What If Obamacare Actually Happens?

What if a health care bill actually passes in the Congress, and President Obama signs it into law?

Given the ways in which his “hope” and “change” are being embraced across the nation right now, such a legislative “victory” for Mr. Obama could be the worst thing, politically, for his presidency and his party.

Earlier this year, I contemplated here in this column how Obama’s behavior tends to be woefully inconsistent with his rhetoric, and how our President has a propensity for “doing the opposite” of what he says. For example, as a candidate Obama insisted that he is not a “big government” advocate, but then as President proposed a federal budget in excess of $3.5 trillion (Treasury Secretary Tim Geithner is now asking Congress to raise the federal debt ceiling above $12 trillion for fear that there won‘t be money to fund Obama‘s budget after October of this year). As a candidate Obama decried the “petty distractions” and “partisan politics as usual” that stifle honest dialog, and prevent people from focusing on the real important issues. Yet from the White House Obama unleashed an intentional and strategic game of publicly demonizing talk show host Rush Limbaugh earlier this year; it appeared that members of his Administration “organized” their “friends” to demonstrate in front of the private homes of AIG Executives to harrass them for having earned bonuses from their employer last Spring; and last week Obama himself told participants in a faith-based organizing conference call that he needed their help to sell his health care take-over plans, admonishing that “I need you to knock on doors, talk to neighbors, spread the facts and speak the truth” (great “community organizing,” but not particularly presidential)

But just as President Obama has established a clear pattern of ignoring many of his campaign promises and “doing the opposite” in so many areas of his presidency, it is also true that on many economic matters, Obama is essentially in lock-step with what he promised on the campaign trail. He campaigned as an economic redistributionist. As President, he has most certainly been a redistributionist, and has displayed little comprehension or respect for the free-market economy.

As a candidate he expressed all-out disdain for business, and repeatedly promised to dramatically increases taxes and regulations on corporations, expressed anger and “outrage” when corporations reported profits that were “too big,” and promised to “give back” corporate profits to “the American people.”

So for those who have been paying attention, “Obamacare” should be no surprise. The candidate promised a “single payer” health insurance plan, and even once lamented that it may take “ten to fifteen years” to get private insurance companies out of the health insurance market entirely. When single-payer proposals began emerging in Congress and were met with staunch opposition from American citizens, President Obama changed his position on single-payer insurance, insisting that all he wanted was an “option” of government funded insurance.

And now it appears that Congress, owing to Obama’s community organizer instincts, is about to begin demonizing health insurance company executives, trashing their lavish lifestyles and portraying them as perpetrators (you thought the treatment of the AIG folks was rough? Stay tuned).

So what if some form of “Obamacare” actually comes to pass? It will likely be woefully unpopular, it could cost the Democrats dearly in the 2010 election, and could set-off an uprising far greater than anything we’ve seen in this summer’s congressional “townhall” meetings. Yet such a “reform” plan would likely be consistent with President Obama’s big-government, centrally-controlled economic sensibilities, complete with governmental conrols over what procedures physicians will perform, and how much money they will be compensated for performing them.

If “Obamacare” comes to pass, it will be a significant fulfillment of President Obama’s vision of a “transformed” America. But it will not be what Americans want.

Although Social Security reform has received considerable attention in recent years, Medicare is the far-bigger problem. Medicare is growing at a faster rate and has an unfunded liability six times the size of Social Security. Medicare is also on a spending path that will be difficult to sustain without unprecedented boosts in revenues. The reason: Per capita health care spending over the past half century has been rising at a rate two to three times faster than per capita gross domestic product (GDP). If this trend continues, health care’s share of the economy will grow considerably:

If the growth of real per capita health care spending exceeds the rate of growth of real per capita GDP by 2 percentage points, health care spending will consume almost 80 percent of GDP by 2075.

--Continuation of these past growth rates indefinitely would imply a five-fold increase in health care’s share of the economy from present levels, crowding out the consumption of most other goods.

--Clearly this path is not feasible. Therefore, in projecting the future, the Medicare Trustees assume that the rate of health care spending growth will moderate, eventually slowing to the rate of income growth after 75 years. This study uses the same assumptions as the Trustees report. Even with these assumptions, it is evident that the federal government has far more in projected benefit costs than it expects to receive in payroll taxes, premiums and other revenues dedicated to Medicare:

--The last Trustees report [2007] estimated Medicare’s unfunded liability over the next 75 years at $32.4 trillion.

--Looking indefinitely into the future, the unfunded liability is $70.8 trillion.

This is 14 times the amount of outstanding federal debt. Medicare already spends more than it receives in dedicated taxes and premium payments. As baby boomer retirees begin to flood the system, the impact will be felt by every other federal program:

Currently, Medicare claims about 11 percent of federal nonentitlement tax dollars.

-- By 2020, Medicare deficits will claim one in every five federal tax dollars that are not already dedicated to Medicare and Social Security.

--This means that in just 13 years the federal government will have to stop doing one in every five things it does today if taxes are to remain at their current level and projected Medicare benefits are paid on behalf of the disabled and the elderly.

--By 2030, the deficits in Medicare will claim one in every three general revenue dollars; by 2050, they will claim one in every two.

What can be done? The suggested reforms include raising taxes, making seniors pay for more of their benefits, cutting benefits for higher-income beneficiaries and raising the eligibility age. Yet these reforms would not directly reduce health care spending growth; rather, they would change the allocation of the program’s costs between taxpayers and seniors.

How, then, can the country get off the spending path it is on? On the demand side, someone must choose between health care and other uses of money. That is, someone must decide that the next MRI scan or the next knee replacement, for example, is not worth the cost. Such decisions could be made by seniors themselves, by the government (as it is in other countries) or by private insurers operating under government rationing rules. On the supply side, the way health care is produced must change fundamentally, replacing cost-increasing innovations with cost-reducing ones.

A common technique in other developed countries is to impose a global budget on health care providers. To estimate the effects of this type of rationing, projections were made that assume, starting with the baby boomer generation, Medicare spending on each year’s cohort of newly eligible beneficiaries will be limited. After a beneficiary begins receiving Social Security benefit payments, they are indexed for inflation only. A similar method of indexing Medicare benefits is considered. Upon reaching age 65, beneficiaries would receive a health plan that covers projected lifetime Medicare costs as they exist in the year they retire. This benefit package would be indexed for inflation only. Although this reform is unquestionably harsh, it would reduce Medicare’s unfunded liability by as much as 40 percent.

Why don’t spending constraints accomplish more? The reason: 48 percent of the projected growth in Medicare is due to population growth and aging, while 52 percent is due to per capita spending growth in excess of per capita GDP growth. Reforms which limit reimbursements, therefore — even in a best-case scenario — can only affect part of the expected growth in Medicare spending. The effects of beneficiaries making their own rationing decisions are also estimated, by creating a $5,000 deductible policy, with retiree Health Savings Accounts (HSAs) to fund spending below the deductible. The size of the deductible grows through time (as health costs grow) and since deposits to the HSAs would be made with after-tax dollars, withdrawals for any purpose would be tax-free. In this way, beneficiaries would be encouraged to make their own tradeoffs between health care and every other good or service. The effects could be substantial. Like the impact of global budgets, this reform could reduce Medicare’s unfunded liability by as much as 40 percent if started immediately. Alternatively, if the reform is phased in, the government could initially make deposits to beneficiaries’ HSAs.

Health care supply-side reforms are not simulated in this paper. However, there is ample evidence that when people spend their own money on health services, supply-side responses are considerable. This implies that a properly designed Health Savings Account could help move Medicare off its current spending course in two ways: 1) by allowing the elderly to reallocate health care dollars to goods and services they value more and 2) by spurring providers to provide care more efficiently

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