The GOP’s Gift To Henry Waxman — Part I

Nancy Pelosi (D-CA) and John Boehner (R-OH) took a bow when the House passed a $141 billion health care bill. But Henry Waxman deserves the credit. [Credit: Politico]

Nancy Pelosi (D-CA) and House Speaker John Boehner (R-OH) took a bow when the House passed a $141 billion health care bill. But Henry Waxman deserves the credit. [Credit: Politico]

“What a way to celebrate a birthday!”  — House Minority Leader Nancy Pelosi (D-CA) after the House passed bipartisan health care legislation

Sorry, Nancy.  It’s not about you.

The $141 billion health care bill that cleared the House last month and that is expected to win Senate approval next week is a tribute from the GOP-controlled Congress to former Congressman Henry Waxman, a man who worked tirelessly – and with great success – to expand health care-related welfare spending.

Because the measure deals predominantly with Medicare, most have overlooked its nearly $30 billion hike in social welfare outlays.  The bill (H.R. 2)  increases Medicare payments to physicians, largely by replacing one complicated and flawed formula with another.  It directs the army of bureaucrats who populate CMS cube farms to soldier on with their futile, half-century-long quest to implement a workable system of administered pricing.

During its first 27 years, Medicare paid physicians “reasonable” fees for their services, as determined by the CMS bureaucracy based on a process that took into account both “customary” and “prevailing” reimbursement rates.  The system rested on the misguided assumption that the government could mimic market prices without distorting markets.  Medicare payments to physicians grew spectacularly and overall health spending as a percent of GDP more than doubled.

In 1989, Congress conjured a new payment system based on the work of a very smart economist by the name of William C. Hsaio.  Hsaio taught at Harvard(!) and used a computer(!) to devise a formula that precisely calculated what Medicare should pay a physician for each of the thousands of services he or she might perform – from throat swabs to heart and lung transplants – based on the “relative value” of each service.  Hsaio’s computer had them all (actually 1,400 of the eventual 7,500 categories of services) by the time Congress passed the law in 1989.

But, alas, Hsaio’s exquisite resource-based relative value schedule (RBRVS) didn’t arrest the rise in Medicare payments to doctors.  Physicians, many of whom turned out to be almost as smart as Hsaio, acquired computers of their own that helped them devise coding strategies that fattened their Medicare reimbursements.

So Congress in 1997 came up with the “sustainable growth rate” (SGR) methodology, which served as a cap on Medicare payments to doctors.  If aggregate Medicare physician payments exceeded the SGR cap one year, CMS would make an across-the-board cut in the RBRVS fee schedule the following year.  Thus would growth in those payments be rendered sustainable.

SGR, however, proved politically unsustainable.  Congresses and Presidents of both parties refused to let the scheduled cuts take effect.   Thus developed the Congressional ritual of waiting until the last minute (and sometimes longer) before adopting a “doc fix” – legislation that would prevent cuts from occurring, but only on a temporary basis.  Congress has enacted 17 such legislative patches since the early 2000s.

Members of both parties professed to detest this ritual and vowed to scuttle the hated SGR.  The House bill does so, replacing the RBRVS/SGR system with one that is more complicated, more expensive, and equally quixotic, misguided and unworkable.

The bill’s authors contend that the measure would “replace the SGR formula with a stable payment system that promotes higher quality of care for seniors.”   Actually, it would instate two complex methodologies — a “merit-based payment system” (MIPS) and an “alternative payment model” (APM) – which would exist side-by-side, both requiring adherence to government-devised “clinical practice improvement activities.”

The new payment formula will be launched in 2019 and fully phased in beginning in 2026.  In the event I’m not around to say “I told you so,” I’ll say it now: this latest government foray into administered pricing will be no more stable, no more cost-efficient and no more conducive to quality than the three that preceded it.

No centralized price-setting system, despite the genius of its architects and the elegance of its algorithms, can substitute for markets. The only Medicare reform worth doing is one that would get the government out of the price-setting business.  Medicare should be transformed from a defined benefit program, in which the government dictates reimbursement rates, to a defined contribution program, like Medicare drug coverage.  In that program, the government subsidizes private insurance coverage at an established level, leaving insurers to negotiate prices, design policies, establish premiums and compete for customers.

Nevertheless, the very prospect of physician payment “reform” made lawmakers tingle with bipartisan ecstasy.  The new payment system’s sheer complexity – it’s even more inscrutable than the one devised by the estimable Professor Hsaio – evidently convinced lawmakers that some very smart people had at last outsmarted markets (and doctors).  The fractious House passed the measure with 392 votes, confining opposition to just 37 troglodytes.  A similarly big vote is expected next week in the Senate.

Republicans justify their support for the measure by noting that it would increase Medicare premiums paid by seniors with income in excess of $133,500 ($267,000 for couples) and place certain restrictions on Medigap coverage, private insurance that covers some or all of Medicare deductibles and coinsurance.  Beginning in 2020, it will be illegal for insurers to issue new customers Medigap policies that cover Medicare deductibles.  (Existing coverage, however, can be renewed.)

Mrs. Pelosi spun these two provisions as enormous concessions to Republican sensibilities.  Democratic class warriors grieve that Republicans would require the wealthiest seniors to pay more for their Medicare.  They demanded something in return for acquiescing in this GOP soak-the-rich proposal.

Their quid pro quo came in provisions that enlarge programs that former Congressman Waxman championed during his tenure: expanding Medicaid, reauthorizing CHIP, showering community health centers with more money and doubling funding for programs that enroll children (and their parents) in Medicaid, CHIP and Obamacare.  Together, these changes will increase federal welfare spending over the next 10 years by nearly $30 billion, not quite enough to fully offset the estimated $34 billion that wealthy seniors will pay in higher premiums, but enough to win the support of House Democrats.

Of course, that social welfare spending, unlike the premium increases and Medigap reform, is front-loaded.  Through 2017, the additional spending on CHIP, community health centers and Medicaid expansions will total $12.2.  Premiums on higher income seniors won’t take effect until 2018.  Before then, Democrats will demand another increase in social welfare spending.  And Republicans will go along.

They always do. (More on that here.)  But in this case, their concessions have come in exchange for little (the illusion of Medicare “reform”) and were made with little reflection.

Consider CHIP authorization.  CHIP was passed in 1997 as a consolation prize to Henry Waxman and Ted Kennedy after Hillary Care had crashed and burned and President Clinton had capitulated to Speaker Gingrich by signing welfare reform and negotiating entitlement spending curbs.  Liberals wanted something they could point to in what became known as the Balanced Budget Act of 1997, one of the few pieces of legislation that lived up to its name.   (The federal government ran four years of surpluses after its enactment, in part the result of the law’s restraints on entitlement spending growth.)

Since CHIP’s enactment, we have seen the implementation of Obamacare, a glorified Medicaid expansion that primarily benefits households with incomes less than 200 percent of FPL.   It is difficult to understand why the CHIP program is still needed.  Even the heavily-Democratic Congress that created Obamacare allowed it to expire in October of this year, and it is reasonable to assume the new law’s implementation has rendered the old one redundant.

As CBO notes in its analysis, “most of the people who would receive coverage through CHIP as a result of enacting HR 2 would otherwise have received coverage” through another source.  CBO lists Medicaid, Obamacare and employer-sponsored insurance as among those other sources.

So the most Republican Congress since the 1920s has approved tens of billions of dollars in new spending, not to cover more uninsured children, but to allow state bureaucrats to enroll already-insured children in the program that leverages the most federal dollars.

The programs Waxman championed have become so warmly embraced by Republicans that they reflexively reauthorize them with barely a moment’s thought to their necessity or cost.

Congratulations, Henry.  This one’s for you.