Health Policy in the New Administration

The confluence of severe recession and a one-party government has overcome the usual procedural barriers that typically shove health legislation into the last few months of the year. On February 4, 2009, the State Children's Health Insurance Program (SCHIP) was reauthorized and eligibility was expanded to include children in families with up to 300 percent of the federal poverty level, or $66,000 for a family of four. The economic stimulus bill, signed into law on February 17, 2009, included a plethora of provisions to expand health information technology (HIT), fund comparative effectiveness research, subsidize health insurance for people who become unemployed, bail out states by increasing Medicaid matching rates.

In less than a month since he was sworn in, President Obama and the largely Democratic Congress have committed to spend $227 billion over the next decade in the health sector. No wonder we have been spared the usual blather about "the first hundred days." That would be a substantial sum for health policy in any other year. Could this early success lead to even more (and more expensive) health legislation later in the year? Or have the easy decisions already been made and future legislation will be slow to emerge from the political meat grinder? Health reformers--at least those whose idea of reform consists of massive increases in government health programs--should not get their hopes up. Senator Tom Daschle's withdrawal from the HHS secretary's job has dealt a blow to the administration's plans that will be felt late this year when the administration's health legislation needs help getting through the Senate.

But even if Daschle had been able to take the lead on health reform, he would not have been able to sell a proposal costing hundreds of billions in the near term and imposing an obligation on future generations of tens of trillions of dollars. If a provision was not in the stimulus package, then some way will have to be found to "pay" for it--through offsetting costs in other parts of the health budget or higher taxes. The President has stated the need for fiscal prudence, and that means some adherence to budget limits that so far have been swept away by the hope that massive deficit spending will restart the economy.

Health reformers--at least those whose idea of reform consists of massive increases in government health programs--should not get their hopes up.

It will not be easy to find savings to offset the cost of new reform proposals. When he was director of the Congressional Budget Office (CBO), Peter Orszag initiated a study of over 100 policy options, most to cut federal health spending. The conclusion is clear: there is no pain-free way to save money in health care. Incentives to adopt HIT? Instead of saving money, that will cost an additional $800 billion to $1 trillion over ten years. Fund comparative effectiveness research? Another $800 billion. Pay for a medical home in Medicare? Only about $5 billion in new spending, but no savings over the next decade. Now that Orszag is the President's budget director, he will have to live with those judgments.

Proposals to achieve universal coverage are expensive--likely to exceed $200 billion annually before savings offsets are identified--and complex, the key ingredients in political stalemate. It is far more likely that smaller initiatives will be advanced, targeting particularly vulnerable populations rather than offering insurance to everyone. Even that is uncertain this year, given the huge new subsidies that have already been enacted to cover kids, unemployed workers, and low-income individuals.

In addition, the administration will have to manage existing programs despite the distractions of more exciting policy development. Medicare's Sustainable Growth Rate calls for a 20 percent reduction in physician fees next year, and additional cuts as far as the eye can see. With the cost of a permanent "fix" now over $400 billion, count on Congress once again giving a one-year reprieve. Medicare Advantage payment rates will again come under scrutiny, but cuts in those rates come at the risk of disrupting millions of seniors enrolled in such plans. Sharp increases in Part D premiums for 2009 coupled with ongoing concern about the cost of pharmaceuticals are likely to trigger a renewed call for direct government price negotiation and tougher benefit standards for the plans. Medicaid drug rebates might be applied to drugs sold under Part D to low-income enrollees. The administration will push hard to expedite approval of follow-on biologics, and the shift at FDA toward greater evidence on the safety of new drugs in the approval process is likely to persist.

President Obama's first year in office is like a meal eaten in reverse order. We started with dessert, in the form of new subsidies for insurance. Whether we like it or not, we will have to eat our vegetables before the year is out.

Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI.

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