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New Medicare and Medicaid report shows cost savings are imaginary.

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Harrycare Breaks the Bank

New Medicare and Medicaid report shows cost savings are imaginary.

On Friday, the Chief Actuary for the Centers for Medicare and Medicaid Services (“CMS”) released his report on the estimated financial impact of the Senate’s health care bill passed on Christmas Eve on a party-line vote.  Unlike the Congressional Budget Office’s score estimating the bill would reduce the deficit over the first ten years, CMS estimates that the measure will add $280 billion to the federal deficit from 2010-2019.   

Like the CBO score, CMS’s estimate largely masks the true cost and cynicism of the bill because non-partisan government agencies have little room to make assumptions outside of the pure text of the proposed legislation.  However, even more aggressively than the CBO’s commentary, the CMS actuary offers harsh words and stern warnings about this bill’s true likely cost and crowd-out effects on the private insurance market.

The costs and so-called savings in Harrycare, officially titled the Patient Protection and Affordable Care Act (“PPACA”) are broken down into 2 major categories: Coverage and Medicare, the former representing government costs and the latter theoretically representing savings.  There are smaller categories for Medicaid/CHIP (separate from the expansion of Medicaid which falls under Coverage), and the Community Living Assistance Services and Supports (“CLASS”) program.  The provisions for each category are a minefield of uncertainty, with real-world outcomes likely to cost the taxpayer far more than any current government estimate.

Regarding “Coverage,” CMS estimates that the measure will “reduce the number of uninsured from 57 million under current law to 23 million” primarily by increasing eligibility for Medicaid.  What this does is shift the cost burden from the federal government to cash-short states. It’s an accounting gimmick, not a cost savings.

And there are not 57 million uninsured Americans by any definition that an objective analyst would accept.  The majority of the uninsured are typically either (1) in between jobs and uninsured for a single digit number of months, (2) wealthy enough or with high enough incomes to afford insurance if they wanted it, or (3) already eligible for government programs but not signing up.  

CMS estimates that 18 million people would receive new coverage under Medicare with a further 2 million who have employer-based insurance signing up for Medicaid as supplemental insurance.  They also estimate that 21 million people will receive coverage “through the newly created Exchanges.”

Crowding out private insurance (the Democrats’ real goal), CMS guesses that 15 million people will drop their current individual health insurance policies to join an Exchange.  Furthermore, the report notes that “some smaller employers would be inclined to terminate their existing coverage, and companies with low salaries might find it to their — and their employees’ — advantage to end their plans, thereby allowing their workers to qualify for heavily subsidized coverage through the Exchanges.”

In other words, currently-private insurance costs will suddenly be borne in large part by taxpayers.  

In total, “Coverage” costs total $882 billion during the 10-year analysis window. Of utmost importance to understand, however, is that the key coverage provisions don’t begin until the fifth year (2014), and that the 6-year cost from 2014 to 2019 is $875 billion. In other words, more than 99% of the coverage costs occur in years 5-10, meaning that if the coverage provisions were begin at the same time as the tax increases and mythical “savings”, the cost of the bill would be roughly $250 billion higher.

The Senate bill’s use of the Medicaid program to move us toward socialized medicine further understates the true cost of the measure because — as noted above — Medicaid is partly paid for by states.  In 2008, states paid about 43% of Medicaid costs.  Therefore, even accepting the unlikely-to-occur estimated savings from Medicaid cost cutting, Harrycare dumps an additional $277 billion of costs on to states. For perspective, the combined budget shortfalls of all states combined for Fiscal Year 2010 (July 2009 – June 2010 for most states) is estimated at just over $190 billion.

To fund the massive government-subsidized Exchanges and the expansion of Medicaid, Harrycare proposes massive cuts to Medicare spending, totaling $541 billion over the 10-year period.  Perhaps most remarkable about the CMS report is the aggressive cynicism with which it treats these so-called savings.

In the third paragraph of the “Medicare” section of the CMS report, the actuary notes that the Democrats continue to try to count money twice (as the CBO previously disclosed), once as savings to the Medicare trust fund and again as defraying other health care expenditures.

In the fourth paragraph, the actuary makes the remarkable statement that “the estimated savings shown in this memorandum for one category of Medicare proposals may be unrealistic.”  They add that planned payment reductions to medical care providers “suggest that roughly 20% of Part A providers would become unprofitable within the 10-year projection period.”  This is, of course, precisely the Democrats’ intent.  Once doctors begin to drop Medicare and Medicaid patients en masse to avoid bankruptcy (as the Mayo Clinic in Arizona did last week), Democrats will claim that the private health care market is failing and use that argument to destroy what little will be left of the world’s best health care system.

In the fifth and sixth paragraphs, CMS says that plans to cut Medicare cost growth per beneficiary “to a level below medical price inflation alone would represent an exceedingly difficult challenge.”  This is because Medicare by definition has patients older, and therefore with more (and generally more expensive) medical issues, than the average population. Holding down costs in the most expensive part of the health care sector below the sector’s average will be all but impossible, and thus Harrycare’s projected savings are imaginary.

A few other provisions of PPACA are noteworthy even though the numbers are smaller than those for Coverage and Medicare:  First is the topic of “Comparative Effectiveness Research”, code for government rationing of health care.  CMS estimates that the total “savings” which CER might accrue over 10 years to be $2 billion, or less than one quarter of one percent of spending, with CER having “a relatively small effect on expenditure growth rates.”  In English, this means that even when the Secretary of Health and Human Services says, for example, that like in England the government will only treat macular degeneration in one of grandma’s eyes, but let her go blind in the other eye, you’ll have a half-blind grandmother but be paying just as much in taxes for your “free” health care.

Second, CMS notes that despite the nice sounding “prevention and wellness” movement and even the not unreasonable guess that “prevention” would lower long-term costs, “several prominent studies conclude that such provisions…generally increase costs overall” (though clearly helping some people in the process.)

Finally, perhaps the most cynical provision of Harrycare is the CLASS Program, whose supporters champion it in the name of recently-deceased Senator Ted Kennedy.  The CLASS Program is essentially long-term care insurance. The Democrats set up the provisions so that the program takes in insurance premiums for at least 5 years before paying any benefits and paying little in benefits for the next several years. In fact, CLASS will take in more in premiums than it spends until 2025.  However, after 2025, “projected benefits exceed premium revenues, resulting in a net Federal cost in the longer term.”  In other words, the Democratic bill counts the premiums received in the measure’s early years as reducing the cost of PPACA by $40 billion over 10 years even though those premiums are actually pre-paid liabilities which the government will owe, and more, just a few years down the road.  
The entire CMS report is dotted with warnings: “These estimates…are subject to much greater uncertainty than normal”; “The future costs and coverage effects could lie outside the range of estimates…”; a “negligible financial impact” of many of the bill’s so-called “savings” provisions.

The actuaries for Medicare and Medicaid, the government agency that probably understands policy impacts on government health care spending better than anybody on the planet, not only says that PPACA will cost taxpayers more than $400 billion more than the CBO’s estimate. He also says that the cost would be much higher if he weren’t forced to accept so many Democratic unrealistic assumptions.

In the meantime, liberal newspapers are trying to put the best face on a disastrous report for Democrats, with the Washington Post grasping for the thin reed that the CMS report does not show “increasing overall health-care spending quite as steeply as previously anticipated.”  It’s the journalistic equivalent of a man being told he has one year to live saying “That’s great! I thought you were going to say I only had 10 months.”

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Written By

Ross Kaminsky has been a professional derivatives trader for over 20 years. Ross is a fellow of the Heartland Institute and writes about political economy and current events at Rossputin.com. He also contributes to blogs for the National Taxpayers Union and FreedomWorks among others.

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