Why Obama's Deficit Commission Makes Me Miss Bill Clinton

Cross-posted from National Review Online.

UPDATE: National Review Online has posted an audio version of this article. So, if you’re puttering around the house and you feel like listening to someone read this article on your behalf, this mp3 file is for you:

It’s an oft-repeated joke in Washington: When the going gets tough, the tough appoint a commission. Presidents appoint commissions so they can say that they’re “doing something” about a politically thorny problem without actually making any difficult choices.

But congressional commissions aren’t always the joke they’re made out to be. In 1988, as the Cold War came to an end, Congress organized the Base Realignment and Closure Commission as a way of reducing our military footprint. The unorthodox idea was to close obsolete military bases on strategic merit, rather than the parochial interests of individual congressmen. The BRAC process was an enormous success, and the “peace dividend” that BRAC generated did much to balance the budget in the 1990s.

In 1997, Congress created the National Bipartisan Commission on the Future of Medicare as part of the Balanced Budget Act of that year. Led by Sen. John Breaux (D., La.) and Rep. Bill Thomas (R., Calif.), and with a staff headed by an unknown 26-year-old named Bobby Jindal, the Breaux-Thomas Commission put together the most credible plan for Medicare reform ever to receive bipartisan support. Unfortunately, because of the political dynamic fostered by the Monica Lewinsky scandal, that plan never made it into law.

President Obama sought to draw on the credibility of these commissions when, last January, he established the National Commission on Fiscal Responsibility and Reform. The president had already signed the $1 trillion stimulus package and was assembling the votes to push Obamacare through the House. He needed to throw a sop to those who were complaining about deficit spending. And a sop is what he got.

The commission, as designed, consisted of 18 members: six appointed by the president, six appointed by the House, and six appointed by the Senate. President Obama chose former Wyoming senator Alan Simpson, a moderate Republican, and Erskine Bowles, who was chief of staff in the Clinton White House, to lead the commission. Obama’s other appointments consisted of one Republican and three Democrats, and the House and Senate each sent three Democrats and three Republicans. For anyone keeping score, that adds up to ten Democrats and eight Republicans.

This was a commission set up for failure. In order to endorse a formal proposal, the commission required 14 votes out of 18: 78 percent of the commission’s members. When you consider the fact that Andy Stern, a left-wing laborite, was never going to vote for any serious deficit-reduction measure, you’re talking about 14 out of 17, or 82 percent. It’s hard enough to get a simple majority of politicians to agree on deficit-reduction measures, let alone a four-fifths majority. And that’s before you consider the fact that Republicans, who are normally more sympathetic to deficit-reduction measures, were outnumbered: Even if all eight of them supported the commission’s findings, six out of ten Democrats would also need to join in.

Given these odds, it’s somewhat miraculous that the commission came up with any useful ideas at all. To its credit, the Commission made constructive proposals for capping discretionary spending, reforming Social Security, and simplifying the tax code (albeit with substantial tax hikes).

But the commission utterly failed in the area in which it needed most to succeed: steering our health-care entitlements onto a sustainable path.

According to the long-term outlook of the Congressional Budget Office, nearly the entirety of the growth in federal spending -- and hence the entirety of the growth of our fiscal cancer -- is driven by runaway spending on health care: Medicare, Medicaid, the Children’s Health Insurance Program, and Obamacare’s exchange subsidies. In contrast, over time, Social Security and other discretionary spending will actually stay relatively constant as a percentage of GDP.

When it comes to health care, the commission’s plan would hardly prevent a fiscal collapse: Instead, it would guarantee one. By replacing the meaty plan of the old Breaux-Thomas group with a hodgepodge of half-measures, the commission did nothing to address the fundamental flaws in government health policy.

First off, this being President Obama’s commission, repealing Obamacare was off the table. Hence, any consensus would involve endorsing and ossifying the budget-busting aspects of our new health-care law: the massive expansion of Medicaid and the huge new insurance subsidies for lower-income individuals. (The CLASS Act, a new entitlement for long-term care, was a notable exception; the commission did recommend its repeal, if it cannot be adequately reformed.) Spending on these programs is certain to exceed CBO projections, and tax rates can’t increase fast enough to make up the difference.

The commission missed other opportunities for reform. Instead of eliminating the employer tax exclusion—the tax break that allows employers but not individuals to buy health insurance tax-free—the Commission proposed tinkering around the edges: capping the deductible amount at the 75th percentile of premium levels and reducing the “Cadillac tax” on expensive health plans.

In contrast, real reform would either eliminate the exclusion altogether, or give individuals the same tax break, so that individuals could buy insurance for themselves. This reform alone would transform our health-care system and is arguably more important than any other. Instead of seizing this opportunity, the commission chose to dabble in it.

On Medicare, the commission did its least bad work. The core problem with Medicare is this: If people are able to get an unlimited amount of health care for free, they will use more of it than they need. There are two ways to solve this problem: (1) giving seniors more control over their own health-care dollars, so they have an incentive to spend the money wisely; or (2) empowering government bureaucrats to deny care when they find it too costly. It won’t surprise you to learn that the commission leaned toward option number 2.

The commission did make some constructive proposals on the free-market side: It proposed (very modestly) increasing the degree to which seniors share in the costs of care, and it proposed (again, modestly) restricting the ability of private insurers to offer “Medigap” plans that wipe out Medicare’s cost-sharing provisions. The commission proposed ending the practice of reimbursing hospitals and doctors for bad debts caused by failure to collect co-payments from patients, something that should have been done a long time ago.

But they proposed these measures only to pay for increased spending elsewhere, and other needed reforms were nowhere to be found. The commission didn’t address the need to index the Medicare retirement age, nor the need to means-test Medicare benefits. Paul Ryan’s proposal to gradually shift Medicare from a defined-benefit to a defined-contribution plan—one that would do much to solve the fiscal problem—was shriveled into a symbolic pilot program within the Federal Employees Health Benefits System.

The rest of the commission’s proposals for Medicare involve enhancing the reach of Obamacare: expanding the authority of the Independent Payment Advisory board; applying Medicaid-style drug-price controls to Medicare; and accelerating the implementation of the legislation’s Medicare pilot projects.

On Medicaid, a $500 billion–a–year (and growing) program that has somehow managed to become a fiscal crisis and a humanitarian crisis at the same time, the commission proposed essentially nothing. They aspire to “restrict and eventually eliminate” a Medicaid tax loophole that states use to bilk the federal government, for savings of around $5 billion a year, though they didn’t specify how to do it. They hope to pass some administrative costs to the states, for a “savings” of under $300 million a year. They recommend that Washington grant waivers to certain states, under a plethora of conditions, to experiment with their own ideas for Medicare reform.

Given that Medicaid is the program most immediately in crisis, with the potential to drive large states such as New York and California into bankruptcy, the commission’s silence on Medicaid is breathtakingly irresponsible. It’s one thing for the Commission not to endorse real Medicaid reform: but to not even propose it?

If you’ve managed to get through the preceding 1,300 words, let me summarize them in one: punt.

On December 3, the commission’s findings received the support of eleven of its members, well short of the 14 it needed to make an official endorsement. (Those opposed included Max Baucus, all of the House members save John Spratt, and—wait for it—Andy Stern.) But on the critical issues surrounding health-care entitlements, the commission, as a group, got nowhere.

Is there hope for Americans concerned about our fiscal dysfunction? Yes, some. The commission’s final report does contain a few measures that the next Congress would do well to consider. The path forward, however, is most likely to revolve around proposals put forth by individual commission members. James Capretta praises the plan from Paul Ryan and Alice Rivlin, which, while imperfect, far exceeds the commission’s work in wrestling with health-care entitlements. Importantly, come January, Representative Ryan will be in charge of the House Budget Committee, and will be thereby able to put some of his ideas into actual legislation.

Ultimately, the failure of the National Commission on Fiscal Responsibility and Reform was a failure of leadership. One man could have done much to encourage the commission to take bolder steps and tackle the hardest issues. Unfortunately, that man was President Obama. Who could have figured that Obama would make Americans miss Bill Clinton?

The Fiscal Commission on Health Care Reform

Cross-posted from The Agenda on National Review Online.

The National Commission on Fiscal Responsibility and Reform has put out its anticipated report, entitled “The Moment of Truth.” In this post, I summarize the Commission’s recommendations on health care policy, with minimal editorializing. I’ll put out a subsequent post with my assessment of the actual quality of these recommendations.

Overall, the Commission aims to achieve $4 trillion in deficit reduction through 2020, by capping revenue at 21% of GDP (higher than historical averages) and reducing the deficit to 2.3% of GDP by 2015 (it’s currently 8%). Because Medicare and Medicaid are such are such huge components of federal spending, achieving these fiscal goals requires substantial changes to our government’s involvement in health care. These include:

Modifying the employer tax exclusion. Currently, employer-provided health insurance is excluded from taxable income, something that grossly distorts our health care system by taking purchasing decisions out of individuals’ hands and placing them in the hands of HR bureaucrats. I have advocated eliminating this exclusion entirely as a way to increase revenue and lower health costs. The Commission advocates capping the deductible amount at the 75^th percentile of premium levels in 2014, and freezing the cap (i.e., not indexing it to inflation) from 2018 to 2038. The Commission also advocates reducing Obamacare’s “Cadillac tax” to 12% from 40% on high-cost plans.

Reforming the Medicare Sustainable Growth Rate (SGR) “doc fix”. The “doc fix” requires the government to reduce payments to doctors and physicians if health costs exceed the Sustainable Growth Rate, a blend of health inflation, GDP, and other measurements. Congress keeps overruling the SGR and paying doctors and hospitals at higher rates; bringing payment rates in line with SGR in 2012 would require a 23% cut to physician and hospital payments. The Commission recommends freezing rates at current levels (i.e., continuing to spend well above SGR levels), enacting a 1% cut in 2014, and directing Medicare to come up with a new payment system that would “cost about $22 billion less” than freezing payments at current levels. That is to say, the Commission advocates punting the SGR situation and saving costs elsewhere to make up for the excess spending.

Reform or repeal the CLASS Act. The CLASS Act, a voluntary entitlement for long-term care, was famously described last year by Kent Conrad as “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of,” but Conrad voted for it anyway. The Commission advocates reforming the CLASS Act “in a way that makes it credibly sustainable over the long term”—good luck with that—or repealing it.  Because the CLASS Act will rake in more money in the near term but lose money in the long term, it is considered a deficit-reducing measure within the CBO’s ten-year scoring window. Hence, repealing it will require matching tax increases or spending cuts.

Paying for SGR reform and CLASS Act repeal. The Commission recommends offsetting the above SGR and CLASS Act reforms above with a long litany of reform measures that are projected to save $391 billion from 2012 through 2020:

• Waste, fraud, and abuse ($9 billion in savings from 2012 through 2020). “Increasinging the ability of CMS to combat waste, fraud, and abuse” (don’t laugh) “by providing the agency with additional statutory authority and increased resources.”
• Increased cost-sharing ($110 billion). Reforming Medicare cost-sharing rules, by increasing the amount seniors pay for increased health spending. This is key to any serious attempt to reform Medicare. The Commission recommends a single combined annual deductible of $550 for Medicare Parts A and B (hospital and medical care), with 20% coinsurance up to $5,500, 5% coinsurance from $5,500 to $7,500, and 0% cost sharing above $7,500.
• Restrict Medigap plans ($38 billion). This is another key element of serious Medicare reform: restricting the ability of private insurers to write plans that piggyback off of Medicare coverage, incentivizing seniors to overspend on health care. The Commission recommends prohibiting Medigap plans from covering the first $500 of an enrollee’s cost-sharing liabilities and no more than 50% of the next $5,000 in liabilities.
• Extend Medicaid drug rebate to dual eligibles ($49 billion). Currently, seniors who are eligible both for Medicare and Medicaid pay the private-sector (i.e., market-rate) prices for drugs through the Medicare prescription drug benefit. The Commission advocates requiring pharmaceutical companies to give these individuals the much-lower Medicaid rates.
• Reduce “excess” payments to hospitals for medical education ($60 billion). At present, Medicare provides supplemental funding to hospitals in order to subsidize the cost of training medical interns and residents (recent medical school graduates). The Commission advocates reducing these payments using a new formula.
• Cut Medicare payments for bad debts ($23 billion). Medicare reimburses hospitals and doctors for deductibles and copays owed those providers by patients, giving hospitals and doctors no incentive to track down those missed payments. The Commission recommends ending this practice.
• Accelerate Obamacare home health savings ($9 billion). The Commission recommends moving up the timetable for changes to reimbursements for home health providers, as mandated by PPACA, by several years.
• Eliminate state gaming of Medicaid tax gimmick ($44 billion). According to the Commission, many states game the system by taxing hospitals and doctors, and then using those revenues to pay for more health care delivered by those hospitals and doctors. Because the federal government gives states more Medicaid funding if the states “spend” more, this system allows states to effectively force Washington to fund profligate Medicaid spending. The Commission recommends “restricting and eventually eliminating this practice,” but declines to give specifics.
• Place dual eligibles in Medicaid managed care ($12 billion). Because the government reimburses doctors and hospitals at much lower rates in Medicaid relative to Medicare, putting these patients on Medicaid will save the government money. It will also reduce administrative redundancy.
• Reduce funding for Medicaid administrative costs ($2 billion). The Commission advocates passing these costs onto the states.
• Allow expedited application for Medicaid waivers in well-qualified states (no savings specified). The Commission advocates allowing ten states to opt out of the traditional Medicaid system, if they meet a set of “certain objective threshold criteria,” in order to come up with innovative new approaches.
• Malpractice reform ($17 billion). The Commission advocates incremental reforms to the malpractice litigation system, such as creating specialized health courts, allowing safe haven rules for providers who follow best practices, imposing a statute of limitations, etc. The Commission advocates that Congress “evaluate the impact” of “statutory caps on punitive and non-economic damages”: a victory for Democrats.
• A pilot voucher program through the Federal Employees Health Benefits (FEHB) system ($18 billion). The Commission advocates using the popular FEHB program as a vehicle for road-testing a voucher system that could be adapted to Medicare at some unknown point in the future.

Implementing Obamacare’s cost-saving measures as soon as possible. The Comission recommends directing Medicare “to design and begin implementation of [PPACA’s] Medicare payment reform pilots, demonstrations, and programs as rapidly as possible.”

Allow IPAB to cut payments to hospitals. For all the talk about “death panels,” the Medicare Independent Payment Advisory Board, which is tasked with reducing Medicare spending, is essentially only allowed to cut payments to doctors if health costs grow too quickly. The Commission advocates allowing IPAB to cut payments to hospitals as well.

Establish a long-term global budget for total health care spending. The Commission recommends “requiring both the President and Congress” to make further recommendations about reducing health spending.