President Obama Attempts to Get Derailed U.S. Healthcare Reform Back on Track

In response, the president clarified the program's goals, provided some additional broad details on how the program would work, and provided some broad guidelines on how the costs of the program will be contained, and at the same time attempted to dismiss some of the misinformation and propaganda that has been directed against the healthcare reform proposals.

The president outlined three broad goals of healthcare reform: (1) security and stability for those who are already insured through employer-based programs; (2) expanding coverage for the uninsured; and (3) controlling costs.

In making the case for evolutionary change, the president tried to make it as clear as possible that employer-based insurance coverage—which applies to the majority of American households—will not be negatively affected by the reform proposal. Rather, these programs would be enhanced by provisions that prohibit the denial of coverage for pre-existing conditions and arbitrary changes in coverage that apply in the event of serious illness. In addition, the president is proposing no arbitrary cap on the total coverage, but a cap on out-of-pocket expenses. Large employers would be required to provide health insurance for their employees, or else pay a fine. Small businesses, however, would be exempt from these requirements. The president did not specify how a "small business" would be defined.

The novel element in the reform proposal is to create new not-for-profit insurance exchanges that would be designed to provide affordable insurance for the uninsured. Individuals currently uninsured would be required to carry basic heath insurance, which they could obtain through these exchanges. If they did not obtain coverage, they would be subject to penalties. Earlier versions of healthcare reform included the availability of both private insurance and public insurance in these exchanges, with the public program run by the Secretary of Health and Human Services. In order to make insurance affordable in these exchanges, the government would have to provide very significant subsidies. Given that roughly 37 million Americans do not currently have insurance, that is a major driver of the costs, estimated by the president to be $900 billion over 10 years.

With respect to costs, the president stated emphatically that he would not sign a bill that would put any upward pressure on the deficit either in the short term or the long term. The president made the bold assertion that most of the costs of the program could be covered by extracting significant savings within the existing healthcare system (Medicare and Medicaid). This would include eliminating waste and fraud and eliminating unspecified subsidies to private healthcare insurance companies.

The president endorsed the formation of an independent "Medicare Advisory Council" that would make recommendations to the president for changing federal payments for Medicare services, as well as recommendations for reform of the Medicare delivery system.

The president admitted in his speech that many details need to be addressed and debated in the proposals, which elicited an unexpected round of derisive laughter from the Congress. Indeed, the biggest Achilles' heel in the president's proposals are the representations with respect to cost savings to be extracted from within the existing system, and the potential offsetting revenues from increases in taxes on high-income individuals implied, although not spelled out, in the presidents' speech.

The Congressional Budget Office (CBO) has already looked at a wide range of proposals for cost controls in the House bill, and total savings from various measures to control escalating Medicare and Medicaid costs amount to only $219 billion over 10 years. The CBO also indicated that the introduction of the "Medicare Advisory Council," as advocated by the president, would generate only $2 billion in additional savings beyond the $219 billion already identified.

Thus, the president is facing close to an $800-billion funding gap if he wants to avoid any upward pressure on the deficit over the next 10 years. Roughly $600 billion of that gap presumably would be covered by surtaxes on high-income individuals and other tax revenues. However, experience with these surtaxes in the past tells us that predictable changes in behavior will substantially reduce the potential increase in revenues. Thus, Congress and the president still have a funding gap of at least $200 billion, and more realistically close to $500 billion.

Finally, efforts to control long-term costs could indeed be very difficult to achieve if the president intends to build on the existing employer-based, Medicare, and Medicaid insurance system. Under this system, consumers for the most part are insulated from costs, and without price signals in many cases there tends to be overconsumption and lack of market discipline.

In short, the president made an impassioned appeal to Congress to re-energize momentum for healthcare reform and has staked a huge amount of his political capital behind the effort. The problem is that the math on controlling costs and the deficit does not work even if the Congress approves hefty surtaxes on wealthy individuals. How is Congress going to close that funding gap, bend the long-term cost curves in a downward direction, maintain credibility under budgetary oversight from the CBO, and face a potentially surly electorate in mid-term elections in 2010?

As a result of the president's keynote address on Wednesday evening, the stakes in healthcare reform have been elevated to historic proportions. The success or failure of substantive healthcare reform will become a defining element of the Obama presidency.