Living in “Interesting” Times: Health Policy in 2011

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

November 16, 2011

On November 16, 2011, Henry Aaron addressed the Rockford, Illinois Chamber of Commerce to discuss the future of health care policy.

Most of us have heard the wry curse, allegedly from ancient China: “May you live in interesting times.” Leave aside the fact that no one has been able to find any such actual Chinese expression. Let’s leave it aside because truth is more important than authenticity. And the truth is that tumultuous change is both unnerving and dangerous.

Health care policy in the United States is a mess. About that, everyone—politically left, right, and center—agrees. But they don’t agree on what to do about it. That means that almost all of us think major change is in order—even likely. Still, we fear that change may be for the worse.

And the stakes are high. Health care is vital to all of us. To a greater extent than ever before, health care can spare us pain, improve the quality of our lives, and delay our deaths. We spend much of our income on it, even if we don’t realize just how much, because of our remarkably convoluted payment system. How we change health care policy matters—and it matters a lot—to our well-being and to our pocket-books. We do, indeed, live in interesting times.

The times are interesting, as well, because change is coming at us in so many directions. I’d like to use my few minutes with you to describe five of them: the courts, Congress, the voting booth, state and federal executive agencies, and medical research.

Before I begin, I have to deliver an apologetic warning: to those of you who have become so habituated to PowerPoint that you think people listen with their eyes, I’m not going to use it. You’ll just have to listen.

Let me start with the courts. As you all know, the Supreme Court just announced that it will hear arguments on whether key provisions of the Affordable Care Act are constitutional. Those arguments will come early next year. A decision will then follow, probably at the end of the current court term, next June.

Those challenging the ACA have raised several points. First, they have alleged that the extension of Medicaid coverage is unconstitutional. No court has found merit in that claim.

The key issue is whether the requirement that people carry health insurance is constitutional. The reason the individual mandate is so important is that most of the key provisions of the Affordable Care Act depend on it. These provisions include the health insurance exchanges through which millions would buy insurance and receive subsidies, the requirement that insurance companies insure all comers and that bars them from canceling coverage once provided, and the limits on how much premiums can vary because of age or other factors. Without the mandate, all of these provisions would become unenforceable.

Here is why. If people don’t have to carry insurance but insurers have to sell it to them whenever asked, the economically sensible thing to do would be to go without insurance until you get sick, then buy it, and cancel it once you get well. As if that weren’t good enough, most people will be eligible for income-related subsidies. The law provides subsidies to everyone whose income is less than four times official poverty thresholds. Presto: you get all the coverage you ever need and pay premiums only when you are sick. Seeing this opening, employers would drop their health insurance plans. Everyone not covered by Medicare or Medicaid would be eligible for this sweet deal.

There is, alas, a rather serious problem. If customers can go without insurance until they are sick and cancel it when well, insurers would have to set premiums high enough to cover the full cost of care during episodes of illness. People who are not eligible for subsidies would no more be able to afford insurance than they can afford to pay for the cost of serious illness without insurance. After all, the inability to pay for serious illness is precisely why people buy insurance. Subsidies would make such insurance affordable for many. But the budget cost of those subsidies would then explode. The cost of serious illnesses would migrate to the federal budget. Even now, some fear that the Affordable Care Act will cost more than official estimates. Repealing the individual mandate would resolve all uncertainty.

So, the economic and political stakes are high. But what is the legal issue? In passing, let’s note that this issue has arisen because of the current political climate. There is little doubt that Congress has the constitutional authority to impose a head tax that could be rebated to those on those who carry health insurance that meets standards Congress could specify. Such a tax could be designed to exactly replicate the penalties the Affordable Care Act imposes for failure to carry insurance. Even attorneys who have argued in court the unconstitutionality of the individual mandate acknowledge that such a tax would have been immune to legal challenge.

To double the irony, had the individual mandate been enforced through the taxing power, there could be no litigation—at least not yet. Under established law, taxpayers can’t challenge a tax until it has been levied. Since no penalties can be collected before 2014 when the individual mandate takes effect, litigation would still be at least two years away.

So, why didn’t supporters of the Affordable Care Act use the government’s taxing authority to enforce insurance coverage? The reason is that taxes are not and never have been popular. Republicans have, with considerable success, hammered Democrats as the ‘tax and spend’ party. The newly elected president Obama and the Democratic majorities in Congress were not going to hand their Republican opponents a cudgel to beat them with if they could possibly avoid it.

And a low risk alternative seemed to be at hand. The Constitution gives Congress authority to regulate interstate commerce. Health care and health insurance are clearly involved in interstate commerce. Through the power to regulate interstate commerce, Congress could penalize people who do not carry health insurance.

Not so fast, said those challenging the law. People who do not buy insurance are inactive. They are simply not doing something. Congress has no authority, they claimed, to tell people they cannot be inactive. People are inactive with respect to everything they don’t buy. If Congress can tell people that they have to buy health insurance, Congress can tell them to buy anything. Basic freedom is at stake.

Those supporting the mandate countered that the distinction between activity and inactivity is bogus for at least two reasons. First, over extended periods virtually no one is inactive in the markets for health insurance and for health care. Virtually everyone buys insurance at some point. Even if they don’t, they still use health care. Some may not pay for it, generating costs that providers recover by boosting charges on those who are insured. And insurance, indisputably, is interstate commerce. Second, several Supreme Court decisions have established the power of Congress to regulate activities that viewed by themselves are outside interstate commerce but that indirectly affect it.

On whether the individual mandate is constitutional, the lower courts—both the District courts where the cases were filed, and the Appellate courts to which the initial decisions were appealed—have been all over the map. Now, in this age of hyper-partisanship, one might suppose that judges appointed by Republican presidents would have sided with those who claim Congress cannot require people to buy insurance and judges appointed by Democrats would have concluded that Congress can.

Well, surprise. Most of the appellate judges, whether appointed by Democratic or Republican presidents, have voted to sustain the requirement. Decisions from two circuits eviscerated the argument that Congress lacks the power to require coverage. Both were written by judges appointed by Republicans. One was written by Laurence Silberman, a 76-year-old jurist appointed by Ronald Reagan and once considered a likely candidate for the Supreme Court. The other was written by Jeffrey Sutton, a young judge who clerked for Antonin Scalia, was nominated to the Court of Appeals by president George W. Bush, and who was so controversial that 41 Senators voted against confirming him.

One of the Supreme Court’s major jobs is to settle disagreements among appellate courts. The Supreme Court consists of nine very independent-minded people. The decision will be complicated. It is fraught with legal and political significance. No prudent person should predict how the court will vote on such an issue.

So… here is my prediction. The Supreme Court will sustain the individual mandate, and it will do so not by the narrow 5 to 4 split that has become so familiar, but by a vote of 7 to 2. Or 8 to 1. Justices Breyer, Ginsburg, Sottamayor, and Kagan are virtually certain to find the mandate constitutional. But also voting to sustain it, I believe, will be Justices Scalia and Kennedy, based on reasoning similar to that of Silberman and Sutton. Justices Roberts and Kennedy are in play and I am assuming that either or both will vote to affirm the mandate. Justice Thomas, who has staked out a far-reaching opposition to federal regulation in many currently accepted forms, will say that the mandate exceeds Congress’s constitutional authority.

Now, having peered deeply—although possibly inaccurately—into my crystal ball, let me turn to the second venue within which the future of health care policy is being shaped… Congress.

Last August, as part of the deal to raise the ceiling on the national debt, Congress created a Super Committee charged to propose ways to cut the deficit. The ground rules were quite extraordinary. Congress set no limits on what could be in the committee’s recommendations. But it did set targets for itself.

Congress gave the committee authority to propose repealing, reforming, or enlarging any existing tax, expenditure, or regulation and to propose any new tax or outlay that it wanted. It could call for scrapping the Internal Revenue Code, repealing Social Security, imposing a tax on value added, restructuring Medicare, or closing three cabinet departments—assuming it can remember which ones it wants to close. All it takes for the committee to make a recommendation is a simple majority of committee members, half of whom are from each party and half of whom are from each house of Congress. There is only one thing that the committee must do: it must report by November 23, the day before Thanksgiving.

The peculiar power of the committee stemmed not just from its unlimited purview, but also from the rules Congress set for itself last August. Congress committed to vote on the committee’s recommendations within two months, without amendment, with passage by simple majority of both houses, no filibusters allowed.

Congress also set a target amount of deficit reduction. Congress instructed the committee to propose at least $1.2 trillion in deficit cuts over the next decade. If the committee does not recommend deficit reduction of at least that amount, or if Congress does not approve the committee’s recommendations, or if the president vetoes such measures and Congress does not override his veto—if, in other words, if anything stops enactment of measures to cut the deficit by at least $1.2 trillion-domestic and military spending will be cut automatically by formula enough to bring the total to $1.2 trillion, starting in 2013.

The committee could recommend measures to cut the deficit cuts by more than $1.2 trillion. And most budget analysts agree that cuts of much more than $1.2 trillion-perhaps $4-5 trillion over the next decade-are needed to prevent the national debt from continuing to grow faster than national income.

The automatic cuts will fall in part on Medicare, but not on Medicaid or on any other income tested benefits. The Medicare cuts would come only from payments to providers and insurers and are limited to 2 percent—a maximum of a little under $11 billion in 2013 and slightly different amounts in later years.

This is strong procedural medicine. What the committee recommends or doesn’t recommend is important. But whatever happens, action now will only be provisional. Whatever the committee does and however Congress disposes of its recommendations, this is far from the end of the story on modifications to Medicare, Medicaid, and other aspects of health care policy.

Rising health care spending is the principal driving force behind projected increases in federal budget deficits. In fact, if health care spending were rising no faster than national income, we would have no significant long-term deficit problem. But the elderly and disabled populations are growing fast and medical science continues to generate a growing menu of beneficial treatments. These two forces mean that there is no way to sustain the nation’s commitment to assure standard medical care for the elderly, disabled, and poor without sizeable tax increases. That is true, even if the Affordable Care Act or other legislation transforms the way the United States delivers health care.

That is not just my opinion. It was the unanimous view of a bipartisan panel appointed several years ago by the National Academy of Social Insurance. This dilemma is hard and enduring-second class medicine for the elderly, disabled, and poor or higher taxes. You may not like the choice. I don’t. But we are stuck with it. So, whatever the Super Committee recommends and however Congress responds, budget pressures will require either higher taxes or sizeable cut backs in spending on health care.

In the near term, Congress will have to decide—as early as next month—what to do to avoid across-the-board cuts of 27 percent in physician fees under Medicare that are slated for January 2012. These cuts are the effect of legislation passed more than a decade ago to hold down Medicare costs. Furthermore, in late 2012 or early 2013, the debt ceiling will have to be raised yet again. And, of course, there is going to be an election next year. Come January 2013, the winners will have to present a budget. Nothing the super committee recommends is going to take effect before 2013. Future Congresses, which cannot be bound by what Congress may do today. They will be free to modify whatever recommendations of the super committee that Congress approves.

Meanwhile—and I know what I am about to say will come as no surprise to people who reside in Illinois—not everything of importance occurs in Washington. Right now, state legislatures, hospital administrators, and physicians are deciding how to respond to the sizeable responsibilities that the Affordable Care Act places on their shoulders. States must decide whether and how to set up insurance exchanges through which to enroll millions of people who are not insured in other ways. If they decide not to set up such exchanges, the federal government is authorized to do the job.

State governments must also prepare for a flood of new enrollees in Medicaid—about 16 million of them. The first job is to enroll them. The next job is to encourage enough doctors to see those patients to make enrollment more than a tease. That is not a trivial job, as Medicaid fees are so low that many doctors will not see Medicaid patients, and hospitals in many states lose money on them.

The Affordable Care Act includes other provisions intended to promote efficient delivery of health care. It calls for the creation of so-called ‘accountable care organizations.’ ACOs are groups of providers—hospitals, physicians, and others—who take responsibility for providing care in an integrated fashion and seek to simultaneously improve quality of care and hold down spending. They need to meet specified quality standards and show that they have saved money. If they do both, they get to keep part of the savings. The government has just issued regulations, but it is not clear how many providers will want to take up the offer.

The government is also trying to design new methods of paying for care under Medicare—so called ‘bundled payments’ that get away from the perverse incentives created by the current fee-for-service system. Whether and how fast these measures work remains to be seen.

The last force that will shape health care policy is easy to forget, but is, in fact, the most important. Over the past several decades the most powerful force driving up health care spending has been the advance of medical science. In this respect, medicine is similar to other scientifically dynamic fields. Advances in research typically boost total spending, even as they reduce price. Transportation spending rose even as the cost of moving passengers and freight fell. Computation spending rose even as the price per floating point operation fell. The same has been true of entertainment and communications.

The reason that health care poses such difficult problems is that the benefits it generates are now so large. People are living longer and medical science is advancing. Medical benefits promise to become increasingly indispensable as successive diseases become amenable to treatment and degenerative processes can be slowed or stopped. These benefits promise to transform what it means to live a normal human life. That is good news. We should want more of it. Yes, we in the United States spend more for them than we need to do. Getting more for what we spend is one of the principal objectives of health reform. But as medical science advances, we will want the benefits of those advances ever more desperately for ourselves and those we love. Our sense of justice is offended if they are not shared fairly, even among others we do not know. In the end, the most important force driving up health care spending is the advance of clinical and laboratory research that none of us would willingly sacrifice.

And so, I end with a paradox. The best news for all of us as human beings would be scientific advance that intensifies the economic and political problems that we and our elected representatives must confront. One of my health economist friends has wondered whether he would find any customers if he offered a new and novel health insurance plan: 1960s health care at 1960s prices. The sales slogan would be: we aren’t very good, but we sure are cheap. He doesn’t think he would have many takers. I don’t think so either. I’ll bet you don’t as well. If we are right, that should tell all of us that however aggravating we find current policy choices and however exasperated we become with the curious ways in which our elected representatives mismanage public policy, things have actually gotten a lot better.

As an inherently pessimistic fellow, I can’t end on such an upbeat note. The trend to ever higher health care costs should alert us to a troubling fact: at some point we will not be able to afford all beneficial care for all. We will have to ration health care. Let me be clear—I am no more advocating rationing than a weatherman advocates a hurricane he sees on his radar screen. I am not talking about the dependent minority of poor, disabled, and elderly. I am talking about the well-insured majority of us.

Before we have to cope with that problem, however, we have a lot of work to do. The nation needs to reform the way health care is organized and delivered. It needs to change the financial incentives that motivate patients and providers. It needs to underwrite a vast program of research on the comparative effectiveness of what physicians do. Those steps will delay the need at some point to ration health care. But if we are lucky, the menu of ways to diagnose and treat our bodies will continue to grow. Spending pressures will keep intensifying. What a blessing for extended and improved lives! What political and fiscal aggravation!