Center for Business & Public Policy
Collaborative blog exploring the relationship between market forces and public policy.

Hot off the Internet, the Supreme Court has upheld the “Obamacare” individual mandate, which requires most people to buy health insurance or else pay a tax.  The ruling isn’t available yet, but I have to say that I’m really, really impressed by this decision because it shows that the Supreme Court was able to look beyond the politics of the situation and the poor argument by the administration in defense of the bill, and rule according to the law.

The argument against the mandate was that it violated the Commerce Clause of the Constitution in that it regulated economic “inactivity” rather than activity.  That is, it forced people to participate in the individual insurance market even if they didn’t want to.  The administration flubbed its defense on this point by failing to show how health insurance markets are different than most other markets, giving the Supreme Court a limiting principle that would prohibit the ruling from establishing that Congress can regulate anything it wants.

It sounds like the Supreme Court did not buy the argument that the indivual mandate was justified under the Commerce Clause.  But, in some sense this is all a red herring.  The individual mandate is a tax, plain and simple.  People who do not buy health insurance must pay a fine to the IRS.  A fine paid to the IRS is a tax.  The Democrats and the administration tried to hide the fact that this was a tax while rallying support for the bill for obvious reasons.  Nobody wanted to be seen as raising taxes, and President Obama had promised during the campaign that he would not raise taxes for middle income Americans.  But, just because the Democrats wanted to pretend that this wasn’t a tax, that doesn’t make it true.  It’s a tax. And, Congress has the right to impose taxes.

Despite the fact that the administration did not emphasize the tax aspect of PPACA’s indivual mandate in either its presetation of the bill to the public or in its defense before the Supreme Court, the Court was able to step beyond the narrative that was being fed to them and identify the key legal principle involved.

Whether you support the bill or not, I think that in a post Bush v. Gore / Citizens United world, when people are wondering whether the Supreme Court really is an impartial arbiter of the law, you have to see this as a great moment for the Court.  Hooray for them.

More after I have a chance to look at the ruling.

A war of words (and numbers) has broken out in the policy wonk world over the effect of Obamacare on the deficit.  It is important, entertaining, and confusing.  This blog attempts to bring a bit of clarity to the debate.    

 It began last week with an article, written by Charles Blahous and issued by the Mercatus Center, that argued that Obamacare increased the deficit.  The piece was discussed in the Washington Post (and on my blog) on the day it was issued.

It took almost no time at all for Paul Krugman to denounce the study.  He first began, in typically unfortunate fashion, by attacking the credibility of the author through a suggestion that Blahous was just another Koch-funded crazy who should not be believed.  He then went on to make a slightly more substantive argument about the fact that Blahous’ result rested upon a view (that Krugman called “bogus”) about what Obamacare spending should be compared with.

Blahous publicly responded, defending his position.  A few days later, former CBO Director and former OMB Director Peter Orszag joined the broadside attack against Blahous.  Peter also joined in the credibility attack and went on to also attack Blahous’ choice of baseline. 

So who is right?   The point of this post is to try to provide a bit of clarity on the issue. 

Before proceeding, I should disclose my own personal biases.  First, I consider both Chuck Blahous and Peter Orszag to be personal friends – and I believe both would agree with that assessment.  I have known and worked with both of them for over a decade.  I have an incredibly high level of respect and admiration for both Chuck and Peter as public servants, as intellectuals, and as individuals.  This is not the first time they have publicly tangled (they did so frequently over Social Security reform).  Ideologically, I almost always find myself on the same side of issues as Chuck.  But Peter is an outstanding economist, and when his views are also echoed by other highly respected economists like David Cutler of Harvard (one of the most highly respected health economists in the world, who engaged in a debate with Chuck on my Facebook page), I often find myself temporarily in a state of cognitive dissonance.  When this happens, I try to figure out the core reason for the disagreement.  Is it different values (e.g., perhaps one cares more about redistribution and the other more about economic efficiency)?  Is it different assumptions (e.g., fundamentally different views about how the politics will play out or on how future health costs will evolve?)  In such cases, two very smart people can disagree on policy, without either being “wrong.”

But this debate seems different.  This is – or at least should not be – an ideological debate.  The question here is deceptively simple.  It is a debate over a “fact.”  Either Obamacare increases the deficit, or it does not. 

So who is right?

The correct answer is “it depends.”

To understand the long-term effect of any public policy change, one must first ask the question “compared to what?”  And this is where Blahous and Krugman/Orszag differ.

The following is a FICTITIOUS conversation between Blahous and his critics.  I am trying to be clear on their views.  The material in “quotes” is taken from their writing.  The rest is my own attempt to explain their views, and I alone am responsible for any misattributions.  The Orszag quotes can be found here.  The Krugman quotes are here.  Blahous’ views can be found in his original paper, his follow-up post on Forbes, and a new post at E21.  The use of the term “Obamacare” is mine.    

Me:  “If I look at the new spending programs under Obamacare, and compare that to any spending reductions or tax increases under Obamacare, does the program increase or decrease the deficit?”

Blahous:  Over the next ten years, the increases in spending from Obamacare – Medicaid/CHIP, new exchange subsidies, making full Medicare benefit payments for an additional eight years, etc. – exceed the ways that it reduces spending or raises taxes by $346 billion through 2021.  (This is based on a CBO projection of $352 billion adjusted slightly by Chuck.)

Krugman:  This is just “another bogus attack on health reform.”

Orszag:  Indeed.  The cost savings exceed the new costs by $123 billion through 2021.   

Blahous:  But you are both ignoring the cost of extending the solvency of Medicare!  One of the effects of Obamacare is to extend our full financing commitment to Medicare through 2024.  This costs money.  Add up all the things the legislation does, and it is $346 billion more than the legislation’s cost-savings.

Orszag:  This is a “trick.”  The Blahous analysis “begins with the observation that Medicare Part A, which covers hospital inpatient care, is prohibited from making benefit payments in excess of incoming revenue once its trust fund is exhausted. He therefore argues that the health reform act is best compared to a world in which any benefit costs above incoming revenue are simply cut off after the trust-fund exhaustion date. Then, he argues that since the health-care reform act extends the life of the trust fund, it allows more Medicare benefits to be paid in the future. Presto, the law increases the deficit by raising Medicare benefits.” 

Blahous:  Look guys, this is really simple.  Without the ACA, Medicare would have been insolvent in 2016.  Under the new legislation, we are making a binding commitment to make full benefit payments through 2024.  These are real payments to real people.  How can you ignore the extra commitments through 2024?  After all, you claim the Medicare solvency extension as one of the achievements of the ACA.

Krugman:  “OK, this is crazy. Nobody, and I mean nobody, tries to assess legislation against a baseline that assumes that Medicare will just cut off millions of seniors when the current trust fund is exhausted.”

Blahous:  But under a literal interpretation of current law – which is how most budget scoring is done in Washington – a law that extends Medicare for additional years would be scored as a cost.  Do you acknowledge that under a literal change in law, this legislation puts us $346 billion deeper in the hole? 

Krugman:  The literal law does not matter.  Everyone knows that Congress is not going to allow Medicare benefits to be slashed in 2016.  To suggest these costs are a cost of Obamacare is misleading.  “In general, you almost always want to assess legislation against ‘current policy’, not ‘current law’; there are lots of things that legally are supposed to happen, but that everyone knows won’t, because new legislation will be passed to maintain popular tax cuts, sustain popular programs, and so on.

Blahous: But we have to abide by these budget rules in other contexts.  For example, let’s look at the Alternative Minimum Tax. The Congressional Budget Office counts the revenue from the AMT in its baseline budget projections, even though it knows full well that Congress is likely to continue to provide AMT relief before that revenue is collected.  Similarly with the “doc fix” in Medicare!

Orszag:  Yes, but by your logic, if we just assume that Medicare benefits are cut when the trust fund runs dry, or that Social Security benefits are cut when its trust fund runs dry a few decades later, then we do not have a long term budget problem!  Indeed, Chuck, you are “far too modest. The government is not legally allowed to issue any debt above the statutory limit, so (you) should have assumed the deficit would disappear when we reach that limit at or around the beginning of next year.”

Blahous:  Look, when you make Medicare benefit payments, real money leaves the US Treasury.   We can’t send the same check to Medicare and to Medicaid.  If you want to take credit for all the benefits of the ACA – one of which was to extend Medicare – then you have to account for the Medicare commitments as well as the Medicaid ones.  Even if you don’t think we would have allowed benefits to be suddenly cut, historically Congress has always enacted other savings to avert Medicare insolvency.  And, now that Medicare solvency is extended through 2024, the pressure on Congress to enact further savings is reduced.  So it’s not only as a matter of literal law but as a matter of practical budgetary behavior that the ACA worsens the outlook.  No matter how exactly you think things would have played out under prior law, this legislation still worsens deficits by $346 billion relative to prior law.

Krugman:  Don’t believe any of this.  The Mercatus Center is funded by the Koch brothers.  The Koch brothers, by golly!!

Blahous:  Look guys, I am trying to make a real point here, not engage in character assassination.  If carried to its logical conclusion, this is not only a departure from interpreting actual law, it is also fiscally dangerous.  You guys are basically saying that there are no prior law restraints on Medicare spending.  So every time we extend the program’s solvency, it does not cost anything!  

Me:  Okay, guys, thanks for clearing that up.  I understand it all so much better now. 

—–

So there you have it.  A knock-down, drag-out battle over budget baselines.  The debate is not over the cost of things like the coverage mandate.  It is a debate over the proper way to account for an extension of Medicare’s solvency. 

To summarize:

Relative to a world where Medicare expenditures are brought into balance with revenues within the next few years (which does appear to be required under the literal reading of current law), ACA increases Medicare expenditure and the deficit.  This is the Blahous view.   

Relative to a world in which we project current practice forward, ACA reduces Medicare expenditure and the deficit.  This is the Krugman and Orszag view. 

I think most reasonable people can understand both points.  And I don’t think this really calls for name-calling and credibility-questioning.  But in Washington, that is what passes for debate.

Most ordinary people probably think that what we should be doing is making some cuts, but not cut so deeply as to eliminate the entire Medicare shortfall.  If so, the effect on the deficit is better than if we did nothing, but worse than if we solved the problem. 

So most people probably think the “truth” (whatever that means in this context) lies somewhere in the middle.

Last week’s U.S. news was dominated by the oral arguments before the Supreme Court of the United States (SCOTUS) on the constitutionality of the Patient Protection and Affordable Care Act (PPACA), also known more succinctly as the Affordable Care Act (ACA), or, simply, “Obamacare.”  Most of the news coverage revolved around legal issues, such as how to define a “limiting principle” that would distinguish health insurance from other goods and services.  A few of those analyses, including one by my colleague Nolan Miller at the University of Illinois, provided useful economic insights on these legal questions.

But what I have not seen much of – until now – is a careful analysis of the impact of repeal on the federal budget.  Yes, there is plenty of rhetoric around this topic, with Democrats arguing that PPACA saved money and Republicans arguing that it created a huge new entitlement.  But there has been very little careful analysis.

That changed today, when the Mercatus Center at George Mason University released a meaty new report written by Charles (“Chuck”) Blahous.  His analysis shows quite clearly that the Supreme Court now finds itself in the position of having an enormous impact on the long-run fiscal situation in the U.S.

As background, Chuck Blahous is one of two public trustees of the Social Security and Medicare trust funds, having been appointed to this post by President Barack Obama and confirmed by the U.S. Senate.  Previously, Chuck served all eight years of the G. W. Bush administration at the National Economic Council.  After spending over two decades in both the legislative and executive branches of the U.S. government, Chuck knows the ins and outs of federal budgets.  He is also widely respected on both sides of the aisle as a serious policy analyst.

In a nutshell, here is what Chuck’s careful analysis finds:

1. PPACA is expected to increase net federal spending by more than $1.15 trillion over the next decade.
2. PPACA is likely to add more than $340 billion, and perhaps as much as $530 billion, to federal deficits over the next decade.
3. Despite these realities, government scorekeeping rules lead to deep confusion over the fiscal impact, and have the effect of making PPACA appear less expensive than it really is.

How can this be?  In part, the law “relies upon substantial savings already required under previous law to maintain the solvency of the Medicare Hospital Insurance (HI) Trust Fund.  These do not represent new net savings … but substitutions for spending reductions that would have occurred by law in the absence” of this act.  There are other issues at play as well.

All of this is “public,” in the sense that it has been disclosed in scoring documents by the Congressional Budget Office (CBO). But the CBO is constrained to report the effect of government tax and spending programs according to various scoring rules – even when those rules deviate substantially from the likely political or economic reality.  Skilled politicians have learned to use these scoring rules to their advantage.

As Chuck points out in his paper:

“A full understanding of the ACA’s budget effects requires appreciation of the distinction between two important points:

1. CBO found that the ACAD would reduce federal deficits when a specific scoring convention was applied;
2. The same analysis shows implicitly that the ACA would substantially increase federal deficits relative to previous law.”

The paper is over 50 pages in length (including the helpful Q&A in the appendix), but is well worth a read if you want to know the details behind the calculations.

But if you don’t have time to read it, here is the bottom-line: “Taken as a whole, the enactment of the ACA has substantially worsened a dire federal fiscal outlook.  The ACA both increases a federal commitment to health care spending that was already unsustainable under prior law and would exacerbate projected federal deficits relative to prior law.  This is an unambiguous conclusion …”

Were the Supreme Court to strike down all or part of this Act, we should view it as an opportunity to revisit health care reform in a way that reduces, not increases, public spending.

The argument over the fate of the Patient Protection and Affordable Care Act, a.k.a “Obamacare,” is taking place before the United States Supreme Court this week.  Three questions are being considered.  The first is a technical question regarding whether the challenge to the law can be heard now or if it has to wait until someone actually pays the penalty the law imposes.  Perhaps this is an interesting legal matter, but there isn’t much economics there.  The second question is whether the individual mandate, which requires most Americans to buy health insurance or face a penalty, is a constitutional exercise of Congress’s power to regulate interstate commerce or not.  This is the key question, since, if the justices decide that Congress overstepped its powers in passing the law, the part of the law that results in nearly universal health insurance could be struck down.  The third question is, if the individual mandate is struck down, how much of the rest of the law will go along with it.

As I said, the second question is the key, and SCOTUS heard arguments on this question yesterday.  By all accounts, the administration bumbled it.  Here’s an excerpt from the New York Times:

But several of the more conservative justices seemed unpersuaded that a ruling to uphold the law could be a limited one. Justice Alito said the market for burial services had features similar to the one for health care. Chief Justice Roberts asked why the government could not require people to buy cellphones to use to call emergency service providers.

Justice Scalia discussed the universal need to eat.

“Everybody has to buy food sooner or later, so you define the market as food,” he said. “Therefore, everybody is in the market. Therefore, you can make people buy broccoli.”

Justice Alito asked Mr. Verrilli to “express your limiting principle as succinctly as you possibly can.”

So, the justices wanted to know if they allow the individual mandate to stand, what won’t Congress be able to regulate.  The administration’s response:

Instead of a brisk summary of why a ruling upholding law would not have intolerably broad consequences, Mr. Verrilli gave a convoluted answer. First of all, he said, Congress has the authority to enact a comprehensive response to a national economic crisis, and the mandate should be sustained as part of that response.

He added: “Congress can regulate the method of payment by imposing an insurance requirement in advance of the time in which the service is consumed when the class to which that requirement applies either is or virtually most certain to be in that market when the timing of one’s entry into that market and what you will need when you enter that market is uncertain and when you will get the care in that market, whether you can afford to pay for it or not and shift costs to other market participants.”

Huh?

Here’s what they should have said.  It is true that people need to buy burial services and food, but these markets differ from health care in that there is no threat of “adverse selection” as there is in health insurance, and adverse selection has the potential to make it impossible for individuals to purchase insurance at reasonable rates (i.e., the sick pay less than their expected cost of care and the rich pay more) unless that market is regulated.

Take the market for broccoli or burial services.  As the justices point out, it is true that everybody needs food or burial, eventually.  However, my ability to consume food or be buried does not depend in any crucial way on what others do.  In economic terms, we say that there is no “market failure” here.

Now, take the market for health care services.  Suppose there are two kinds of people.  Healthy people have expected annual health care costs of $1000, while sick people have expected annual health care costs of $11,000.  If there are equal numbers of healthy and sick people, then the average cost of caring for all people is (1000 + 11000)/2 = $6000.  Next, assume that individuals know whether they are healthy or sick, but health insurers don’t know whether a person is healthy or sick, or, as is done in the new health care law, are prohibited from using this information to charge different prices to healthy and sick people. 

Suppose the insurer charges a price of $6000.  If everyone purchased this insurance, the insurer would break even.  But, a person who expects to have only $1000 healthcare costs would not be willing to purchase this coverage, since by doing so they spend $6000 for something worth $1000.  A person who expects to so spend $11,000 on health care would be willing to buy coverage.  But, if the insurer expects that only sick people will buy the insurance, it will not be willing to sell it at a price of $6000, since by doing so it would lose $5000 on each policy.

In this example, the only sustainable outcome is where the insurer charges $11,000 and only the sick people buy insurance.  But, at this price, the sick people are no better off than they would be without insurance, and the insurer earns zero profit.  So, nobody benefits from this market.  In cases like these, we say that adverse selection (the fact that those who value a product the most are likely to be the most costly to serve) has led to a market failure.  In this case, the fact that the healthy are unwilling to purchase health insurance voluntarily makes it impossible for the sick to purchase it at a reasonable price.  It is this interdependence that makes health care markets and broccoli markets fundamentally different.

This market failure could be addressed by mandating that everybody had to buy insurance, as is done in PPACA.  In this case, the price of insurance would be $6000.  Firms would just break even, sick people would benefit from insurance, and healthy people would be forced to subsidize the sick against their will.

Rather than focus on the distinction made above, the administration has argued that the key distinction between health care and other markets is that there is a degree of uncertainty about future use in health care markets that is not present in other markets.  This case is empirically weak, and more importantly, not a market failure that requires government intervention.  They have also argued that even those who choose not to purchase health insurance often consume health care, and in many cases these costs are passed onto others.  This argument, however, would seem to fail the broccoli test: if not eating broccoli today means I’ll be less healthy and more likely to collect government benefits in the future, then, by extension, the government should be able to force me to eat broccoli.  I don’t think the administration wants to be making this argument (at least not today, in front of the Supreme Court).

The example I discussed above illustrates how the PPACA provisions that prohibit charging higher prices to sick individuals and the individual mandate work together.  The result is a situation where everyone is covered by private insurance.  However, there is clear redistribution from the healthy to the sick.  This may be desirable from a social perspective, and somewhere in the administration’s convoluted argument is the idea that the healthy are always at risk of becoming sick.  Whether you favor PPACA on social grounds depends on your individual preference for redistribution and, even if you are in favor of increased redistribution, whether you think intervening in health insurance markets is the best way to do it.  However, one thing that is indisputable is that health insurance markets are different from broccoli and burial markets.   The administration’s failure to effectively show that there is a bright line between the market for health insurance and broccoli might result in PPACA being overturned.

Late Friday afternoon, the Obama Administration announced that it was killing the CLASS Act, a controversial provision of Obamacare (the Patient Protection and Affordability Act) that was going to create a new, government-run long-term care insurance program.  The fact that they released this news late on a Friday should not come as a surprise, as this is a time honored trick for trying to bury bad political news (although as noted by Stefano DellaVigna and Joshua Pollet, this strategy does not have long-lasting benefits, at least for publicly traded companies!)  Undoubtedly, both sides of the political divide will try to spin this issue for political benefit, as it is the first part of Obamacare that has been ended.

Politics aside, however, the death of this program is a rare victory for good economics.  And we should give credit to the Obama Administration for killing it before it grew into yet another unworkable and fiscally irresponsible government program.

Early in the life of this blog (November 2009), in a post entitled “A Solution in Search of Problem,” I wrote about why the proposed CLASS Act (which went on to become law several months after my post) was fatally flawed.  In that post, I made the point that “the government has developed a solution to a supply problem that does not exist, but has failed to address the demand problems that do exist.”

In a recently issued NBER working paper, MIT economist Amy Finkelstein and I wrote in much more detail about the flaws of the program.  Here are a few of the points we make:

“Medicaid will likely impose a large implicit tax on CLASS benefits, just as it does on private insurance policies … Overall, the Congressional Budget Office (2009) has estimated that only 4 percent of the adult population would enroll in the CLASS Act program by 2019.”

“The pricing and financing of the program are controversial. Monthly premiums are to be set by the Secretary of Health and Human Services with a goal of maintaining program solvency over 75 years.  In practice, this means that premiums will likely be below “actuarially fair” levels. To understand why, imagine that individuals start paying premiums immediately, but the average payout will not occur for, say, 25 years in the future. To oversimplify, a 75-year “solvency” calculation counts 75-years’ worth of premium payments, but only 50 years’ worth of benefit payments. Thus a program could be technically solvent even though it is being run on a negative NPV basis. The financial problem is magnified by the fact that individuals below the poverty line and full-time students would be able to participate at only $5 per month (in 2009 dollars). A number of experts have also voiced concerns about adverse selection into this voluntary program, and have suggested that the program will face a troubled fiscal future.”

This program was a clear example of a program designed by people with good intentions, but who had such a frail grasp on basic economic concepts that they designed a program destined to fail. We should all just be glad that it was killed before it developed its own constituency and grew to become “too big to fail.”

Of course, we all knew this.  But, the Washington Post had a couple of interesting op-ed pieces last week that really drove home the point.  The fun part was that the two pieces, written by Charles Krauthammer and Eugene Robinson, appeared next to each other on my computer screen and exposed the disingenuousness of both the Democratic and Republican positions on the financial aspects of the Patient Protection and Affordable Care Act, aka “ObamaCare,” or, more neutrally, PPACA.

Let’s begin with Robinson, who takes aim at the Republican’s self-serving and somewhat hypocritical approach to the numbers in promoting their repeal of PPACA through the ominously-named “Repealing the Job-Killing Health Care Law Act.”  Now, the Republicans painted themselves into a bit of a corner on this one from the get-go.  Swept into the House majority on a promise to decrease the deficit, they were faced with the fact that PPACA, at least on paper, lowers the deficit over the next 10 years.  The fist bit of Republican tap dancing around this point came earlier this month when the new majority enacted new rules in the House specifying that every new law had to explain how any new spending it proposed would be offset by an equivalent cost reduction.  Deficits, after all, are bad.  This “cut-as-you-go” rule, however, specifically exempted PPACA repeal from this requirement.  So, I guess deficits aren’t all that bad after all.

According to Mr. Robinson, the Republicans, faced with the CBO’s projection that repealing PPACA would increase the deficit by $143 Billion over the next decade, took the position that the CBO “score” for the bill was disconnected from reality.  According to House Budget Committee Chairman Paul Ryan, “CBO scores what is put in front of them – and what Democrats put in front of them last year was legislation packed with smoke and mirrors to hide the impact of trillions of dollars in new spending.”  On the other hand, Republicans are putting a lot of faith in the CBO when they declare PPACA to be “job-killing,” saying it would eliminate 650,000 jobs.  But, according to Robinson:

“One problem, though: The CBO analysis contains no such figure. It’s an extrapolation of a rough estimate of an anticipated effect that no reasonable person would describe as “job-killing.” What the budget office actually said is that there are people who would like to withdraw from the workforce – sometimes because of a chronic medical condition – but who feel compelled to continue working so they can keep their health insurance. Once the reforms take effect, these individuals will have new options. That’s where the “lost” jobs supposedly come from.”

So, Republicans are not above picking and choosing which numbers to ignore and which to exaggerate to make their point.  On to the Democrats.

Krauthammer takes on the Democrats’ cooking the numbers in the original PPACA bill in order to make it look like it reduced the deficit when it will actually add to the deficit (i.e., new expenditures will be greater than new revenues in the long run).  Now, cooking the CBO’s score is a time-honored practice in Washington.  The key is this.  The CBO is the most gullible body in the government.  By law, they are required to take whatever Congress puts into a bill and score it as if it is actually going to happen.  So, if Congress tells them that they are going to spend $50 billion on a bridge to Hawaii and pay for it by taking all of Bill Gates’ money, CBO will come back and say “awesome.  That will reduce the deficit by $4 billion.”  As I said, this is nothing new.  Remember how the Bush Tax Cuts were scheduled to expire at the end of last year?  Same deal.

So, to cook the books on PPACA, the Democrats did the following.  The new taxes and revenue sources for health care were scheduled to start coming online almost immediately, while the new expenditures were scheduled to start much later.  So, according to Mr. Krauthammer, “the entitlement [PPACA]  creates – government-subsidized health insurance for 32 million Americans – doesn’t kick in until 2014. That was deliberately designed so any projection for this decade would cover only six years of expenditures – while that same 10-year projection would capture 10 years of revenue. With 10 years of money inflow vs. six years of outflow, the result is a positive – i.e., deficit-reducing – number. Surprise.”  And, Krauthammer argues, PPACA does the same with its new long-term care insurance program, where it starts collecting premiums immediately but doesn’t pay anything out for 10 years, resulting in a surplus, at least on paper, according to the rules.

Krauthammer also makes the additional point that although PPACA is supposed to decrease the budget by $230 billion (the numbers differ between the two articles), the way it does it is through offsetting $540 billion in new spending by $770 billion in new taxes.  This “radical increase in spending, topped by an even more radical increase in taxes” is probably not what most people had in mind when they heard that the bill reduced the deficit by $230 billion, and certainly much different than simply cutting $230 billion in government spending.  But, that’s perhaps a topic for a different day.

So, both sides are twisting the numbers and sloganeering.  Am I shocked like Claude Rains in Casablanca?  Well, I guess I am, which is to say, not shocked at all.  Am I frustrated?  Definitely, because there are real problems in health care that have to be addressed.  Even if you are a fan of PPACA, you have to admit that it was at most a first step toward reforming health care in this country.  Real progress is going to require cooperation on coming up with solutions.  As long as both sides are deliberately twisting the facts to score political points, we aren’t going to make progress.

Despite the Republican’s grandstanding on the issue of repealing PPACA, it’s not going to happen.  There is a glimmer of hope.  Along with the political theater, Republican leaders in the House are instructing committees to get to work on legislation to replace PPACA.  Without Democratic support, such legislation will never become law. But, maybe, just maybe, if the two work together, they can come up with something that actually improves on PPACA and begins to work on the excessive growth rate of health care costs in this country, which is what I and many others have said is the real ticking fiscal time bomb facing this country.

[Note:  I originally wrote this last week and scheduled it to post today.  Yesterday I read Uwe Reinhardt's post on the NYTimes Economix blog that expresses much the same sentiment with more real-world input and fewer of the blow-by-blow details.  If I hadn't written my post already, I might have just linked to his.  But, since the work is already done, I'll leave mine here.  If you are at all interested in health, I highly recommend reading everything Uwe writes at Economix.  Even when you don't agree on the conclusions, he's right on the facts and identifying the key issues.]

In the wake of President Obama’s falling approval ratings and last month’s stunning upset in the Massachusetts Senate race, I hear a lot of people saying that this is the inevitable result of Democratic hubris, and in particular of Obama and the Democrats trying to do too much on health care too quickly, especially when the country has not yet bounced back from the current, severe recession, is (still) fighting wars in Iraq and Afghanistan, and faces an ongoing a real terrorist threat.

I’m willing to concede the points in the last paragraph.  Maybe this wasn’t the time to try health care.  Arguably, though, given the Senate’s anti-filibuster rules, the chance may not come again for a long time.  I’m also not a huge fan of the bill because I don’t think it went far enough to contain cost growth, which I (and others) have said is the real threat to the system in the long run.  But, I think that those who argue that Obama and the Dems should have taken a more incremental approach to expanding access to health insurance also miss the mark.  Here’s why.

Suppose that you want to extend access to the health care system to the roughly 46 million uninsured people in the U.S. (or just the 80 percent of them who are U.S. citizens).  The least obtrusive way to do this in the context of the existing U.S. health care system would be to either expand Medicaid to cover wealthier people or to bolster the dysfunctional individual (non-employment-based) insurance market.  Now, Medicaid does a good job of providing basic care to poor people, especially children and their families, but because of its low reimbursement rates is probably not a great way to extend care more broadly.  And, any broad expansion of this government-run program would surely meet with strong opposition.  So, this leaves us with bolstering the individual market.

The individual market is the insurance market for people who don’t get insurance through their employers.  To put it bluntly, this market doesn’t work very well.  Only about 5% of the U.S. non-elderly population gets its health insurance through this market.  There are several reasons for this.  First, coverage is expensive because those buying insurance through the individual market do not have access to the economies of scale and bargaining power of employment-based coverage.  Second, those who seek to buy insurance on this market tend to be sicker than the population as a whole.  Insurers respond to this by charging higher prices based on medical history (“risk rating”), excluding pre-existing conditions, charging higher rates for coverage, putting annual or lifetime limits on benefits, or simply refusing to cover the sick.  And, in many states they can cancel an existing policy with little or no justification.

All this translates into private, individual coverage being very expensive at the same time those who might buy such policies are relatively poor.  This leaves us in a situation where the sick can’t get insurance and the well do not want insurance because it is too expensive.  As a result, there are few people for whom buying insurance on the individual market is an attractive option.

So, how do you fix it?  The first step would be to prevent insurers from engaging in the types of practices mentioned in the previous paragraph.  So, let’s require that insurers charge everyone the same price for insurance and must enroll anyone who is willing to buy insurance.  Let’s also prevent excluding pre-existing conditions and lifetime limits on benefits.  In other words, we outlaw “abusive insurance practices.”

Fine.  Now anyone who wants to buy insurance can buy it at any time.  How does a reasonable person react to this?  Well, if you are currently sick, you buy insurance.  But, suppose you aren’t sick.  A reasonable calculation would be to not buy insurance while you are well and take advantage of the prohibition on denying coverage in order to buy insurance only if you become sick.  The result of this will be that only sick people will have insurance and that, without healthy people in the risk pool to balance them out, premiums will have to be high.  So, even though everyone will be able to buy insurance, it will still be expensive to buy, and many insurers will find that it is simply not worth the trouble of insuring an exclusively sick population.

So, how do you bring down the cost of insurance?  The way to do this is to bring the healthy people into the risk pool.  After all, even though they don’t buy insurance while well, they are already benefiting from the system which guarantees them access to health care if they get sick.  In exchange for this guarantee, let’s force them to buy insurance early.  So, we mandate that individuals buy insurance.

The mandate puts healthy people into the risk pool, so now we have a mix of sick and healthy buying insurance from the individual market.  This should bring average prices down.  How might insurers react?  Well, all else equal, the insurer does better if it attracts a relatively healthy pool to its policies.  While the regulations above prevent insurers from explicitly excluding sick people, they can try to design policies that are implicitly more attractive to the healthy than the sick.  For example, they may exclude mental health benefits, refuse to cover weight-loss surgery, put their offices on the third floor of no-elevator buildings, etc.  But, these “dumping” practices are wasteful.  So, let’s prevent insurance companies from engaging in these practices by standardizing benefits.  This will have the additional benefit of making it easier for consumers to shop for plans since it will be easier to compare apples to apples.  And, if consumers become more sensitive to quality and price differences between plans, this will encourage plans to improve quality and lower price, which is an added bonus.

In fact, let’s push that idea further.  In order to encourage insurers to compete more vigorously, let’s set up insurance markets, or “exchanges,” where people can easily shop for plans.  This will also help people choose a health plan, an extremely complicated decision.

Finally, we need to face up to the fact that the uninsured are primarily poor.  This means that many of them will not be able to afford coverage no matter how well the individual insurance market works.  If we want to them to have access to private insurance, we’re going to have to help them pay for it.  So, let’s subsidize poor people to buy insurance through the private market.  We can do this in two ways.  We can either directly subsidize purchases of individual insurance policies or force employers to expand their insurance offerings by requiring employers to offer insurance or pay a penalty if they don’t.  But, if we’re going to subsidize individual insurance purchases, the money is going to have to come from somewhere.  So, we’ll have to increase taxes in one way or another.  (Aside: Clearly, the best way to do this is through a tax on tanning salons, as proposed in the Senate Bill.  The only question I have is why we didn’t come up with such a brilliant idea sooner.)

And there you have it.  If you want to expand coverage and you want to use the private market to do it, you quickly find yourself with a very big piece of legislation.  It’s a house of cards, and without any of the pieces it will quickly fall apart.  (Another aside: many people feel the penalties paid by individuals and employers who choose not to buy/offer insurance are insufficient in the current legislation, so the house of cards may be destined to tumble, anyway.  See this op-ed by Martin Feldstein.)

While going all the way may be too far, it is unclear whether there would have been a way to ease into reform.  Unfortunately, the one part of the bill that can be chopped out without jeopardizing the short-run goal of covering more people is the one that we really need to address to ensure the long-run viability of the system — the cost reduction part.  Even if we expand coverage in the short run, without addressing cost and especially the rate of cost growth, we’ll be right back in the position of insurance coverage being unaffordable for an ever-increasing segment of the population in a matter of years.