SHOW ME THE MONEY: Options for Financing Health Reform

1. SHOW ME THE MONEY: Options for Financing Health Reform Uwe Reinhardt Princeton University ALLIANCE FOR HEALTH REFORM & COMMONWEALTH FUND Washington, DC July 31, 2009

2. I. WHAT IS TO BE FINANCED? In 2008, Hadley et. Al. estimated that if all non-elderly Americans had then been fully insured like the typical employee with private insurance, national health spending would have been $122 billion or 5% higher than it actually was. Brought forward to 2010, that would be about $140 billion Brought forward to 2019 @ 6% growth this sums to $1.85 tr. Brought forward to 2019 @ 5% growth this sums to $1.76 tr. Brought forward to 2019 @ 8% growth this sums to $2.1 tr.

3. How much of those total additional nation health spending (NHE) would have to be financed by the federal govern-ment depends on: how much of the total can be extracted from the newly insured through a mandate to be insured; How much can be off-loaded onto the states through Medicaid and CHIP How generous the basic benefit package to be mandated and, where need be, federally subsidized is. How long the phase-in the increased coverage is. The current preference on the Hill seems to be a federal contribution of $1 trillion for the next 10 years.

4. II. FINANCING $1 tr OF NEW FEDERAL SPENDING There are basically three major sources of financing: Borrowing more from the descendants of Mao Tse Tung, from Japan, from Middle East oil potentates, etc.; Increasing various kinds taxes on Americans; Cutting health spending on the already insured to help finance the newly insured (in other words, making the providers of health care serve more people for the same money by increasing their productivity).

5. III. NEW TAXES ON AMERICANS The menu here is far and wide, to wit: Raising income taxes on high income Americans Pigovian spill-over taxes (like pollution taxes) on substances and activities than cause ill health and may burden people other than those consuming the substances (e.g., sugar and fat) or engaging in the activities (e.g., motorcycles) A modest, broad-based and earmarked “health care” tax on retail sales (e.g., 0.5%). This might yield ~$500 billion per year.

6. TAXES OF ALL TYPES AND LEVELS AS PERCENT OF GDP, 2007 SOURCE: WWW.OECD.org/dataoecd/48/27/41498733.pdf

7. IV. “BENDING THE COST CURVE” During the past four decades, health spending in the U.S. has doubled every 10 years. The supply side of the health sector seems to assume that a continuation of this trend is a firm social contract between them and the rest of American society. Therefore any downward deviation from that projection is viewed as a “give-back” or a “contribution” of providers and insurers to health reform. Remarkably, the White House seems to have has bought into that weird thesis.

8. CURRENTLY PROJECTED HOSPITAL CARE 2010-2019, in trillions of nominal dollars $11.1 tr 1.4% of total spending on hospitals 2010-19 $5.2 tr $3.3 tr $0.155 tr SOURCE: CMS Data & Statistics http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage

9. 2050 38% 13% SOURCE: http://www.cbo.gov/ftpdocs/87xx/doc8758/11-13-LT-Health.pdf

10. CONCLUDINGQUESTION What are we to make of an industry that faces a revenue stream of $11 trillion for the coming decade but claims it cannot manage its affairs so as to absorb a $155 billion ($0.155 trillion or 1.4%) “cut” of that projected revenue stream? And ditto, mutatis mutandi, for other providers of health care.