Obamacare and the States' Benefits Budgets

Congress can't repeal the laws of supply and demand.
August 13, 2009 AT 3:00 AM
Girard Miller
By Girard Miller  |  Finance Columnist
The finance columnist for Governing.

As the national debate over universal health care intensifies, state and local government officials are mostly sidelined. Despite occasional banter about nationalized or socialized health care, it is now evident that Congress will build upon the existing system rather than replace it. Thus, the benefits now provided to public employees will likely remain untouched -- with the possible exception of a tax on ultra-generous insurance arrangements that could raise costs for "Cadillac" plans which are much more prevalent in the corporate world.

As I've written before, the idea that national health care changes could impact retiree medical benefits plans has been an excuse for inaction by local politicians who have failed to properly fund these OPEB (other post-employment benefits) plans.

Once Congress finalizes a bill for the president's signature, it will become obvious to all that state and local governments remain entirely responsible for the medical benefits they have promised, and there will not be an "OPEB fairy" to relieve them of their $1.5 trillion unfunded liability.

On a broader level, an invisible hand will eventually emerge from the nation's populist shift toward more-universal access to health care: supply-demand economics. Simply stated, the end result of providing improved access to the existing system for the tens of millions of now-uninsured Americans will be an old-fashioned "demand-pull" cost inflation. Unless Congress somehow figures out how to clone doctors and nurses overnight, the number of people entering the health care system to receive services will pressure costs higher, not lower.

During the last presidential debates, and earlier this year in the Congress, it was argued that cost-savings would be realized through new medical information technology (universal recordkeeping systems) and by preventive care to reduce the strain on hospital emergency rooms now flooded by medical indigents. Unfortunately, those efficiencies are not sufficient to offset the supply-demand imbalance that will result from expanding citizens' access. Testimony in Congress by the head of the Congressional Budget Office burst that bubble. As others have noted, the cost curve will not be bent downward by expanding access.

As those of you who took economics may remember, there are only a few types of industries that enjoy a cost curve that consistently delivers lower costs at higher quantities. One is high-tech manufacturing, where automated assembly lines and economies of scale can produce cheaper computers, software and flat-screen TVs as volume increases. Another is the mutual fund industry, where unit costs decline as the pool of investments grow but portfolio management expenses don't.

Most other industries with declining cost curves are monopolies. That's because a monopoly can spread its fixed costs over higher volumes as demand increases. It works for electric and water utilities run by government agencies, until rising variable costs begin to overwhelm the fixed-cost savings (which is why we have peak demand pricing schemes to conserve energy). In the health care marketplace, the only way to actually bend the cost curve downward would be a monopoly system, which sounds like the "government-run health-care monopoly" that congressional Republicans are demonizing in the current debate.

I'm not even convinced that a monopoly in the health care industry can accomplish the magic of lower costs at higher volumes. Maybe for hospitals and clinics with high fixed costs (like MRI machines), or empty beds and excess capacity today, a monopoly model could work, but when it comes to paying doctors and nurses, orderlies, clerks, janitors and food-service workers, old-fashioned economics should tell us that the more people we serve, the more labor we will require, and those workers will be able to demand higher compensation.

Just look at the nursing profession for an example. As baby-boomers age and the demand for hospital care has increased simply by demographics, the demand for nurses has exploded. Some nurses can now push six-figure incomes in certain metro areas with a little overtime and specialty work. There are very few unemployed nurses.

I'm all in favor of real medical-cost mitigation. Let's automate and centralize medical records, with privacy safeguards of course. Let's bring on more ideas like pragmatic medical tort reform through on-site, patient-cost advocates -- who could arbitrate the bypass of redundant tests and treatment plans and thus reduce the number of procedures now performed to protect the docs from malpractice lawsuits. Let's give bold tax incentives for new medical technologies that actually reduce today's costs rather than create new expectations at even higher costs. Let's think through the morals, ethics and humane methods to reduce the costs of critical care in the final 90 days of life, where we spend an outlandish amount of GDP to prolong lives that have been well-lived but can't go on forever, no matter how much we spend. Let's have an honest discussion with ourselves about the growing national costs of extended medical morbidity as baby boomers age beyond 75. And let's fund Medicare at its real cost.

Like the Roman god Janus, there are two faces to the health care conundrum. Health care cost-reduction is the second face of President Obama's initiative. His administration should pursue it vigorously for its entire term, and not simply declare victory with a bill that expands coverage to most Americans without making sufficient progress on cost controls. Like Lyndon Johnson's War on Poverty, President Obama needs a War on Health Care Costs to prove that his team can manage as effectively as he can explain the problem.

Now, back to state and local governments. The point of this column is that national health care will most likely bring incrementally higher costs for employee medical benefits in the years to come -- not savings. For OPEB plans that are highly sensitive to prolonged medical-cost inflation that outruns investment income, it's even worse.

My conclusion: Solutions to rising costs of medical benefits for state and local government employees and retirees are not coming from the bills in Congress. The sooner we all realize that -- and begin the hard work necessary to manage benefits levels, cost-share with employees and fund the necessary retirement benefits -- the less prone we will be to cut public services to pay for rising medical costs. Meanwhile, forget about getting a break in your insurance and OPEB costs in next year's budget -- and keep reminding the folks in Washington that we need real health-care cost reductions.

Girard Miller
Girard Miller | Finance Columnist | millergirard@yahoo.com