Monthly Archive for March, 2010

The Cost of U.S. Health Care Reform

At 16.5 percent of GDP and rising, America’s health care spending is the highest in the industrial world. By most measures, this spending has not produced superior health care outcomes.  The health care reform billed passed by Congress will drive these costs even higher. 

When Mr. Obama first introduced health care reform, he said that the weight of health care spending was a burden on U.S. business and needed to be restrained.  He was correct.  Unfortunately, the burden is likely to rise further.

What will cause these costs to continue to rise? 

First and most fundamentally, the bill increases demand without immediate measures to increase the supply of health care providers. Even excluding the time it takes to increase supply, most U.S. state governments do not have resources to do so without federal government support. Whether that support will or can be provided is an open question.

Second, this complex bill further increases the administrative burden on the system, especially since the federal government is also adding new regulations and a bureaucratic apparatus to enforce them.  One of the reasons that America’s health care is so relatively expensive is that the administrative cost adds several percentage points of cost that no other country faces. That cost now increases.

For example, the bill requires almost all Americans to carry health insurance, with public subsidies if necessary.  Enforcing that provision in a country so large and generally hostile to government will be extraordinarily difficult. 

Third, there are few meaningful constraints on the key determinants of cost: drug expense and physician compensation. And such constraints as exist will need to be enforced. But the complexity of the rules and procedures make enforcement always costly and often ineffective.

 It was therefore not surprising that after the bill passed, the stocks of most health care providers rose.  They had, after all, dodged the bullet.

Fourth, since insurance companies are now required to increase coverage for high-risk customers, their profits will be adversely affected.  They will then increase premiums.  The bill does no more than demand that they “justify” the increases. What for-profit company could fail to justify a price increase based on rising costs?  So premiums will rise and the burden on employers will increase.

It might be noted that the bill offers access to health insurance, not actual access to health care.  There is a difference.

Fifth, a large part of the savings anticipated by the bill is a dramatic reduction in spending on Medicare for the elderly. In the contentious political environment of America, where elections are hard-fought and often close, few expect Congress to actually implement such constraints.

Sixth, there is no single institution or point of authority responsible for restraining health care costs.  In every domain of endeavour, costs rise inevitably unless there is a determined effort by someone mandated to restrain them. Even in other countries with ministers of health or finance who try to control costs, the battle to do so is endless. In the U.S. cost-control is apparently going to be on auto-pilot.

It must be granted that the passage of the health care bill was a significant and symbolic victory.  However, informed opinion in Washington [including, one presumes, Mr. Obama] understands that the struggle for accessible health care in America has only begun. And they know that the battle to restrain costs will be long and brutal.

Notwithstanding the unsustainable aspects of the present bill, its most alert proponents believe that it was essential to extend this promise of access. Then when the inevitable cost pressures build, Congress will be forced to tackle costs and improve the efficiency of health care delivery. In other words, once the entitlement to health care has been provided, no Congress will be able to reverse it.  

But this is a very dangerous strategy.  It might work; it could as easily backfire.

There are several reasons to be concerned.  First, it will take several years to implement the bill and the sense of entitlement might not be locked in fast enough. Moreover, the majority of Americans who already have health care coverage are not sure if the bill benefits them. This perception interferes with creating that desired sense of entitlement. [The bill does provide benefits to almost all Americans, but the bill’s complexity interferes with making that message.]

Second, the appearance “entitlement” might stay in place, but it could be effectively gutted.  Indeed, Congress could easily react to subsequently soaring costs by just reducing the coverage of the insurance. Of course, that response might be affected by which party was in power at the time.

Third, by failing to both pre-empt and attack his opponents, Mr. Obama leaves himself, his administration and the Democratic Party vulnerable to losing power. Unfortunately, by offering an implausible estimate of cost, he has handed his enemies a persuasive weapon, just as the recession and its continuing effects leave many Americans feeling angry and anxious.   


The Presidency of Barack Obama (Part 1)

We now know with certainty several things about Barack Obama, and one thing we do not. We know that he arrived at the White House without new ideas, considered priorities or a strategic understanding of America’s challenges, political dynamic and the essential role of the presidency. As a result, into the second year of Mr. Obama’s presidency, almost all that has been accomplished is a further stimulus package and a deeply-flawed health care bill.

What we do not know is whether he can achieve this understanding and adopt a dramatically more effective approach. 

New, clearly articulated ideas are almost impossible to find in the first year of Mr. Obama’s administration. Whether the wars in Iraq and Afghanistan, Gitmo, the Middle East, China, the global economy, the deficit, the debt, the trade deficit, the unsustainable social security program or the erosion of  U.S. competitiveness, there is almost nothing different from the policies of Mr. Obama’s predecessor. There is, on occasion, gentler language and many statements of aspiration. But rhetoric is not a substitute for new approaches to actually achieving long overdue results.

What Mr. Obama, the candidate of change, has done is to set off a multiple of task forces, reviews and consultations.

Health care reform is the defining case in point. Mr. Obama clearly wanted health care reform, even as he never actually said how exactly he would improve access and restrain cost,  a challenge if there ever was one.

Instead, he told Congress, that undisciplined mob of petty kingdoms, to figure out how to do it. And it would be better to include one’s enemies in the bargaining process.

Predictably, the bill passed by Congress is a cobbled-together, fiscally unsustainable mishmash that will drive up the cost of health care in the U.S., already the most expensive on earth. Yes, it does improve access, while postponing the day of reckoning. One presumes that Mr. Obama is leaving that for someone else to figure out. Of course, it was difficult to rally public support for such a poorly considered set of bits and pieces.

Of course, America should join the civilized world and offer universal health care access to its residents. And yes, the bill is an important symbolic step. But soon, very soon, America will have to move beyond symbolic expressions. And it will have to deal with the nasty business of how to pay for it.

In the early days when Mr. Obama was putting together his team of establishment advisors, the candidate of change was asked where the new ideas would come from, given the background of his advisors. From me, said Mr. Obama. It is a promise not yet fulfilled.

Policy priorities are also difficult to discern. There are lots of announcements about many issues and much travel. But there is almost never a sense of relative importance, sequence or interdependence.  Apparently everything is a separate concern and equally desirable. It is, of course, impossible that they all be equally desirable.

In spite of a brutal recession that destabilized the global financial system and sent the U.S. Government deficit soaring, Mr. Obama inexplicably did not see the restoration of the economy as his first priority. And any careful reading of U.S. employment figures would have made labour market development through training and education a second priority.

In addition, given that this global recession was caused by the imprudent behaviour of U.S.-based global financial institutions, a key and urgent priority would also appear to have been regulatory reform. Strategically, one would have advanced proposals for regulatory reform while the financial institutions were still wobbling, while public support was still high and before the lobbyists could be rallied to resistance. (Of course, some new ideas about how to create regulations that would work better than the old tools would have been especially helpful.) So now regulatory reform limps along, with few new ideas and against fierce opposition. The moment to act has passed.

Indeed most actions to restore sustainability to the U.S. economy and its financial system were sidelined by the premature proposal for health care reform.

It is telling that health care reform was advanced in Mr. Obama’s first year because he bowed to the conventional wisdom that only in the first year can a president advance major initiatives. As we will see repeatedly, Mr. Obama seems to accept conventional wisdom easily.

This lack of priorities is not surprising since Mr. Obama also appears to lack a strategic understanding of America’s challenges. It is striking that he seems not to recognize that the economy sustains all public programs and that an expansion of health care and new initiatives in education and the environment all require a healthy and growing economy. Yet the structural deficit, the unsustainability of social security and the stresses of the global economy are disregarded, if not explicitly avoided.

A strategic vision would have noticed that America is being challenged on many fronts, from technological leadership to export competitiveness. Yes, America has the resources to respond, not the least of which is its wealth of human talent. But it has to get its act together. It has to address these challenges. That is Mr. Obama’s overriding personal challenge and responsibility. And yes, there would have been kicking and screaming and heads would have had to be knocked together. “Consensus” could not possibly address these difficult challenges.

Or will it be of consensus forged in yet another near death experience.

Perhaps Mr. Obama has fundamentally misread the political dynamics of contemporary America. Perhaps he truly believes that he can “reason with” his political opponents,  or at least a few of them. Yet again, Mr. Obama accepts the conventional wisdom that the American people want a bipartisan approach. That is what they may tell the pollsters, but that is not how they cast their votes. In these difficult and contentious times, even were it possible to forge a consensus, there is indeed not enough time to do so. 

A realistic reading of the political environment of America would have told Mr. Obama to attack his enemies even as he moved into the White House. He would have reminded the electors again and again that the regulatory failure, the fiasco of the recession and the out-of-control spending occurred under the presidency of his predecessor, with Congress controlled most of the time by the Republican Party. 

In those few precious early moments while riding high in the polls, he could have tried to seize more political power by reforming the clearly cumbersome and outdated processes of the Congress of the United States. Did he not wonder how he would effect important change when the operational reality of Congress is hostile to change and reform of any significant degree?

In those earlier days, Mr. Obama should have insisted on a line item veto that would have allowed him to strip wasteful pork-barrel spending from appropriation bills. He also should have asked Congress to change the filibuster rule back to what it used to be. There is nothing in the constitution of the United States requiring sixty votes in the Senate to pass a bill. It is the Senate’s own rules that require super majorities and virtually guarantees stalemated U.S. government. With the pace of gobal change accelerating, this is an extraordinary anomaly. Indeed, there are a variety of administrative measures that Congress could use to streamline its processes.

Finally, Mr. Obama appears not to understand the essential power of the presidency and how to wield it effectively. With a limited range of constitutional powers, a president can substantially influence policy in only one of three ways.

First, he can advocate clearly-defined ideas.

Second, he can exhibit a relentless determination to achieve his policies and to use such constitutional powers as he has aggressively.

Third, he can wield a political machine that delivers funding and votes.

Together these tools can exert a powerful influence on Congress. Mr. Obama has chosen to dissipate all three of them.

On a whole range of subjects, like how to bring U.S. Government spending under control, there is little meaningful attempt at communication. Mr. Obama’s unwillingness to commit to specific ideas that he advocates aggressively is one of his greatest limitations. He urged Congress to take action on health care, for example, and failed to give any guidance on exactly how they should do it. Indeed, he had nothing specific to advocate except he was in favour of health care reform, whatever that would mean, and that it had to be brought to a vote.  This is hardly an argument that stirs the heart of the public.

You could not design a less effective communication strategy if you tried. 

Mr. Obama unwillingness to advocate specific ideas also contributes to the sense that he is not determined to get policies through. They would have to be defined to make it even apparent that he was determined to suceed at those policies. Otherwise, he appears just determined to do something. He therefore signals political weakness to his friends and foes.

It is also clear that when he actually said he opposed the wasteful spending in a recent defense bill passed by Congress, he was still not prepared to wield such constitutional powers as he has.

In an interview concerning a defense appropriations bill packed with lunatic spending, including massive spending on programs the Pentagon of the United States did not want, Mr. Obama virtually shrugged and said it was what Congress wished to do. Yet he could have vetoed the bill and thundered that the Congress was jeopardizing the safety of the men and women at the front in two active wars and that they were jeopardizing the military security of America with their irresponsible behaviour. However, Mr. Obama does not “thunder”. If he will not use the veto aggressively, or not even use it all, and if he does not ask for new procedural powers, no one in Washington will be either afraid of him or feel protected by him.

Last and certainly not least, having built up powerful political machine with millions of volunteers and a prodigious capacity to raise money, Mr.Obama then let it rapidly erode. Since he articulates no specific causes, he cannot rally the troops.

It was the young of America who made Mr. Obama President of the United States, not the mythical independent voters. (Young voters are independent only because they have not yet made up their political minds.) But these younger voters surely did not vote for an apparent directionless president who either stands for nothing or appears to turn his back on what he had so clearly promised. So the volunteers flee, not just uninterested but disillusioned. Recreating that army of people whose hearts have been broken will be an exceedingly difficult task.

It may be the case that Mr. Obama miscast himself in the theatre of politics. Or perhaps he was persuaded to do so, if he was as unsure of himself as he is in so many other matters. Thus he is cast as a reformist agent of change, when in reality he is a cautious, conservative seeker of consensus. Therefore, it would not be surprising that he sees change as a broad avenue, discerned by the wisdom of the experts and accommodating many persons of varying views. He then tries to effect this general direction of change by gentle, logical persuasion and commanding rhetoric.

The remainder of Mr. Obama’s first term hangs in the balance. And we shall all see over the next year whether he has the force of mind to change himself and his approach before he tries to change anything else.