Limits To What GOP Can Do In Budget Reconciliation

Stuart Varney of Fox Business asks some sharp questions to Heritage Action CEO Michael Needham regarding repealing and replacing Obamacare. There is a reason that many past presidents, with the exception of Obama, has been unsuccessful in passing comprehensive health care reform.

Many Americans don’t understand the budget reconciliation process. There are strict rules relating to provisions that can be passed on a majority vote at the Senate level. While you can make changes to certain taxes and spending initiatives, you cannot make new laws governing the healthcare marketplace. That can only be done through the legislative process that must overcome the filibuster, meaning they must get 60 votes for a bill to get consideration.

Varney Interview with Needham

When Varney questioned Needham on his opposition to Ryan’s health care bill, he talked about his desires to replace government intervention with a free market platform where patients and doctors have more control of the process. As pointed out by Varney, the budget reconciliation process can’t do that.

Now it can eliminate subsidies and quicken the timeline for federal funding to Medicaid expansion, but any efforts to offer health insurance across state lines; provide health savings accounts; and offer a more free market model must be done through the traditional legislative process.

Even if the GOP successfully dismantles the Affordable Care Act, they will find it tough sledding to push through an alternative.

Taking Debt Ceiling To The Brink

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As we enter into the second week of the government shutdown, a more ominous threat looms as the U.S. approaches the debt ceiling.  The debt ceiling has always existed as one of the powers of the U.S. Congress in controlling the spending and taxation activities of the government.  Even though the Executive office can create legislation with a President’s signature, Congress can prohibit its funding by imposing a debt limit which limits the U.S. Treasury’s ability to finance current obligations.

We have already reached the debt ceiling, but Treasury Secretary Jack Lew has been able to employ ‘extraordinary measures’ to prevent the U.S. from not being able to pay for funding already authorized by Congressional legislation.  These measures include underinvesting in certain government funds, suspending the sales of nonmarketable debt, and trimming or delaying the auctions of securities.  However, these methods will be exhausted by October 17th.

While it is highly doubtful that not raising the debt ceiling will result in the U.S. defaulting on its interest payments of U.S. Treasuries, there is concern how global investors will react to the potential turmoil inflicted by the U.S. government not paying all of its bills. As stated by Daniel Mitchell of the Cato Institute, the U.S. collects tax revenues exceeding $3 trillion a year, which is more than capable of servicing our U.S. Treasury annual debt service of about $230 billion.  However, it is not sufficient to cover a broad range of government expenditures ranging from national defense, social spending, and transportation.  This disruption in funding could affect credit markets and dampen consumer and business spending that is already hampered by a tepid recovery.

There are a few scenarios that they can pursue, such as either significantly raising taxes or gutting government spending, though either action would have severe consequences to the economy in the short-run.  Federal employees, civilian contractors, educators, and non-profit organizations would all likely feel the negative consequences of dramatic funding cuts.  Unemployed workers and Social Security recipients would also be at risk of delayed payments or benefits.  Another possibility would be the U.S. selling its financial assets to temporarily fund governmental operations, however those options carry legal and practical obstacles.

One must also realize that politically astute moves do not necessarily equate to good economics, especially in the short-term.   In gerrymandered House districts that are highly conservative, there are significant costs to compromising core beliefs.  Voting for a clean continuing resolution that funds the federal government without defunding or delaying the Affordable Care Act are embedded with significant political risks.  Highly financed conservative political action committees will react negatively to any vote that does not impact health care reform and can redirect campaign financing to the opposition in the 2014 primaries.  That places pressure to not compromise and find common ground with the collateral damage being slowed economic growth and higher unemployment.  Though it should be acknowledged that this strategy of self-inflicted wounds to the economy will be worthwhile to some Republicans if it results in sabotaging health care reform or substantive deficit reduction.

On the other hand, Democrats are just as unyielding when considering delaying the individual mandate for a year or waiving the medical device tax.  Both are necessary to generate the revenues necessary to bring down health premium costs that will otherwise rise due to enhanced mandatory health coverage; prohibiting private health insurance companies from denying coverage due to preexisting conditions; and changing demographics that are placing upward pressures on health care services.  That is why Democrats are hesitant to agree to any changes in health care reform that would undercut its effectiveness.

While it appears there is movement within the Senate to extend the debt ceiling to the early part of 2014, that is still a relatively short time frame that compromises business confidence.  Then there is the concern that House Republicans will not see much political benefit in accepting an agreement where Democrats have yielded little in terms of spending cuts or changes to health care reform.  However, the government shutdown would end with funding available until January 15th and there would be an extension of the debt ceiling to mid-February.

If those talks break down, it is not known how financial markets will react.  The worst case scenario would be a dramatic sell-off of U.S. Treasury bonds.  That occurs If global investors are rattled, then credit costs could skyrocket and slow down the rising momentum in U.S. housing, along with compromising future job creation.   The U.S. dollar could plummet and lead to global panic where a deep recession envelopes the globe.  If that occurs, then even a quick resolution among politicians would be too late to minimize damage that could take decades to recover from.

As the clock ticks, the gamesmanship of debt negotiations leaves the global economy teetering on the balance.

Will Health Care Reform Hit A Snag?

Will Health Care Hit A Snag

Nick Gillespie of reports that a key target of the Affordable Care Act signed by President Obama in 2010 appears ambivalent about buying health insurance.  Specifically, the young and healthy have so far not been interested in buying health insurance.  However, it is still early and none of the insurance exchanges have been set up.  Plus, it is possible that they are waiting until the last minute before having to pay a fee for not being insured.

One of the key elements of health care reform was the individual mandate.  The individual mandate requires most Americans to buy health insurance by 2014.  However, there are exemptions available to avoid paying the fee.  Examples include having a low income, being cost-prohibitive to buy health insurance; or not wanting health insurance for religious reasons.

Due to the number of potential exemptions and relatively low penalty compared to purchasing health insurance, it is possible that the estimates of the uninsured by 2014 might be underestimated.  Of the approximately 48 million uninsured before health care reform was passed, more than half remain uninsured.  That is far more than the 6 million estimated by the Congressional Budget Office.

This could potentially be a significant problem, especially if those opting out are the young and healthy.  The combination of increased regulations that will force insurance companies to provide more preventive care and enhanced benefits, along with less than expected enrollment into insurance plans that was expected to offset some of the costs of extra benefits, could prove troublesome.  That could mean the federal government will have to subsidize more of the cost in providing health care and drive up federal deficits.

Gillespie highlights some of the challenges in getting more people to sign up for health insurance.  For the young and healthy, they cite the cost and less likelihood of needing health care services because of their age.  Then there is the group described as the “passive and unengaged”, who procrastinate and do not take the time to assess the health care options available to them.  Both groups have little motivation to enroll and the penalty might not be significant enough to change their minds.

The above scenario is a prime example of adverse selection.  Adverse selection means that private health insurance companies are faced with covering less healthy, more expensive individuals, while the more healthy, less expensive individuals decide to not buy insurance.  In order to remain profitable and cover rising health care expenses, they will likely have to raise premiums.  While the penalties can offset some of the subsidies that will be used to boost the number of the uninsured, it might not be enough to offset the cost of enhanced benefits.

Another troubling consequence is that employers might face higher than expected costs in providing health insurance to their workers.  In fact, this uncertainty was pointed out by the Fed’s Beige Book as why a number of firms were reluctant to add to their payrolls.

Unfortunately, there remains many unknowns, so we will have to wait and see.

Does Obamacare Have A Death Panel?

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Bloomberg Businessweek’s January 17th article entitled “Wanted:  Obamacare Death Panelists” corrects misperceptions of the law, but also highlights serious challenges in fighting fraud and rising health care costs.  The controversy started when Sarah Palin made erroneous claims that bureaucrats could cut costs by denying expensive medical treatment to seniors.  Specifically, she was referring to the Independent Payment Advisory Board (IPAB), which was created to slow the growth in Medicare spending when President Obama signed the Patient Protection and Affordable Care Act, also known as Obamacare.  The board will consist of 15 members, who have expertise in health care, economics, experience with employers and third party payers, and working with consumer groups.

While it is true that IPAB will be bureaucrats appointed by President Obama and confirmed by the Senate, their powers in controlling health care costs are limited.  In fact, they can only act when actual Medicare expenditures exceed specified targets.  They are also prohibited from doing the following three actions:

  • ration health care;
  • raise revenues or increase Medicare premiums;
  • restrict benefits or change eligibility criteria.

It just so happens that those three methods would be the easiest ways to control rising costs.

Therefore, their main function is to find ways to streamline the delivery of health care by identifying instances of fraud or limiting payments to private insurance companies.  In 2020, their powers will be extended to limiting payments to hospitals.  They would do this by drafting recommendations that must be considered by Congress.   While Congress could amend or repeal any of the recommendations by gaining a three-fifths majority vote in the Senate, they must come up with an alternative set of recommendations that would yield the same amount of savings.  If they do not meet those guidelines, then Kathleen Sebelius, who heads the U.S. Department of Health and Human Services would be required to implement the IPAB recommendations by default.

The main problem with the IPAB will be finding quality candidates to serve on the board.  Even though it pays a generous salary of $165,300, that compensation is far below the market value of many health care experts and doctors.  It also requires a full-time commitment of six years, so they would have to leave their profession.  In addition to their limited powers, they would be subjected to contentious Senate hearings that have the potential to malign their reputations.  Some have suggested that board membership should be part-time, so that they can continue with their day-to-day jobs, but that would cause potential conflicts of interest.

While critics balk at having unelected bureaucrats making decisions on health care spending, our current Congress is incapable of seriously addressing the issue.  The political costs of dealing with health care in a reasonable way are twofold.  First, seniors are a significant voting bloc, so it will be difficult to justify significant cuts in benefits.  Second, the various special interest lobbyists representing doctors, hospital administrators, and medical device suppliers are extremely powerful.  Both groups have the funding and influence to organize opposition to take out incumbents that go against their wishes.

Ideally, we would have our elected officials make the tough decisions, rather than deferring them to a group of bureaucrats.  The problem is that it is in a Congressman’s best interest to not compromise in order to enhance their re-election prospects.  Given the demographics and projected explosive growth of Medicare though, there will not be enough savings gained from fraud and inefficiencies from health care delivery systems to close the future funding gap.  Despite the inherent risks of compromising and finding common ground, the status quo and simply deferring the problem into the future will only make the problem more unmanageable over time.

In order to come up with an ideal solution to Medicare, we first need to outline priorities.  Is the goal to protect vulnerable seniors?  Then we need to restrict eligibility through greater means testing.  That means higher incomes would pay more premiums and receive less coverage, while lower incomes would maintain the same level of coverage.  If the goal is to maintain the same level of benefits for the poor, middle class, and affluent, then we must risk taking on substantially higher deficits and hope global investors will look the other way.  It will not be practical to raise enough tax revenue or gut other federal spending in order to meet future Medicare needs, which is projected to be insolvent by 2024.

Given the political difficulties, the IPAB appears to be the best option in controlling Medicare spending despite its flaws.  Due to the problem of scarcity, any recommendations implemented from the IPAB will undoubtedly negatively affect the delivery of health care because there is not enough fraud to offset increased health care spending as Baby Boomers retire.  However, the positive would be that Congress might be forced to find common ground that will involve some combination of tax increases and reductions in benefits in order to minimize the impact on quality and access to health care.

In fact, common ground would probably entail some sort of means testing, which would appear to hold appeal to Democrats because it involves redistribution from the rich to the poor.  The only problem is that Republicans surprisingly came up with the idea, so naturally Democrats rejected it.  Doesn’t that make you shake your head…

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