] Senate Roll Call 325 of 2009, October 21, 2009, http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=1&vote=00325 (accessed July 11, 2013).

[14] Congressional Budget Office, cost estimate for S. 1776, October 26, 2009, http://cbo.gov/sites/default/files/cbofiles/ftpdocs/106xx/doc10674/s1776greggltr.pdf (accessed July 11, 2013).

[15] Andrew Rettenmaier and Thomas Saving, “How the Medicare ‘Doc Fix’ Would Add to the Long-Term Medicare Debt,” Heritage Foundation WebMemo No. 2695, November 13, 2009, http://www.heritage.org/research/reports/2009/11/how-the-medicare-doc-fix-would-add-to-the-long-term-medicare-debt.

[16] American Taxpayer Relief Act of 2013, Public Law 112–240, Sections 636 and 638.

[17] Centers for Medicare and Medicaid Services, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, May 31, 2013, p. 58, Table II.B4, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2013.pdf (accessed July 11, 2013).

[18] Section 6102 of the Omnibus Budget Reconciliation Act of 1989, Public Law 101–239, established a Medicare physician fee schedule based on the RBRVS, effective in January 1992.

[19] Robert E. Moffit, “Back to the Future: Medicare’s Resurrection of the Labor Theory of Value,” Regulation (Fall 1992), pp. 54–63.

[20] Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2013, p. 79, http://medpac.gov/documents/Mar13_EntireReport.pdf (accessed July 11, 2013).

[21] Ibid., p. 95.

[22] House discussion draft, pp. 3–5.

[23] Centers for Medicare and Medicaid Services, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, p. 2.

[24] Patricia A. Davis et al., “Medicare Provisions in PPACA (P.L. 111–148),” Congressional Research Service Report for Congress No. R41196, April 21, 2010, http://assets.opencrs.com/rpts/11-148_20100421.pdf (accessed July 12, 2013).

[25] Patient Protection and Affordable Care Act, Public Law 111–148, Section 3002(b).

[26] Ibid., Section 3007.

[27] American Recovery and Reinvestment Act, Public Law 111–5, Section 4101(b).

[28] 42 U.S.C. 1395.

[29] Richard Dolinar and Luke Leininger, “Pay for Performance or Compliance? A Second Opinion on Medicare Reimbursement,” Heritage Foundation Backgrounder No. 1882, October 5, 2005, http://www.heritage.org/research/reports/2005/10/pay-for-performance-or-compliance-a-second-opinion-on-medicare-reimbursement.

[30] Ibid.

[31] Tom Daschle, Scott Greenberger, and Jeanne Lambrew, Critical: What We Can Do about the Health Care Crisis (New York: Thomas Dunne Books, 2008), pp. 172–173.

[32] Michael Leavitt, “Health Reform’s Central Flaw: Too Much Power in One Office,” The Washington Post, February 18, 2011, http://www.washingtonpost.com/wp-dyn/content/article/2011/02/17/AR2011021705824.html (accessed July 11, 2013).

[33] For further information on the HHS Secretary’s powers, see John S. Hoff, “Implementing Obamacare: A New Exercise in Old-Fashioned Central Planning,” Heritage Foundation Backgrounder No. 2459, September 10, 2010, http://www.heritage.org/research/reports/2010/09/implementing-obamacare-a-new-exercise-in-old-fashioned-central-planning.

[34] Section 4507 of the Balanced Budget Act, Public Law 105–33.

[35] Robert E. Moffit, “The First Stage of Medicare Reform: Fixing the Current Program,” Heritage Foundation Backgrounder No. 2611, October 17, 2011, http://www.heritage.org/research/reports/2011/10/the-first-stage-of-medicare-reform-fixing-the-current-program.

Pediatric Research Bill: Obamacare’s Road to Rationing?

A PDF of this Issue Brief is available on the Heritage Foundation website.

Later this month, the House of Representatives could consider legislation regarding pediatric research.[1] Legislation regarding this issue (H.R. 1724) was first introduced in April, and a new version of the bill (H.R. 2019) was introduced in May.

Although largely similar, H.R. 1724 would require the director of the National Institutes of Health (NIH) to provide a justification for any existing grants studying health economics, and would prohibit new grants until “a federal law has been enacted authorizing the National Institutes of Health to use funding specifically for health economics research.”[2] Press reports indicate that H.R. 2019 excludes the restrictions included in H.R. 1724 “in order to please Democrats who favor the research.”[3]

This is a mistake. The House should ensure that H.R. 1724’s proposed restrictions on health economics research remain in any NIH-related legislation that comes to the House floor. To do otherwise would provide tacit approval to Obamacare’s road to government-rationed health care.

Proposed Restriction a Necessary Protection

The provision omitted from H.R. 2019 would have instituted an important and necessary protection on taxpayer-funded research on cost-effectiveness in health care. In recent years, the federal government has funded numerous such studies. For instance, a June 2011 Government Accountability Office report examining projects funded by the “stimulus” highlighted NIH grants studying the cost-effectiveness of various medical treatments, including:

  • “A Comprehensive Model to Assess the Cost-Effectiveness of Patient Navigation,”
  • “Cost-Effectiveness of Hormonal Therapy for Clinically Localized Prostate Cancer;”
  • “Clinical and Cost-Effectiveness of Biologics in Rheumatoid Arthritis,” and
  • “Cost-Effectiveness of HIV-Related Mental Health Interventions.”[4]

Liberals Favor Cost-Effectiveness Research

Setting aside the wisdom of using taxpayer funds to examine the cost-effectiveness of various treatments, such research could eventually be used to deny patients access to certain kinds of care. Quotes from key policymakers reveal how some would use cost-effectiveness research as a way for government bureaucrats to block access to treatments that are deemed too costly:

  • Former Senator Tom Daschle (D–SD), President Obama’s first choice for Secretary of Health and Human Services, wrote in 2008 that “we won’t be able to make a significant dent in health-care spending without getting into the nitty-gritty of which treatments are the most clinically valuable and cost effective. That means taking a harder look at the real costs and benefits of new drugs and procedures.”[5]
  • In a 2009 interview with The New York Times, President Obama argued that “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.”[6]
  • Former Medicare Administrator Dr. Donald Berwick, in his infamous 2009 interview, strongly argued in favor of taxpayer-funded cost-effectiveness research when stating that “the decision is not whether or not we will ration care—the decision is whether we will ration with our eyes open.”[7]

Lawmakers have already expressed their desire to use cost-effectiveness research to restrict access to certain treatments. A report prepared by the House Appropriations Committee in 2009, discussing “stimulus” funding for the types of projects highlighted above, noted that thanks to the research funding, “those items, procedures, and interventions that are most effective to prevent, control, and treat health conditions will be utilized, while those that are found to be less effective and in some cases more expensive will no longer be prescribed.”[8]

Road to Rationing

Although research comparing the relative merits and costs of medical treatments may sound appealing, past experience has demonstrated that such research can, and often is, used as a blunt tool by governments to restrict access to certain kinds of care. At a time when genetic advances have opened the door to personalized medical treatments, Obamacare has moved health policy in the opposite direction, expanding the federal bureaucracy in an attempt to micromanage the health care system.[9]

Imposing the restrictions on cost-effectiveness research included in H.R. 1724 would represent a good first step in restoring the balance between federal bureaucrats and patients.

 



[1]Daniel Newhauser, “Mindful of Previous Defeat, Cantor Pushes Bill to Increase Pediatric Research,” Roll Call, June 10, 2011, http://www.rollcall.com/news/mindful_of_previous_defeat_cantor_pushes_bill_to_increase_pediatric-225436-1.html?zkPrintable=true (accessed June 13, 2013).

[2]The Kids First Research Act of 2013, H.R. 1724, § 4.

[3]Newhauser, “Mindful of Previous Defeat.”

[4]U.S. Government Accountability Office, HHS Research Awards: Use of Recovery Act and Patient Protection and Affordable Care Act Funds for Comparative Effectiveness Research, GAO-11-712R, June 14, 2011, http://www.gao.gov/new.items/d11712r.pdf (accessed June 13, 2013).

[5]Tom Daschle, Scott Greenberger, and Jeanne Lambrew, Critical: What We Can Do about the Health Care Crisis (New York: Thomas Dunne Books, 2008), pp. 172–173.

[6]David Leonhardt, “After the Great Recession,” The New York Times, April 28, 2009, http://www.nytimes.com/2009/05/03/magazine/03Obama-t.html (accessed June 13, 2013).

[7]Biotechnology Healthcare, “Rethinking Comparative Effectiveness Research,” June 2009, http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2799075/pdf/bth06_2p035.pdf (accessed June 13, 2013).

[8]Helen Evans, “Comparative Effectiveness in Health Care Reform: Lessons from Abroad,” Heritage Foundation Backgrounder No. 2239, February 4, 2009, note 3, http://www.heritage.org/research/reports/2009/02/comparative-effectiveness-in-health-care-reform-lessons-from-abroad.

[9]Kathryn Nix, “Comparative Effectiveness Research Under Obamacare: A Slippery Slope to Health Care Rationing,” Heritage Foundation Backgrounder No. 2679, April 12, 2012, http://www.heritage.org/research/reports/2012/04/comparative-effectiveness-research-under-obamacare-a-slippery-slope-to-health-care-rationing.

Obamacare’s Future Still Shaky

Judging from much of the media coverage of the Supreme Court’s ruling over the past 24 hours, one would think the law had been given a clean bill of constitutionality by the Court, meaning Obamacare faces smooth sailing from here on in.  But as ESPN’s Lee Corso might say, “Not so fast, my friend!

First, as we pointed out yesterday, part of Obamacare WAS ruled unconstitutional by the Court – and by a 7-2 margin, no less.  That bears worth repeating: Even Justices Elena Kagan – one of President Obama’s appointees, and his former Solicitor General – and Steven Breyer – a former Ted Kennedy staffer – thought Obamacare’s Medicaid expansion was unconstitutionally coercive.  So much for “Are you serious?”

Second, Obamacare faces continued obstacles on numerous fronts, including in the courts:

  1. (More) Constitutional Uncertainty:  Other Obamacare provisions are subject to constitutional litigation.  For instance, the law’s Independent Payment Advisory Board – that bureaucratic spawn so dangerous President Obama is afraid to appoint nominees to it during his re-election campaign – has been challenged as giving unelected and unaccountable officials carte blanche to re-write Medicare policy, thereby usurping the role of Congress.  Former Obama Administration budget chief Peter Orszag thinks IPAB is one of the lynchpins of the law, precisely because it is constitutionally questionable – or, as he put it, “less democratic.”
  2. Legal Uncertainty:  Challenges to other elements of the law – such as its infringements on religious liberty – that had been delayed during the Supreme Court’s consideration will now proceed apace.  Also likely subject to a legal challenge is the Administration’s regulatory ruling indicating that individuals in a federal exchange can receive insurance subsidies – which appears to violate the plain text of the statute.
  3. Funding Uncertainty:  While some implementation funding was included in the law, most of that money has been spent – meaning the Administration has to come back to Congress for more money through the annual appropriations process.   Amidst all the reaction to the Court ruling yesterday, many may have missed the fact that the White House issued a veto threat against an appropriations measure being considered in the House, in part because the appropriations bill restricts funding to the IRS for implementation of Obamacare – including implementation of the health insurance mandate tax.  As a reminder, Obamacare does NOT give HHS mandatory funding to establish a federally-based exchange, which is why the Administration requested more than half a billion dollars in new discretionary funding for a federal exchange in its budget this February.  Given that the federal government is running trillion-dollar deficits, why does anyone think Congress should be favorably inclined to spend billions more implementing a law the Supreme Court has admitted is a constitutional overreach?
  4. State Uncertainty:  Yesterday’s ruling gave states the ability to opt out of the law’s new Medicaid expansion – which according to the Medicare actuary accounts for more than half of the law’s coverage expansions – without giving up their existing Medicaid funding.  States can also decide not to create state-based exchanges, and many have declined to create them.  Even Tom Daschle, President Obama’s once-putative HHS Secretary, admitted that the law is so cumbersome and unwieldy that states are unlikely to be ready for its “Big Bang” in January 2014.  And yesterday’s ruling should not give states any more incentive to implement an unconstitutional law – it may well give them less incentive to do so.
  5. Electoral Uncertainty:  This topic should be self-evident.  However, it does give me the opportunity to point out the conservative justices’ observation in their dissent that “cutting Medicare is unpopular” (page 59).  Which is a delicate way of pointing out that senior citizens may not like the idea that Obamacare uses more than $500 billion in Medicare savings not to improve Medicare’s financial stability, but to create a new entitlement.  And as President Obama likes to say, “Elections have consequences.”
  6. Overall Uncertainty:  Even as the Administration attempts to claim victory and certainty on implementation, the true picture is far from clear:
    • States could opt out of the Medicaid expansion;
    • More states could choose not to create Exchanges;
    • The federal government could lack the resources necessary to create a federal Exchange;
    • Courts could overrule federal bureaucrats’ arbitrary decision, and decide that Obamacare does NOT authorize insurance subsidies to those enrolled in a federal Exchange – thus undermining both the subsidy regime and the employer mandate.

The most important point is this: The American people don’t want this unconstitutional law – and they never have.  To argue that implementation will proceed full-speed ahead – in the face of public opinion, the significant obstacles ahead, and a Supreme Court ruling calling parts of the law unconstitutionally coercive – may strike some as whistling past the graveyard.

Obama’s “Bait and Switch” on the Berwick Nomination

Late on Friday, John McDonough published a blog post in the Boston Globe entitled “Why Berwick Matters.”  He intended to use the posting as a means to attack Republicans – but in reality his revealing comments unwittingly serve as an indictment of Democrats, Obamacare, and Berwick for political gamesmanship over the nomination.

As many of you know, McDonough served as Sen. Kennedy’s point person on health “reform” through his senior post on the HELP Committee during 2009-10.  It is therefore with a strong insider perspective that McDonough’s post included the following bombshell:

It was a thrilling moment when it became clear that Berwick had been selected by President-elect Barack Obama and the new Secretary of Health & Human Services, Tom Daschle, to run the federal Centers for Medicare and Medicaid Services.  Finally, the key U.S. health agency would be headed by a physician thoroughly committed to fundamental quality and system improvement, as well as patient empowerment.  It was a heady — and short-lived — moment.

If you think the reference to HHS Secretary Daschle was a typo, it wasn’t; the piece continues:

In late January 2009, Daschle’s nomination blew up over his unpaid taxes.  Berwick’s nomination — which would have sailed through an easy confirmation in early 2009 — was held aside while a successor was recruited, and then the Administration began looking at other names.  The health reform legislative campaign provided another reason to delay, and so it was not until April, 2010 that the President nominated Berwick.

In other words, the White House intended to have Berwick head CMS all along – but delayed the nomination until AFTER Obamacare passed, because it knew how controversial he was.  What McDonough’s piece elides over is the fact that Daschle’s withdrawn nomination prompted the new Administration to engage in closer scrutiny of its nominees.  It’s likely that Berwick’s history of support for British socialized medicine – including his comments about the NHS being a “seductress” – emerged at that time.  At which point, according to McDonough’s account, the Administration scrapped the idea of nominating Berwick – at least until AFTER Obamacare passed.  All of which raises the question:  If Berwick was so unpopular that the Administration couldn’t bring itself to nominate Berwick in the light of day – i.e., to make a clear statement before Obamacare passed that Berwick would be the one to implement the law – why was ever he nominated at all?

McDonough concludes his blog post by saying that Senate Republicans engaged in “meaningful disrespect” of the nominee, a similar tone to the White House reaction that said “a small group of senators…[were] putting political interests above the best interests of the American people.”  In reality however, McDonough’s account makes clear that the real disrespect was being driven by the Obama Administration, which refused for political reasons to inform the American people before Obamacare’s enactment that the unpopular health care bill would be implemented by an even more unpopular and controversial appointed bureaucrat.

A Modest Proposal for IPAB’s Defenders

Several months ago I began experiencing problems walking on my left foot.*  I was born with deformed bones in my left foot, and the pressure from walking on this abnormal foot structure for more than 30 years began to take its toll.  I visited several podiatric and orthopedic specialists to evaluate my options; non-invasive methods like orthotics and therapy helped, but it became apparent to me that they weren’t really solving the problem, as opposed to delaying the inevitable.  So I consulted with a surgeon, and he arrived at a plan of action – fusions, grafts, and a tendon lengthening – which should significantly alleviate my pain and improve my gait.  Feeling comfortable with the surgeon’s level of expertise and with his recommended treatment plan, I scheduled surgery for a few weeks from now.

However, the recent debate over the IPAB – Obamacare’s body of unelected bureaucrats who will control Medicare spending – has prompted me to reconsider my decision.  After all, who am I to decide how my own health care should be handled?

  • Paul Krugman has taught me that “Patients are Not Consumers” and that “making [health care] decisions intelligently requires a vast amount of specialized knowledge”;
  • The Center for American Progress, in making “The Case for Bureaucrats in Health Care,” has taught me that health care is different from buying shoes;
  • Ezra Klein has taught me that “consumer-directed health care is a silly idea” because “patients are not qualified to evaluate good care”; and
  • CMS Administrator Donald Berwick has taught me that “I cannot believe that the individual health care consumer can enforce through choice the proper configurations of a system as massive and complex as health care.  That is for leaders to do.”

These statements have left me in a serious conundrum, and forced me to reconsider my thinking.  After all, I’m not an expert on health care – I’m not even close:

  • I don’t have a PhD in economics, which, as Secretary Sebelius recently pointed out, qualifies individuals as “experts” in how to run a health care system;
  • Neither I nor my surgeon graduated from an Ivy League school; and
  • I don’t even know all the words to Fair Harvard.

I do however now recognize that I am not only clearly incapable of making my own health care choices, but also that my health – and our entire country – would be better off leaving those choices to “experts” who are my intellectual superiors.  After all, President Obama promised that the stimulus would prevent unemployment from rising above 8 percent – and who thinks joblessness is still a major problem more than two years later?  And just look at how Obamacare has already delivered the $2,500 reduction in premiums that candidate Obama repeatedly promised.

So all I need now is to find a suitable “expert” to tell me whether I should have the surgery or take the painkiller.  Therein lies my open request to IPAB’s defenders, to provide me with the enlightened knowledge of my own medical condition that I so clearly lack:

  • Peter Orszag – supporter of IPAB as a way “to improve Medicare’s cost-effectiveness” – can tell me whether my surgery will cost too much;
  • Zeke Emanuel can tell me where my procedure fits on his chart for the allocation of scarce medical resources; and
  • Dr. Berwick can tell me if I’m one of those cases where “Most people who have serious pain do not need advanced methods; they just need the morphine and counseling that have been available for centuries.”

I do hope that one of these individuals – or indeed other political commentators who have supported IPAB in recent weeks – can tell me how I should proceed when it comes to my foot.  After all, I now realize that my surgeon could be recommending an operation just for the reimbursement check – because most medical professionals base their decision-making processes on whether they will obtain a $50,000 payday (as opposed to Obamacare’s “experts,” whose decisions will be based on the fact that “the social budget is limited – we have a limited resource pool”).

There is a catch however:  While I will defer my own opinion to those of the “experts,” I do expect that any individual who passes judgment on my case will assume full financial and legal liability for same.  That may be a problem for some of IPAB’s defenders.  After all, Section 3403 of the statute exempts the IPAB and its members from ANY legal liability associated with its decisions.

And therein lies the point of this proposal, and this story:  If the IPAB’s defenders – and its so-called “experts” – aren’t willing to put their own money where their mouths are, then how good will this board of unaccountable bureaucrats be?

 

* And just in case you were wondering, the facts of this story are real, as is the sarcasm…

Washington (State) Rations with Its Eyes Open

Speaking at the AHIP convention in San Francisco yesterday, former Majority Leader Tom Daschle praised Obamacare’s board of unelected bureaucrats that will be empowered to make changes in Medicare policy: “I can’t think of anything…that is more important than ultimately giving some real authority to someone to make these tough decisions.”  Sen. Daschle’s 2008 book Critical likewise praised the idea of having unaccountable bureaucrats make “tough decisions,” writing that “We won’t be able to make a significant dent in health-care spending without getting into the nitty-gritty of which treatments are the most clinically valuable and cost-effective.”

Washington – the state, not the city, that is – has given a board of bureaucrats the power to do just that, and its experience is illustrative of what all Americans can expect when Obamacare’s bureaucratic board finally convenes.  The Seattle Times reports on the state’s board, which meets later this afternoon:

If you want trouble, try telling a mother that insurance will no longer pay for her diabetic teenager to test his blood-sugar levels as often as she thinks he should.

Or tell a man who was crushed in a workplace injury that he can’t have the spinal injections for pain control he says are the only thing keeping him going.

That’s the job of the state’s oft-vilified Health Technology Assessment committee, a group of 11 health professionals charged with deciding whether taxpayer dollars should be spent on certain types of medical care for injured workers, people on Medicaid and state employees.

In an effort that’s unique in the country in depth and scope, the committee decides — at open meetings — which procedures, treatments and tools are effective and cost-efficient, and thus worthy of state dollars.
Far more persuaded by empirical data than personal anecdotes, the committee has passed judgment on newer technology such as upright MRIs and virtual colonoscopy, and on the more familiar — such as cardiac stents, arthroscopic knee surgeries, hip resurfacing and breast MRIs.

And despite the Administration’s claims that Obamacare’s board will be pollinated by experts, the Seattle paper notes that the Washington state board’s members “are, by design, not experts in the technologies they review… as a consequence, they sometimes appear less-than-fully informed — critics would say clueless — about the technologies they are assessing.”  The board members ARE however “experts in evaluating evidence” when it comes to the cost-effectiveness of treatments, meaning whether a particular course of action may be too expensive for the government to cover it.

To sum up:  A board of “experts” – who may or may not actually BE “experts” – gather in a room and pass judgment on whether the government will cover procedures like colonoscopies, breast screenings, diabetes test strips, and cardiac stents.  If you want a preview of the future under Obamacare – what Medicare Administrator Donald Berwick called “rationing with our eyes open” – you would be well advised to make a trip to the Pacific Northwest.

Pelosi Advisor Admits: Comparative Effectiveness Research a “Cost Control Method”

Earlier today, Wendell Primus – a “liberal lion,” and Speaker Pelosi’s chief health care advisor – spoke on a panel about the health care outlook for the 112th Congress.  At the bottom of one page of his Powerpoint slideshow is a list of “Cost Control Mechanisms” in the health care bill, the first of which is “comparative effectiveness research.”

It is perhaps unsurprising that one of Speaker Pelosi’s closest policy advisors would make such a statement, as Democrats have a long history of making statements in support of cost-based rationing of health care resources:

A draft House Appropriations Committee report on last year’s “stimulus,” discussing the impact of comparative effectiveness research:  “Those items, procedures, and interventions that are most effective to prevent, control, and treat health conditions will be utilized, while those that are found to be less effective and in some cases, more expensive, will no longer be prescribed.”

Former Senate Majority Leader Tom Daschle, writing in his book Critical:  “We won’t be able to make a significant dent in health-care spending without getting into the nitty-gritty of which treatments are the most clinically valuable and cost-effective….The federal government could exert tremendous leverage with its decisions.”

President Obama, in a New York Times interview last year:   “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 conversation that is guided by doctors, scientists, ethicists.  And then there is going to have to be a very difficult democratic conversation that takes place.”

Medicare Administrator Donald Berwick, in a 2009 magazine piece:  “The decision is not whether or not we will ration care—the decision is whether we will ration with our eyes open.”

The first page of slides includes the following so-called “Republican provisions” in Obamacare, the fifth of which is that it “Must reduce [the] deficit.” (Emphasis mine.)  If Speaker Pelosi’s office believes the bill “MUST” reduce the deficit, does that mean that she will support repealing the legislation if it does not accomplish that objective?  The non-partisan Congressional Budget Office categorized most of the major savings provisions in the health care law as “widely expected” to change, or “difficult to sustain for a long period” – meaning that under a more realistic scenario (as opposed to the rosy scenarios painted by Democrats), the law will likely increase, rather than decrease, federal budget deficits.

It may be difficult to reconcile the statement that the health care law “must” reduce the deficit with non-partisan opinions raising significant questions about the accuracy of that assertion.  Then again, if Speaker Pelosi and Democrats plan to use comparative effectiveness research as a “cost control mechanism” by denying patients access to expensive treatments, the law may in fact reduce the deficit – at an extraordinarily high price to American patients.

How State Exchanges Could Restrict Access to Health Care

Active Purchaser or Active Rationer…?

 

“The decision is not whether or not we will ration care—the decision is whether we will ration with our eyes open.”

 — Dr. Donald Berwick, June 2009[i]

 

“Maybe you’re better off not having the surgery, but taking the painkiller.”

— President Obama, June 2009[ii]

 

Over the next year, many state legislatures will consider legislation establishing insurance exchanges to implement the health care law. These legislative debates will revolve around whether governments can or should limit the insurance plans available to consumers—and in so doing, potentially restrict access to life-saving but costly treatments:

  • In designing their exchanges, states will have to determine whether to allow their exchange to serve as an “active purchaser” of health insurance, negotiating rates directly with insurance carriers and excluding from the exchange those companies that do not comply with government diktats. Among the two states with existing exchanges, Massachusetts’ insurance Connector, the Commonwealth’s version of an exchange, utilizes the active purchaser model, while Utah’s nascent exchange welcomes all insurance companies licensed to operate in the state.[iii]
  • States that choose to establish exchanges that function as active purchasers of health care could use their market clout to exclude plans that cover costly treatments. Such actions would attempt to reduce costs using the blunt instrument of government-imposed rationing.
  • The health care law includes few restrictions on state exchanges regarding plans that cover costly treatments. Section 1304 of the law[iv] requires only that exchanges may not exclude insurance offerings “on the basis that the plan provides treatments necessary to prevent patients’ deaths in circumstances the exchange determines are inappropriate or too costly.”

While the language of the statute may sound reassuring, the definition of “treatments necessary to prevent patients’ deaths” is far from clear. For instance, whether costly chemotherapy drugs will be considered “necessary” to prevent a patient’s death is subject to interpretation. In the same vein, cancer drugs that extend life, but do not necessarily cure illness or prevent death, could be restricted on cost grounds—the policy of Britain’s National Health Service until a reversal earlier this month.[v] In other words, state exchanges granted the power to exclude insurance plans still would have broad latitude to exclude plans that cover treatments perceived as too costly.

  • Influential Democrats have already proposed using government boards to restrict access to costly treatments, as state exchanges could do under the new law. In his book Critical, former Senate Majority Leader Tom Daschle—President Obama’s original choice to head the Department of Health and Human Services—noted that a board of health care bureaucrats, could “rank services and therapies by their health cost impacts,” and make coverage determinations based on that list.[vi] Daschle argued that “government could exert tremendous leverage with its decisions,” including a “nitty-gritty” analysis “of which treatments are the most clinically valuable and cost-effective.” [vii]

“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, April, 2009 [viii]

  • Former leader Daschle is far from the only one who has advocated restricting access to costly treatments. Last year President Obama called for a “difficult democratic conversation” about what he perceives as excessive spending on end-of-life care.[ix] And in appointing Dr. Donald Berwick to head the Medicare program, the president chose as one of the key officials implementing the new law a man who has expressed his desire to “learn from and adapt” the British scheme of rationing based on cost.[x]

Many may find troubling the prospect that state-based insurance exchanges could restrict access to insurance plans that cover costly treatments—imposing a de facto form of rationing on the millions of individuals who will be forced to buy policies through the exchanges to receive federal subsidies. States wishing to avoid this particular problem could structure their exchanges in a way that prevents this form of government-imposed rationing. More broadly however, the fact that the health care law even contemplates unelected bureaucrats restricting access to treatments in this manner represents one of the many pernicious ways in which the overhaul places government between patients and their doctors.

 

[i] “Rethinking Comparative Effectiveness Research,” Biotechnology Healthcare June 2009, http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2799075/pdf/bth06_2p035.pdf

[ii] “Questions for the President: Prescription for America,” ABC News forum, June 24, 2009, transcript available at http://abcnews.go.com/Politics/HealthCare/story?id=7920012&page=1

[iii] “Health Care Overhaul Depends on States’ Insurance Exchanges” by Robert Pear, New York Times October 25, 2010, http://www.nytimes.com/2010/10/24/health/policy/24exchange.html

[iv] Patient Protection and Affordable Care Act, P.L. 111-148; http://www.opencongress.org/bill/111-h3590/text

[v] Life-extending drugs such as Sutent and Avastin were rejected by Britain’s National Institute for Health and Clinical Excellence (NICE) in 2008 as too costly; see “Kidney Patients Denied ‘Too Expensive’ Life-Extending Drugs,” Daily Telegraph 6 August 2008, http://www.telegraph.co.uk/health/2512639/Kidney-patients-denied-too-expensive-life-extending-drugs.html?DCMP=EMC-new_07082008. However, press reports from November 2010 indicate the new British government will restrict NICE’s ability to restrict drug access on cost grounds.

[vi] Critical: What We Can Do About the Health Care Crisis, by Tom Daschle, Scott Greenberger, and Jeanne Lambrew, St. Martin’s Press, 2008, pp. 171-72

[vii] Ibid., pp. 171-72, 158

[viii] “After the Great Recession,” by David Leonhardt, New York Times, April 28, 2009, http://www.nytimes.com/2009/05/03/magazine/03Obama-t.html

[ix] Ibid.

[x] “Rethinking Comparative Effectiveness Research,” Biotechnology Healthcare, June 2009

Employers’ Choice: To Drop or Not to Drop?

Much has been made in recent days of Tennessee Governor Phil Bredesen’s Wall Street Journal op-ed suggesting that many employers will use the health care law’s passage as a reason to exit the group insurance market.  It’s a critically important issue, and not just because such a choice will determine whether or not millions of Americans will get to keep their current coverage.  If many employers decide to place their workers in Exchanges, receiving taxpayer-funded insurance subsidies, the federal budget deficit will necessarily skyrocket.

So it’s worth taking a few moments to analyze the claims made by health care law supporters as to why employers will continue to maintain coverage, and see the extent to which they have merit.

  1. The tax benefits of group coverage will keep workers in the employer-based system.

The tax benefits of group health insurance inure largely to the EMPLOYEE, not the EMPLOYER, due to the exclusion for employer-provided health coverage.  Employers can write off both salaries and health insurance contributions from corporate income taxes as a business expense – the income tax code is neutral toward the components of compensation (i.e., cash vs. benefits).  Granted, employers who provide salary increases instead of benefits will have to pay the employer’s share of FICA payroll taxes (from which health insurance benefits are exempt), but these are small by comparison – on a $10,000 family insurance premium, an employer pays $765 less in taxes than he would had he given the worker a $10,000 raise in wages.  It would be perfectly rational for employers to drop coverage and give their workers an offsetting increase in wages – knowing they may pay a bit more in FICA taxes in the short term – because by doing so, they will protect themselves from the liabilities associated with rising health care costs over the long term.  (Whether and how employers consider their workers’ preferences – including the tax benefits most employees gain for group health insurance – is something I’ll address below.)

  1. Employers will see savings as a result of the health care law that will encourage them to maintain coverage.

Tom Daschle made this argument in a BNA article Tuesday, citing a November 2009 Business Roundtable (BRT) report to claim that “employers offering health coverage to their workers could experience a savings of as much as $3,000 per person from the new law.”  Over and above the significant fact that the report was released BEFORE the enacted health care law was written – meaning it’s speculative for Daschle to claim the promised savings were actually achieved by the language – here’s what the operative paragraph of the BRT report stated:

If the cost trends of the past 10 years repeat, by 2019, employment-based spending on health care at large employers will be 166% higher than today on a per-employee basis.  This equates to an average of $28,530 per employee when employer subsidies, employee contributions, and employee out-of-pocket costs are combined.  We estimate that if enacted properly, the right legislative reforms could potentially reduce that trend line by more than $3,000 per employee, to $25,435.  If we are able to enact broader market reforms that eventually lower future cost increases to an average of 4% per year, we could potentially reduce average per-employee costs further to $23,151 per employee by 2019.

In other words, under the ideal scenario Daschle described, health insurance premiums would “only” more than double over the next decade, from $10,743 in 2009 (also cited in the BRT report) to $23,151 in 2019.  That’s not a savings of $3,000 – that’s an INCREASE of $13,000.  (It’s also far from the $2,500 per family reduction in premiums that candidate Obama promised.)  Such a rapid increase, coupled with new insurance options for employees, would give firms a strong incentive to drop their current plans.  After all, even under Daschle’s “ideal” scenario for cost-savings, in 2019 firms could pay the $2,000 per employee tax for not offering coverage, give their workers a $20,000 per year raise to offset the loss of their employer insurance policy, and STILL come out $1,151 per employee ahead.  Granted, most firms aren’t paying the full cost of workers’ premiums, particularly for family plans, but the same logic still applies.  If an employer promised you a $10,000 per year salary increase as a trade-off for accepting new Exchange coverage instead of your current policy – a realistic number, given the projected cost of family plans for most firms – how many workers wouldn’t take that deal?

  1. The individual mandate will increase demand for employer coverage.

There are several problems with this argument.  First, the low penalty of only $695 for not buying health coverage will likely encourage individuals to flout the mandate and purchase coverage only when they need it, just as carriers in Massachusetts found.  Second, if individuals decide to comply with the mandate – and it may not be a rational choice for many to do so – it’s not entirely clear that individuals will prefer group insurance to the federal Exchanges.  For instance, low-income individuals by definition will receive a small tax subsidy for buying coverage from their employer (because they’re in a lower tax bracket), but a large taxpayer-funded subsidy if their employer doesn’t offer coverage and they buy a policy through the Exchanges.  Thirdly, whether an employer offers coverage is ultimately a decision for the employer, and not the employee, to make.

  1. Massachusetts saw an increase in coverage as a result of its reforms.

Jonathan Gruber, among others, has made this argument.  Unfortunately, it’s hard to equate how employers will respond to a statewide initiative to their possible responses to a national reform effort.  When Massachusetts passed its reforms, national employers (e.g., Wal-Mart, General Motors, etc.) couldn’t drop their health plans ONLY in Massachusetts – they still needed to provide coverage for their workers in 49 other states.  But now, if they so choose, they can shed their employee health benefit obligations entirely.

It’s also worth noting two other important points.  First, the Massachusetts legislation included a more robust Exchange “firewall” than the federal law.  Under the Massachusetts plan, individuals with an offer of employer-sponsored coverage CANNOT utilize the Commonwealth Connector to buy unsubsidized plans using only their own money.  Conversely, the federal law includes no such prohibition – so if employees believe they can get a better deal by buying a plan with their own funds on the Exchange, they can and will do so.  This potential “leakage” from the employer system could encourage some firms to drop coverage entirely, particularly if the individuals migrating from employer plans to the Exchanges are their young, healthy employees (leaving them with an older, sicker, and costlier population).

Second, the federal initiative expanded taxpayer-funded insurance subsidies further up the income scale – Massachusetts subsidizes insurance for families with incomes under three times poverty, while the federal effort gives subsidies up to 400% FPL.  According to the Census Bureau, in 2007 there were 121.5 million non-elderly Americans (46.4%) in households with incomes under three times poverty, but 158.2 million non-elderly Americans (60.4%) in households with incomes under four times poverty.  In other words, nearly 37 million more Americans will be eligible for income-based subsidies under the federal statute than if the Massachusetts law were extended nationwide.  That fact – more than three in five Americans will qualify for taxpayer-funded health subsidies based on their income – will only encourage employers to drop health benefits, because the majority of their workers can get new federally-funded insurance instead.

  1. Employers will not anger their workers by dropping health benefits.

There are several responses to this criticism.  First, as explained above, many firms will save so much money by dropping their coverage that they can afford to give their workers an offsetting pay raise to “sweeten the pill” of losing their current coverage.  Former CBO Director Doug Holtz-Eakin has previously run the math about the millions of workers who would benefit – as would their employers – if firms dropped coverage and raised salaries instead, with workers relying on federal insurance subsidies in the Exchanges.

Second, employee goodwill only goes so far when compared to basic economic realities.  If a struggling firm faces a choice between dropping coverage and laying off workers – or closing entirely – it will be much more likely to do the former than the latter.  Laying off workers or other efforts to reduce a firm’s costs could reduce its productivity and future earnings potential.  But particularly once workers have an acceptable alternative source of insurance coverage through the taxpayer-funded subsidies on the Exchanges, dropping coverage may seem like the best possible way for a firm facing financial difficulties to streamline its expenditure base.

And once one company in an industry drops coverage, others will be forced to follow suit in order to remain competitive – witness what happened with pensions and health benefits in the auto, steel, and airline industries (to name but a few).  As one consultant put it in an Associated Press story, “What we are hearing in our meetings is, ‘We don’t want to be the first one to drop benefits, but we would be the fast second.’  We are hearing that a lot.”

Long story short: Most of the arguments used to suggest employers will not drop coverage under the health law’s new order cannot withstand rigorous scrutiny.  Even some Democrats appear to admit this reality: A former staffer for Finance Committee Chairman Baucus acknowledged (subscription required) that the law could push industry toward a “tipping point scenario, where some large employers in particular sectors make a decision to drop, which then makes it acceptable for their competitors to drop coverage as well.”  Unfortunately, such a scenario would also point the federal budget deficit well past the tipping point – where skyrocketing expenditures on new health care entitlements, coupled with soaring health care costs, overwhelm future generations in an avalanche of debt.