The cost of Obamacare...

11/29/2009

What Will Obamacare Cost? Chicanery, Underestimation, and their Ilk

Michael Cannon at Cato opines that:

Congressional Democrats are using several budget gimmicks to disguise the cost of their health care overhaul, claiming the House and Senate bills would cost only (!) about $1 trillion over 10 years. Now that critics have begun to correct for those budget gimmicks, supporters of ObamaCare are firing back.

One gimmick makes the new entitlement spending appear smaller by not opening the spigot until late in the official 10-year budget window (2010–2019). Correcting for that gimmick in the Senate version, Sen. Judd Gregg (R-NH) estimates, “When all this new spending occurs” — i.e., from 2014 through 2023 — “this bill will cost $2.5 trillion over that ten-year period.”

Another gimmick pushes much of the legislation’s costs off the federal budget and onto the private sector by requiring individuals and employers to purchase health insurance. When the bills force somebody to pay $10,000 to the government, the Congressional Budget Office treats that as a tax. When the government then hands that $10,000 to private insurers, the CBO counts that as government spending. But when the bills achieve the exact same outcome by forcing somebody to pay $10,000 directly to a private insurance company, it appears nowhere in the official CBO cost estimates — neither as federal revenues nor federal spending. That’s a sharp departure from how the CBO treated similar mandates in the Clinton health plan. And it hides maybe 60 percent of the legislation’s total costs. When I correct for that gimmick, it brings total costs to roughly $2.5 trillion (i.e., $1 trillion/0.4). ...

When we correct for both gimmicks, counting both on- and off-budget costs over the first 10 years of implementation, the total cost of ObamaCare reaches — I’m so sorry about this — $6.25 trillion. That’s not a precise estimate. It’s just far closer to the truth than President Obama and congressional Democrats want the debate to be.

Predictably, leftist blogs have dismissed all this as hype and lies. Yet, The Economist is reporting much the same sort of findings as Cannon:

...all manner of budgeting chicanery is being used to reduce the apparent cost and keep the CBO “score” to below $900 billion. For example, the Senate bill assumes that payments to doctors and hospitals by Medicare, the government health plan for the elderly, will be magically cut by over a fifth in two years’ time—though Congress has always lacked the backbone to make supposedly obligatory cuts of this kind in the past.

Even so, let's make the heroic assumption that the proponents of Obamacare aren't lying about what it will cost. The government's track record with projecting the long term costs of major entitlement programs isn't reassuring, as a report for Senator Brownback details:

Since the end of World War II, major health care reform proposals have generally always cost more-sometimes significantly more-than the highest cost estimates published while the legislation was pending…

…Medicare (entire program). In 1967, the House Ways and Means Committee predicted that the new Medicare program, launched the previous year, would cost about $12 billion in 1990. viii Actual Medicare spending in 1990 was $110 billion-off by nearly a factor of 10.

A certain level of error in cost projections is to be expected, especially regarding sectors as complicated as health care. But ... health care appears to be an area with great room for overly optimistic assumptions regarding changes in the behavior of patients and providers, technological innovation, the practice of medicine, program take-up rates, future health cost inflation, and the likely success of proposed cost-control mechanisms.

…Whatever the causes, it seems there is a kind of Murphy’s Law of health care legislation: “If it can cost more than the highest available official estimate, it probably will.”

In sum, we can't trust the Obama numbers on healthcare. Anybody committed to good government would see the need for cautious, prudential, incremental reform rather than sweeping surgery on 16% of the economy. Unfortunately, prudence and caution are not hallmarks of our current rulers. As things stand, the odds are that we're headed for a massive increase in the federal deficit.

I'd feel better about Obamacare if the Democrats had dared take on some of their key constituencies. For example, Obamacare won't do squat about the problem of defensive medicine and sky high malpractice insurance costs caused by runaway medical malpractice litigation. As Trial Lwyer, Inc. documents:

While the excesses of the litigation industry alone cannot explain America’s mounting medical costs, litigation is a large, and growing, contributor to our health-care bill. As the graph below shows, medical malpractice liability—the “tort tax” on doctors and hospitals, whose costs constitute the majority of health expenses—has grown much faster than health-care inflation.[4] Indeed, medical-malpractice liability alone constitutes over 10 percent of the entire U.S. tort tax, which by 2003 represented over $3,300 for a family of four.[5]

Although medical-malpractice liability provides Trial Lawyers, Inc. with its largest health-care sector revenue stream, litigation over pharmaceuticals and medical devices exacts a staggering cost on an increasingly important part of the U.S. economy. Wyeth’s massive reserve for Fen-Phen litigation is $21 billion,[6] and Merck’s exposure to Vioxx lawsuits may total as much as $50 billion.[7] Such figures are astronomical in comparison with these companies’ individual budgets, representing nine to twelve times each company’s annual research and development costs.[8] In fact, since each drug was only widely used for about four years, the approximate annualized liability cost of these two drugs comes to almost $18 billion—equivalent to 10 percent of the annual revenues for the pharmaceutical industry as a whole.[9]

As this report will detail, far from limiting its attacks to doctors and drug makers, the plaintiffs’ bar is attacking all levels of the health-care distribution chain. Some of Trial Lawyers, Inc.’s favorite targets, nonprofit hospitals and nursing homes, are the health-care providers that minister to our nation’s most vulnerable—the poor and the elderly. And as if its effects on health costs were not bad enough, the litigation industry has focused its crosshairs on managed- care providers, who, while politically unpopular, are crucial to dispersing risk and providing for health care at affordable cost.

It is also important to emphasize that the direct costs of healthcare litigation only begin to scratch the surface of the toll that these predatory lawsuits exact on our economy—and on our health itself. Med-mal lawsuits tend to inflate health-care costs by encouraging “defensive medicine”—unnecessary procedures and referrals that doctors and hospitals prescribe in order to limit their exposure to future litigation. Studies suggest that defensive medicine costs are several times higher than the direct liability costs themselves.[10]

Nor are we made safer by product-liability litigation over drugs and medical devices. Such suits inevitably drive innovation from the marketplace that would lead to net health improvements not only for U.S. society but for the entire world. Since any drug manufacturer might be held accountable for unanticipated liability of the magnitude of Vioxx and Fen-Phen, every drug company will consider such numbers in its research and investment decisions, and many drugs that would otherwise save lives or improve the quality of lives will never reach the market.

If Obama and his Congressional allies had been at all serious about bending the curve, they would have tackled this enormous problem. Instead, they gave the trial lawyers a pass. Indeed, to the contrary, as David Frum observes, they're trying to give trial lawyers a boost:

Small but sophisticated interest groups use big political battles to gain special advantages. Health care reform is, of course, the biggest battle of them all, with trillions of dollars at stake.

On Saturday night with the House vote in favor of the health reform bill, the trial lawyers sliced themselves a nice little piece of that bonanza.

It's Section 2531 of the bill -- to be precise Section 2531(4)b -- and it provides as follows:

The new health bill will empower the Secretary of Health and Human Services to make grants to states that reform their medical malpractice systems. There are just two conditions: Those reforms must not "limit attorneys' fees or impose caps on damages."

Which is like saying that we're going to encourage you to develop a personal weight loss plan that includes neither exercise nor changes in diet.

In sum, it's a massive increase in government control that won't reduce costs but rather is likely to bankrupt our posterity.