Access to the best care

is what is at stake in allowing end of life preferences and planning discussions to be covered in annual wellness exams for Medicare beneficiaries. When I teach my class in health policy, and give lectures about health reform and health policy, I typically start with the first of two basic laws that govern any health system:

• Everyone dies, it is only a matter of when and from what.

When I say this in lectures, there is always a nervous laughter. Of course everyone knows this to be true, but I think the laughs are saying why start there? I start there because it is the only thing I know to be absolutely certain about health policy and our health care system.

Allowing physicians to be paid to discuss the options that Medicare beneficiaries have as they move inexorably toward death (we are all one day closer than yesterday, right?) is a matter of ensuring access to high quality care. I have written about the benefits of palliative care (care designed to improve quality of life regardless of age or prognosis) including ways in which I think the hospice benefit in Medicare should be opened up and expanded to allow persons to access many of the services offered even if they wish to continue aggressive medical treatments.

As a culture, we really need to grow up and learn to talk about the inevitability of death, both with family members, our health care providers, and more broadly. In the same talks with community groups that I mention above, after the nervous shifting is done, later people insist that we have to control out of control health care spending. Then as I walk through ways we might do this, the audience doesn't like any of them. I conclude that we are a profoundly delusional people when it comes to facing death and the amount of money we spend to forestall it. The root of this delusion is that we don't know how to talk about hard things in health care.

We have come a long way in talking about choices that people have as they approach death in the past 30 years or so since the Medicare program started covering hospice care (in 1983) and when there began to be books and dialogue around the concept of a good death, and amplifying patient choices. We still have a ways to go, and expanding access to discussions of this sort between doctors and patients if they want them is a good step.

Mark A. Smith, RIP

Mark Smith, one of the top researchers in the field of Alzheimer's Disease died unexpectedly on Sunday at the age of 45. Mark was the Editor-in-Chief of the Journal of Alzheimer's Disease, and I have been honored to have been an Associate Editor for the journal during 2010. JAD has posted the following in memory of Mark. Remembrances of Mark can be submitted via the JAD as follows George Perry (george.perry@utsa.edu) and Beth Kumar (editorial@j-alz.com).

I pray blessings on his wife and children and all his friends and colleagues at this difficult time.

Taking a break

I will be taking a break from blogging for the next week or so. Merry Christmas and blessings for the New Year!

What would a compromise look like?

While the rhetoric around health reform has been incendiary from day one, in policy terms, a compromise between Democrats and Republicans using the outline of the Affordable Care Act (ACA) has always been available. The two primary problems with the health care system are costs and lack of coverage. The ACA does pretty well on the second, and is a start on the first, but much more is needed. It will be very hard to get a handle on health care costs, and we will likely only succeed in doing this if both parties are on board.

This is what a deal to move ahead could look like.

• Replace the individual mandate to purchase insurance with guaranteed catastrophic coverage that is universal. I suggest individual caps of $10,000/family $15,000. I would do this via Medicare because it is simple, and could be implemented quickly. Others have suggested new federal initiatives that would provide catastrophic coverage; it is surprising to me that conservatives would want a new federal apparatus to implement this, but I follow the logic of their wanting to focus on catastrophic coverage. I would gladly trade true universal, catastrophic coverage for slowly creeping up on universal coverage with more comprehensive benefits. This allows progressives and conservatives to get what they most want: universal coverage and catastrophic, instead of first dollar coverage, respectively.
  

• End the tax exclusion of employer paid insurance. This is easily the most consequential policy that we could undertake to slow cost inflation in the private market. The Deficit Commission suggested this. It has long been a mainstay of Republican health care plans, like Sen. McCain's, and the Patients' Choice Act, the most comprehensive Republican bill submitted in the last Congress (but never scored by CBO). The tax on high cost insurance that is in the ACA (delayed by the reconciliation bill until 2018) is a back door way of achieving the same policy goal of slowing cost inflation. It would be better to cap this tax subsidy in a more straightforward manner and to do so sooner rather than later. It will take both sides to take this politically difficult step.

• Set up insurance markets for coverage underneath the catastrophic cap. Some would stick with the catastrophic level of insurance, others would want more coverage. People should buy this insurance with after tax dollars; employers could arrange such cover but the premiums they paid for workers would be taxable as income. I think you would expect employer involvement in insurance to decrease over time, which I think would be good. We could have income-based premium support. States could be given broad discretion in setting up these markets. There are many details to work out, but the parties should be able to do so if they can agree on the goal of helping people shop for insurance.

• Medical Malpractice reform. Our current malpractice system does almost nothing well. I always thought the route to the deal went through malpractice reform. The Republicans could have gotten quite a lot on this after Scott Brown's victory last January, and they missed an opportunity to advance a long term interest of theirs given that the ACA passed. However, they thought they could kill it, and preferred that to moving ahead on this issue. Politics aside, there are good policy reasons to have malpractice reform, especially if we can use that opportunity to develop a comprehensive quality improvement approach that is hard to develop in the midst of an adversarial malpractice system. I think the cost savings of malpractice reform are real but overstated, but there are many reasons to move ahead in this area.
  

• Transition Medicaid. Medicaid is now essentially two programs: Acute Care Medicaid, which covers mostly pregnant women and children, and with the ACA adults up to 133% of poverty. Long Term Care Medicaid, which pays for long term care services (nursing homes) for elderly and disabled persons. The acute care portion of Medicaid could be transitioned into premium support to allow persons to buy private coverage underneath the catastrophic cap. This would mainstream these folks. States could decide what extra help and services such low income people might need; some states might prefer to keep Medicaid as the provider of underneath cover. The long term care portion of Medicaid would remain unchanged as these persons are the amongst the most vulnerable members of society.

• Medicare purchasing. The Independent Payment Advisory Board (IPAB) set up by the ACA could play an important role is addressing health care cost inflation if it implemented, and particularly if it is expanded as suggested by the Deficit Commission. Most interestingly, the first suggestion of such a Board during 2009 was made by Republicans: The Patients' Choice Act (PCA) was introduced on May 20, 2009, around one month before the House of Representatives passed any of their reform bills. Republicans criticizing the IPAB have conveniently forgotten that the PCA proposed a similar commission that would apply cost effectiveness research and use this to make coverage decisions. Co-sponors of the PCA include Rep. Paul Ryan and Sen. Tom Coburn, leading conservatives in the Congress (and my senior Senator, Richard Burr). Of course, Rep. Ryan is the incoming chair of the budget committee, a key health care committee. We have got to be able to ask hard questions about what we pay for, when and how in the Medicare program. The existence of the IPAB in the ACA is an example of a Republican-initiated idea being folded into the final bill. Again, we will only be able to do the hardest things if both parties work together.
  

The Democratic party invested much political capital and time to pass the ACA. The Republicans have talked about many of the ideas above over the years, but it is worth remembering that they passed none of this when they controlled both Houses of Congress and the White House from 2002-2006. No federal bill to expand insurance purchase across state lines; no medical malpractice reform; no changing of the tax treatment of employer paid insurance. Now that they control the House of Representatives, I hope they will work to pass some health reform legislation, and thereby continue the health reform discussion that is needed if we are to ever develop a sustainable health care system.

More on individual mandate and the options

Mark Hall with a very nice, succinct piece in the New England Journal of Medicine addressing the constitutionality of the individual mandate. He does a good job of addressing the legal/constitutional, political and health policy dimensions to this question.

Universal coverage or something close is a necessary, but not sufficient condition to deal with our health care cost problem. There are three basic ways to expand insurance coverage toward anything resembling universal from our current point of 50 Millionish uninsured.

• Government insurance, such as Medicare, Medicaid or a new plan in which government acts as the insurer. Such government insurance needn't be expansive, it could be catastrophic like what I wrote here.
  
• Employer mandate, in which employers are compelled to provide insurance or pay a tax to support such coverage if they do not. Hawaii has had one for 30 years and has the second highest rate of insurance (after Massachuetts, that has an individual mandate).
  
• Individual mandate, which is what the Affordable Care Act proposes.
  

A fourth option is direct government provision of care, like in the Veterans Administration in the U.S., or the National Health Service in the U.K. This would be an actual takeover of the health care system, and I list it as a possibility in the interest of completeness since some of my students read this blog.

If the Supremes rule that the individual mandate is unconstitutional, then I see only two other options left. If there are other ways to move toward universal coverage, which is a necessary but not sufficient condition to addressing costs, we need to see this laid out in a bill that is marked up in a House committee, scored by the CBO and subjected to the debate and discussion that was afforded the ACA. There are some good ideas hidden amidst GOP talking points on health policy, but they have to come together in a piece of legislation for the Republicans to be taken seriously on the health policy front.

Offense is harder than defense

Dave Leonhardt with a nice piece placing opposition to health reform in historical context. One take home from this long history is that you might as well try something radical because any new health or social policy will be called radical even if it is not. The Republican alternative to the Clinton Plan became the end of the Republic 15 years later. It will be fascinating to see what the House Republicans do on health reform in the new Congress beyond passing a repeal bill that has no consequence. Will that be it, or will they move to pass an alternative vision?

One thing I learned from my experience coaching my 10 year old's little league football team this past Fall is how much harder offense is than defense. On defense, one player can make a great play and the entire team looks great. On offense, 10 players can make a great play and one player messes up, the play fails and the team looks terrible. In the House of Representatives, the Republicans are getting ready to shift from defense to offense. Do they even have a health reform offense?

I don't believe that they do have an offense on health reform. That does not mean they don't have ideas, but they are mostly expert in using them to argue against things. I would love to see Paul Ryan's budget committee mark a bill along the lines of his roadmap proposal. I suspect he cannot pass it through his own committee, much less the entire House, but who knows? The default of our health care system with no changes is future fiscal disaster for our country, so we have got to do something. Offense is a whole lot harder than defense...I think the House Republicans owe it to the country to lay out their vision for health reform, and to go on offense.

Is the individual mandate unconstitutional?

The practical definition of what is constitutional these days is whatever Anthony Kennedy thinks. This is the clearest, simplest treatment of the constitutional issue I have read, and makes me think the individual mandate will be upheld eventually (as does private convos with a couple of constitutional lawyers). Here are lengthier discussions of the issues. However, I will leave the constitutionality decision to the Supremes and focus here on what happens to the health system if the individual mandate in the ACA goes away.

The three biggest problems with the health system are: it is unsustainable due to cost; there are many uninsured persons; and there are quality problems in the system. These problems are not isolated from one another, but they are distinct. The Affordable Care Act is mostly a coverage expansion bill with some steps toward dealing with costs; we need many more steps to effectively deal with costs.

While it may seem paradoxical, expanding insurance coverage beyond the 50 odd Million uninsured persons in our country is actually a necessary, but not sufficient condition to addressing costs. [Update:@IncidentalEcon with more on this from Len Nichols]. So, if the individual mandate is unconstitutional and the ACA unwinds, we will be left with a status quo that is not so good. And little hope of addressing costs. Likewise, if Republicans somehow get the repeal they say they want, perhaps after the 2012 election, where would that leave us?

• 3 in 6 Americans covered by employer based private insurance
• 2 in 6 will be covered by government insurance
• 1 in 6 will be uninsured
  

With the 3 in 6 getting smaller over time as the link between employment and insurance breaks down, and the 2 in 6 gets larger due to population aging. And the plight of the uninsured is familiar: getting some care, albeit delayed, typically of lower quality, and often delivered in the most expensive setting, with the costs shifted to persons with private health insurance via higher premiums.

There are three basic ways that health insurance is financed across the world:

• Government
• Employers
• Individuals

No country has gotten anywhere near a universal coverage system without some type of a mandate, or a mix of mandates, and neither will we. Medicare, for example, is a type of mandate because you must pay payroll taxes, and then you are eligible for insurance.

The reason we have uninsured persons is because the link between employment and insurance is imperfect and some employers don't provide it. The link is likely to continue to break down over time because insurance is so expensive. Others slip through the cracks because they lose their job, but are not eligible for any governmental insurance. Some may want to purchase insurance but it is very expensive if you are priced as an individual and not as part of a large risk pool, and others will be denied because of their health without the insurance reforms of the ACA (the only thing I can think of worse than nothing is no individual mandate but guaranteed purchase, updated with stuff from Austin Frakt via Ezra Klein talking about Jon Gruber). And some choose not to take up offers of insurance, mostly because they are young and don't think they will get sick. They will probably be right unless they are wrong. If they are wrong, we all will pay.

So, if Republicans get their wish and the ACA goes away either via the courts or repeal, then what?

• Republicans are opposed to government expansions of health insurance. They don't like the expansion of Medicaid in the ACA and certainly don't want an expansion of Medicare to cover younger persons, for example.

• They are opposed to an employer mandate, and don't like the penalties in the ACA to larger employers who don't provide cover if their employees subsequently get subsidies to purchase insurance coverage. The Clinton Plan and other options in the early-mid 1990s were based broadly on an employer mandate, or so-called 'pay or play' in which employers had to provide coverage or pay a tax to fund government insurance for their workers. Republicans were deathly opposed to this plan, and in their opposition they proposed an alternative: an individual mandate.

• Now they are opposed to the individual mandate, what has heretofore been their idea. The pragmatic solution that focused on individual responsibility is now a threat to the Republic. It is not clear when they changed their mind, but it seems to have been sometime around Noon on January 20, 2009.

If you are opposed to government insurance, to employer mandates, and to individual mandates, then you have no credible policy to attempt to expand health insurance coverage. And no hope of addressing costs. There are plenty of inconsequential policies that sound great but won't do much, such as selling insurance across state lines.

Maybe there is another way that I just can't see. Maybe the House Republicans will pass a bill in the next Congress that provides their vision for how we can expand insurance coverage and address costs and people will be sold. They control the House and all the Committees. I would love to read their vision for the future of the health care system. They need to move beyond what they are against and lay out what they are for, meaning written in legislative form, marked in a committee, scored by the CBO and so on. We know what you are opposed to in health policy, now show us what you are for.

*I updated this post around 7:00am on 12/14 with posts that made some of my points much better than I had done. Update 12/14, 4:45pm. Ian Crosby of @IncidentalEcon with another good post on the legal arguments.

DAFT

Deficits Are Future Taxes (DAFT) says Mike Munger in an op-ed in today's Raleigh, (N.C.) News and Observer. This should worry both Republicans (Conservatives) and Democrats (Liberals/Progressives) because in shoving hard decisions off to the future by continuing to run deficits, both 'sides' put their main interests in jeopardy: Conservatives low taxes and Progessives/Liberals protection of programs that they believe to be key, such as Social Security and Medicare.

I wrote about 10 days ago that our country needs to take up the fight about the long term deficit in the next Congress, and not delay this further to the future. We will eventually deal with it, the only question is whether we do so in the midst of a crisis when options will be limited, or whether we do so while there is time to have reasoned debate.

I don't think the tax deal is as bad as Mike does, IF it is truly a short term deal. If it turns out to be long term, we will have huge deficits in the near future to pay for anything other than Social Security, Medicare/Medicaid, Defense, and interest on the debt. This tax code cannot raise more than 16-17% of GDP in even in a normal economy, and the cuts proposed by the Bowles/Simpson Commission to get to balance at 21% of GDP were seen as too draconian by many. This tax code and any level of spending that has a chance of being enacted is completely unsustainable.

The 'sides' need to work together and fight this out, starting in the next Congress, for the good of the country.

I believe the President is going to do the right thing in the next Congress and propose a serious tax reform in the short term that will increase the amount of taxes collected by the federal government. And begin the conversation about reducing spending over what it is projected to be over the long term. The stars are aligning and the best policy also represents the President's best chance for re-election. I am a lifelong North Carolinian, and winning N.C. again will be hard for the President, period (it was plenty hard last time, and on Labor Day 2008 I would have bet a lot of money that he couldn't win NC, even as I was going door-to-door for his campaign). Seriously addressing our long term fiscal crisis through difficult choices strikes me as his only hope with the many independents, and independent-minded Democrats who live east of I-95 in North Carolina and who default to voting for Republicans in Presidential elections.

If the President takes the risky move of being the first to truly lay out the hard choices as someone with a lot to lose, he will go down in my mind as a great President, regardless of the outcome of the next election.

Moving beyond death panels

New America Foundation event today on "Moving Beyond Death Panels"...I haven't watched the entire event but following the livetweets suggests it was a good one. Presenters included David Goodman from Dartmouth talking about their recent report on quality of end of life care for Medicare beneficiaries. Shannon Brownlee moderated, and here are the presenters.

• David Goodman
• Joanne Lynn
  
• Becky Beauregard
• Michael Cannon
• Martin Gorman

The antidote to the death panel nonsense is to learn how to talk about the issues related to end of life care. This is a good example of that. Joanne Lynn especially, talking from about 25th minute to the 35th minute, very clearly lays out our culture's inability to talk about death and how that greatly hinders policy.

Pay for in the Doc Fix

Austin Frakt via HealthReformGPS noting that the pay-for in the doc fix bill actually 'pays for' an indeterminate amount of money (Senate Finance committee says $19.1 Billion over 10 years) because the Secretary of HHS has the final authority to set the payback amounts for persons who get premium subsidies that are too large due to income increases during a year in which they got such subsidies. Amounts noted are maximums.

A separate source I talked with confirmed they thought that the above interpretation was correct and the amount of 'pay for' in the doc fix depended upon what the Secretary did. Further, they said that the language in the doc fix bill would have likely been in a conference committee bill reconciling the House and Senate reform bills if there had been one. It obviously wasn't a part of the reconciliation bill, however.

Update: Here is another take, discussing the undermining of the ACA (h/t @HEALTH_NOTES) by reducing subsidies in a way that would be a hardship to folks who got a better job during the year. This take assumes that the pay back amounts are definitely the amount that will be charged; the take from HealthReformGPS written by Sara Rosenbaum, and what Austin was commenting on. assumes the amounts specified in the doc fix are ceilings, or maximums and that the actual amount of pay-backs that people will have imposed on them if they get a better job is to be determined by the Secretary of HHS.

If the payback amounts set forth in the Medicare Extender/doc fix bill are maximums, then the degree to which this bill undermines the ACA is really dependent upon what pay back levels the Secretary of HHS sets. The general principle that taking bits of money out of the ACA will undermine it is correct, but it seems as though this bill may not do so much of that in reality.

Three Questions

If we ever slow health care cost inflation to a sustainable pace, it will be because we learn how to ask 3 simple questions when thinking about a medical treatment:

• Does it improve quality of life for the patient?
• Does it extend the patient's life?
• How much does it cost?

Asking the questions are of course much simpler than figuring out the answer, and far far simpler than deciding what to do with the answer.

The first step is not demonizing even the asking of the questions. This would represent a profound shift in our culture, and is needed. We need to grow up and learn how to talk about limits in medicine. Then we will have to learn how to give practical answers to these questions, and the answers will have to be knowable and usable at the bed side as doctors and nurses are caring for actual people--you, me, my parents, grand parents and kids.

Then we will have to decide what to do with the answers. None of this will be easy.

The good bad news is that there is a good deal of care that is non-productive, which I would define as care that does not improve quality of life or extend life. We should start there. I don't know how much health care spending could be reduced by stopping care that didn't improve quality of life or extend life, but this is the correct way to think about our attempts to slow health care cost inflation. We might have to get into the very hard business of deciding that some care that was productive but very expensive shouldn't be done. But, we might not; we won't know until we start asking these 3 questions.

Austin Frakt links to the comments of Rep. Issa (R-Ca), who is going to be the chair of the House Oversight Committee in January, who states his openness to using cost effectiveness research to make medical coverage decisions. Issa quite reasonably notes that we have got to learn how to ask questions about whether the use of expensive technology makes sense, and whether patients are getting the least aggressive care that will meet their needs. Austin praises these comments, but also notes that Issa's use of 'bureaucrats' is not helpful in the same way that the use of rationing and 'death panels' has been unhelpful, as Issa himself notes.

Any physician who is named to a panel such as the Independent Payment Advisory Committee (IPAB) will immediately be labeled a bureaucrat by anyone opposed to the work of the IPAB. One practical solution is to name one of the Republican members of Congress who is a physician to the IPAB. Heck, make them the chair. Anything that moves us in the direction of beginning to ask these questions.

Doc Fix language

is out tonight (h/t @sarahkliff). Here is a summary of the law in more readable form. The primary pay-for is the next to last paragraph of the third page of the second document. Short version is that the ACA specified that if your income rose during the year such that your end of year income was higher than was projected (which is how amount of subsidy/tax credit was figured), then the maximum amount an individual had to pay back to the government was $250 for individual or $400 for family coverage. Now there is a sliding fee scale based on how much your income turns out to be, with much larger pay backs in force. If your income is 200% poverty, you have to repay up to $600, if it is 450-500% of poverty, you have to repay up to $3,500, with sliding scale in between.

This provision saves around $19 Billion over 10 years. $14.9 Billion of this is used to extend the SGR formula and avoid the scheduled Part B payment cuts (planned for Jan 1, 2011) for one year (now set for Jan 1, 2012)....the so-called doc fix.

The remainder of the money saved is used for other tweaks, such as extensions of enhanced payment for ambulance service, exceptions to Medicare outpatient cap violators, and maintain extra payments for certain mental health services.

The big question is whether Congress and the Administration can come up with a better physician payment formula over the next year and get away from these rolling 'fixes' that are actually just delays of cuts that never happen. It really does start to become a matter of general competence and can we solve problems or not.

Medicare and Specific Boxes

I understand where Austin Frakt is coming from in saying he wishes the doc fix deal could have been implemented from within the Medicare program's future planned spending. It has been implemented by reducing the amount of subsidy that goes to persons with incomes above 133% of poverty (below that they would be covered by Medicaid) and 400% (where the subsidy will cut off). This means that some federal spending has been moved from the 'under-65 box' to Medicare as compared to the new baseline created by the Affordable Care Act.

Of course, it was controversial to achieve expansions of health insurance by reducing planned Medicare spending by around $500 Billion over the first 10 years of the ACA; this was shifting money from the Medicare box to the under-65.

We need to keep an eye on the cross subsidy of the 'boxes' in our health system, but we first and foremost need to improve the health care system of our nation. It costs too much and there is ample evidence we are not getting our monies worth for what we spend. And there are 50 odd Million people who are uninsured.

There is a disconnect in focusing too much on the various 'boxes of coverage' in our country. When we reduce Medicare spending to fund insurance subsidies, the people newly receiving coverage are of course the children and grand-children and great-grandchildren of Medicare beneficiaries. Who are paying the payroll taxes necessary to fund Medicare, which is of course providing care to their parents, grand parents and great grand parents.

We have got to develop a system that makes sense for the young and old alike, realizing that the former will eventually become the latter.

Doc Fix Deal

The Senate is apparently nearing a year long update of the SGR payment formula for how Part B of Medicare pays physicians (aka doc fix). I haven't read the text of the deal and don't exactly understand the pay for as it is described. The article linked says that around $19 Billion will be gotten from a tweak in the formula that determines how subsidy people will get to purchase health insurance beginning in 2014 in the exchanges. More specifically, it seems to be linked to how consumers would pay back subsidies if their income rises during the year in which they received a subsidy. This would effect people who got bonuses that push them out of eligibility or who were unemployed for part of a year but then got a job. Bottom line, it is some sort of reduction in the subsidy available to persons with incomes between 133% and 400% of poverty in 2014 to purchase insurance, but the details are sketchy. A few thoughts about this:

• The ongoing saga of the 'will the cut take place' while everyone knows it won't is a bit tiresome. The Congress really needs to develop a new policy and move away from these short term fixes.
• This is a one year fix, which is longer than any fix in the past couple of years. Maybe this will give them some space and time to develop a better long range policy.
  
• In developing a new Medicare physician payment policy, it is easier to figure out what is wrong (a fee for service based system that incentivizes doing more and not paying for quality) than it is to figure out how to transition to a better payment policy.
• Improving physician payment policy is made all the harder by the 'repeal' mantra that continues, has now morphed into the 'death by a thousand cuts' approach to hamstringing reform. The Republicans have little incentive to work constructively toward a revised payment approach because that would seem like momentum toward transitioning the health care system toward a better place.
  
• At the same time, lets say the Affordable Care Act were repealed--then you just lost your pay for that delays the SGR cut.
• Working out a reasonable and sustainable revision to how Medicare pays physicians needs to be a chief goal of the next Congress and the Administration. Think of it as a down payment on proving that we have some hope of implementing health reform, or any other imaginable health reform.
  
• In addition to addressing Medicare physician payment policy, we have got to also begin to address cost inflation in the private insurance sector as well as in Medicare. If the pay rates in Medicare diverge too widely from private insurance, it will cause access problems for Medicare beneficiaries....not what the baby boomers who are getting ready to move into eligibility have dreamed about.
• More and more I think Joe Newhouse (here via Austin Frakt) is correct that the only way to address cost inflation while maintaining access is all payer rate setting. Perhaps at some point in the past this wasn't true, but now I am not so sure there is another way....
  

Tax Deal

The President has apparently reached a deal with Congressional Republicans on taxes. It is not clear the House Democrats have signed off, but I am not sure what realistic choice they have. Several parts of the deal were expected, and several were more of a surprise:

• plan extends the current tax rates for two years, both for the first $250,000 of income as well as above. This was expected, but is a huge loss for the President, who campaigned on not extending the tax rate for income above $250,000.
  
• extended unemployment insurance for claims lasting up to 99 weeks; that lapsed on Nov. 30, and I think most thought there would perhaps be 13 or 26 weeks of extension. This was not expected by many, and is a big win for the President.
• A payroll tax holiday for 2011 that will cut the employers Social Security payroll tax from 6.2% of wages up to $108,600, to 4.2%. This is a good idea that provides some needed stimulus in the most straightforward and quick way possible. This is more stimulus than many thought possible to get out of the Republicans.
  
• The creation of a tax on estates above $5 Million, at a rate of 35%. The estate tax had lapsed to 0 this year and would then kick back in at the old rate as part of President Bush's budget gimmickry to hide the cost of his tax policy. The rate of 0 was ridiculous, at least there is an estate tax again.
  
• Extension of some temporary tax cuts that were a part of the stimulus in 2009 for students and some working families.
  
• Expanded deductions for equipment and the like for businesses.

In the short run, we need more stimulus, and this is likely the best that could be gotten. In the long run, we need a radical transformation of our tax code and benefit side of government or our country will go bankrupt. The next two years won't do it, but the tax code we have just extended is a disaster for anyone who is interested in a balanced budget if it remains for the long term. Hopefully it will be replaced by a far simpler tax code along the lines suggested by the Deficit Commission, and our nation will have an adult conversation about how much spending we want and we will then develop a way to pay for it. It will be up to the President to focus the nation's attention on our long term fiscal situation and the deficit with his budget next year, and his powers of persuasion for the remainder of his time as President.

The Way Forward on the Deficit

The President's Deficit Commission passed by an 11 to 7 vote; this is short of the 14 yes votes needed to trigger an 'up or down vote' in the House and Senate. However, I am not really sure what that would have meant....a general 'sense of the Senate' vote? Surely, the Deficit Commission report has not been put into legislative language.....no matter now.

I an any event, looking at who voted yes and no is instructive:

• Chairs of the Committee, both yes.
• Business leaders, both yes.
  
• Alice Rivlin, former CBO head (founding Director) and policy wonk extraordinaire, yes.
• Sitting U.S. Senators, 5 of 6 yes (Max Baucus, D) voted no
• Sitting U.S. House members, 5 of 6 no (John Spratt, D) who lost election in Nov. voted yes
• Organized Labor leader, voted no

The bipartisan range of the Senate members who voted yes is impressive: Coburn is one of the most conservative members, and Durbin a reliable liberal. Both the Chair of the Senate Budget Committee (Conrad) and the ranking member, (Gregg) managed to both agree.

In the House, the bipartisan agreement is also impressive. Paul Ryan, the soon-t0-be chairman of the House budget committee, and who has no problem issuing sweeping proposals, to change, well everything, voted no because he said it did too little on health care, and didn't cut enough. Xavier Becerra, a liberal from California, said it cut too much. Ryan voting no especially dims his reputation as a young gun a bit. He thinks that he is going to get support of something even more radical than this? He should recognize quite a lot about his roadmap here, especially the tax reform (fewer brackets, lower rates, broader base by ending tax expenditures). He is getting plenty of deserved derision.

The theory of the Senate is that members are more insulated from elections (only every 6 years) while the House is always running for re-election (we are less than 23 months from the next one and they haven't even been sworn in yet).

I think that the President's Commission has succeeded in generating lots of elite discussion of the deficit and how it should be addressed, and is a reasonable way forward, certainly as a starting point. I think there is grudging acceptance by most that something must change. The only question is whether we wait for an economic crisis to bring it about, or go ahead and fight it out now.

There is a profoundly delusional aspect of the current tax rate debate: extending all the rates (those above and below $250,000) would add around $4 Trillion to the deficit over the next 10 years. The plan released by the Deficit Commission would reduce it by around $4 Trillion over the next 10. That is quite a swing....

The next big move is that of the President. Will he propose a budget to Congress that contains these hard choices, perhaps forcing continued discussion of these issues? The results of the Commission suggest there could be hope of the White House being able to work with the Senate on these issues. If they build momentum, it may become increasingly hard for the Republican controlled House to ignore things given how much Republicans have traditionally talked about deficits (they have mostly only talked, however).

Especially if we extend the tax rates of the past decade into the future, we have got to move to develop a plan to address the long term deficit in a reasoned manner. Reasoned means that we certainly need some short term stimulus, perhaps the payroll tax holiday suggested by the Deficit Commission is the simplest, most consequential way to act.

Simply continuing the tax rates that have existed through the economic crisis and doing nothing else is akin to flooring it when you finally see clearly the bridge is out ahead. Perhaps an extension makes a large change (esp a tax reform) such as that proposed by the Deficit Commission much more likely to gain traction. It may be that the extension of the current rates makes a big change inevitable, sooner rather than later.

Commssion Report, 11 Yay, 7 Nay

The President's Deficit Commission report was approved by a 11-7 vote, but this is short of the 14-4 vote needed to get an up or down vote in the House and Senate. All 3 Republican House members (Ryan, Hensarling, Camp) voted no as did Max Baucus, the Chairman of the Senate Finance Committee. But, early reports that none of the elected Republicans would vote for the report proved false, as Sens. Coburn and Crappo who will return to the next Congress and Gregg who is retiring voted in Favor. Sen. Conrad (D) and Sen Gregg (R) both voted yes and they are the current Chairman and ranking member of the Senate budget committee.

WSJ coverage.

Op-Ed on Deficit Commission: fight it out now

I have an op-ed in today's Raleigh, (N.C.) News and Observer arguing that the President's Deficit Commission report is a good place to start discussions and that we need to go ahead and fight this out now and not wait for a debt-driven financial crisis to address our fiscal problems.

The Deficit Commission proposes to achieve balance at 21 percent of GDP, which would be a historical tax increase and a historical cut of spending seen at many points in the past 40 years. Here is an overview of historical spending and taxation levels the past 40 years.

Taxes and Spending as Percent of GDP, 1970-2009

Year	Taxes Collected, % GDP	Spending, % GDP	-Deficit/+Surplus, %GDP
1970	19.0	19.3	-0.3
1975	17.9	21.3	-3.4
1980	19.0	21.7	-2.7
1985	17.7	22.8	-5.1
1990	18.0	21.9	-3.9
1995	18.4	20.6	-2.2
2000	20.6	18.2	+2.4
2005	17.3	19.9	-2.6
2009	14.8	24.7	-9.9

source: my calculations from CBO sources.

The proportion of our economy that is redistributed by the federal government is a profound one that is deserving of reasoned debate. And every dime of government spending is redistributive because government's produce spending patterns that markets won't achieve. That is the point of government spending. It is not job food stamps that is redistributive. Every single dime.

Medicare, the earned income tax credit, home mortgage deduction, Social Security all produce patterns of spending that would not occur without government action. Medicare was created because society decided the outcome produced by the market (around 50% uninsured for those 65 and over in the early 1960s was not acceptable). The existence of the Department of Defense is an explicit claim that the market won't produce the appropriate amount of Military spending our nation needs, and that government knows how much we need. So, don't say you are opposed to redistribution unless you want 0 government spending. Say which redistribution you are opposed to.

Update: The Medicare example is better to illustrate the point that govt action is a rejection of what the market would otherwise provide and not defense since 'the common Defence' is explicitly noted in article 1, section 8 of the Constitution, so there is the clear statement from the Constitution that the federal govt would be responsible for Defense. Article 1, sect. 8 also notes the 'general Welfare' as being a reason the Congress can levy taxes. Many disagree what is legitimately done by the federal government in this way....that is the conversation we need to have: how much 'common Defence' and how much 'general Welfare' we will have and then we need to pay for it.

Bottom line: lets fight it out now and not wait for a debt-driven crisis that gives us fewer options and less time.

A short term extension

of both the tax cuts might actually be good for the deficit commission, the ensuing discussion and our ability to actually address the long term issues. Extending them both forever is a disaster if you are interested in a balanced budget. The current tax code won't produce anywhere near the amount of revenue needed to fund any level of spending that has any chance of being enacted. It will raise 16-17% of GDP in a good economy; maybe 5% of the country wants the cuts that would be necessary to make spending that low.

The current tax code as the default, and therefore perpetual and growing deficits, may make a large scale tax reform like proposed by the Commission report that gets rid of many/most tax expenditures just about the only way to proceed politically. Because you can say (correctly) that you will be lowering rates. And increasing fairness. And doing it in a progressive manner, because most of the tax expenditures help those with higher incomes. And it will be good in health policy terms because that may be the only way we will actually address (cap, maybe end some day) the tax exclusion of employer paid health insurance, which is easily the best, simplest and most straightforward way to slow health care cost inflation.

Extend them both for a period of time, and then get down to business.

Deficit Commission Good Place to Start

The Deficit Commission final report is out, and its recommendations are a good place for our country to start the discussion about how to address the federal deficit, and its effect on our cumulative level of debt. I don't like everything in it, but I would take it over the status quo in one second.

The problem we face is that the very large deficits due to the economic downturn will give way to large ones from our paying for several basic governmental functions: Military, Social Security, Medicare, Medicaid and the interest on the debt. Our tax code simply doesn't raise enough revenue to pay for the spending we have. One or both have got to change. In fact, if we do nothing, the 5 line items above will consume all federal revenue in 2020, and every other dime spent would be deficit-financed. The deficit would be over $1 Trillion then, and this assumes a normal economy.

The deficit is a problem because it adds to our cumulative debt. It was around 33% of our GDP in 2000, and at the end of this year it will be around 63% of GDP. Now borrowing costs are low, but if the debt gets too high, investors will be worried, and we will have to pay higher interest rates to finance our debt. No one knows for sure what level of debt will trigger this crisis. It would be better for us to hash it out now while we can have some reasonable debate than to wait and deal with it under a financial crisis.

The broad outline of the Commission report is the same as the earlier draft report from the co-chairs, Erskine Bowles and Alan Simpson.

• 21% of GDP as the target balance point to be achieved by 2035. This would be a historical tax increase and a historical cut to our spending level. I would probably be willing to spend a bit more, but I think a target is necessary.
• The future deficit is driven almost entirely by health care costs. The plan caps the tax exclusion of employer paid insurance at the 75th percentile of premium costs nationally in 2014, and holds this amount constant through 2018 which means even more policies will be affected. They propose then moving slowing to eliminate this tax exclusion by 2038. This would be the most consequential cost-control health policy enacted by the U.S. since, well ever. And this policy is flexible, meaning it will work as intended regardless of whether the Affordable Care Act is implemented fully, repealed or anywhere in between.
• The plan is a bit wobbly over the ACA, and basically comes down with expansion of the Ind Payment Advisory Board, which is the strongest part of ACA to address Medicare cost inflation. Then it notes disagreement on the board about whether ACA and these expanded policies will slow costs. They recommend that Medicare growth be capped at 1% above inflation after 2020 if enough cost savings do not materialize.
  
• Bottom line on health care: capping the tax exclusion and beefing up the IPAB would (by far) be the strongest cost control health policies our nation has enacted. There are others proposed such as malpractice reform, but these are the two biggest, and in and of themselves make it a strong health policy package.
  
• The plan proposes a profound tax reform, which is essentially a trade of fewer brackets and lower rates for the removal of around $1.1 Trillion in tax expenditures, or aspects of the tax code that benefit one group of taxpayers over another. Progressives need to get on board with this approach, because it is a progressive way to reduce this type of 'spending.' Some of the tax expenditures are proposed to be added back, but the plan makes clear how much they cost. One of the benefits of the debate so far is that (maybe) more people are beginning to understand that the 'outs' include explicit spending and tax expenditures like the home mortgage deduction and the tax exclusion of employer paid insurance.
  
• Regarding Social Security, it is in need of tweak, while the health care system is in need of tremendous changes. I would rather not raise the retirement age, but more directly cut benefits for high wage beneficiaries and increase the amount of wages subjected to payroll taxes faster than what they propose (they want to eventually get back to the 1983 standard of the 90th percentile of wages being subjected). We need a deal on Soc Security so we can redouble our efforts on health care costs.
  
• Their plan cuts Military spending, and discretionary spending and is filled with symbolic things like cutting the budgets of the White House and Congress. But, symbolism can be important so long as you get to the actual policies needed.

This report is a good place to start. There are now 5 or 6 deficit plans, from liberals, conservatives and everyone in between. This report has the benefit of having been discussed and put together in the context of Democrats and Republicans being involved, many of whom are in Congress. So, it has already been subject to some of the inevitable negotiations. And some Democrats and Republicans have signed on: Conrad and Gregg, for example, the Chair and ranking member of the Senate budget committee are going to vote for the report on Friday. Xavier Becera, a Democrat on the more liberal end is undecided but says this is a template for how we address the problem, and Sen. Tom Coburn who is decidedly conservative is reportedly considering voting yes. That is some progress. The business leaders on the panel are supporting it as the way forward.

The President of course has the ability to propose dramatic changes in his own budget. If he choose to do so, that will ensure continued discussion of these difficult changes next year, and put an end to the hyperbolic discussion of miniscule spending programs as a way to deal with the deficit. It is the correct policy for him to focus our country on the hard things. He has said he would rather be a good one term President than a mediocre two-term one. And because his political fortunes with independents have been on the rocks, perhaps the stars are aligning and what will be good politics for him in terms of maybe wooing back independents which seems necessary for his re-election will be the same thing as the right thing to do. Here's hoping.

The Moment of Truth

is the title of the Deficit Commission final report. More later.

More on deficit Commission Delay

Update 9:15am: Commission Report, "The Moment of Truth" just released. Some tweaks, such as replacing the mortgage deduction with a refundable tax credit, which is a capping of an otherwise unlimited tax subsidy. The bottom balance point remains 21% of GDP.

**************
NY Times with a bit more reporting saying that the Republican members are unified is being against the Commission report. It is not clear how much it may have changed since Bowles and Simpson released their draft report earlier in November.

If the Commission negotiations are only among the Democrats it shows several things. (1) Republicans are total frauds in worrying about the deficit. They lament tax and spend but practice don't tax but still spend.
(2) The Democrats have allowed the Republicans to get away with the above because they have been mostly worried about programs and haven't talked about the deficit.
(3) The deficit and cumulative debt is an actual problem, and we will have to address it at some point. The only question is whether that point comes during an economic crisis or through some sort of (reasonable?) debate.
(4) Republicans have more to lose short term in actually doing the hard thing, because they think they can ride bad economy and Obama unpopularity to win the White House and Senate in 2012.
(5) For the President, good policy and good politics (for his re-election chances) are coming toward the same thing. He should call the bluff of the Republicans and propose a budget that actually lays out many of these hard decisions.

Again, the historical data on taxes and spending. 21% of GDP is lower than spending was in 1975, 1980, 1985 and 1990. Spending was 22.8% of GDP in 1985. And the baby boomers were working then and not receiving Soc Security and Medicare.

And 21% of GDP collected in taxes would be the highest amount since I have been alive.

Taxes and Spending as Percent of GDP, 1970-2009

Year	Taxes Collected, % GDP	Spending, % GDP	-Deficit/+Surplus, %GDP
1970	19.0	19.3	-0.3
1975	17.9	21.3	-3.4
1980	19.0	21.7	-2.7
1985	17.7	22.8	-5.1
1990	18.0	21.9	-3.9
1995	18.4	20.6	-2.2
2000	20.6	18.2	+2.4
2005	17.3	19.9	-2.6
2009	14.8	24.7	-9.9

source: my calculations from CBO sources.