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Two weeks ago, we talked about the onset of the sequester – which applies almost exclusively to “discretionary” spending, that is, annual appropriations for federal agencies – and what it implies for both the macroeconomy and the performance of government functions.

Next week, a further development will pull that issue back on stage:  House Budget Committee Chairman Paul Ryan (R-WI) will release his budget resolution for next year.  As part of the deal struck within the House Republican caucus to pass the fiscal cliff bill at the turn of the calendar year, that resolution will claim to achieve a balanced budget – a deficit of zero – in the tenth year from now (that is, in fiscal year 2023).  To reach budget balance that quickly – last year’s House resolution was estimated to achieve balance in 2040 – will require greater savings, and some of those additional savings likely will come from a lower path for discretionary spending than is set under current law – that is, even with the sequester.

Then, to avoid a government shutdown (that is, a lapse of appropriations for federal agencies), the Congress will need to replace the current continuing resolution before its expiration on March 27.  That will highlight once more the implications of the level of annual appropriations (although its effect will be restricted to the current fiscal year – fiscal year 2013, which ends on September 30, 2013 – more on that point later).

And at some time in March or April, the President will submit his fiscal year 2014 budget.  Many people will rush to see how the budget proposals compare with the House budget resolution, and in particular its FY 2023 budget balance.  The President’s proposed future-year levels for discretionary spending will be an important element in determining how that comparison will look.  So for yet a third time in just a few weeks, proposals for levels of discretionary spending will get at least a little air time – even though we do not yet have specialty cable channels that focus on the federal budget.

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If you want a friend in Washington, get a dog.  If you want to lose your friends in Washington, talk about Social Security or Medicare.

I feel free to write this post only because I have no friends left.

What’s right with Medicare:  Many (probably not all) people who believe that Medicare can be – in fact must be – improved are fully aware that the program has accomplished its major objective, and is essential.  They say so, clearly.  No one listens, and those who recommend any change are accused of heartlessness toward their own parents (and every other elderly American), or worse.  But after multiple attempts at even-handed discussion I have nothing left to lose, and completeness requires one more try at articulating the positive as well as the negative.  So here is what’s right:

If left to fend for themselves, far too many elderly could not obtain health-insurance coverage, and eventually would be impoverished by out-of-pocket costs – or possibly even left without care.  The Medicare guarantee changed that.  Terminating that guarantee is unthinkable.

So why even broach the subject?  The care that our elderly get from Medicare could be a lot better.  The rising cost of Medicare is the primary driver of our long-term budget problem.  A deal to fix the long-term problem is both unthinkable and impossible without reform of Medicare.  And on the basis of potentially misleading information, many have come to think that we can ignore the program’s rising costs – though procrastination might come back to haunt us later.

So what’s wrong with Medicare?

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Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion – mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans. As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances.

President Barack Obama
The State of the Union Address
February 12, 2013

Many years ago, a seasoned Capitol Hill professional cautioned me about giving any questionable number to a politician.  Many have fly-trap minds, and once you put something in, you never can get it out.  Any nuanced but only partially understood fact, like a discount-store blowtorch, could be misused with considerable ill effect at some later moment.

This bit of wisdom comes quickly to mind when one hears the current buzz about a mere $1.5 trillion of deficit reduction over ten years ending our budget woes.  Some reach that number by the roughest of arithmetic; others use more sophisticated analysis, and even provide important and subtle caveats.  But the number, even though it has some limited use, already has left the corral of qualification and analysis far behind.

The simple way to reach that number is the way the President did.  Three years ago, Erskine Bowles and Alan Simpson characterized our fiscal plight with a calculation that $4 trillion of deficit reduction would “stabilize the debt.”  As the President noted in his remarks, some have estimated subsequent budget action to have achieved $2.5 trillion of that.  $4 trillion minus $2.5 trillion equals $1.5 trillion, under either OMB (Office of Management and Budget) or CBO (Congressional Budget Office) scoring.

That little inside-Washington joke is not really a joke, however.  Bowles and Simpson’s $4 trillion was derivative of many complex and controversial assumptions, and was calculated at a particular time.  Let’s review the numerical spreadsheet, and its even-more-subtle and important conceptual underpinnings.

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Two troubling stories hit print this week.  They are troubling because they bode ill for the prospect of meaningful Medicare reform, and therefore for a budget deal.

Image taken from here

The later of the two appeared in this morning’s Washington Post.  It uses poll results to show that voters in key swing states — Florida, Ohio, and Virginia — strongly oppose the premium-support Medicare model of Governor Mitt Romney and Representative Paul Ryan.  At least 70 percent of seniors responded to the poll that they want to retain Medicare as a system of guaranteed benefits, rather than receiving fixed-dollar premiums to choose among alternative plans.  In Florida, 65 percent of the entire population favor the current system.

On the question of whom they trust to deal with the Medicare program, respondents favored President Obama by 19 percentage points in Ohio, 15 percentage points in Florida, and 13 percentage points in Virginia.  In a different poll, strikingly, respondents in these states who consider Medicare to be an important issue favor President Obama by 59 percent to 36 percent; those who do not consider Medicare to be an important issue favor Governor Romney by 54 percent to 36 percent.

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In something of a “scoop,” Meghan McCarthy of National Journal reported this week that two of the most significant outside advisers to President Obama have expressed general approval of “premium support” for health care.  That is positive news substantively, though it underlines the complexity of the political environment in Washington during the election campaign.

Image found here

The story  relates that David Cutler of Harvard and Jonathan Gruber of MIT were consulted by the Simpson-Bowles commission during its deliberations two years ago.  Members of the commission’s staff asked the two advisers’ opinions of the concept of giving Medicare beneficiaries cash to choose among alternative health-insurance plans, including private plans.  In the usual clipped and short-hand language of e-mail communication, the two both mentioned some preconditions that would need to be met, including favorable and useful experience under the insurance exchanges in the Patient Protection and Affordable Care Act (PPACA) of 2010, and special work to protect the elderly from “cherry-picking” and confusing marketing by insurance companies.  But with those conditions met, Cutler and Gruber expressed generally positive views of this approach, known as “premium support” among the cognoscenti of health care. Read More

This is an additional, longer-than-usual post, to provide detail on the news of the last few days.  We will be back to the usual format later this week.

Jacquelyn Martin/AP

Former Massachusetts Governor Mitt Romney’s choice of Wisconsin Representative Paul Ryan as his running mate already has proven controversial.  But virtually every authority agrees that it will put budget policy front and center in the election campaign.

The nation needs a debate about the budget.  Now, apparently we will get one.  Whether it will prove to be productive is another question.

This is to give you some background to put the issue and the candidate into perspective.

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 Let’s Make a Deal:

A New Series

This is the third installment in a series about the two keys – Medicare reform and tax reform – to a comprehensive agreement to solve the budget problem.  These commentaries will explain the details of the two issues, and show where it is that each political party – the Democrats and the Republicans – must give ground to resolve this crucial issue.

Image from 401kcalculator.org

In CED’s 2007 policy statement, Quality, Affordable Health Care for All , we advocated consumer cost-responsible choice among competing private health-insurance plans.  Although we did not go into detail on the implications of that program for Medicare, we stated that we believed that the same model would both improve quality and reduce cost for that program.  We then went on to elaborate on that vision for Medicare in a paper by Alain C. Enthoven, To Reform Medicare, Reform Incentives And Organization .  That Medicare model has come to be referred to as “premium support.”

Now, there is a similar congressional proposal with bipartisan co-sponsors: Senator Ron Wyden (D-OR) and House Budget Committee Chairman Paul Ryan (R-WI).  That proposal has attracted a great deal of attention, and it has proven highly controversial.

Senator Wyden has defended that proposal in the following terms:  “I believe the most important aspect of Medicare is not the structure of the program but the guarantee to all Americans that they will have high quality health care as they get older… Wyden-Ryan doesn’t eliminate the traditional Medicare plan, instead it guarantees that seniors who want to enroll in Medicare’s traditional fee for service plan will always have that option.”

However, it probably is fair to say that the bulk of Democratic opinion is contrary.  The clearest statement of which I am aware came from former House Speaker Nancy Pelosi (D-CA):  “What they’re trying to do is put lipstick on a pig — that would be Ryan — and call it Monique — that would be Wyden… But it’s still a pig… [Medicare will] wither on the vine.  The Republican plan would break the Medicare guarantee.”  A frequent refrain from many Democrats is that the Wyden-Ryan bill would “end Medicare as we know it.”

Clearly, these two interpretations of the effect of the same proposal differ by 180 degrees.  So what gives?  And what precisely is the “Medicare Guarantee?”

Some background:  Two years ago, Chairman Ryan and Alice Rivlin (founding Director of the Congressional Budget Office, former Director of the Office of Management and Budget under President Clinton, and lots of other cool stuff) collaborated on a bipartisan approach to Medicare premium support.  Then last year, when Republicans took control of the House and Chairman Ryan was called upon to submit a budget resolution, he included that basic idea but modified it substantially.  The key difference was that where Rivlin-Ryan would have imposed a modest cap on Medicare cost growth to ensure future budget savings, Chairman Ryan substituted a draconian cap that would be sure to reduce the public contribution to the program, leaving even modest-income Medicare beneficiaries with much-increased out-of-pocket costs.  (The savings from this tight cap were needed to “pay for” a substantial tax cut also included in the House budget resolution.)  The 2011 Ryan proposal would have “ended Medicare as we know it.”

Democrats pounced on this proposal, and by all accounts made much political hay.  An apparently spontaneous television reference by Chairman Ryan to Rivlin as a co-creator of the new much-modified proposal earned a stern rebuke from her.  So at the end of 2011, the Ryan proposal was something of a political dead weight.

At the beginning of this year, the questionable 2011 launch left Chairman Ryan with imperfect options.  With the House Republicans indelibly identified with last year’s proposal, a strategic retreat would have admitted that the plan for which they already had voted was seriously flawed.  But doubling down on the same unattractive proposal would provide no exit.

So instead, Chairman Ryan tried to execute a squeeze play between those two flawed options.  He already had worked with Democratic Senator Wyden to formulate a bipartisan approach much more in the spirit of Rivlin-Ryan.  However, he admitted no error in his original proposal; the changes from the original plan were not highlighted, but rather mentioned only when necessary and convenient.

The Democrats responded in a way reminiscent, for those old enough to remember it, of the Kennedy Administration’s Cuban missile crisis team’s reaction to the receipt of two contradictory messages from Soviet Premier Nikita S. Khrushchev (C-Moscow).  In 1962, the White House chose to respond to the more-conciliatory first message, and ignore the bellicose second message, in the interest of avoiding nuclear war.  This year, the Democrats chose to respond to the more-bellicose first proposal and ignore the conciliatory second proposal, to (in analogous terms) obtain the upper hand in the inevitable missile volley to follow.

This point and counterpoint is perhaps emblematic of the deterioration of the policymaking process inWashington.  If Chairman Ryan had been willing to highlight the changes in his proposal, or if the Democrats had been willing to applaud them, or ideally both, there could have been the beginning of significant progress on one of the two major sticking points (the other being tax reform) in the budget crisis.  Instead, the two sides continue to fight over interpretations of an obsolete proposal while the world economic and financial environment worsens by the moment.

This political posturing behind the rhetoric is sad, though fairly easy to understand.  The substance is more complex.  Is there still a “Medicare guarantee” under Wyden-Ryan, or not?

In terms of the concerns as of its creation, Medicare is an extraordinary success.  Millions of elderly persons had been losing their health-insurance coverage (based, as it was, on employment).  With Medicare, all of the elderly are guaranteed the right to traditional coverage – basically a “fee-for-service” system (with reform patches that are designed to limit the perverse incentive to collect fees by providing all possible services, however limited their value).

That is the good news.  The bad news is that the costs of this coverage already are large and are growing faster than the economy that must pay for them, and so this system clearly is unsustainable.  (A recent slowdown of cost growth helps, but it is not sufficient, and health experts struggle to understand why it has occurred and whether it is likely to continue.)  A guarantee is wonderful.  However, a guarantee is only as good as the resources that back it up.

So what happens to the Medicare guarantee under Wyden-Ryan, or under Domenici-Rivlin (a similar proposal which is an improved version of the original Rivlin plan, developed with former Senator Pete Domenici (R-NM))?  Unfortunately, there is no definitive answer; it depends.  In this uncertain world, that should not be surprising.

Each of these plans for Medicare imposes a cap on cost growth; if costs grow faster and exceed the cap, then the federal contribution toward coverage is limited, and beneficiaries have to pay more.  In that sense, the “guarantee” is no longer guaranteed.  Even if costs grow faster than the cap rate, however, the Congress and the President could choose to intervene by changing the law to stay below the cap by some other means, including borrowing.

But advocates of competition are often more optimistic.  Although true competition has never been tried broadly in health care, there is evidence that even isolated systems have had some success in limiting cost growth without reducing quality.  (See http://www.ced.org/component/blog/entry/1/355 and http://www.ced.org/images/library/reports/health_care/CED_CA_HC_2010.pdf about competitive systems that have been successful in Wisconsin and California, respectively.)  So suppose that competition holds costs down.  Then the Medicare guarantee could be alive and well.  Could.

The question is whether competition holds costs down in traditional Medicare, or only in competing private plans, with traditional Medicare costs growing faster.  If that should occur, then beneficiaries would continue to have guaranteed zero out-of-pocket cost access to insurance coverage that is fully the equal of today’s traditional Medicare coverage.  But it would be private insurance, not Medicare itself.

Is that the “Medicare guarantee?”  If the elderly unconditionally can get coverage at the value of today’s Medicare, with zero out-of-pocket cost – but that coverage is private insurance – has the Medicare guarantee been maintained?  That certainly is in the eye of the beholder.  From CED’s position in favor of cost-responsible choice, this outcome is a valid guarantee that is fulfilled by the most efficient means – which in the long run is the inevitable and justifiable outcome.

But is the other contingency – under which overall Medicare costs continue to grow out of control, and so the federal government contribution is capped, and seniors with incomes above eligibility for Medicaid must pay part of their premiums out of pocket for either traditional Medicare or a private plan – a violation of the Medicare guarantee?  Arguably, it is; but in that instance society cannot afford to make good on the guarantee.  Congress could choose to short-circuit the increase in beneficiary premiums by raising taxes or cutting other spending – for a time.  But if Medicare costs continue to grow faster than the GDP indefinitely, those options will not be feasible.  This is just one more way of making the point that budget watchers have repeated for years:  We must solve the problem of Medicare cost growth, or suffer the consequences.

Although many Democrats decry the cost-responsible choice of competing plans in Ryan-Wyden, they have not presented an alternative.  Even the highly regarded National Commission on Fiscal Responsibility and Reform (more commonly called “Bowles-Simpson,” after Erskine Bowles and former Senator Alan Simpson (R-MT), its two co-chairs) essentially punted on long-term reforms (recommending “targets” and “requiring further structural reforms” if necessary).

The truth of the matter is that there is no viable alternative to cost-responsible choice – at least none that has yet been revealed to man.  Simply cutting physician and hospital reimbursement rates will eventually leave Medicare as a distinctly second-class healthcare system.  We cannot replace Medicare with a single-payer system – because Medicare is a single-payer system.  We simply must put the invisible hand of market competition to work on our side of the fight to keep healthcare costs affordable.

But we cannot know in advance whether the invisible hand will solve the problem.  We cannot measure the invisible hand – because it is invisible.  No one knows what market competition will do to reduce costs and improve quality in the markets for automobiles, computers, haircuts, or any other goods or services over the next 20 years; and the same certainly goes for health care.  The one thing that we do know is that we want the invisible hand on our side.

There is no alternative to cost-responsible Medicare beneficiary choice among competing health-insurance plans – including private plans.  Democrats must recognize and accept that reality, as part of a bargain that is balanced with higher tax revenues collected on the basis of the ability to pay.  If the two political parties do not wake up, smell the coffee, and cut that deal, we will have problems even more serious than the demise of the Medicare guarantee – which itself will be a part of the explosion.

Over the last 72 hours, former Florida Governor Jeb Bush has done a messaging tap dance.  First he made comments about the political behavior of former President Ronald Reagan and also his own father, former President George H.W. Bush.  But then Governor Bush made a more-current substantive statement: that he would accept a deficit-reduction deal that included ten dollars of spending cuts for every one dollar of tax increases.

For that, he was immediately castigated by members of his own party.  Among them, Republican activist Grover Norquist criticized Governor Bush by saying that “…he thinks he’s sophisticated by saying that he’d take a 10:1 promise. He doesn’t understand — he’s just agreed to walk down the same alley his dad did with the same gang. And he thinks he’s smart. You walk down that alley, you don’t come out. You certainly don’t come out with 2:1 or 10:1.” Norquist’s organization, Americans for Tax Reform, posted a statement saying that “When bipartisan deals are struck promising to cut spending and raise taxes, the spending cuts don’t materialize but the tax hikes do.”

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