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Can the market trust gradual deficit reduction?

There's a critique of the Affordable Care Act that argues that it doesn't save money. This critique is wrong. It doesn't save money if the bill is changed and its cost controls are repealed. But as written, our best estimate is that it saves money -- and it's as likely to save more than projected as it is to save less.

There's another critique, however, that is more persuasive: It saves money slowly. That frustrates me, too. But if you want to go faster, you need to figure out a way around the roadblocks that Jon Cohn describes:

Uwe Reinhardt, the Princeton economist, always reminds people that every dollar of wasted spending in health care is also a dollar of somebody's income. Take it away and that person is going to be unhappy. And while not every health care interest group has the credibility of the medical profession, everyone has money to finance advertising, organizing, and contributions -- not to mention well-connected lobbyists who know how to deliver messages in Washington.

This doesn't make cost control hopeless. It just makes cost control really, really slow. In most cases, you have to settle for reducing future earnings -- that is, allowing incomes for these groups to grow more slowly than they otherwise would. And that's precisely what the Affordable Care Act does.

This is also true for things like entitlements like Social Security and pricey tax-based entitlements like the mortgage-interest deduction. But a world in which most of your savings have to be phased in slowly is a world in which Congress has to be credible when it tells the public and the bond market that future congresses won't simply overturn its decisions.

Congress's record actually is pretty good on this front. The Social Security changes recommended in the early 1980s are being phased in on schedule. The vast majority of the budget cuts made in the '90s were implemented with little fanfare. But there's been an effort in the past few years to use the sad case of Medicare's doctor payments -- where a policy that people expected would mean tiny cuts proved flawed and required giant cuts that would've disrupted Medicare -- to undermine confidence that Congress can uphold any cost containment, and of course the current conservative fad for repealing the cost controls in the health-care law further suggests that the mere fact that legislation passed doesn't mean the bonds market can relax.

I've said it before and it's still true: If Republicans were really worried about the market's confidence in our finances, they'd have strengthened the cost controls in the Affordable Care Act and, whatever else they wanted to do to the bill, loudly embraced things like the excise tax and the Independent Payment Advisory Board. As it is, they've steadily tried to persuade the market to ignore the cost controls we've passed and assume instead that Congress won't follow through when it promises to pare back the tax breaks for employer-provided health care or allow a commission to actually get Medicare's spending under control.

That's good politics, but it comes at the cost of telling the bond market that it can't trust us even when we do pass cost controls. And that might mean that, down the road, the bond market demands deficit reduction happens quickly, rather than gradually, and that will be much more painful.

By Ezra Klein  | October 26, 2010; 11:38 AM ET
Categories:  Budget, Health Reform  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Handicapping the deficit under divided government
Next: Half of all doctors using electronic records, most of the rest considering it


isn't this kind of thing -- that a cut in something is a cut into someone's income, transfer payment or in kind benefit -- the basis for a big share of negative political advertising?

Posted by: bdballard | October 26, 2010 12:08 PM | Report abuse

I was just discussing overhead in the health care system with a French friend a few days ago. We all condemn it, but it really does represent a large number of good, well-payed jobs. The people who do all the coding, billing, and contracts with the insurance companies get paid a decent living and often operate small businesses. There was a famous comparison of Mass General which, at the time, employed over 300 people to do insurance billing with a large Toronto hospital that employed 3 people. Multiply dozens to hundreds of billing jobs per hospital by all of the hospitals in the U.S. and add in all of the billing services that bill for outpatient clinics and you are talking about a lot of jobs.

Anthem Blue Cross is running help wanted ads on my local lefty radio station right now. I've heard two today.

Posted by: J_Bean | October 26, 2010 12:38 PM | Report abuse

The problem with your proposed solution is that the Independent Payment Advisory Board is a price control solution to a problem that is better solved by a market. The reason the market isn't functioning is that there are no curbs on demand.

My knee hurts today. If it costs me a $20 co-pay to go to the doctor, but imposes a $200 cost on everyone else, plus $780 MRI, plus a prescription, I win. If I just look up the best advice online, I don't have to go and we all win. Even if we nub those numbers down a little bit with price controls, really, I just don't need to go to the doctor.

Posted by: staticvars | October 26, 2010 12:41 PM | Report abuse


Great point. And as to people's question that we can't solve it quickly they're wrong and I hate to keep harping on it but I will. If we were as obese as say Canada we'd save hundreds of billions of dollars. While the administraton took the tact of shaking insurers pockets to see what falls out they should have done things to make sure obesity in this country is reduced. Sure that's a longer term proposition but its also a much more beneficial one for all. To me its the inverse of your stimulus debate Ezra. You're not stimulating the economy if you put (as JBean correctly puts it) many tens of thousands or hundreds of thousands out of work as medical billers with some level of efficency. You're reducing their income while incrementally increasing the income of those that purchase insurance etc. If we were all healthier then we'd all be wealthier.

Posted by: visionbrkr | October 26, 2010 12:52 PM | Report abuse

The current CBO numbers for the Patient Protection and Affordable Care Act (the PPACA, which proponents prefer to call by one unauthorized nickname while opponents call it by an equally unauthorized nickname) do not show savings. In fact, even econo-lobbyist Jon Gruber acknowledged over the weekend that the PPACA may not produce savings: from the AP "'This is a brave new world with uncertainties,' said Gruber."

In his remarks, Gruber mentioned that "it's impossible to create new government benefits without some unintended consequences". This is true and brings to mind the analogy "if your arm hurts when you move it a particular way, stop moving it in that particular way" -- quit conjuring federal benefit programs thereby ceasing to grow uncertainty.

The vast uncertainty created by the PPACA is unique in that it will persist, perhaps for decades, if not checked by voters: the regulatory reigns have been handed over to unelected (and therefore unaccountable) political cronies who lack rudimentary business sense.

Posted by: rmgregory | October 26, 2010 12:52 PM | Report abuse

I don't think we can dramatically cut doctor payments without changing the agreement we make with young doctors. My friend is about to graduate from medical school with hundreds of thousands of dollars of student loan debt. Part of the pact you sign when you go to medical school is that you will be making an income sufficient to pay that back.

But at the same time, I recognize the need to get our health care costs under control - so what's the solution? Even things like increasing the number of nurse practitioners and physician's assistants takes money out of doctors' pockets. Loan forgiveness programs for doctors who are willing to practice in high-need areas or specialties can help, but at some point, shouldn't people willing to spend that much time educating themselves be able to make their own decisions about where they want to live and practice?

Posted by: amy130 | October 26, 2010 2:10 PM | Report abuse

Enacting cuts in a panicky rush, with disaster looming, isn't a bug. It's a feature. What the previous social security privatization debate showed is that giving people a long time to discuss this kind of thing leads to results that generate hardly any graft at all.

Posted by: paul314 | October 26, 2010 2:19 PM | Report abuse

Only Ezra Klein can argue that a law creating a new health care entitlement for over thirty million people "saves" money. Its absurd on its face. This law hands out hundreds of billions of dollars in subsidies, and just taxes the rest of us to pay for it. It amazes me that week after week, this guy can write this nonsense. He truly believes that giving away more free stuff to millions of people is an exercise in fiscal responsibility. Its ridiculous.

Posted by: donopj2 | October 26, 2010 3:03 PM | Report abuse


oh come on now. Look at how Mass. is reaping the benefits of super low cost since their reform was enacted which many times Ezra touts as a mini PPACA plan but yet conveniently forgets that MASS does nothing to control costs. I'm guessing he has a lot of faith in IPAB. My question is that when it doesn't work who will be to blame???

Posted by: visionbrkr | October 26, 2010 4:17 PM | Report abuse

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