James Pethokoukis

Editor’s Note: This piece has been updated. Please see the update below.

Consulting firm McKinsey kicked up a hornet’s nest with these recent findings:

The Congressional Budget Office has estimated that only about 7 percent of employees currently covered by employer-sponsored insurance (ESI) will have to switch to subsidized-exchange policies in 2014. However, our early-2011 survey of more than 1,300 employers across industries, geographies, and employer sizes, as well as other proprietary research, found that reform will provoke a much greater response.

· Overall, 30 percent of employers will definitely or probably stop offering ESI in the years after 2014.

· Among employers with a high awareness of reform, this proportion increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI.

· At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

· Contrary to what many employers assume, more than 85 percent of employees would remain at their jobs even if their employer stopped offering ESI, although about 60 percent would expect increased compensation.

As I have written, there was pressure on McKinsey to release its methodology, which it finally has.

Yet missed in all this was another consulting firm which also found some worrisome Obamacare trends (as explained by the Heritage Foundation):

PricewaterhouseCoopers (PWC) recently released its annual report on medical cost trends for 2012, and it is revealing.

1) The report shows health care costs and premiums continuing to rise—and uncertainty increasing for employers who offer insurance to their workers. Health care spending increased by 7.5 percent in 2010 and will grow by 8 percent this year.

2) In 2012, it will rise again by 8.5 percent. This is exactly the opposite of the President’s promise that his health care plan would reduce premiums by $2,500 per person.

3) Perhaps most concerning are the findings of a survey also released by PWC divulging how employers are likely to react to Obamacare.  The survey showed that nearly half of employers will drop their coverage, dumping employees into the government-run exchanges. Individuals who qualify would then receive generous federal subsidies to purchase insurance. If more employers than expected dump coverage, as other experts have predicted, the cost of the subsidy program will explode deficit spending. The results of the PWC survey indicate this is likely to be reality.

4) Even if employers do not dump coverage entirely under the new law, according to the survey, five out of six employers will completely re-evaluate their benefits strategy. Four out of five employers will make changes to help cover new costs under Obamacare, including raising premiums, deductibles, and co-payments.

5) Employers who offer coverage to their workers face growing uncertainty regarding costs under the new law. The negative consequences of Obamacare’s changes will be threefold: higher costs for those with employer-sponsored coverage; a greater debt burden on current and future taxpayers; and slower growth in job creation and the overall economy.

Update:

The folks at PricewaterhouseCoopers disagree with Heritage’s interpretation of its report:

As you will see, the Heritage Foundation’s statement that PwC’s survey found that nearly half of employers will drop their coverage and dump employees into government-run exchanges is false.

In fact, PwC asked about “employer subsidies” not “coverage.” These are different. Employers can decrease the level at which they subsidize employees premiums and still retain health insurance coverage. Furthermore, PwC found that employers’ subsidy level has not changed. The question PwC asked was: “As a result of the new healthcare reform PPACA provisions, how likely is it that your company will significantly change or eliminate company subsidies for employee medical coverage? “

Very likely: 11%

Somewhat likely: 34%

Unlikely 55%

It would be inappropriate and inaccurate to interpret that employers who answered “very likely” or “somewhat likely” would eliminate coverage, and it is impossible to allocate which employers are consider which option to take. Furthermore, PwC found that fewer than 7 percent of employers (not half) said they were very likely to cover employees through state-run health insurance exchange pools. Interestingly, the primary approach that employers intend to take in the future is to increase health and wellness programs to improve the health and productivity of their workforce.

Furthermore, PwC clearly clarified in both its report and news release dated May 18, 2011 that “The health reform law will have minimal effect on the medical cost trend in 2012. Provisions of the Patient Protection and Affordable Care Act that took place prior to 2012 were small changes that employers already have fully accounted for.”

Consulting firm McKinsey put out a report on Obamacare that the White House doesn’t like very much. Here is the relevant bit (bold is mine):

US health care reform sets in motion the largest change in employer-provided health benefits in the post–World War II era. While the pace and timing are difficult to predict, McKinsey research points to a radical restructuring of employer-sponsored health benefits following the 2010 passage of the Affordable Care Act.

Many of the law’s relevant provisions take effect in 2014. Our research suggests that when employers become more aware of the new economic and social incentives embedded in the law and of the option to restructure benefits beyond dropping or keeping them, many will make dramatic changes. The Congressional Budget Office has estimated that only about 7 percent of employees currently covered by employer-sponsored insurance (ESI) will have to switch to subsidized-exchange policies in 2014. However, our early-2011 survey of more than 1,300 employers across industries, geographies, and employer sizes, as well as other proprietary research, found that reform will provoke a much greater response.

· Overall, 30 percent of employers will definitely or probably stop offering ESI in the years after 2014.

· Among employers with a high awareness of reform, this proportion increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI.

· At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

· Contrary to what many employers assume, more than 85 percent of employees would remain at their jobs even if their employer stopped offering ESI, although about 60 percent would expect increased compensation.

McKinsey, shorter: Anyone who tells you that if you like your current health plan you can keep it under Obamacare is trying to sell you a false bill of goods. Now the White House points to other studies that arrive at a different conclusion, that employers won’t change their plans much if at all.  So the White House is banging on McKinsey to release its methodology:

McKinsey says they obtained their data after they “educated respondents” about reform and that their survey used proprietary research. We don’t know what respondents were told or whether they had the chance to check with their colleagues or crunch the numbers for their business before responding.

The firm has so far declined to reveal any more info to the administration of congressional Democrats. Now what I find interesting is that the WH and its minions in the blogosphere have apparently forgotten that Team Obama likes to keep things secret as well. Remember the infamous Romer-Bernstein prediction that claimed the Obama stimulus plan would keep unemployment from reaching 8 percent? We still don’t know exactly how they arrived at that number.

Then there’s the recent budget speech by President Obama in which he presented a plan that would supposedly cut projected deficits by $4 trillion over 12 years. As I wrote in April:

When he made his big budget speech last week, it wasn’t at all clear from where his numbers were coming — nor in what direction they were heading. A “fact sheet” on his “Framework for Shared Prosperity and Shared Fiscal Responsibility” gave a few more specifics, but little or no context to make real sense of them. Even for seasoned budget experts, it was a puzzlement.

So maybe the White House should lay off McKinsey until it submits Obama’s big budget “plan” to the Congressional Budget Office for scoring, which is what Rep. Paul Ryan did with his Path to Prosperity. And if the White House really wants more info from McKinsey, maybe they should call Diana Farrell. She is the former head of the McKinsey Global Institute who until last November was a deputy director on Obama’s National Economic Council.

Economist Jim Capretta, co-author of the must-read “Why ObamaCare is Wrong for America,” writes the piece I’ve been waiting for him to write about Paul Ryan’s Medicare plan. First, a brief description of the Ryan plan:

It includes a proposal to reform Medicare. Everyone who is 55 and older today will remain in the current Medicare structure. Those below age 55 will get their entitlement in the form of “premium-support credits,” which will be applied to private health plans of their choice on an annual basis. The government will oversee this new Medicare marketplace, organize the information and choices for the beneficiaries, and ensure that all of the plans meet minimum standards.

The program will begin in 2022, at which point the premium-support credits will reflect what the traditional Medicare program costs at that time. In the years after 2022, the premium support credits will be increased commensurate with the rise in consumer inflation, as measured by the consumer price index (CPI).

It is the bit about inflation that Democrats are attacking.

Well, according to the president’s speech — and columns by Alan Blinder, Paul Krugman, and Ezra Klein — it’s the fact that the Medicare “premium-support credits” could be used only for private insurance, and that the credits themselves would be indexed on an annual basis to consumer inflation, not health costs. They argue that, as the years go by, the credits will fall farther behind the actual cost of insurance, and leave seniors with larger and larger premium bills.

But, as Capretta points out, there is a similar system embedded within Obama’s heath reform:

There’s something vaguely familiar about how the Ryan Medicare plan is supposed to work. Inflation-indexed credits. Competing private insurance plans. Government oversight of the marketplace. Oh yeah: That’s the description of Obamacare that advocates have been peddling for months.

Here are the facts. In the new state-based “exchanges” erected by Obamacare, persons with incomes between 133 and 400 percent of the federal poverty line will be eligible for new, federally financed “premium credits” — dare we say “vouchers”? These vouchers can be used only to purchase the private health-insurance plans that are offered in the exchanges. There will be no “public option” to choose from. Initially, the vouchers will be pegged off of the average cost of silver plans in the exchanges, with a limit on the premium owed by the consumer based on their income. In future years, however, growth in the government’s contribution will be limited, first to the rise in average incomes and then the CPI.

That’s right: Obamacare’s new health-entitlement vouchers are indexed to general consumer inflation too. So if Ryan’s Medicare plan is “cruel” and “inhumane” because the credits supposedly fall behind rising costs, then the exact same criticism can be leveled against Obamacare.

Capretta then goes to highlight just how Ryan’s approach will reduce healthcare costs.  Read the the whole thing.

Ed Carson of IBD’s Capital Hill blog, highlight the 11 red state senators who voted against repealing Obamacare:

Eleven Democrats up for re-election next year represent states in which Republicans won a majority of the 2010 popular vote for House seats: Florida, Michigan, Missouri, Montana, Nebraska, New Jersey, Ohio, Pennsylvania, Virginia, West Virginia and Wisconsin.

Especially vulnerable:

* Montana’s Jon Tester and Missouri’s Claire McCaskill won in 2006 with less than 50% of the vote.

* Ben Nelson of Nebraska may have sealed his fate with his infamous “Cornhusker Kickback” in exchange for being the 60th ObamaCare vote.

* Virginia’s Jim Webb, who narrowly won in 2006, is at least semi-vulnerable. And he could retire after a single term, some have speculated.

Meanwhile, a 12th red-state Democrat, North Dakota’s Kent Conrad, recently announced he would not seek another term. That seems a likely GOP pickup.

Some other longtime Democratic senators could choose to retire, especially if they face the prospect of a grueling campaign. For example, Wisconsin’s Herb Kohl will be 77 in 2012.

I know it’s early, but it would be  very surprising, I think, for Rs not to retake the Senate next year. The Dems really needed to make a better showing in 2010 given how many seats they have to defend in 2012 and 2014.

The always insightful Keith Hennessey show the path to repeal:

The path to repeal is straightforward and, while difficult, achievable. … In 2012 win the White House, hold the House majority, and pick up a net 3 Republican Senate seats to retake the majority there. … In 2013, use reconciliation to repeal ObamaCare, requiring only a simple majority in the Senate. … Repeal of the subsidies, the individual mandate, the insurance provisions, and the Medicaid expansions would, in each case, directly affect spending and revenues, so it would be a straight-up-the-middle use of reconciliation for deficit reduction. Democrats who argued in 2009 that it was OK to use reconciliation to create these provisions would find those same rulings working against them in 2013.

At the moment Democrats are hanging their hat on the CBO-scored deficit reduction associated with the two laws. This CBO score means that a straight repeal amendment faces a Budget Act point of order and therefore needs 60 votes to succeed. If Republicans were in 2013 to try to repeal the laws as-is, CBO would score them with increasing the deficit. That’s not impossible to do through reconciliation, but it’s a trickier path.

Still, this is a solvable problem. The best policy way to address this would be to leave some (most?) of the Medicare savings in place, and not repeal them. I’d also favor leaving the “Cadillac tax” on high cost health plans in place.

Instead of “bending the curve,” Obamacare broke the law. Not only is the new healthcare law fiscally unsustainable, it’s unconstitutional — at least according to a U.S. judge in Virginia.

In the end, of course, it will likely be the Supreme Court that determines the constitutionality of a key piece of President Barack Obama’s healthcare reform. If the majority should rule that Americans can’t be forced to buy insurance or face a fine — as the law would require — the entire plan could implode.  But whichever way the high court rules, the massive overhaul will itself need an overhaul, if not a complete scrapping, if America is going to get healthcare spending under control and prevent it from bankrupting the U.S. government.

While the White House is certainly displeased with the Virginia court’s ruling, the result could have been far worse. U.S. District Judge Henry Hudson said that while the mandate itself was unconstitutional, the finding didn’t infect the rest of the law, which could continue to be implemented. Trouble is if the Supreme Court eventually finds the individual mandate portion unconstitutional, Obamacare could still easily unravel.

Much of the reform is built around a simple tradeoff. Insurers are required to accept everyone who applies. In return, everyone has to buy a policy. While this means insurers have to accept folks with expensive pre-existing illnesses, they are theoretically compensated with more customers, both sick and healthy. But without the individual mandate, an adverse selection problem emerges — only sick people currently lacking coverage would have an incentive to seek insurance.

Jonathan Gruber, a healthcare economist at Massachusetts Institution of Technology and government adviser, calculates that such a scenario would reduce the law’s gain in insurance coverage by more than two-thirds — 80 percent of people without insurance would remain that way — and force companies to raise premiums on individuals by 40 percent. As he puts it: “Without the individual mandate, the entire structure of reform would fail.”

In short, the U.S. healthcare system would get even pricier while still leaving vast numbers of Americans without insurance. A more expensive system would mean government healthcare spending would rise even faster.

Even if the White House overturns the Virginia ruling, the system would still require major reform. A detailed review of the law’s fiscal impact by Obama’s own chief healthcare actuary predicts it will save less than originally envisioned. The increase in long-term Medicare hospitalization outlays, for instance, is still scheduled to double to 4 percent of GDP from under 1.7 percent currently. A preliminary forecast estimated the increase at as little as 30 percent.

So even if the law should meet the standard of constitutionality, it fails another standard — of sustainability. And there’s no court of appeal for that.

On this there seems to be some differing of opinion. From the liberal side, Brad DeLong:

The second [worst thing about the plan]  is the capping of federal health spending growth at GDP+1%/year. That means that, adjusting the aging of the population, the government is supposed to spend a smaller share of incomes on health care as each year passes. That would require not just the repeal of the Affordable Care Act but the elimination of Medicare as we know it.

And from the  conservative side, James Capretta:

But the most important entitlement decision in the entire package is the explicit endorsement of Obamacare. The Bowles-Simpson proposal would leave in place the entire trillion-dollar monstrosity. Indeed, many of its supposed cost-cutting recommendations would build on Obamacare’s flawed structure of government-driven cost-cutting through price controls. In particular, they would like to create what amounts to a global budget on health care, with the Independent Payment Advisory Board (IPAB) given the unilateral authority to hit budget targets with price cutting. This is exactly the opposite of what’s needed, which is cost discipline through consumer choice in a functioning marketplace.

Meanwhile, Bowles and Simpson refused to endorse moving Medicare toward a defined contribution program, as Rep. Paul Ryan’s Roadmap proposes, relying instead on the usual laundry list of cuts to the existing program structure.

I think the right answer here is that the B-S plan keeps the structure of Obamacare but essentially defunds it as envisioned.  U.S healthcare will either move toward more government-mandated rationing or voucherization. Bowles-Simpson throw its lot in with the former by giving the Independent Payment Advisory Board even more power to cut, cut, cut.

Over at Edge, a variety of scientists give their take on the Iceland volcano eruption and its impact on air travel. Two really stood out to me. The first also highlights the problem of defensive medicine; the second shows the downside to action dealing with global warming:

DANIEL KAHNEMAN

Psychologist, Princeton; Recipient, 2002 Nobel Prize in Economic Sciences

Imagine a public official who considers an action that involves a small and ambiguous risk of disaster. Imagine further that the best expert judgment available is that the expected social benefit of the action is large and that the risks are real but tolerably small. Such situations inevitably create a conflict between the interests of society and those of the officials who are charged to decide on its behalf.

Hindsight and personal accountability are the problem. Decision makers can be certain that if the worst happens their decision to act — however justified it was ex ante — will be perceived ex post as a horrendous mistake. They face the possibility of devastating blame and guilt, as well as career-destroying consequences. The risks are asymmetric because the costs of playing it safe are likely to be negligible.

Even if future analyses of the ash cloud incident conclude that flights could have resumed safely much sooner, it is unlikely that any of the officials involved in delaying the flights will lose their jobs. In this situation and in many others — defensive medicine is an example — the valid anticipation of hindsight combines with social norms of personal accountability to produce overly cautious behavior.

The solution?

Where the social good requires taking risks, we need procedures that will reduce personal accountability and diffuse responsibility, perhaps by assigning some categories of decisions to designated groups of experts rather than to individual functionaries.

MATT RIDLEY
Science Writer; Founding chairman of the International Centre for Life; Author, The Rational Optimist: How Prosperity Evolves

The ash cloud reminds us of the risks of risk aversion. Shutting down Europe’s airspace removed the risk of an ash-caused crash, but it also increased all sorts of other risks: the risk of death to a patient because an urgent medical operation might have to be postponed for lack of supplies, the risk of poverty to a Kenyan farm worker because roses could not be flown to European markets, the risk of a collision between ferries on extra night-time sailings in the English Channel. And so on. Risk decisions cannot be taken in isolation. The precautionary principle makes too little allowance for the risks that are run by avoiding risks — the innovations not made, the existing suffering not alleviated. The ash cloud, by reminding us of the risks of not being able to fly planes, is a timely reminder that the risks of global warming must be weighed against the risks of high energy costs — the risks of poverty (cheap energy creates jobs), of hunger (fertiliser costs depend on energy costs), of rainforest destruction and indoor air pollution (expensive electricity makes firewood seem cheaper), of orangutan extinction in subsidised biofuel palm oil plantations.

Oh, and remember the lessons of public choice theory: if you set up a body called the Volcanic Ash Advisory Centre, don’t be surprised if it over-reacts the first time it gets a chance the demonstrate that it considers itself — as all public bodies always do — underfunded.

Cato’s Mike Cannon thinks Ben Bernanke’s comments on budget deficits should have come weeks ago. And he thinks he knows why they did not (excerpts):

If Bernanke really wanted to warn the American public about the dangers of rising budget deficits, then a congressional debate over creating two new entitlement programs would be the most important time to deliver that message.  … Had Bernanke delivered his populist warning before January 28, it could have jeopardized his confirmation by the Senate to a second term as Fed chairman. Had he done so between January 28 and March 21, he would have suffered a storm of criticism from Democrats (and possible retribution when his term came up for renewal in 2013) because his sensible, responsible warning would have made moderate House Democrats more skeptical about ObamaCare’s new entitlements.

Bernanke’s behavior thus reveals why ObamaCare’s cost would exceed projections and would increase the deficit. Knowledgeable leftists, notably Tom Daschle and Uwe Reinhardt, recognize that Congress is no good at eliminating wasteful health care spending because politics gets in the way. (Every dollar of wasteful health care spending is a dollar of income to somebody, and that somebody has a lobbyist.) The Left’s central planners believe they can contain health care costs by creating an independent government bureaucracy that sets prices and otherwise rations care without interference from (read: without being accountable to) Congress. ObamaCare’s new Independent Payment Advisory Board is a precursor to what Daschle calls a “Health Fed,” so named to convey that this new bureaucracy would have the same vaunted reputation for independence as the Federal Reserve.

Politics affects Bernanke’s behavior and the Fed’s behavior. Politics will defang the Independent Payment Advisory Board, and many of ObamaCare’s other purported cost-cutting measures.

Me: This is worrisome. Too much of policy, whether it is  future a Health Fed or the deficit commission, is based on the ability of outside panels to end run Congress —  and of Congress to ultimately cede power.

Ed Yardeni makes the comparison:

What a big relief! I’m not referring to the great stock market rally over the past year, but rather to Tuesday’s “Big Bang.” Particle physicists used the Large Hadron Collider near Geneva to simulate the event that might have occurred at the beginning of the universe. A few Doomsayers warned that the experiment could create a black hole that would suck us all into oblivion. Fortunately, they were wrong. However, even if a doomsday scenario is a small risk, shouldn’t all of us on the Planet Earth get to vote on whether the experiments should proceed? A spokesperson for the physicists said, “We are not doing anything that nature has not done before.” That’s not very reassuring. (Where did all the dinosaurs go?)

It all reminds me of ObamaCare. The legislation was passed despite lots of dire warnings that it will blow up both the healthcare system and the federal budget. Nothing terrible has happened so far, though the predictions are that it will be a slow-acting black hole. There has already been a collision between Congressional Democrats and a few CEOs over the adverse impact of the law on corporate earnings and retiree drug benefits. This spat along with the passage of ObamaCare haven’t unnerved stock investors so far. Maybe that’s because they are relieved.