America's Bitter Pill

by Steven Brill

  Indeed, “death panels” had become the watchword of that government takeover.

  To the extent that Palin was referring to anything in the proposed law remotely resembling death panels, she might have been talking about provisions for independent medical panels to report on the comparative effectiveness of one treatment or drug compared to another—the provisions that the White House economic team thought were so weak in the drafts they had seen so far as to be toothless. Or she might have been thinking about the independent panel that the Obama economic advisers had so far fruitlessly tried to strengthen so that in the event of intolerable medical inflation it could recommend spending cuts that Congress would have to vote up or down. In other words, it was the arrangement akin to the one used to close military bases that Grassley had supported at Baucus’s summit.

  Or Palin could have been trying to pin the death panel label somehow onto a provision that simply allowed Medicare to code for billing purposes the time a doctor spent counseling a patient about hospice care—a provision Grassley had already convinced Baucus to delete because just the idea of doctors talking to patients about preparing for the end of life might scare people.

  Nancy-Ann DeParle, who had been deeply involved in the White House courtship of Grassley, turned on the TV on the evening of August 12 to see Grassley respond to a question by telling the crowd that he, too, was against the Obamacare death panels, or, as he put it, “a government program that determines you’re gonna pull the plug on Grandma.” He did not mention that there was nothing in any pending bill that would pull any plugs on anyone’s grandma.

  By the time Grassley got back to Washington in September, he had declared on Fox News that he was against another element of the “government takeover”—the individual mandate that he, like Romney, had celebrated as an essential element of individual responsibility. “The town halls helped me to realize that there were constitutional issues with the mandate,” is how Grassley later explained it to me. “It’s one thing for a state to require you to buy something. But it’s another for the federal government to.”

  There was predictable overplay of what was going on by the media. Covering town halls that were not raucous, which was most of them, wasn’t good television. Colorado Democrat and Finance Committee member Michael Bennet, a moderate former businessman facing a tough election fight, used an elaborate PowerPoint to walk his constituents through the basics of the pending reform proposal. Bennet got lots of questions, some hostile, but there were no eruptions. And no video coverage.

  Yet politicians of every stripe were getting the message. On the Sunday talk shows on August 16 White House officials began to waver on the public option, which caused former Vermont Democratic governor and presidential candidate (and physician) Howard Dean to squawk. Without the public option, Dean said, the proposed law wasn’t worth passing.

  On August 18, Grassley told Baucus and DeParle that he was bowing out of the negotiations. Even if the Democrats accepted every change he wanted he could still not support a bill, he said. By now no one on the reform side was surprised.

  Obamacare was becoming a political third rail.

  During August conference calls, the drug company executives and Karen Ignagni’s insurance industry bosses signaled that they had gotten the message, too. PhRMA’s board of drugmaker CEOs toyed with pulling out of their deal. The insurers gave the go-ahead for the Chamber of Commerce to start funding those opposition ads. In both camps, the media coverage of the town halls was hitting home. A view was forming that maybe the political climate had changed so much that, once again, healthcare reform could be killed altogether. Maybe they wouldn’t have to make any compromises to avoid the more dire reform provisions, the threat of which had brought them to the table in the first place.

  “WHAT’S MY NAME?”

  Obama met with his senior staff just before departing to Martha’s Vineyard for his end of August vacation. Some were shell-shocked by the town hall clips they had seen during what the reformers would soon be calling the Tea Party summer. They counseled that the effort was lost, that they should try to craft a radically slimmed-down package and move on to other domestic policy issues. Jarrett said nothing, as was her habit in large meetings with the president.

  Phil Schiliro, who was in charge of congressional relations, wasn’t so sure the game was over. Schiliro prided himself on being able to give the president definitive predictions based on being able to see a clear path to getting a bill over the finish line. In this case he certainly couldn’t do that. However, he could see a path that might work. As the discussion among Obama’s top advisers continued, Schiliro interrupted.

  “Mr. President,” he said. “Do you feel lucky?”

  “Phil, where are we?” Obama answered.

  “In the Oval Office, sir.”

  “Phil, what’s my name?” Obama continued.

  “President Obama, sir,” Schiliro replied.

  “Of course, I’m feeling lucky,” Obama answered.

  “Well, if we get lucky, there may still be a way we can do this,” Schiliro continued.

  Obama insisted that they keep at it.

  President Obama’s edict when he took office was that, with some exceptions, his administration was not going to hire lobbyists. This upset the usual way that Schiliro, a veteran congressional aide, would have staffed up his White House congressional liaison shop. Traditionally, this was done by hiring lobbyists, who were typically former congressional staffers. Now, because of Obama’s edict against hiring lobbyists, Schiliro’s only choice had been to hire current staffers.

  That turned out to be a blessing in disguise, Schiliro later told me. He had been able to recruit some of the most effective, senior people from Capitol Hill, eager to join the team of a newly elected president who projected so much promise. Thus, Schiliro now had a group that was much closer in touch with the legislators they had to herd to the finish line.

  Valerie Jarrett went into high gear, too, something she did not receive much credit for in the press. Since the early days of the administration she had been helping Schiliro with his and his team’s incessant outreach to legislators, interest groups, the business community (with mixed results), and anyone else who could help the president’s health reform cause.

  Like Schiliro, Jarrett advised the president that they could survive the Tea Party summer. Obama had survived much worse to get to that desk in the Oval Office, she reminded him.

  Now, Jarrett redoubled her efforts, while serving, Schiliro thought, as someone who would buck up the president whenever the rest of the staff suggested he stand down. It wasn’t that Obama needed bucking up; he never seemed to waver. But it was nice, Schiliro thought, that if he ever started having second thoughts Jarrett would be up there in the White House living quarters that evening to talk him out of it.

  Wall Street thought there was a path, too. A Goldman Sachs analyst speculated in an August 25 report that healthcare reform was still possible and would boost the earnings of the for-profit hospitals, even with the hospitals’ $155 billion in givebacks. Those givebacks “do not look onerous,” the analyst reminded his clients.

  The next day Zeke Emanuel was confident enough that he began looking ahead to when the law would be on the books. On August 26, 2009, he told his brother, who had asked him to start working on a scaled-back plan to extend coverage only to more children and other special populations, that he wanted Rahm to make him the head of CMS—the agency inside the Department of Health and Human Services that would implement the big healthcare reform law if it passed. “I can’t make you anything, you’re my brother,” Rahm Emanuel yelled at him. “Forget it.”

  Besides, the chief of staff added, “Obama and Valerie love Nancy-Ann [DeParle].” If someone was going to run Obamacare it was going to be her.

  Undeterred, Zeke Emanuel began drafting a memo outlining what he would do if put in charge.

  “WHAT MY GRANDPA CALLED THE CAUSE OF HIS LIFE”

  The day before,
August 25, 2009, Ted Kennedy died.

  At the Boston memorial service for Kennedy, Obama eulogized him as a man who “Through his own suffering … became more alive to the plight and suffering of others—the sick child who could not see a doctor.”

  One of Kennedy’s grandchildren cited “what my grandpa called the cause of his life … that every American will have decent quality healthcare as a fundamental right and not a privilege.”

  After the service, which took place during a furious rainstorm and was attended by a who’s who of American politics, Obama got firsthand exposure to a relatively tangential issue that threatened to complicate the law he and Kennedy championed. One of the Catholic bishops in attendance bent his ear about abortion: The president risked the opposition of the church (and, by inference, legislators, particularly conservative Democrats in the House) if he didn’t make sure that no one got subsidized premiums to buy insurance that included coverage for abortions. There was even, he was told, strong opposition to insurance that paid for birth control.

  Yet one of Obama’s favorite stump lines had been his promise that insurance reform would mean that women no longer paid higher premiums than men—a difference that was largely attributed to the insurers’ desire to account for the additional expense risk that women posed because they could become pregnant and accumulate bills for family planning, childbirth, or, in some cases, abortion.

  PLAYING THE CBO GAME

  September 2, 2009, brought more evidence of the Obama team’s desperation. It involved something called the SGR, one of those only-in-Washington acronyms. It stood for “sustainable growth rate” and was a monument to D.C. dysfunction.

  In 1997, Congress had become concerned about the exploding costs of Medicare, and decided that the best way to do something about it was to go after doctors, who made more money the more services they provided and billed for—the fee-for-service problem that Orszag was obsessed with.

  Under fee-for-service, Medicare had established “relative value units,” which specified how much a doctor would be paid for different categories of care, from a routine office visit to brain surgery. So to hold down Medicare expense growth, Congress passed a law that stipulated that if, based on the prior year’s Medicare expenses, Medicare’s costs were projected to increase at a rate exceeding the percentage increase in the gross domestic product—or a “sustainable growth rate”—then the fee associated with every relative value unit would be cut proportionately to make up for the overage. If, for example, Medicare inflation exceeded the growth in gross domestic profit by 2 percent, every relative value unit (how much the doctor would be paid for a given treatment) would be reduced by 2 percent.

  In other words, doctors—whose incomes had never increased during the recent decades of the healthcare boom the way earnings for hospital administrators, drug executives, or CT scan equipment salesmen had—were assumed to be the prime drivers of costs, and they would, therefore, have to pay for driving them too high.

  If you are having trouble following the logic, it’s because there is no logic. Even assuming that a doctor is engaging in a fee-generating activity to enrich himself and not to help a patient, the idea that any one of the 700,000 American physicians would cut his own fee-generating activities for fear that his 1/700,000 contribution to Medicare’s doctor bills would result in a cut in that value unit for him and all other doctors is absurd. If anything, a doctor who was worried that his fees for each service might be cut would be motivated to bill for more services in order to get himself back to even.

  The scheme, of course, didn’t work. Medical inflation continued to outpace growth in the gross domestic product. That’s why every year there would be news stories about an emergency “doc fix” on Capitol Hill, in which Congress would relent and restore the money to the relative value unit so that doctors’ fees from Medicare weren’t cut to the point where they would be so low as to drive physicians out of business or force them to stop treating seniors on Medicare.

  For years, this annual doc fix fire drill had generally kept the doctors’ payments from being reduced, typically freezing them with little or no upticks for inflation.

  In return for getting support for Obamacare from doctors and their main trade group, the American Medical Association, the Obama administration, Kennedy’s staff, and Baucus’s staff had all promised the AMA that a permanent doc fix would be included in the healthcare reform law. No longer would doctors have to worry about last-minute congressional action to save their livelihoods.

  However, now, on September 2, with Obamacare in such trouble, the Baucus people and DeParle’s White House team had agreed that they would leave the doc fix out of the bill. Why? Because the Congressional Budget Office had scored its cost at $200 billion over ten years. Jettisoning it would instantly bring healthcare reform $200 billion closer to the deficit neutrality they had promised. They would tell the doctors they would do a permanent fix in a separate bill, something Washington had failed to do for more than fifteen years. Sure, the CBO would still score that separate bill at $200 billion if and when such a bill was drafted, but that wouldn’t count against Obamacare.

  That decision was emblematic of two important dynamics.

  First, the doctors—the players in the healthcare economy who, with nurses, actually provide healthcare—had seen their influence evaporate compared to the big-money industry stakeholders such as the drug companies, insurers, and hospitals. As a result, they could be trifled with in a way that would have been unimaginable in the Truman era, when they had almost single-handedly torpedoed reform. They just didn’t have that clout any more.

  Frantic emails from AMA lobbyists to the White House when the AMA got wind of the switch were shrugged off. The AMA was already on record supporting the reform plan because of the coverage it would give to so many millions of Americans. They couldn’t be seen as changing positions for a reason related to money. They had to settle for the promise that they would get this permanent fix in in a separate bill.

  Second, the doc fix gambit made it clear that the Congressional Budget Office scoring process was more a game to be played than it was a precise measuring device to be read like a thermometer.

  Every start-up enterprise has to make projections and get them validated by outside parties. As someone who has started several businesses (some that succeeded, others that have failed), I have made countless projections of costs and revenues for potential investors to review. As the guy seeking the money to start the business, I am naturally optimistic. Otherwise, why would I want to do it?

  It’s the job of the potential investors to review those projections—in effect, to “score” them in CBO parlance—after which they typically come up with a best case, a worst case, and a case in the middle.

  A government enterprise is different. First, those designing the enterprise don’t present, or score, anything. They just give the package of provisions in the proposed law to the CBO—a congressionally established group of nonpartisan, independent economists and analysts—to figure it all out. Someone vetting an investment for a private equity firm would consult broadly around the industry looking for clues about the projections that, again, the entrepreneur would have presented. CBO’s turf-conscious economists treasure their independence and work wholly on their own.

  The projections CBO had to make regarding the Obamacare enterprise involved three buckets of money.

  First, CBO had to figure out what everything in the proposal—such as the subsidies for people to buy insurance or the cost of setting up the insurance exchanges—would cost.

  Second, how much government money could be saved by the reform measures in the program, such as Medicare reducing its payments to hospitals or to drug companies?

  Third, how much could be brought in from new fees, taxes, or penalties, such as the new tax on drug company revenues, or the penalties to be paid by individuals who ignored the mandate to buy insurance?

  Many of these variables interacted; a higher penalty f
or ignoring the mandate would bring in more money, but would also attract more people to the exchanges where they would require more subsidies.

  Baucus and the White House team were focused on one thing when it came to the CBO: Would the sum of the second and third buckets—savings and new revenues—equal the first bucket of costs and, therefore, make the enterprise budget neutral?

  Scoping out how the CBO would deal with all this was easier than usual in this case because the Democrats in the Senate and at the White House had enlisted Jonathan Gruber as a consultant to try to use his black box to project the CBO’s black box. Jeffrey Liebman, a Harvard professor now at Orszag’s White House Office of Management and Budget, developed his own shadow model. Moreover, when he ran the CBO, Orszag had had the agency score some hypothetical reforms that were now part of the bill being drafted.

  So the reformers were able to make a lot of good guesses about where the CBO would come out. But they were only guesses, and they were often wrong. The CBO’s scoring results were unpredictable and often maddening to the staffers and legislators on the receiving end of its work.

  Sometimes the frustration came because the CBO worked on its own schedule with its own inexplicable priorities. At times during the summer of 2009 the Senate staffs would be in the midst of a heated debate over some key provision, waiting desperately to get the CBO’s score of how much the overall numbers would be changed by a tweak of some proposed tax rate or in the penalty to be paid by employers who didn’t provide insurance. But the CBO would come back instead with a score of some change they had long since stopped caring about.

  Other times, the scores just seemed wildly off, or a revision would emerge from the CBO staff (often in a matter-of-fact heads-up email to someone on the congressional staff) that turned a positive score into a negative one.

  Most of the time, the CBO numbers seemed to err on the conservative side. In part this was because—as the White House people had been reminded when their proposals for broad but untested changes (such as bundled payments) were scored at near zero—the CBO wouldn’t attach much of a positive score to something where there was not sufficient analogous data to back it up. Put differently, the CBO would have had trouble scoring Google’s ad revenues over its first ten years from something called an Internet search, because it would have had no precedents to compare it to. So its default score would have been zero or something close to that.