What Kind of Health Care Reform Would Actually Help the Debt?

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President Obama hopes to sign both additional economic stimulus plans and a comprehensive health care bill within the next two months. To get some perspective on these two critical issues, I spoke with Robert Reischauer, the director of the Congressional Budget Office between 1989 and 1995. He is currently the president of the Urban Institute and a nationally respected expert on the budget and our entitlement system. In this, the second half of our conversation about stimulating the economy, passing health care reform and solving our long term debt crisis, we go back and forth on the debt and President Obama's ability to address it. Part One -- in which Reischauer weighs in on the economic stimulus and health care debates -- is here.

The average American does not accept that we have to address this problem, and that in addressing it we're going to have to affect programs and taxes that that average American cares about. We're at at stage where people can say mañana: "I accept that we have a terrible debt problem but there is no pressing need to tighten our belt in the immediate future."

I hoped Obama would have put in this year's budget some kind of statement saying "I won't enact a stimulus bill unless there is some legislation that will begin to trim spending and raise taxes starting in 2013."

Politically there are obvious risks with this kind of plan, but what about economically: Would you be worried about a Ricardian equivalence effect, where Americans don't spent the stimulus money today because they're afraid that their taxes are scheduled to dramatically increase within the next three years?

But what do you think happens in three years if we keep running the deficit? A collapse of the dollar? Increase in interest rates? Remember back in 1993, we had a weak economy and people were arguing that we should raise taxes and cut spending and the Clinton administration did and the impact of that was to provide confidence in markets.

There are some economists who argue there is no debt problem. They say look what happened after World War II. Public debt was well over 100 percent of GDP, more than twice the current levels. But in 1946 the deficit declined without a catastrophic recession, because the public debt in the hands of the public was the engine of the late-40s and 50s boom. Savings bonds that provided us with purchasing power and all those interest funds spent back in the US was an enormous fiscal stimulus. But today the CBO is projecting enormous interest payments over the next few years and also slow economic growth. Are they misreading something?

The difference back then was that we owned our own debt. Today half of it is owned by foreigners. That's a very different situation. At that point, the US was the only industrial power left standing and the rest of the world was in ruins and the demand for goods and services produced in America was huge. People because of the depression and the rationing during the war had huge pent up demand for goods and services that they hadn't bought in years. It was a very very different time.

Still there are plenty of respected thinkers like Paul Krugman who consistently say it's damaging to warn about a debt crisis today, since interest rates are exceedingly low and the economy still needs government assistance to replace weak private demand. Is it dangerous to talk about the debt today?

I wouldn't worry about real action over the next two to three years. But the question is: When should we worry? When the economy recovers, we'll say there's no reason to worry with employment high and corporate profits high. We're reducing our ability to respond to crisis in the future. We've mortgaged ourselves to countries that do not share our values or our geopolitical aims. Do you want to have to think twice before setting up a meeting between the president and Dalai Lama, or sell arms to Taiwan and South Korea?

The Chinese don't seem terribly concerned about our debt today. Do you really foresee a geopolitical crisis resulting from our debt burden to countries like China?

It's just one thing. It's the tip of the iceberg. There will come a time if we continue to run trillion dollar deficits that the question will arise: do we have to think twice about new initiatives in our defense budget when the Chinese are paying for it?

Let's look under the hood of the debt. It's no secret that the main driver is entitlements: Medicare and Medicaid and, to a less extent, Social Security. On one end of the spectrum, Republican Rep. Paul Ryan has called to transform Medicare into a tightly budgeted voucher program. On the other end, you've got calls to expand Medicare and Medicaid to cover millions more. Where do you stand?

There's no way to save significant amounts in Medicare and Medicaid without transforming the health sector at large. We don't have a Veterans Administration or Indian Health Services analogue that treats the elderly, disabled and low income people in a different system. They get their services from the same providers that we get our services from. We have to bring down the growth of costs across the entire spectrum.

If we lower the amounts that we pay providers in Medicare then providers won't perform services for these individuals and there will be an access problem. If we begin raising the cost on beneficiaries, you'll quickly find that minority of Medicare beneficiaries have the wherewithal to pay. I'm for raising the burden for those with means. We do some of that in Medicare Part B already. But Medicare is a less generous policy than the average worker has from a large employer in America. So I don't think there's a lot to be gained there, even though this administration has suggested that we should start doing more to means test Part D as well.

Raising the burden on, or cutting benefits for, older Americans with means -- ie means testing -- could be one approach?

Some of Medicare, like Part B, is already means-tested. I'm for that. But again the solution has to come from within system to lower the rate of growth of spending. By some rough estimates 30 percent of the services provided to everybody are of little, no, or negative value. The problem is identifying that wasted care ahead of time, and it's hard if not impossible to do if we remain on a fee for service basis. In the long run, moving toward capitation is the only way to align the incentives of patients, providers and payers in the direction of providing high quality and affordable care.

You're talking about moving away from fee-for-service toward a broader definition of medicine, something like fee for care. When you told me you supported health care reform, you said it bulldozed the landscape to prepare us for something bigger. So is fee-for-care the proverbial building we want to build over the bulldozed health care landscape?

I think that could be right.

Since 2009 you've been calling on the president to include in his budget some provision about future debt reduction. How painful would such a provision have to be, and do you think Americans are ready to receive it today?

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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