The urgent need for genuine health and entitlement reform

Article Highlights

  • At the heart of the nation’s fiscal challenges are the rising costs of the major health care entitlement programs.

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  • As Pres. Obama begins his 2nd term, the nation’s strained fiscal policy remains front and center on the national agenda.

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  • By 2010, the costs of major health care entitlement programs had risen to 5.5% of GDP, up from 1.1% in 1972.

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Editor's note: The editors of asked Chuck Blahous, David Malpass, and James Capretta to provide some commentary on the state of fiscal and monetary policy as President Obama begins his second term.  What follows is Capretta's contribution to the collaborative piece. The entire article can be accessed online here.

As President Obama begins his second term, the nation's strained fiscal policy remains front and center on the national agenda, and for good reason. Over the period 2009 to 2012, the federal government ran a cumulative deficit of $5.4 trillion -- nearly doubling the debt that had been accumulated from 1789 to 2008. The tax legislation passed at the beginning of this year will close projected future deficits modestly over the coming years compared to what would have occurred if the entire Bush-era tax policy had been permanently extended. Estimates produced by the White House Office of Management and Budget show ten-year deficit reduction of just $630 billion from the tax deal. The Congressional Budget Office (CBO) has yet to reduce its updated projections, but when it does those estimates will almost certainly show the gap between future projected spending and revenue remains far too wide and will never fall back again to historically benign levels.

At the heart of the nation’s fiscal challenges are the rising costs of the major health care entitlement programs -- Medicare, Medicaid, and the new subsidies provided by the 2010 health care law. In 1972, total federal spending on Medicare and Medicaid was just 1.1 percent of GDP. By 2010, the costs of these programs had risen to 5.5 percent of GDP, and CBO projections from last year show the costs rising to 9.1 percent in 2030 when the new entitlement spending from Obamacare is also added in and when plausible assumptions about on-going enforcement of arbitrary cost-cutting measures are used.

The prospects for seriously addressing the problem of health entitlement spending is not promising in the president's second term in large part because there is a sense in his administration and among congressional Democrats that Obamacare has already largely solved the problem. They argue that the provisions cutting future Medicare spending in the new law will work, and that numerous, government-initiated efforts to cut costs (such as the Accountable Care Organization program in Medicare) will fundamentally transform how health care is delivered in the United States.

But the actual results from Obamacare are likely to fall far short of the high expectations of the law’s supporters. For starters, the cuts in Medicare will almost certainly get undone in coming years because of the harm they will cause to seniors. Obamacare’s cuts to the Medicare Advantage (MA) program – the private insurance option in Medicare – is expected to push some 4 million seniors out of their MA plans by 2018. Moreover, the cuts in payment rates for hospitalizations and other services are so arbitrary and deep that the chief actuary for the program has stated they will force 15 percent of institutional providers to stop admitting Medicare patients.

At bottom, the disagreement over how to reform the health entitlement programs is a fundamental difference over how best to bring cost discipline to the wider health system. The president and his allies are firmly committed to a vision in which the federal government makes all of the important decisions about cost control. The disastrous byproduct of this approach is an erosion of the quality of American health care as federal price controls drive high quality providers out of the marketplace.

The alternative to full governmental control of the health system is a functioning marketplace with cost-conscious consumers. The president and his allies sometimes pay lip service to this approach when it is politically convenient, but their true beliefs are more accurately reflected in what they are touting in Obamacare. Their vision is for the federal government to become the enforcer of cost discipline, which will inevitably mean imposing Medicare-style price controls on the entire system.

It would of course be far better for the country if the president were to seek common bipartisan ground on health care over the next four years. Such an approach would increase the chances that real progress would be made and might even guarantee a lasting health care legacy for him. But it’s clear already that the president has no intention of following such a bipartisan course.

That leaves the law’s opponents with no choice but to continue to resist implementation of Obamacare and to continue pursuing their own vision. In other words, the intense clashes over health care that marked the president’s first term will almost certainly occur during his second term too.


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