Stockman On Thursday's Defining Moment: Defeat Obamacare Lite Or Be Buried By The Welfare State

Authored by David Stockman via Contra Corner blog,

Thursday's vote on Speaker Ryan's wrong-headed plan to repeal and replace Obamacare involves far more than keeping faith with a crucial campaign pledge or the Donald's notion that it's just the preliminaries to "cutting the hell out of taxes".

In fact, the passage of Obamacare Lite would mean the triumph of a runaway Welfare State in aging and job-deficient America. It would eventually result in fiscal catastrophe and the certainty of tax increases - not cuts - as far as the eye can see.

As we pointed out the other day, the nation's bloated and unsustainable health care system consumes 18% of GDP compared to 10-12% in most of the world's social welfare democracies. And it's an open-ended fiscal time bomb because unlike the state controlled single payor systems elsewhere, the US system is a mutant hybrid of socialism for the recipients and crony capitalism for the providers.

Consequently, there is no brake on the volume and price of services. Health care demand is only limited by what the crony capitalist lobbies for every medical specialty and delivery system vertical can extract from payors---mainly the state.

We refer here to the staggering sum of $24 trillion in health care entitlement spending. That's what government financing of medical programs will cost over the next decade. This total includes CBO's $16.5 trillion cost estimate for the Federal medical programs----plus $4 trillion in tax exclusion benefits for employer health plans and $3.5 trillion for the state share of Medicaid.

For perspective, that sum is nearly 2X the projected $13.2 trillion cost of the entire Social Security system over the next ten years, which will have 8o million retires, dependents and disability recipients by 2027.

Needless to say, the Speaker's Obamacare Lite plan does not even address the runaway costs drivers of the medical delivery system and merely fiddles with the entitlements along the edges. For example, the combined Federal/State cost of Medicaid over the next decade would be $8.5 trillion under current Obamacare law, representing the single most explosively growing entitlement in existence.

Under the Ryan plan's rollback of the matching ratios and the indexed per capita funding formula, the "savings" would be about $500 billion after off-setting the added costs of the State Stability Fund, repeal of the disproportionate share hospital cuts and the 11th hour "manager's amendment" to index state Medicaid grants to a more generous medical inflation factor. But spending $8.0 trillion on Medicaid---a mere 7% cut---- from a veritable fiscal time bomb is not remotely what the doctor ordered.

Likewise, Ryan replaces the income-based Obamacare health exchange subsidies with age-based tax credits bedecked with phony eligibility caps. The former provision would save $673 billion over the decade according to the CBO, while Ryan's tax credits and HSA (health savings account)

expansion would cost around $400 billion as presented; and would eventually eat-up the full Obamacare exchange subsidy savings via the more generous tax credits that would be needed to have any hope of passage in the Senate.

Moreover, we doubt whether anyone who can do 5th grade math will be fooled by Ryan's double shuffle. The new provisions still amount to a massive tax credit entitlement that in some ways is for more profligate than Obama's health exchange premium subsidies for families up to 4X the poverty line or about $100k per year.

For example, consider a family consisting of three children under 20-years old and two mid-40s adults with an annual income of $149,000---putting them on the top 5% of the income ladder. Yet under the new Ryan plan, this family would be eligible for $12,000 of tax credits against its insurance premiums compared to zero under Obamacare.

Finally, the Ryan plan merely fiddles with the regulatory straight jacket on the insurance market that caused premiums to soar under Obamacare. Ryan's nanny state requisites include retention of the ban on annual and lifetime benefit caps, limits on age based premium variation, mandated coverage of pre­existing conditions, coverage of children until the age of 26 and etc.

But these serious structural deficiencies are not the half of it. What is missing entirely in Ryan's plan is an alternative policy vision and, even more importantly, a political model that can actually connect with Trump's Flyover America constituency.

As written, the bill is just the opposite----an embodiment of Ryan's small-ball beltway wonkdom that truly amounts to Obamacare Lite. For that reason it is destined to be a political looser and to never make it through the Senate and conference to the Donald's desk. And in the process of failure----or legislative compromise nearly all the way back to full Obamacare----the GOP will pay an enormous political price.

That's because its watered-down version of Obamacare can't compete on a Washington playing field that measures policy effectiveness by the number of people provided coverage and the amount of "help" with medical costs supplied by Uncle Sam.

We actually believe there is a better way, which is briefly described below. It re-mixes the policy menu drastically and provides a fresh start political model that would actually allow the GOP to fundamentally change the terms of debate in its favor.

But first Ryan's plan must be stopped dead in its tracks and Obamacare allowed to continue its built-in death spiral until the GOP can come back with an altogether different Plan B. Fortunately, the two dozen or so members of the House Freedom Caucus seem to grasp the enormity of the historic inflection point at hand.

In particular, caucus chairman Mark Meadows appears fully cognizant that it is up to him and his small band to stop the nation's slide into welfare state bankruptcy:

This is a defining moment for the Freedom Caucus," he added. 7 don't think there is a more critical vote for the Freedom Caucus than this particular one." 

Another stalwart Freedom Caucus member, Justin Amash of Michigan, also believes the group must hold together to block the bill after the GOP leadership ignored their demands.

"We've made suggestions all the way through," he said Monday night. "If they don't want to listen to them then that's on them."

So here is the outline of a true policy and political alternative to Obamacare Lite.

It starts with a fundamental parsing of the issue into three separate domains.These are workfare, welfare and free market reform of medical care.

The underlying idea is that: (1) the Federal government retains responsibility for "workfare" by supplementing lower-end market wages with earned income tax credits (EITC); (2) the states takeover all means-tested welfare included Medicaid, food stamps, housing and family assistance via a Super-Block Grant; and (3) the free market is powerfully activated in the cause of medical cost control and delivery innovation via deregulation and by permitting millions of workers with employer plans to elect an equivalent amount of tax-free cash to spend for their own health care needs via HSAs (health savings accounts).

Needless to say, these three policy domains cannot be addressed through the awkward tool of a single reconciliation bill---so that dead-end legislative expedient needs to be ash-canned at the get-go.

Instead, we would envision the "workfare" component to be incorporated into the pending tax cut and reform bill and that the welfare Super-Block Grant and Free Market Health Care Plan would be developed separately and carefully on their own legislative tracks. No more Nancy Pelosi moments of passing thousands of pages of statute so Congress can find out what's in the bill----as happened with the ferociously negative public feedbacks on Obamacare.

Embedded in the above approach is an exciting opportunity to bring sweeping disruptive change to America's bloated, moribund medical care delivery system by unleashing tens of millions of cost and service conscience health care consumers on the market. At the same time, financial empowerment of lower income workers with an enhanced system of pro-work earned income tax credits would be a huge positive politically, as would a $650 billion Super-Block Grant to the mostly GOP-run state governments .

A decided advantage is that this approach would get the welfare question and helping the poor out of Washington once and far all. Better that coverage of the welfare policy debate be handled by the Arkansas Gazette and the Indianapolis Star rather than CNN and the New York Times.

Likewise, in the kind of atomized HSA/consumer driven health market this approach envisions, the liberal media's focus on counting the number of covered persons would be eliminated entirely; and the CBO's green-eyes shades would be precluded from their current de facto policy-making role. That is, pricing-out the fiscal dimension would involve nothing more than tabulating the cost of the EITC and tracking a hard statutory number for the block grant.

As to the details of this potential Plan B, the first point is to recognize that Medicaid is essentially a welfare issue and must be separated from health care reform. That's because Medicaid does nothing for the supply side of the delivery system. It is designed to subsidize access to health care for the poor and is ultimately a form of income transfer payment. In Milton Friedman's ideal world of pure cash transfers, it would better be accomplished through a negative income tax.

That would be a Super-Block Grant for all Federal welfare programs that would permit the states to become true "laboratories of democracy" in Justice Brandeis' felicitous phrase.

That is to say, it should be clear by now that there is no one-size fits all welfare policy design with respect to the mix of cash versus in-kind (medical, food, housing) benefits, the manner in which benefit loss and work incentives and requirements are structured, the interactive effects of multiple benefit programs and the level of transfer payments relative to the huge cost of living variances across the US.

So we would let the states experiment and compete for the best designs and solutions to the welfare problem by giving to each a single no-stings block grant that could be spent on medical, housing, cash welfare or any other form of means-tested assistance they would choose. In that context, the current policy baseline for 2020 includes $450 billion for Medicaid, $67 billion for food stamps, $95 billion for family assistance and SSI and another $50 billion for housing aid, child nutrition and several smaller programs.

We are here also talking about reviving a vibrant Federalism. The Imperial City cannot run every government function in America----and transfer payments to the poor is one of those functions, albeit a complex and vexing one. So whack up the $650 billion that Uncle Sam is now spending for welfare and devolve it to the states, which are knee deep in that function already.

In fact, when you add-in the $350 billion state share of Medicaid, it is evident that America already has a $1 trillion per year welfare program for the needy. Moreover, when you acknowledge that welfare is not a constitutional right and that there is no right way to design these programs----then there is nothing at all wrong with delegating that function of government to the states, which are far closer to the facts and circumstances of their communities and people, anyway.

Needless to say, under this grand scheme of a welfare Super-Block Grant the coverage counting fetish of the elite media and Democrat politicians would be entirely abrogated. Dollars would flow into many different designs and cash versus in-kind mixes, thereby transforming the issue into questions about the efficacy of the help being given and the results being obtained, not the beneficiary count in each basket of Federal aid.

On the question of "workfare" there is a good reason to retain Federal responsibility via the EITC. The latter piggybacks on the income tax collection machinery that exits anyway and is a form of transfer payment that is job-based and pro-work. While the design of the current EITC may not be ideal, it does reward rising earnings with more benefits; and after $50,000 of family income, it phases out at a low 21% rate, thereby avoiding the so-called "notch" effects that plague most welfare programs.

Under current law, the EITC is projected to cost about $90 billion per year---or upwards of $1 trillion over the next decade. It would not even be unreasonable to allocate some of the $675 billion saved from repealing the Obamacare exchange subsidies to enhancing benefit levels under the EITC.

After all, the target for the exchange subsidies was working families who needed help purchasing their health care. Under an enhanced EITC, a family of four earning $37,000 per year, for example, could be rewarded with a $13,000 tax credit, bringing their total income to $501c.

The difference, of course, is that they would not have a Washington nanny telling them how much of that to spend on health insurance or what policy structure best fits their needs. In a free society, adult citizens and their families do that.

Finally, the most exciting part of this potential Plan B is to truly liberate the free market in health care, and there is one mind-blowing way to do it that would be enormously popular among the Trump constituencies of Flyover America.

To wit, get the dead-hand of Franklin Roosevelt (owing to the 1944 IRS decision) off the large and growing portion of their wages that are paid in tax free group health plans. Instead, give every employee the option to elect to receive the actuarial cash equivalent from their employer, and make it tax-free as long as it's put in an HSA. 

In the mainstream job market with employer plans, the cash equivalent would range between $8,000 and $20,000 per year for workers with families. Turn them loose to shop with their own HSA dollars, and the health care delivery system will be Wal-Martized in no time.

So doing, the American public---not Washington bureaucrats and rule-writers----would be enlisted in attacking the heart of our roaring health inflation problem. That is, the current giant third-party payment system which essentially eliminates market pricing and consumer shopping behavior.

Instead, what passes for government and private "insurance" amounts to aforrn of health service pre payment under which cost pooling and community rating ofpremiums generates endemic overutilization, overpricing, andfree-riding.

In fact, when virtually everything is paid for by third-parties, you do not have price-conscious, shopping-oriented, cost-minimizing consumers who have their own money at risk----just several hundred million cost-indifferent patients with various kinds of prepaid cards (e.g. medicare, Medicaid, blue cross, employer plans etc.).

Needless to say, there is no such thing as an efficacious free market when their are no real consumers. What passes for the health care market today is just a bureaucratic clearing house where provider cartels attempt to maximize their billings while insurance companies, HMOs, PPOs and utilization review and pre-approval agencies seek to minimize what they certify for payment. 

As a result, the medical professions and delivery system have morphed into Washington's greatest crony capitalist lobby. Their ability to milk the payment pools and maximize their incomes is entirely a function of reimbursement rules under Medicare/Medicaid and collective bargaining power versus private insurers and employer plans.

The consequence, in turn, is high prices, endless hassles over coverage and pre-approvals and a complete loss of consumers' sovereignty over their own health care costs and quality. And that is what the public--whether it fully recognizes it or not----is fundamentally objecting to under the rubric of "Obamacare".

At the end of the day this is health care socialism and it is what will finally bankrupt America, yet Speaker Ryan's Obamacare Lite plans keeps that system fully in place. After all, the K-Street lobbies which essentially drafted his bill would have it no other way.

So what needs to happen now is that Obamacare Lite is ash-canned this week---so that the GOP can launch a fresh start plan. Liberating consumers to drive an honest, efficient, innovative health care market is the essential RX for what ails America's health care system today.

And when America's middle class families go to work driving down the cost of health care in their own interest, it will redound to the less fortunate part of the population as well. Medicare will buy more for less, and the state based welfare systems will do the same.