Ducking the Medicare Crisis

Originally published in the New York Times

NESTLED within the many commendable aspects of President Obama’s health care plan — including the individual mandate — sits a problem that has gone virtually unnoticed by commentators obsessed with the Supreme Court’s review of the law: how to pay for it.

About 65 percent of the cost of the Obama health care law is supposed to be met by Medicare expense reductions and tax increases totaling roughly $1 trillion over 10 years. The deficiency with this plan is that it amounts to double-counting, using urgently needed Medicare economies to finance the new law.

Don’t get me wrong: We need to extract all sensible savings from Medicare and consider revenue increases to ensure its solvency as baby boomers swell its rolls. Thanks to escalating health care costs and repeated sweetening of benefits without commensurate increases in revenues, Medicare was underfinanced by a staggering $37 trillion as of Sept. 30.

That’s the amount — about two and a half times the annual output of the United States economy — that would have to be deposited into the Medicare trust funds to adhere to the principle that members of each generation would contribute enough to Medicare while they were working to pay for their care after age 65.

But the politics of Medicare have been poisonous, so toxic that Democrats haven’t been willing to engage seriously on the issue, while Republicans have advanced a proposal that would eviscerate Medicare rather than preserve it.

The current effort to trim Medicare costs, through initiatives like limiting payment increases to health care providers, amounts to picking the low-hanging fruit. What comes next will surely be more painful and contentious.

Given that context, the government’s accounting practice — counting $748 billion of cost savings and $259 billion of revenue increases toward both Medicare and the cost of the Obama plan — is particularly troubling. Moreover, this problem is largely hidden from public view.

Under Washington’s delusional rules, budget crunchers in both the White House and Congress credit this $1 trillion twice: once in calculating that the care law will generate more revenues than costs, and again in concluding that the Obama plan will chip away at the Medicare problem.

Unfortunately, the real world does not permit the luxury of double-counting. The truth is that the law will either be fully paid for or it will begin to address the Medicare problem — but not both.

There’s no doubt that both parties have similarly gamed the system over the years. Back in 1997, $247 billion of expected Medicare savings was funneled into tax cuts and a children’s health plan as part of a deficit reduction package negotiated by President Bill Clinton and Newt Gingrich, the Republican speaker.

That bit of history merits close attention, because those efforts to cap reimbursements to providers proved unrealistic and were mostly never realized.

While the Obama legislation employs cutting-edge ideas for managing Medicare’s outlays, the program can’t be saved just by squeezing reimbursement rates to hospitals, laboratories and the like. In assessing the new law, the Centers for Medicare and Medicaid Services warned of exactly these risks.

To properly address the competing needs of the Affordable Care Act and Medicare, let’s start with more transparency. The government should act like a company that provides investors with separate profit and loss data for different divisions — without double-counting. Next we need a better plan for financing the health care law, which will be challenging because actually paying for federal programs (that is, increasing taxes) has become a no-go zone in Washington.

That’s further complicated by the admirably redistributionist nature of the Obama law. The preponderance of the Affordable Care Act’s costs go toward extending insurance coverage to an estimated 30 million Americans making less than $44,000 per year (or $89,000 per year for a family of four), about 10 percent of the population.

Meanwhile, a hefty chunk of the new revenues comes from increased taxes on the earnings and other income (like dividends and interest) of affluent individuals, and an excise tax on employers offering so-called Cadillac health plans.

It’s fine to ask the wealthiest to pay disproportionately for important social programs. But the top taxpayers, who are already on the hook for around $260 billion of the law’s costs, can’t be expected to shoulder the entire $1 trillion burden that would flow from intellectually honest accounting.

At a time of trillion-dollar deficits, new initiatives must be paid for in reality, not just the world of Washington arithmetic. The effort to curb Medicare costs must continue and accelerate — but all sides need to be more honest by counting these savings just once, not twice.