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Posted at 9:32 AM ET, 02/17/2011

Handicapping a 'grand bargain'

By Ezra Klein

When people talk about a "grand bargain," they tend to imagine Congress moving on Social Security, Medicare and Medicaid simultaneously -- and perhaps tax reform, too. I think that's misguided. We're likelier to see the programs handled separately: Social Security, which needs the least in changes, is likely to see the most in reforms. Medicare, which is the most important driver of federal health-care costs, is the least likely to experience big changes. Medicaid is somewhere in the middle. And tax reform is in a different bucket altogether, with changes to the corporate code more likely than changes to the individual code. To see why, you have to consider them separately.

Medicare: The reality is that most of the best ideas for slowing the rate of cost growth in Medicare -- and using Medicare to slow the rate of cost growth in the health-care system as a whole -- are in the Affordable Care Act. Bundling care? It's in the law. Accountable Care Organizations? Yep. An independent board staffed by experts and able to make cost-savings changes to the system even if Congress gridlocks? Uh huh. An institute dedicated to funding promising new pilot programs, gathering evidence and then quickly ramping up the ones that work? That's in there, too. You could think of some further tweaks and technical changes, of course, and I hope Congress does. But short of privatizing the system and saving money by giving seniors checks that don't cover their health insurance -- a play that some Republicans like, but that I'd be surprised to see leadership endorse -- most of what we think might work is already being tried. The low-hanging fruit has been picked, and so has the medium-hanging fruit.

Medicaid: "Republicans seem to have settled on, at least as a talking points, instituting block grants to states for Medicaid," reports Politico. This is something George W. Bush proposed in 2004. Right now, the federal government, in partnership with the states, acts like any other insurer and pays the medical costs that members of Medicaid incur, and tries to control costs by negotiating better rates with providers and implementing various programs to make people healthier or manage disease. In a block-grant system, the federal government would stop paying those costs. Instead, it'd just give the states X amount of money, and if that sufficed, great, and if it didn't, too bad. As the Kaiser Family Foundation explains (pdf), "block grants limit federal spending to a predictable level that can be controlled without regard to actual costs or spending at the state level." The Urban Institute makes it clearer: "A block grant shifts financial risk from the federal government to the states." But even if Republicans can agree on this, Democrats won't go for it, so it's not likely to happen in the near term.

Social Security: Unlike Medicare (and, to a lesser degree, Medicaid), Social Security hasn't seen serious changes or reforms in decades. But there's a wide variety of options, and think tanks and groups on all sides have put a lot of work into developing plans that they think would appeal to their allies (here's one from the left-leaning Center for American Progress, here's one from the right-leaning American Enterprise Institute, and here's a bipartisan effort). Moreover, any discussion over Medicare and Medicaid will likely be dominated by arguments over the Affordable Care Act. Not so with Social Security. In fact, the administration called for talks on the issue in their budget. "We should come together now, in bipartisan fashion, to strengthen Social Security for the future," they said, going on to identify six principles that will guide their pursuit of a deal. That combination of bipartisan interest in a deal and general understanding of what policies could go into a deal makes a deal on Social Security fairly plausible, even if the program is objectively in much better shape than Medicare or Medicaid.

Tax reform: This is a whole different process than entitlements, and very unlikely to be rolled into the same bargain. The administration has been much more definitive on their desire o see corporate tax reform than individual tax reform. "Tonight," Obama said at the State of the Union, "I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years – without adding to our deficit." Individual tax reform got a more passive endorsement: "This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them," Obama said. A big part of the reason individual tax reform is so difficult right now is that the disagreement over the future of the Bush tax cuts makes a deal impossible: The two sides don't agree on the amount of revenue the individual tax code is supposed to collect in the coming years, and that agreement is a necessary precursor to a deal on the code itself.

If I were handicapping right now, I'd say some sort of deal on Social Security is fairly likely in the next year, but neither Medicare or Medicaid will see substantial changes. On the tax side, I'd give corporate reform a 30 percent chance of happening, and individual reform something very close to zero -- though I do think there's some chance that a serious process on tax reform begins this year, even if it won't culminate for some time yet.

By Ezra Klein  | February 17, 2011; 9:32 AM ET
Categories:  Budget  
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Comments

It's interesting that you dismiss with a wave of your hand - "short of ... saving money by giving seniors checks that don't cover their health insurance" - a reduction in subsidies to senior who can afford to pay for their own insurance. There is no reason why a poor, lower middle class, or middle class non-senior should pay taxes to help pay for - i.e., subsidize - the insurance costs of middle class, upper middle class and wealthy seniors. If we make people who can afford it pay for their own insurance, we will save money.

Posted by: ostap666 | February 17, 2011 9:49 AM | Report abuse

I'd assert that agreement -- albeit tacit -- regarding Medicaid already exists: the PPACA waivers cited in two of this morning's Wonkbook references underscore the broadening consensus, as does the reference to Suderman's report regarding comments from the Indiana Governor.

In practice, Medicaid block grants are the only answer: the supply of money is finite, the supply of caregivers is finite, and the supply of money paid for indigent care _must_ be held at a proportionally low level to avoid escalation of overall health care costs.

Medicaid is unique in that, at present, it completely removes all incentive for responsible health care consumer behavior by indigents: indigents receiving Medicaid funds feel little or no responsibility to be good stewards of the money they pick from the pockets of their hard-working fellow citizens. A finite pool of money -- a Medicaid block grant -- forces indigents to participate (and to complete) in an economic society more closely resembling that of the real world.

As a positive result of the PPACA, concrete evidence regarding Medicaid's failure is coming to light. It's going to be difficult for LibDems to cling to Johnson's albatross -- and doing so might endanger their grip on other welfare programs.

Posted by: rmgregory | February 17, 2011 9:59 AM | Report abuse

ostap666: I don't think voucher plan is about means testing. It's about capping everyone at an arbitrary level, which will fall short of actual expenses in many cases well beyond anyone's ability to pay.

rmgregory: Limiting costs by consumer choice does not work in the medical market. It's just another way of cutting people off from adequate care, and a cop-out from serious efforts to cut medical costs -- which will bankrupt everybody eventually as they rise without limit.

Posted by: jtmiller42 | February 17, 2011 10:15 AM | Report abuse

There is no consensus, though, on the allocation of Medicaid block grant funds: should Medicaid block grants be allocated based on each State's total population or on each State's indigent population? Put another way, should indigents be encouraged to migrate to greener pastures or should States which breed and harbor the most indigents be rewarded? If the current reward for the breeding of indigents continues, what ultimately happens?

As Mitch Daniels stated (quoted by Suderman) -- "There is a 'big body of evidence,' he argues, showing that when it comes to medical care, 'people behave like the smart consumers they are in every other circumstance'."

Posted by: rmgregory | February 17, 2011 10:17 AM | Report abuse

means testing already happens in plan B premiums. Could it happen more, sure. What we really need to do though is attack costs. And means testing doesn't do that.

But already doctors practices and hospitals are gearing up for 2014 as hospitals and practices are merging to gain negotiating power. This isn't ever touched on in the MSM or on this blog.

Posted by: visionbrkr | February 17, 2011 10:22 AM | Report abuse

"Limiting costs by consumer choice does not work in the medical market. It's just another way of cutting people off from adequate care, and a cop-out from serious efforts to cut medical costs -- which will bankrupt everybody eventually as they rise without limit."

And what is the cost driver here, that would push costs so high that "everyone" would be bankrupt?

Posted by: justin84 | February 17, 2011 10:45 AM | Report abuse

ostap666-
You're confusing medicare and medicaid. The section of Ezra's post from which you quote deals with medicaid. Last I checked...a means tested program. So no, there's no hand waving dismissal of means testing in this post.

Posted by: pvdfan1368 | February 17, 2011 11:04 AM | Report abuse

"The Urban Institute makes it clearer: "A block grant shifts financial risk from the federal government to the states." But even if Republicans can agree on this, Democrats won't go for it, so it's not likely to happen in the near term."


Why?

The solution to Medicaid is obvious if its going to exist. Block grants and let states figure out who they want to cover. 10 years from now we can compare economic growth.

Posted by: krazen1211 | February 17, 2011 11:09 AM | Report abuse

****There is no reason why a poor, lower middle class, or middle class non-senior should pay taxes to help pay for - i.e., subsidize - the insurance costs of middle class, upper middle class and wealthy seniors****

Of course there's a reason -- a very good reason, in fact -- for wealthier people to receive benefits: universal social insurance programs are more politically stable than "welfare" programs. And, as long as we have a progressive tax code, the unfairness issue you refer to disappears.

Posted by: Jasper999 | February 17, 2011 11:12 AM | Report abuse

Klein have you actually taken a look at that "Non-Partisan" LMS Social Security Plan you point to? Just because it is labeled the 'Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan and has a registered Democrat as co-author doesn't make it either 'Non-Partisan' or 'reform'.

On the latter point it requires a combination of benefit cuts and tax increases totaling 5.2% of payroll to address a long-term problem then scored at 1.92%, and then doesn't fix the problem, particularly for lower earners who would get a better result simply by taking the tax component of the plan and not accepting the benefit cuts. (Table 1 p.6) The authors admit openly that the whole point of the plan is to limit transfers to Social Security from the General Fund over the next 75 years to zero. (Table 3 - page 8). The whole thing is a vehicle for introducing private accounts while reducing the burden on wealthier taxpayers to repay the money they borrowed.

As to "non-partisan" Samwick was a top Bush Admin economist at the time of Bush's privatization Commission, while Liebman was one of Clinton's top advisors on Social Security when Clinton was negotiating with Gingrich on a plan to invest Social Security in Wall Street, not exactly a New Deal Democrat, while MacGuineas, supposedly representing the independent center based on her having been McCain's top econ advisor during his Maverick days, currently is President of both the Peterson funded Committee for a Responsible Federal Budget (CRFB) and the Peterson-Pew Commission.

In total this is the most right-wing Social Security Plan out there with the most left-wing participant being a right of center deficit hawk (who is currently no. 3 at OMB and formerly one of the Obama campaigns first three econ hires which might help explain why deficit hawks are in the ascendent at OMB).

Ezra you caught chumped by a label.

Posted by: BruceWebb | February 17, 2011 11:15 AM | Report abuse

Block grants for Medicaid won't go well with the GOP leadership because a number of their up-and-comers are current governors. Block grants implemented immediately would force GOP governors to chose between openly hosing the poor or raising taxes. If implemented after a few years, the cost savings won't materialize and Democrats would mock the "Can't score the savings because Congress won't follow through" aspect.

Posted by: ctown_woody | February 17, 2011 12:12 PM | Report abuse

Here's what Gov. Christie said:

"You're going to have to raise the retirement age for Social Security," he said. "Whoa-ho! I just said it, and I'm still standing here. I did not vaporize into the carpeting, and I said it."


Nice, but entirely untrue, and in fact detrimental to the economy.

SS is solvent for the next twenty years, and anyone who thinks they can predict farther than that financially is an idiot.

Furthermore, SS money is spent is a much more localized way than the wages of younger people. Older Americans tend to buy far less imported items and spend more on local goods and service like restaurants and health care.

Finally, in a ecnomy where EVERYONE says unemployment is the problem, how does failing to move older workers out of the workforce so younger people can get jobs, help employment?

An plan put forth mainly by the financial industry, whose ultimate goal is to take down SS entirely and reap the rewards.

Posted by: johnmarshall5446 | February 17, 2011 12:34 PM | Report abuse

Medicare and Medicaid - In time the only option will be for the government to set prices for healthcare.

http://voices.washingtonpost.com/ezra-klein/2009/11/an_insurance_industry_ceo_expl.html

Social Security - Raise taxes a bit and raise the retirement age a bit. When social security began, average life expectancy was 65, it is now 72. The retirement age for social security has never changed.

Tax Reform - It would take a big movement for us to get real change on our tax system, but I am really hoping the Fair Tax gets more attention and support. Our current system is way too complicated and favors special interests.

http://www.fairtax.org/

Posted by: DeanofProgress | February 17, 2011 1:26 PM | Report abuse

The LMS plan for Social Security doesn't make a lot of sense to me. How will politicians prevent people from withdrawing money from their "mandatory private retirement accounts" in the next economic downturn? The political pressure to allow this will become intense. (After all, it's "your money".) It also ensures that the taxpayers will have to keep bailing out parts of the financial system, which already happens once every 3 to 5 years. And why should the nation incur an additional "transition cost" for the private accounts that will amount to a sum of money (trillions) that will be equal to (if not greater than) the supposed shortfall of the current system? I don't understand why we should add more complexity to Social Security. It should be the simplest transfer. See my little flowchart movie:
http://www.youtube.com/watch?v=Tts2uTWt6e8

Posted by: Lee_A_Arnold | February 17, 2011 1:41 PM | Report abuse

I think there's relatively little chance of a tax deal this year, but I think there's a reasonable chance of a deal on it before the 2012 elections. I think the Republicans will blink on the $200k+ tax cuts and agree to make the sub $200k tax cuts permanent while letting the rest expire.

Personally, I think it's a mistake and all the tax cuts should expire, but I think that's the compromise they'll reach.

Posted by: MosBen | February 17, 2011 1:43 PM | Report abuse

****There is no reason why a poor, lower middle class, or middle class non-senior should pay taxes to help pay for - i.e., subsidize - the insurance costs of middle class, upper middle class and wealthy seniors****

Of course there's a reason -- a very good reason, in fact -- for wealthier people to receive benefits: universal social insurance programs are more politically stable than "welfare" programs. And, as long as we have a progressive tax code, the unfairness issue you refer to disappears.

________________________
the better answer is that they don't. the rich and poor pay for it from their paychecks as the work (the rich paying more, in fact, the more they earn), and receive the same benefit. so the rich are in fact subsidizing the poor on average.

it's nothing more than a prepaid insurance plan. means testing something you bought is pretty serious business, and in fact turns Medicare in to a completely different program. there are good arguments to do just that, but let's not overlook the implications.

Posted by: JoeT1 | February 17, 2011 1:52 PM | Report abuse

"Block grants for Medicaid won't go well with the GOP leadership because a number of their up-and-comers are current governors. Block grants implemented immediately would force GOP governors to chose between openly hosing the poor or raising taxes. "


Not really. Most Medicaid benefits are really just corporate welfare for Democratic donors and Democratic constituencies.

Posted by: krazen1211 | February 17, 2011 2:22 PM | Report abuse

'And what is the cost driver here, that would push costs so high that "everyone" would be bankrupt?'

That's the mega-billion-dollar question. The place to start is another question: Why do other countries pay half or less for better health outcomes? My guess is that it mostly comes down to our doctors and some other providers make that much more, and they're not earning it.

But we need to stop pretending that we can't possibly learn from others. This is a problem that other countries have largely solved. It doesn't have to be this hard.

Posted by: jtmiller42 | February 17, 2011 6:09 PM | Report abuse

Sorry DeanOfProgress the age for Social Security HAS changed just ask all the 66 year olds now getting it. It is already scheduled to increase to 67. Here is the fix from Robert Reich, just raise the taxable level to $180,000. http://www.huffingtonpost.com/robert-reich/budget-baloney-why-social_b_824331.html

Posted by: keirandcee | February 17, 2011 8:05 PM | Report abuse

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