Tag: peter orszag

Oops, Maybe ObamaCare’s Cost Controls Won’t Work after All

One of ObamaCare’s big selling points was that it would launch lots of pilot programs so that Medicare bureaucrats could learn how to reduce health care costs and improve the quality of care. Yesterday, the Congressional Budget Office threw cold water on the idea.

In 2010, Peter Orszag and Ezekiel Emanuel explained the promise of ObamaCare’s pilot programs:

[The law’s] pilot programs involving bundled payments will provide physicians and hospitals with incentives to coordinate care for patients with chronic illnesses: keeping these patients healthy and preventing hospitalizations will be financially advantageous…And the secretary of health and human services (HHS) is empowered to expand successful pilot programs without the need for additional legislation.

Atul Gawande wrote even more glowingly:

The bill tests, for instance, a number of ways that federal insurers could pay for care. Medicare and Medicaid currently pay clinicians the same amount regardless of results. But there is a pilot program to increase payments for doctors who deliver high-quality care at lower cost, while reducing payments for those who deliver low-quality care at higher cost. There’s a program that would pay bonuses to hospitals that improve patient results after heart failure, pneumonia, and surgery. There’s a program that would impose financial penalties on institutions with high rates of infections transmitted by…

You get the idea.

The thing is, pilot programs in Medicare are not new.  And in a review of dozens of Medicare pilot programs released yesterday, the Congressional Budget Office revealed they aren’t very successful, either:

The disease management and care coordination demonstrations comprised 34 programs…

In nearly every program, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program, when the fees paid to the participating organizations were considered…

Only one of the four demonstrations of value-based payment has yielded significant savings for the Medicare program.

No big deal, you say. Startups fail all the time. What’s important is not that 37 startups failed, but that one succeeded.

That’s how things are supposed to work. But as Alain Enthoven explained to Gawande, the really perverse thing about Medicare pilot programs is that even the successful ones die:

Gawande got it wrong about pilots…The Medical Industrial Complex does not want such pilots and often strangles them in the crib. For example, nothing lasting and significant came of the pilot to reward people for getting their heart bypass surgery at regional centers of excellence. I don’t remember the details of how it died, but I believe it was tried and went nowhere.  No doubt every hospital thought it was a center of excellence and wanted to be so rewarded.

Another more recent example is durable medical equipment.  David Leonhardt had an excellent article in the New York Times on June 25, 2008 called “High Medicare Costs Courtesy of Congress.”  Someone had sold the good idea that prices of durable medical equipment should be determined by competition, and there was a provision in law for pilots to test competition. The industry lobbied hard to stop it and promulgated scare stories. “Grandma won’t get her oxygen.”  Leonhardt recounts how Democratic and Republican leaders got together and postponed the pilot— and, I suspect, postponed it forever.  There were proposals to test health plan competition, fought off by the industry of course.  So this is not a fertile political environment for pilots.  In fact, one of the most important lessons that has come out of the current “reform” process is the enormous power of the medical industrial complex and their large financial contributions and armies of lobbyists to block any significant cost containment.

Rather than a reason for more government interference in health care, the death of these pilots is a consequence of government interference. If the federal Medicare program weren’t such an enormous player in the U.S. health care sector, industry lobbyists (and their servants in Congress) wouldn’t have so many ways to protect themselves from competition by more efficient providers.

Enthoven summed up ObamaCare’s approach to cost control best:

The American people are being deceived. We are being told that health expenditure must be curbed, therefore “reform is necessary.”  But the bills in Congress, as Gawande acknowledges, do little or nothing to curb the expenditures.  When the American people come to understand that “reform” was not followed by improvement, they are likely to be disappointed.  Our anguish is only intensified by the fact that the Republicans are no better at fiscal responsibility, probably worse as they demagogue reasonable attempts to limit expenditures.

Congress is sending the world an unmistakable signal that it is unable or unwilling to control health expenditures and the fiscal deficit.  That is not going to make it easier to sell Treasury bonds on international markets. I fear this will lead to higher interest rates.

FYI, Enthoven wrote those words in 2009.

Let the Market Cut Medicare?

The center-right consensus is that in order to balance the budget and improve health care, Congress needs to overhaul Medicare using some form of voucher or premium support.  Whereas the current program offers an essentially unlimited subsidy for medical care, under these options Congress would give each enrollee a fixed subsidy with which they could purchase private health insurance.  But how should Congress determine the size of these fixed subsidies?

The House GOP approved a budget under which Congress would pick the amount.  Beginning in 2022, all new enrollees would receive a voucher.  The average voucher amount would be equal to the average amount Medicare currently spends per enrollee in 2011, adjusted for overall inflation.  Congress would adjust the actual voucher amount for each enrollee based on health status and income, so some enrollees would receive larger and some would receive smaller vouchers.  But since the average voucher would grow at the rate of inflation (i.e., about 2.5 percentage points slower than per-enrollee Medicare spending currently grows), this approach would reduce Medicare spending over time.

A drawback of this approach is that opponents can (and do) demagogue it, claiming that the vouchers would be insufficient and seniors would die for lack of medical care.  This demagoguery ignores two important factors.

First, as Peter Orszag and President Obama themselves loved reminding us during the ObamaCare debate, there is lots of wasteful spending in the Medicare program.  Orszag frequently cites the Dartmouth Atlas, which estimates that one third of Medicare spending is pure waste.  Since the amount of the House GOP’s vouchers would be based on per-enrollee Medicare spending, they would essentially give Medicare enrollees 50 percent more money than they would need to purchase all the beneficial medical care that Medicare currently provides.  The vast amount of wasteful Medicare spending is a disgrace.  But when converting to a voucher system it’s an absolute boon, because it provides a huge margin of safety.  It means that enrollees could reduce their medical consumption by one third without harming their health.

Second, the anti-reform demagogues presume that vouchers would do absolutely nothing to make health care more efficient.  Vouchers would make the nation’s 50 million heaviest consumers of medical care cost-conscious in a way they have never been before.  Like an old man trying to send back soup at a deli, they will force providers to cut costs and thereby make their vouchers go farther.

It is because of this second factor that Yuval Levin proposes a different way of setting the voucher amount(s).  Levin proposes to use a competitive-bidding process.  Under this approach, everyone in Medicare would receive a voucher equal to the second-lowest bid that health plans submit to provide a standard package of benefits.  Enrollees could then apply their voucher to any private plan or even a government-run plan.  Under this approach, enrollees would still be cost-conscious: if the health insurance policies they choose cost more than the voucher amount, they would have to make up the difference; if the policies cost less, they would keep the savings.  Levin argues that this cost-consciousness would also lead enrollees to put pressure on providers to cut costs, and therefore the amount of the second-lowest bid would automatically grow at a slower rate than per-enrollee spending under the current Medicare program.  ”In such a system,” Levin writes, “the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula. ” Voila!  The competitive forces of the market would cut Medicare spending.

The best evidence that competitive bidding will reduce Medicare spending is that the durable medical equipment manufacturers have fought efforts to impose it on them.  So while I’m not hostile to the idea, I don’t think it’s an improvement over the House GOP plan.

First, Levin calls competitive-bidding “the Confident Market Solution” because he is confident that markets will reduce the cost of health care.  I’m confident of that too.  But I’m also confident that rent-seeking will be present in Medicare, no matter what reforms Congress enacts.  I am far less confident that markets will reduce costs faster than rent-seeking will increase them.  My sense is that politicians will be much more likely to hold the line on rent-seeking if they actually draw one.

Second, House Budget Committee chairman Paul Ryan (R-WI) crafted a House budget that proposed to reduce the growth of Medicare spending using hard, score-able numbers.  Hundreds of House members likewise stuck their necks out by voting for it.  The Confident Market Solution essentially undercuts those folks by telling them they should not have done something so bold and courageous.  Levin is no doubt correct that a competitive-bidding process that doesn’t specifically commit Congress to reducing Medicare spending growth is more politically feasible than a voucher plan that does.  When politicians choose the more politically perilous option, however, reformers should tell the world why that was the right thing to do.

Third, Levin would include a public option in the competitive-bidding system.  I am also confident that the government would heavily subsidize that health plan until it drove private insurers (and any hope of cost-cutting innovations) out of the market.

I’ve discussed what I think is a better approach to Medicare reform here and here.

Obama’s Fannie and Freddie Amnesia

Peter Wallison calls attention to President Obama’s amnesia regarding events that precipitated Fannie Mae and Freddie Mac’s collapse. Writing in the Wall Street Journal, Wallison points out that in 2005 then-Senator Obama joined with his Democratic colleagues in stopping legislation that would have helped rein in the government-sponsored housing duo’s risky behavior:

The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.

These authorities were necessary to control the GSEs’ risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.

The date of the Senate Banking Committee’s action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee’s bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

The president’s complicity in the housing collapse hasn’t stopped him from pinning the blame on Republicans, “special interests,” and Wall Street “fat cats.” As he does with other problems, the president blames everyone except himself and his party.

As I recounted in a Cato Policy Analysis, Fannie and Freddie epitomized the tawdry relationship between businesses that receive special federal breaks and policymakers. Democrats, including Obama’s chief of staff Rahm Emanuel, played a key role in facilitating Fannie and Freddie’s destructive activities. Emanuel, a then recent senior adviser to President Clinton, was appointed by Clinton to Freddie Mac’s board of directors, where he earned $320,000 in compensation and sold company stock worth more than $100,000.

Then there’s the current Office of Management and Budget director, Peter Orszag. In 2002, Fannie Mae commissioned a paper authored by Nobel Laureate Joseph Stiglitz, Jonathan Orszag, and Peter Orszag, who was then at the Brookings Institution. The study concluded that “the probability of default by the GSEs is extremely small.” Oops.

Given the company Obama keeps, it’s not surprising that the administration still hasn’t come up for a plan on what to do with Fannie and Freddie.

The administration has intentionally not incorporated Fannie and Freddie into the federal budget in order to hide the cost to taxpayers. And on Christmas Eve the administration quietly announced that the government would cover all of Fannie and Freddie’s losses beyond the original $400 billion limit through 2012. The Congressional Budget Office estimates that the final cost to taxpayers for bailing out Fannie and Freddie will approach that figure, although Wallison calls that projection “optimistic.”

See this essay for more on the problems the federal government causes in the housing market.

Fannie, Freddie, Peter, and Barney

Last week, after Rep. Barney Frank (D-MA) said that holders of Fannie Mae and Freddie Mac’s debt shouldn’t be expected to be treated the same as holders of U.S. government debt, the U.S. Treasury took the “unusual” step of reiterating its commitment to back Fannie and Freddie’s debt.

If ever there was case against allowing a few hundred men and women to micromanage the economy, this is it.

Fannie and Freddie, which are under government control, are being used to help prop up the ailing housing market. If investors think there’s a chance Uncle Sam won’t back the mortgage giants’ debt, mortgage interest rates could rise and demand for housing dampen. Therefore, Frank’s comments caused a bit of a stir. However, with the government bailing out anything that walks or crawls, investors apparently weren’t too concerned with Frank’s comments as the spread between Treasury and Fannie bonds barely budged.

As I noted a couple weeks ago, the Treasury is in no hurry to add Fannie and Freddie’s debt and mortgage-backed securities to the budget ($1.6 trillion and $5 trillion respectively). Congress certainly isn’t interested in raising the debt ceiling to make room. And as Arnold Kling points out, putting Fannie and Freddie on the government’s books would actually force the government to do something about the doddering duo.

All of which points to what an unfunny joke budgeting is in Washington. Take a look at what current OMB director Peter Orszag had to say about the issue when he was head of the Congressional Budget Office:

Given the steps announced by the Treasury Department and the Federal Housing Finance Agency on September 7, it is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget. The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.

Note that Orszag wrote that statement less than two years ago. And since then, the bond between the government and the mortgage giants has only gotten tighter.

The same people that say Fannie and Freddie shouldn’t be on the government’s books are often the same people who once dismissed concerns that the two companies were headed toward financial ruin. In 2002, Orszag co-authored a paper at Fannie’s behest that concluded that “the probability of default by the GSEs is extremely small.”

Another one of those persons, Congressman Frank, has his fingerprints all over the housing meltdown. In 2003, a defiant Frank stated that “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis.” Frank couldn’t have been more wrong. Yet there he remains perched on his House Committee on Financial Services chairman’s seat, his every utterance so important that they can move interest rates.

Democrats’ Voracious Search for New Tax Revenue

Last year I tried to compile a list of all the taxes President Obama and his allies were maneuvering to impose. But each week brings new ideas. Just recently we’ve heard about a bank tax, applying the Medicare tax to capital gains and other “passive” or “unearned” income, raising the Medicare tax rate, raising or broadening the capital gains tax, an income tax “surtax,” a tax on tanning – and of course the tax on private health insurance to pay for the expansion of government insurance has moved to the top of the list.

And all of these on top of these ideas proposed or publicly floated by President Obama and his aides and allies:

Back in July the Wall Street Journal reported:

President Barack Obama’s health-care plan is in jeopardy because of serious concerns that costs will spin out of control. As much as anyone, it’s White House budget director Peter Orszag’s job to save it…

After his TV appearances, he went straight to the Senate Finance Committee, where he spent three hours with committee aides brainstorming about how to pay for the trillion-dollar legislation. At one point, they flipped through the tax code, looking for ideas.

Flipping through the tax code, looking for ideas on how to relieve us of more of our money. That’s a great visual of Obama’s Washington. President Obama and his allies look at the vast abundance in America, and all they see is wealth that they don’t yet control. It annoys them. They could do so much good with that money. How dare bankers and businesses, farmers and entrepreneurs, widows and foundations hold tight to their wealth, when government has so many plans to fund? “Let’s go and get it from those who’ve got it,” they cry, in the immortal words of Sen. Barbara Mikulski.

But perhaps Thomas Jefferson’s words are even more immortal and equally applicable: “He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.”

Cost Overrun Incompetence at Energy

OMB director Peter Orszag is blaming the inefficiencies of the federal government on outdated personal computers. That is hard to understand given that federal IT spending amounted to $200 million a day last year.

A new GAO report on cost overruns at the Department of Energy undercuts Orszag’s argument that the solution to government incompetence is new computers. DOE cost overruns are nothing new. As far back as 1982 the GAO was reporting that “DOE lacked sufficient guidance to provide to its contractors for developing cost estimates.” A 2007 GAO report found that eight of 12 DOE projects it examined had exceeded their initial cost estimate by almost $14 billion due to “ineffective DOE project oversight and poor contractor management.” In 2008, GAO reported that nine out of 10 environmental cleanup projects it examined had cost overruns that DOE estimated would require an additional $25 to $42 billion.

For the new report, the GAO looked at DOE’s contract management procedures and here are some of the highlights:

  • “DOE has not had a policy that establishes standards for cost estimating in place for over a decade, and its guidance is outdated and incomplete, making it difficult for the department to oversee the development of high-quality cost estimates by its contractors.”
  • “DOE’s only cost-estimating direction resides in its project management policy that does not indicate how cost estimates should be developed.” (This statement has to be read several times to actually be believed.)
  • “DOE’s outdated cost-estimating guide assigns responsibilities to offices that no longer exist.”
  • “DOE does not have appropriate internal controls in place that would allow its project managers to provide contractors a standard method for building high-quality cost estimates.”
  • “DOE has drafted a new cost-estimating policy and guide but the department expects to miss its deadline for issuing them by more than a year.”

There’s nothing here that a supercomputer is going to change. Cost overruns in government programs will continue to occur for the simple reason that policymakers and administrators are playing with other people’s money. Moreover, the market forces that compel private firms to manage resources effectively or risk going out of business (unless they are in the auto or finance industries) are absent. DOE won’t be put of business for its cost overruns (although it should be); it’ll just go ask Congress for more taxpayer money.

See this Cato essay for more on cost overruns at the Department of Energy and other government agencies.

Federal Job Creation

The board game Monopoly first took off during the Great Depression. A different game has become popular during today’s Great Recession. In this game, politicians race against high unemployment to create jobs in order to save their own. The players (politicians) have unlimited tax and borrowing authority, and can call upon friendly economists to help them maneuver. The players even get to keep score, although the media can penalize shoddy scorekeeping. Ultimately, voters will decide which players win and lose in the fall elections.

Okay, I’m being facetious. But as politicians continue to throw trillions of dollars at the economy in a vain effort to create jobs, and the media continues to go along with it by obsessing over meaningless job counts, the entire spectacle has become surreal. If government job creation is a game, the losers have been the taxpayers underwriting it, as well as the employers (and their employees) who are closing shop, laying off workers, or not hiring because of uncertainty over what big government schemes will be next.

Two news articles point to this “regime uncertainty” being generated by Washington.

First, the government’s chief technology officer, Aneesh Chopra, received a somewhat hostile reception at the recent Consumer Electronics Show in Las Vegas according to the BBC:

“The government doesn’t spur innovation or entrepreneurship. The government often gets in the way,” said Mr. [Gary] Shapiro, president of the Consumer Electronics Association (CEA) which stages CES.

It [CEA] also had little support for President Obama’s $787 billion stimulus act calling it “panic spending” and warned of the growing federal deficit.

“The government is often a barrier,” said Mr. Shapiro. “High taxes and regulatory bureaucracy are barriers.”

Mr. Chopra’s response was typical of the political-bureaucratic mindset:

He said the US government was planning a summit with a number of chief executives from the “most innovative companies in the country to directly advise us to make government more efficient and more effective”.

Ah, another summit.

In the other article, the CNBC headline says it all: “Many Reluctant to Hire Because of New Taxes, Rules.” The article makes it clear that what businesses don’t need is another orchestrated summit:

The prospect of increased federal and state regulation and taxes has been particularly disruptive to the hiring plans of small- and medium-sized businesses, which have historically generated about two-thirds of the nation’s jobs. “I don’t really see the private sector hiring much in the next few months,” says Brian Bethune, an economist at Global Insight. “For the small-business sector there is just too much uncertainty about what happens beyond 2010.”

In reporting that its small business optimism index fell for the second straight month in December, the National Federation of Independent Business Tuesday said members’ No. 2 reason for not expanding payrolls was the prospect of government policy initiatives…”We’re hearing it more and more from our membership,” says Bill Rys, the NFIB’s tax counsel. “At the federal level, there’s uncertainty about tax rates, health care costs, energy costs. You also have what’s going on at the state and local levels, with new fees and taxes. They’re reluctant to jump back in.”

Unfortunately, instead of heeding the business community’s message, the Obama administration is focusing its energies on tinkering with the game’s scorekeeping. From ABC News:

The Obama administration has taken some heat and mockery for using the nebulous and non-economic term of jobs being “saved or created” by the $787 billion stimulus program.

So it’s gotten rid of it.

In a little-noticed December 18, 2009 memo from Office of Management and Budget director Peter Orszag the Obama administration is changing the way stimulus jobs are counted.

The memo, first noted by ProPublica, says that those receiving stimulus funds no longer have to say whether a job has been saved or created.

“Instead, recipients will more easily and objectively report on jobs funded with Recovery Act dollars,” Orszag wrote.

In other words, if the project is being funded with stimulus dollars – even if the person worked at that company or organization before and will work the same place afterward – that’s a stimulus job.

The American people are rightly growing tired of this nonsense. But it’s important that they understand that the idea of government job creation was flawed from the get-go. The government cannot simply wave a magic wand and create jobs without making private sector jobs disappear at the same time because of higher taxing and borrowing. There is no free lunch with government.