The GOP's Obamacare Lite: Retreat, Retweak, Rename, Renege

We have always said "repeal and replace" was a political scam perpetuated by the spineless GOP congressional leadership, and that it would soon bite the clueless Team Trump in the posterior. Now comes the outline of Speaker Ryan's plan, and self-evidently it's a big nothing-burger that makes a complete mockery of the Donald's campaign pledge.

In fact, let's just call it Obamacare Lite and here's why. Health care socialism---that is, cost pool averaging and elimination of market pricing---is what will finally bankrupt America. Under current law, government programs will cost at least $24 trillion over the next decade. That staggering sum includes CBO's $16.5 trillion cost estimate for the Federal medical programs----plus $4 trillion in tax benefits for employer health plans and $3.5 trillion for the state share of Medicaid.

Those humungous figures sound unfathomable, but look at it in relative terms. The government health care total is nearly double the 10-year cost of $13.2 trillion for social security, which by 2027 will cover 80 million retires, dependents and disability recipients. And it would amount to 7X the $3.3 trillion cost for all non-medical means-tested benefits like foods stamps and welfare over the next decade.

But here's the thing. At least these latter entitlement programs are cash-based and closed-ended owing to eligibility limits and demographics. By contrast, health care socialism is the most fiscally explosive entitlement ever conceived because it destroys market discipline on costs-----even as it corrodes individual accountability for the ultimate drivers of medical care demand such as personal fitness and nutrition habits and practices.

In our judgment, the GOP's swell new Obamacare Lite will end up costing $23 trillion or 95% of the current baseline over the next decade, and will leave all the anti-market and collectivist features of the existing health care doomsday machine fully in place.

Worse still, it will take the GOP a full year or even more to get a heavily diluted version of Obamacare Lite to Trump's desk for signature. During that legislative ordeal of shuffling the deck chairs on the medical care Titanic, the rest of the fanciful Trump Stimulus----sweeping tax cuts and an infrastructure boom---will fall by the wayside, thereby assuring a financial crash and renewed plunge into recession.

The source of the public anger that Trump tapped into with his strident attack on Obamacare during the campaign was the runaway cost and bureaucratic rigidity of the entire US health care system, not just the soaring premiums being experienced by the 8 million or so enrollees in the state health exchanges. Yet Obamacare Lite does exactly nothing about that as we will demonstrate below.

But first here is just one example of the old Ryan double-shuffle at work in his newly released outline. The Medicaid expansion piece of Obamacare is projected to cost $1.1 trillion over the next decade owing to 15 million new beneficiaries on the rolls by 2026. This huge expansion is being driven mainly by increasing the Medicaid eligibility threshold to 133% of the poverty line.

Presumably, the GOP repeal plan would save Uncle Sam the $1.1 trillion price tag---a goodly sum that Washington doesn't have anyway. But when you read the fine print, it is evident that despite all the liberal arm-waving Ryan's plan doesn't roll back the Medicaid coverage expansion at all!

It just reduces the 90% Federal matching rate for these new populations to the normal 57% (average for all states), meaning that savings would amount to just $300 billion through 2027. But that won't go to the bottom line either because Ryan recycles $100 billion of that into a new handout called "innovation grants" for funding high risk pools and other state determined benefits.

And that's just for starters. The GOP governors are in town this weekend and you can be sure that pumping more money into the "innovation grant" side-car has already been promised right and left.

As an analyst posting on the liberal Vox blog noted, the Ryan draft already amounts to a huge escalation from the more measly amounts contained in earlier GOP plans:

This is significantly more generous than other Republican proposals for how much to spend on the especially high-cost patients. Ryan’s (original) plan, for example, would put $25 billion toward the high-risk pools over a decade ($2.5 billion per year) and keep them running indefinitely. The Price plan envisioned only $3 billion for high risk pools over three years.

Likewise, the Ryan draft repeals Obamacare cutbacks for Disproportionate Share Hospital (DSH) allotments of $60 billion. That's another sop to the Governors and hospital lobbies which will chew up more of the putative "repeal" savings.

Yes, the Ryan draft does say that Federal Medicaid funding at some unspecified date in the future will be converted into a per capita based grant, which makes sense in theory until you look into the detail. It turns out that a base year per capita "allotment" will be determined for each category of Medicaid beneficiary-----aged, blind, disabled, children, adults---and that allotment will be multiplied by the current year number of recipients for each category to determine total Medicaid funding for each state..

Moreover, the per capita amount for the categories listed above will be determined "by each state's average Medicaid spending in a base year" and will be escalated annually by an "inflationary index". Of course, neither the base year nor the index details are specified.

Folks, we have some considerable experience in the legislative sausage factory. When the Republicans get done haggling over the total amount of the above referenced "innovation grants" and the nitty-gritty details of the per capita allotment mechanism, it will be a miracle if Obamacare Lite saves a single net dime from the $8.5 trillion combined Federal/state spending for Medicaid built into current law over the next decade.

Yet our point is not simply about runaway fiscal costs. Medicaid is in fact that dumping ground for 70 million people who are priced out of the nation's egregiously bloated health care system because of poverty or insufficient income to pay the huge premiums needed to buy insurance coverage and delivery system access.

So Ryan has no plan to cut Medicaid because he has no plan to attack the underlying inflationary bias of the entire health care system. All the sturm und drang of the coming battle will be about jiggering Medicaid reimbursement formulae in a manner that satisfies red state governors and congressional delegations, not fixing the relentless cost escalation that is driving Medicaid costs.

Needless to say, the only solution to the latter is three-fold. First, there must be a sharp diminution of the massive government fiscal transfers flowing into all sectors of the system---Medicare/Medicaid, employer plans and the individual coverage market. After all, the US spends an incredible 18% of GDP on the health care system and gets no better results than most European democracies at 10-12%.

Secondly, free market pricing, resource allocation and utilization discipline must be introduced back into the health care sector in lieu of the pervasive and dysfunctional third party insurance and payments model.

And finally, that means a drastic rollback of third-party payments for medical services in favor of out-of-pocket purchases by financially motivated and attentive health care consumers.

Against these requisites of true health care reform, Ryan's plan is all hat and no cattle. Its proposed substitution of Medicaid block grants, more generous health savings accounts and tax credits for the core features of Obamacare have nothing to do with pro-market reforms. Obamacare Lite is just one more example of Ryan's typical content free rhetoric about relying on market forces when in fact his policies are simply a more medical cartel friendly form of state action.

The truth is, there is no longer any such thing as free markets in the health care sector; it is dominated by provider cartels, rigid government funding programs and the perverted incentives of the third party payment system.

In fact, the underlying problem with the bloated US health care system---of which soaring Medicaid costs are only a symptom--- is too much insurance, not too little competition; and too much government money in the system regardless of whether the latest dollop is channeled through the Obamacare exchanges or Health Savings Accounts (HSAs), tax credits and block grants.

And most important of all, there are few market-based, price-sensitive medical care consumers----just several hundred million cost-indifferent prepaid patients.

That's the essence of the matter. When everything is paid for by third-parties, you do not have price-conscious, shopping-oriented, cost-minimizing consumers who have their own money at risk.

America's vaunted consumers, in fact, have been economically euthanized by the current system; it turns the throngs patrolling the aisles at Wal-Mart or relentlessly searching on Amazon for bargains in everyday life into zombie patients who sit around the doctor's office instagraming on their iPhones waiting to be seen for a visit that will be charged to an anonymous payor.

Needless to say, there is no such thing as an efficacious free market when their are no real consumers. What passes for the health care market today is just a bureaucratic clearing house where provider cartels attempt to maximize their billings while insurance companies, HMOs, PPOs and utilization review and pre-approval agencies seek to minimize what they certify for payment.

The consequence is high prices, endless hassles over coverage and pre-approvals and a complete loss of consumer sovereignty over their own health care costs and quality. And that is what the public is fundamentally objecting to under the rubric of "Obamacare".

Yet soaring premiums coupled with rapidly rising deductibles and copays and intensifying utilization and "gate-keeper" review hassles---cannot be remedied until the underlying problem of a third-party payment system is addressed head on.

As we suggested above, the sweeping anti-Obamacare sentiment that Trump tapped into, in fact, is about the fact that these problems afflict the entire system---including the 160 million universe of employer provided coverages. The sticker shock which hit the tiny sliver of the population (about 8 million) using the Obama exchange bronze and silver plans only provided a dramatic whipping boy for Trump and the GOP politicians to finally crystallize the issue in the 2016 elections.

As we document below, the nation's run amuck third-party payment system has been metastasizing for more than a half century. In an ironic way, therefore, the one useful thing that Obama actually did during his Presidency was to put a patch-work "top hat" on the margins of the system. That is, he brought in a considerable share of the remaining 25-40 million "uncovered" citizens and gave the whole enchilada a new name---Obamacare---that could be politically attacked.

The latter succeeded splendidly, but the GOP is completely blowing the political opportunity it has provided. Obamacare Lite does not challenge the failing fundamentals of the current health care system; it's a cop-out which reinforces everything which is wrong with it. Abolishing the Obama health exchanges or rejiggering the Medicaid expansion will do absolutely nothing to curtail soaring costs and premiums and intrusive efforts at utilization control of providers.

In fact, the Ryan plan simply replaces the $700 billion cost over 10-years of the Obamacare subsidies to the state exchanges with a generous system of HSA (Health Savings Accounts) allowances and tax credits. Thus, the maximum tax deduction for HSAs would be doubled to $13,000 per family and universal tax credits of up to $4,000 would also be available for recouping the cost of individual health insurance policies outside the employer based system.

Like most other features of the Ryan outline, these GOP substitutes for the Obama exchanges have also been escalating in generosity and fiscal impact as the process of getting real on Capitol Hill has unfolded. The proposed levels in the Ryan outline are now more than 2X as expensive as similar provisions in the original Price bill.

Accordingly, we are quite confident that Obamacare Lite will end up re-allocating all of the $700 billion of state exchange subsidies to substantially enhanced HSAs and tax credits.

Besides that, replacing Obama's income-based graduation of tax credits for the GOP's aged-based system is truly whacky. Thus, the Ryan tax credit would be $2,000 for those under 30; and then it would escalate to $2,500 for 30-40 year olds, $3,000 for 40-50 year olds, $3,500 for 50-60 year olds and $4,000 over 60.

That is, Bill Gates at 61 and $83 billion of net worth would get $4,000 and a 28-year old couple working three burger joint jobs and living in mom's basement with their three kids would get $2,000. Not only can this bit of idiocy be infinitely demagogued by the Democrats, but it deserves to be because it's based on the wrong principle.

To wit, the Ryan plan's bloated tax credits and HSA deductions are designed to encourage workers outside the walls of the 160 million employer plan universe to buy health insurance from the individual/family plan market. But those new GOP tax subsidies will never keep up because it is the giant employer plan world which drive costs in the delivery system.

On this crucial issue, historical perspective is essential because the inherent "recency bias" of the status quo can be blinding. But consider where all of this started circa say 1960. At that time the GDP was about $55o billion and the nation spent $27 billion on health care in all forms----from doctors to hospitals and vocational rehab----or about 5% of GDP.

In per capita terms that amounted to just $145 per person, but the startling thing is that $70 of that or nearly half the total was paid for out-of-pocket. Indeed, third-party insurance of all types only paid $40 per capita and just $9 per capita was from government programs.

Fast forward 55 years and the health care payments landscape is unrecognizable. Third-party payments in 2015 amounted to $7,450 per capita or 186X more than in 1960. And self-evidently, that is not all inflation or economic growth. The CPI has risen by about 8X during that span and  nominal GDP per capita is up by about 18X.

Stated differently, total health care spending of $3.2 trillion in 2015 amounted to 17.8% of GDP compared to just 5% back in 1961. By contrast, out-of-pocket spending for health care by US households in 1960 amounted to 3.2% of personal income compared to only 2.0% in 2015.

That is, the share of national income devoted to health care has risen by 3.5X while the bite out of household cash budgets has declined by nearly 40%.

Moreover, there is no doubt about how this transpired. The greatest of all abominations on the free market is employer provided health insurance, a product that would not exist if it were taxed like other wage income and which is not insurance at all but merely a form of prepayment for health services. Like many of the other deformations which distort the free market, today’s giant $350 billion per year tax subsidy for employer health plans (the combined impact of the exemption from both income and payroll taxes) was a New Deal special (wartime phase when health plans were excluded from wage controls).

The rest was history: So-called employer health insurance plans drove a giant wedge between the higher prices received by doctors and hospitals and the steadily shrinking out-of-pocket costs felt by medical service consumers.

And, yes, it was some kind of wedge. In 1960, private insurance amounted to $5.8 billion. That covered just 22% of total health care expenditures and amounted to only 1.3% of personal income.

By contrast, private health insurance---almost entirely employer plan provided----was $1.07 trillion in 2015 or 107X its 1960 level on a per capita basis. It amounted to 7% of personal income----far more than the 2% consumers spent out of their own pockets.

Owing to the inherent dynamics of the third-party payment system, in the fullness of time health-care inflation came to occupy its own perch far above all others. During the last half-century, for example, the consumer price index has risen by 8X, average wages by 10X and hospital costs per day by 40X.

Inflation in physician costs, drugs, lab tests, and most other health services has been only slightly less explosive, but the underlying cause is the same. That is, routine health services are not insurable risks because both providers and consumers heavily drive the frequency and cost of service.

In certain extreme demographic strata, for instance, the rate of obesity and diabetes is so high that health coverage amounts to providing arsonists with fire insurance. Likewise, it has long been demonstrated that the incidence of a variety of surgical procedures per 100,000 population is a function of the number of surgeons in the catchment area.

In truth, employer-provided health insurance is one of the great deformations of our times, and is no more an honest form of free market insurance than Social Security pensions. Instead, it is a form of tax-subsidized cost pooling in which overutilization, overpricing, and free-riding is endemic.

But the insuperable problem is the massive spillover on innocent citizens. Rampant health-care inflation means that much of the non-employer-plan population is eventually priced out of the health-care system, including the poor, the retired, the self-employed, and those with preexisting conditions. And so we got Medicare, Medicaid and Obamacare, respectively.

That is, one market disturbance by the state begat another and another, and now the GOP delivers up Obamacare Lite, too.

Needless to say, use of health-care services thereby became utterly divorced from financing their costs, and in the process two great deformations of the state quickly emerged. Since there was no means test on Medicare, the entire retired population became a potent political force against any patient cost-sharing measures that might have helped contain the explosion of costs owing to the third party (i.e., taxpayer) payment system.

More importantly, Medicare and Medicaid were built on a misbegotten combination of socialism for the beneficiaries and capitalism for the providers. While both programs attempt to regulate providers through utilization controls and reimbursement caps, this cumbersome and bulky bureaucratic machinery fights on an inherently uneven battlefield; that is, the K Street and PAC-dominated milieu of Washington where virtually every medical specialty, supplier, and type of institutional medical care facility has organized representation.

The proof that Medicare and Medicaid function in the realm of crony capitalism, not market capitalism, is in the pudding. Before these programs were enacted, total government insurance and other health care funding in 1960 amounted to just $1.7 billion or 0.3% of GDP and $9 per capita.

Today the combined cost of Medicare/Medicaid and other government programs amounts to $1.5 trillion or 8.5% of GDP. That amounts to $4,800 per capita or 530X more than was spent per capita in 1960.

Moreover, government insurance and medical subsidy programs---regardless of how Obamacare is replaced---will reach $2.4 trillion, or 10.5 percent of GDP by 2026.

Yet it goes without saying that the medical needs of the elderly and the poor did not escalate by a factor of 9 percent of GDP over the last fifty years.

What happened was that the state created massive insurance pools for an uninsurable service, and then invited the medical profession to morph into Washington’s greatest crony capitalist lobby. The American Medical Association, for instance, fell on its sword in opposition to Medicare in 1965, but in 2010 it sold its soul in support of Obamacare in exchange for a more doc-friendly control régime, the very thing which caused the cost of Obamacare to explode in the years after enactment.

In fact, Obamacare is the endgame of the 74-years ago carve out (from income and payroll taxation) for employer health plans. The combination of giant employer-based health cost pools and the even larger ones run by Medicare and Medicaid have not only driven health inflation skyward, but have also generated a noxious system of price discrimination that would be wholly unnatural on the free market.

The so-called big buyers, consisting of large plans and managed-care operations, have extracted ever larger “discounts” (25 to 75 percent) from “rack rates” ( i.e., sticker prices) for their plan participants, thereby forcing rack rates higher and higher for everyone else including small employer plans and individual insurance buyers.

Accordingly, the Obama health exchanges came about essentially because another component of the population was flushed out of the system. That is, self-employed and workers in part-time jobs and small businesses became the third wave of citizens needing state intervention to compensate for the original employer-paid insurance distortion.

Their claims arose for the same reason as Medicare and Medicaid; namely, part-time and self employed America was priced out of the crony capitalist health-care system in the same manner as the elderly and the poor.

Yet with eligibility for state-run health exchanges under Obamacare reaching up to $90,000 per family, the cost explosion from still more health-cost averaging of pre-paid plans subsidized by the public purse has become virtually unimaginable.

So what has actually happened is that the nation's crony-capitalist-driven healthcare system is devouring the American economy, and the figures which prove it could not be more dispositive. To reiterate, in 1960 national health expenditures amounted to $145 per capita and hardly 5 percent of GDP. By 2015  those figures had grown to $10,000 per capita and 17.8 % of GDP.

To be sure, these trends are widely known to the policy wonks, and widely lamented, too. But the backstory is far less noted and is the reason that the Keynesian state in America is headed for inexorable insolvency.

Namely, as the free market economy continues to fail owing to the burdens of debt, money printing, and fiscal profligacy, more and more of the population will be flushed into the state-funded pools of Medicare and Medicaid; and that will be further supplemented by the new tax credit, HSA and block grant mechanisms and expedients that will be stuffed into Obamacare Lite as the White House and Congressional Republicans attempt to cobble together final legislation that "covers everyone" at lower cost.

No, it will cover "everyone" but only at nearly the same crushing cost as the current system. The Ryan plan even retains the ban on pre-existing conditions, albeit allowing insurers to charge 130% of the standard rate.

Yet near uniform pricing regardless of actuarial risk is at the heart of all that is wrong with the current system. It amounts to cost averaging of giant insurance pools-----or socialism-----when what is needed is efficient pricing of individual risk.

But absent structural change and the abolition of employer covered health plans and the $4 trillion of tax subsidies they are slated to receive over the next decade, there is little hope for improvement. Without a return to an out-of-pocket, cash-based consumer payment system (perhaps supplemented by true catastrophic insurance), Obamacare Lite will accomplish virtually nothing on the cost containment front; and it will also end up generating even more burdensome restrictions on patient health care choices than already exist.

Yes, the GOP would argue that even the limit on deductibility of employer plans at the 90th percentile of premium costs it is now proposing in the Ryan outline will generate waves of adverse political  backlash. But that's because in all its cheap-shot attacking of Obamacare, the GOP never once explained the real source of the problem to the American public.

Besides, there is a simple way to abolish employer provided health plans that would be highly popular. Namely, mandate as a condition of employer tax deductibility for such plans that any employee can elect to take the insurance value of his employer's plans in cash. There would be a veritable stampede of tens of millions of workers to accept that option, and to use some of the proceeds to buy their own catastrophic insurance on a revived insurance market.

But the GOP is owned by the insurance companies, HMOs and organized provider groups. Accordingly, this logical solution the baleful legacy of FDR's dead hand would never even occur to the so-called free market conservatives who profess to lead the GOP in Washington.

So as the fiscal crunch in the Imperial City intensifies, the crony capitalist gangs which fed on these giant pre-paid health pools will resist controls and cost containment with a vast mobilization of lobbying power and campaign lucre. It is the ensuing hand-to-hand combat in the corridors of Washington which will further paralyze the fiscal process; and it is the asymmetrical nature of the contest which will ultimately break the state.

The Donald and many of his conservative supporters in the GOP back-benches mean well, of course. But under the deceitful leadership of Paul Ryan and his henchman, they are heading into a Swamp far deeper than any of them can possibly imagine.

At the end of the day, huge political capital will be consumed to enact Obamacare Lite, but it will not make America's health care system great again. It will only trigger the political conflagrations that are inherent in an irrational and dysfunctional third-party payment system that has become hideously costly due to 75 years of Washington policy machinations.

And now there's even more to come.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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