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Released only 5 weeks after Obama assumed office, the 134-page pamphlet of budget proposals represents a preliminary offering and, as such, is sketchy on details — particularly about reform. But Obama notes that, whereas many past federal budgets have reflected continuity, his represents "a break from a troubled past," because "the problems we face demand that we begin charting a new path." The preliminary plan will be supplemented by a complete 2010 budget that the administration said it will unveil in April.
In addressing the vast medical economy, Obama has proposed a grand bargain to the American people and the disparate array of private interests engaged in health care. The administration has assured the populace, providers, and its political allies that it is serious about pursuing reform and expanding coverage. (And a new report issued by the Institute of Medicine1 may strengthen the administration's hand: it concludes that in areas with high rates of uninsurance, even people with coverage are more likely to have difficulty obtaining care and to be less satisfied with it.) But the budget proposal indicates that a reform package should be paid for in part by reductions, totaling $318 billion over 10 years, in Medicare and Medicaid payments to health plans, pharmaceutical companies, hospitals, and home health care providers. The other half of the down payment would be secured by increasing taxes for Americans in the highest tax brackets.
The budget also incorporates proposals for accelerating efforts to root out fraud and abuse, working to reduce hospital readmission rates, and setting the stage for reforming the way Medicare pays physicians, though it does not indicate how that would be accomplished. The largest slice of the $318 billion in savings would come from reductions — of approximately $175 billion over 10 years — in Medicare's payments to health plans. Under current law, the administration notes, Medicare "overpays" health plans with which it contracts through its managed care component (Medicare Advantage), reimbursing them an average of 14% more ($103 per member per month) than it does traditional fee-for-service providers for the care of comparable beneficiaries. About 9.9 million Medicare beneficiaries (22%) are enrolled in Medicare Advantage plans, which are required to use most of the overpayments to provide enhanced benefits, most of which come in the form of reduced cost sharing for patients. As the budget document explains, "The administration believes it's time to stop this waste and will replace the current mechanism to establish payments with a competitive system in which payments would be based upon an average of plans' bids submitted. This would allow the market, not Medicare, to set the reimbursement limits." In response to this proposal, the stock prices of the largest Medicare Advantage contractors, including Aetna, Humana, and United Health Group, tumbled by double-digit amounts.
The administration also calls for substantial changes in federal policies that apply to the pharmaceutical industry. It proposes to increase the budget of the Food and Drug Administration by $1 billion to accelerate its regulation of the food supply and strengthen its capacity for approving new drugs, and it pledges to "accelerate access to make affordable generic biologic drugs available through the establishment of a working regulatory, scientific and legal pathway." Furthermore, the administration says it will seek to prohibit "anticompetitive agreements and collusion between brand name and generic drug manufacturers intended to keep generic drugs off the market."
The budget includes expenditures of $76.8 billion in 2010 for the discretionary spending programs (not including Medicare and Medicaid) operated by the Department of Health and Human Services — a decrease of $1.4 billion (1.7%) from 2009. It also includes a proposed $900 million increase in spending by the National Institutes of Health, which would come on top of the $10 billion provided through the stimulus package. The administration proposes to increase spending for cancer research by $6 billion as part of its multiyear commitment to doubling such funding.
Though it adds no more details to the administration's approach to health care reform, the budget document does include a pledge to work closely with Congress to design a way forward, noting that "the administration will explore all serious ideas that, in a fiscally responsible manner, achieve the common goals of constraining costs, expanding access, and improving quality." The administration's language suggests that it is open to a more ambitious reform plan than Obama outlined during his campaign, possibly including coverage mandates, as well as more ambitious Medicare and Medicaid reforms and the increasing of funding through mechanisms such as a value-added tax or changes in the tax deductibility of insurance premiums as a business expense.
Whenever Obama discusses reform, he emphasizes that slowing the growth of health care expenditures is one of his highest priorities. In this regard, he is echoing the strongly held views of the director of the president's Office of Management and Budget (OMB), an agency that reigns supreme over the shape of the annual budget and acts as arbiter of executive-branch policymaking. Its director, Peter Orszag, is an economist who formerly headed the Congressional Budget Office. In 2007, before the economy took a nosedive, Orszag wrote that "the long-term fiscal balance of the United States will be determined primarily by the future rate of growth of health care costs."2
The withdrawal of Tom Daschle as Obama's nominee for secretary of health and human services and director of the new White House Office for Health Reform left a vacuum that Orszag has filled. Although he was always expected to become a central figure, Orszag is now presiding over the development and execution of the administration's reform strategy. His special assistant for health reform is Ezekiel Emanuel, an oncologist who was detailed to OMB from the National Institutes of Health, where he chairs the Department of Clinical Bioethics. Emanuel, who set out his views on health care reform in a recent book,3 is a brother of Rahm Emanuel, Obama's chief of staff.
On March 2, Obama announced the appointment of Nancy-Ann DeParle as director of the White House Office for Health Reform. DeParle, a Harvard-trained lawyer and Rhodes scholar who commands respect from legislators with whom she has worked, served as administrator of the Health Care Financing Administration (the predecessor to the Centers for Medicare and Medicaid Services) during the Clinton administration.
Obama's new nominee for secretary of health and human services — Kansas Governor Kathleen Sebelius — brings impressive credentials to the job, but in order to influence the administration's health policies she will have to contend with a phalanx of economists and analysts who are already entrenched in the White House. Seemingly to a person, they share Orszag's belief that, given the competitive environment created by globalization and the lack of evidence that spending more on health care necessarily results in higher-quality care, we must put a stop to the pattern of health care expenditures' growing far more rapidly than wages and the overall economy. A recent study by the McKinsey Global Institute4 estimated that the United States spends $643 billion more every year on health care than its peer industrialized countries, after adjustment for wealth (see graph and table). These findings have had a profound influence on the thinking of Orszag and his colleagues. Two McKinsey principals who worked on or oversaw this study, Robert Kocher and Diana Farrell, recently joined the staff of the National Economic Council in the White House.
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Congress will soon engage in battle over the 2010 budget. Many Democrats who reacted to the Obama budget expressed cautious optimism about its prospects. But most Republicans came out firing against it because it would increase the federal deficit. At a gathering of the Conservative Political Action Committee on February 27, House Minority Leader John Boehner (R-OH) told his cheering colleagues: "The stimulus, the omnibus, the budget — it's all one big down payment on a new American socialist experience." Whether that characterization will hold sway among any but the more conservative of the party faithful remains to be seen, but Republicans have little to crow about in this regard, having been in command of government from 2001 through 2008, when the annual budget went from a surplus of $710 billion to a deficit of $1.4 trillion under the watch of President George W. Bush.
Though strident in its language, the budget proposal includes only a sliver of the savings required to slow the growth of health care costs to anything close to the rate of growth for nonmedical goods and services. Very little in the history of modern Congresses suggests that legislators have the stomach to retrench a sector that is such a large part of the economy, particularly one with an impressive record of creating jobs. Carrying it off in normal times would take much of the political capital of any president, and this is only one of countless challenges faced by the new administration. On the other hand, Obama pulled off a historic victory last November; perhaps he will prove capable of bending the cost curve and achieving health care reform as well.
Source Information
Mr. Iglehart is a national correspondent for the Journal.
This article (10.1056/NEJMp0901927) was published at NEJM.org on March 4, 2009.
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