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Deficits, economics and health care reform: Reconciling the issues


President Obama has called for an "up or down" vote on health care reform he hopes will occur next week, prior to his departure to the Far East. The process involves taking "his" yet unfinalized version of an amalgamated plan (mostly the Senate version, add a dash from the House bill, and a pinch of other ideas from who knows where) via the Democratic majority through a legislative maneuver known as reconciliation. Reconciliation is essentially a legislative process within the U.S. Senate allowing a budget bill or a bill predominantly related to budgetary matters, to be voted upon (a simple majority rules) without the threat of a filibuster. The House also has a procedure for reconciliation but in so much that the House generally allows for open debate and open-ended amendments on matters of budget, the procedure is used far less frequently. For Mr. Obama, reconciliation is the technical term for "up or down" vote so he fundamentally prefers the plainer language in his "reform" campaign addresses. Per Mr. Obama, the time has come, the debate on the issue is well-wrung out, the people (they just don't know it yet) want health care reform and reform is essential for the economy and to reduce the deficits that continue to mount.




Listening to the case Mr. Obama is attempting to make is a bit like watching the Abbot and Costello comedy bit "who's on first"; at times it sounds logical but then its confusing and then it is exasperating and farcically funny. The difficulty arises in sorting out the facts from all of the rhetoric and in keeping up with the shifting logic muddled between ideology and politics. To be certain, health care reform is an idea whose time has long since come and it is very necessary for the health of the economy and in reducing the deficit. The present Medicare and prescription drug liability, just at the tip of the baby-boom retirement cycle, is $93.5 trillion; an incomprehensible amount that will continue to rise, left unchecked by reform. Taking Social Security into account adds another $14.2 trillion to the unfunded, entitlement tote board. Despite these daunting numbers (scary might be a better word) and the logic applied that reform is necessary sooner rather than later, what Mr. Obama is pressing and his Democratic colleagues will propose as reform legislation, if enacted, will only make matters worse. Factually, the economic arguments proffered by Mr. Obama "for" the bill are exactly, when one reads the bill's major provisions (such that are known at this point) and maps the same against the present U.S. health system, the primary arguments for why this reform package is a tragedy in the making.


To the facts that should raise suspicion about Mr. Obama's claims of necessity for his particular approach to health care reform. At present, the national debt stands at $12.5 trillion. As a percentage of GDP, debt represents 87.4%. Tax revenue, the government's major source of income other than borrowing, should roll in at approximately $2.1 trillion while spending based on the current Obama budget and trend will roll in at approximately $3.5 trillion, producing a deficit of $1.4 trillion which is added to the present debt level of $12.5 trillion. By fiscal year-end (September 30), the U.S. debt level will rise to just short of $14 trillion and given the projected pace of growth for the remainder of the year, GDP should stand fairly close to $14.6 trillion. Factoring in the present pace of federal spending, by early 2011 or late 2010, the U.S. debt level will match and ultimately surpass, the total GDP of the economy.


Within the above numbers, Medicare and Medicaid consume $762 billion annually. Social Security consumes another $682 billion. The next biggest ticket items are defense at $662 billion, interest on the debt at $191 billion, and federal pensions at $190 billion. These items alone amass to $2.7 trillion; $600 billion more than the projected tax revenues of $2.1 trillion. Looked at another way, the aforementioned expenses are essentially fixed and save fundamental changes in U.S. defense and war strategy, are all likely to increase over the foreseeable future. One that could increase substantially faster perhaps than the others, is the interest on the debt as today, interest costs are at historic lows thanks to the moribund U.S. and world economy. A modest increase in inflation, some due to economic recovery and the balance due to the huge continuing deficits and the requirement to attract capital to a riskier investment (the U.S. government and economy), will send interest costs rapidly upward.


According to the Congressional Budget Office, the best guess of deficit impact arising out of the reform proposal the President wishes to have voted upon is a reduction of $134 billion over a ten-year horizon. A longer horizon view shows far more uncertainty about the prospects for any real deficit reduction. The reasons that the longer horizon view is "iffier" str found in four key assumptions, among these only one can be somewhat quantified.

 


  1. Expenses associated with reform fully mature by year ten (all benefits in-place) and with revenues to match. Early in the first ten-year horizon, revenues in the form of tax increases and theoretical spending reduction, etc. are all factored in immediately while the benefit expenses take years to come into effect. This "lag" factor is the primary cause of the projected $134 billion deficit reduction. This is the "quantifiable" assumption.

  2. It is unknown whether Congress will fully face a number of "unaccounted for", related health care issues that are not contained in the reform legislation such as the Medicare "doc payment fix" issue. Evacuating the trend of piece-meal fixes that occur yearly and facing a permanent "fix" would add an estimated $210 billion to health care spending, over and above, the spending in the legislation. Factoring in this type of fix (already passed by the House in the fall of 09), reform is no longer deficit reducing.
  3. The legislation calls for cuts in Medicare spending to fund essentially, newer, bigger entitlement spending on a deficit basis. As illogical as this sounds, it is a typical Washington smoke and mirror trick. In reality, the question centers around how realistic is the projection of savings and cuts via program adjustments in Medicare given that Congress has rarely, if ever, followed-through on maintaining and/or accelerating, spending reductions.

  4. The legislation is a broad expansion of coverage and entitlements for a large percentage of the population that presently, has a lower level of benefits or no benefits at all. Further, the legislation creates a whole new class of individuals, presently privately insured, eligible for government subsidy or outright, government insurance. What is impossible to project with any certainty, is how much cost via pent-up demand and unconstrained access to health services, will this new "class" of entitled insureds have on the system. The logical answer is, "far more than the government estimates". Rarely has the government ever come close to estimating the actual costs associated with new entitlements.


Viewed in the context or through the eyes of real world economic theory and the present realities of the U.S. health system and the U.S. government budget, the only response one can offer to Mr. Obama's claim of reform reducing the deficit is, "you can't get there from here". In order to get close to the realm of deficit neutrality and ultimate deficit reduction, reform must include a complete restructuring of the entitlements presently in place, namely Medicare and Medicaid. Their genetic, inherent programmatic creep already is unsustainable and unfunded and unfortunately, nothing in the reform proposal about to come forth for a vote, changes the programmatic or economic, realities. Without a "bend" in this cost curve and a reversal of the way both entitlements are presently funded and configured to spend for benefits, deficit reduction is improbable if not impossible. A plan that layers on additional entitlements with no real source of substantial, sustainable new revenue (issuing more debt is not new revenue) cannot possibly, logically be deficit neutral or deficit reducing over any reasonable time horizon.


The sole remaining argument for reform thus becomes an issue about moral responsibility or the notion that health care is a fundamental right that the government should bestow upon the people and in addition, subsidize such that all people have access to the same level of care. In the end, it is unlikely health care reform as it sits today, barring any economic considerations, would even satisfactorily resolve this moral issue.

 

Comments

  • datadog 4 years ago

    Your brain is so full of stuff I bet you have a hard time finding a good debate partner. Reginald a very informative article thanks for the data.

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