Obama’s Health Care Overhaul Begins

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

March 5, 2009

If anyone was unsure of President Barack Obama’s commitment to healthcare reform, his recently released budget and the White House health “summit” being held today should end all doubts. The budget sets aside $634bn over 10 years to pay for a healthcare overhaul, a sum large enough to begin upgrades as large as any that a still-divided Congress is likely to approve. And the summit underscores the president’s commitment to spending the “reserve fund” to jump-start real reform.

A bit of history helps clarify what this “reserve fund” means. In 2003, Congress allocated about $400bn over 10 years for an as-yet-undefined plan to extend coverage of prescription drugs for the elderly and disabled under the Medicare programme. The expenditure was included as part of the overall budget, but simultaneously a limit was placed on how much the plan could cost. The same is true now. By asking Congress to set up a reserve fund, Obama has signalled that he wants a health-reform bill, but one that starts slow – just $16bn in 2011 – and builds gradually to $96bn in 2019.

This reserve fund would not have to cover the costs of some important healthcare reforms already enacted and paid for. These include the extension of health insurance to about four million children, the introduction of health information technology to hospitals and physicians’ offices and the expansion of studies of the cost and effectiveness of alternative ways of treating various illnesses. Those three measures were enacted even before the president’s budget was released.

What exactly the reserve fund would cover is not specified in the February budget for three reasons. The first is that the administration knows it takes more than five weeks to figure out how to reform a $2.5tn industry. Second, the administration has just put in place the officials who will lead the effort: Kathleen Sebelius, who will serve as secretary of the department of health and human services, and Nancy-Ann Min DeParle, who will head the White House office of health reform. Neither has the unique qualifications that former Democratic Senate leader Tom Daschle would have brought to both jobs had he not been forced to withdraw his name from consideration. But each is a proven and knowledgeable leader.

The third – and most important – reason is that the Obama administration is determined not to repeat the cardinal error of the Clinton administration’s abortive health reform effort. That error was to present to Congress a completed plan, designed within the executive branch without significant input by members of Congress, and to expect members of the co-equal legislative branch of government to accept it. Instead, the Obama administration is determined to work with members of Congress to draft health reform legislation and, thereby, secure “buy-in” from the people who will have to vote to approve it. As a result, the details are yet to be determined.

What should one expect? The answer is that it’s too early to know for sure. Some members of Congress – notably Massachusetts senator Ted Kennedy and a number of liberal allies – would like to see one large bill that sets in motion solutions to the three major problems of US healthcare: a lack of insurance coverage (17% of the non-elderly population is without health insurance); mediocre quality of care (many Americans think US healthcare is the best in the world, but hard evidence on medical errors and failure to deliver standard care contradicts this belief); and staggeringly high expenditures.

Doing all of this with the funds set aside is impossible for several reasons. The cost of covering everyone is considerably greater than the amount in the reserve fund. Reductions in the growth of healthcare spending require administrative controls that are now impossible to implement under US payment arrangements. And improvement in the delivery of care requires wholesale changes in the organisation of care, links between in- and out-patient treatments and changes in physician and hospital practices that federal legislation cannot force. More generally, democracies do not remake an industry as large as the entire economy of France – US healthcare spending and French GDP are both approximately $2.5tn – in one bill during one presidency.

But it is possible for Congress to set in motion a process of reform that will play out over several presidencies. It is possible to extend coverage to many, even if not to all, of the uninsured, including all children. It is possible to establish government-run clearing houses to regulate the sale of health insurance to individuals and small groups so that overhead costs are driven down, premium variations are narrowed and insurance becomes more affordable. It is possible to introduce “re-insurance” – the collective payment for very high-cost illnesses. Such protection would end the risk to small- and medium-sized companies that now prevents them from offering coverage to millions of workers.

The reserve fund could also pay for federal support of state government initiatives to further extend coverage or to reform the delivery of care. And, at no net budget cost, Congress could reduce the inordinately generous tax incentives that encourage employers to pay for health insurance for high earners, and use the savings to increase the unduly meagre incentives for employers to provide insurance to low earners.

If Obama can oversee those advances, in addition to those he’s already enacted, he will leave office having been the agent for health reforms as far-reaching as any in American history. And if he succeeds in these initial steps, even more will be possible later in his administration.