Analysis: Health Care Reform—Passed, But Just the Beginning

President Obama’s historic victory on health reform carries enormous consequences for American business, the economy, social policy and politics.

But it’s only the first chapter in a story that will play out unpredictably.

The legislation would substantially expand the role and size of government, adding an estimated 16-million beneficiaries to the costly Medicaid program. It would sharply escalate regulation of the health care system, most notably affecting insurance companies.

Obama's Victory

Yet it would also vastly expand the market for private insurance by requiring Americans to purchase health coverage, just as drivers are required to carry auto insurance.

The market for employer-provided health insurance flourished after federal policy made benefits tax free during World War II. Mr. Obama’s proposal, to minimize disruption and political resistance, was designed to leave that system mostly in place. But over time, growth in the individual marketplace could reduce the role of employer provided health insurance, which has weighed down corporate bottom lines as health costs exploded in recent decades.

The burdens of financing the new health system will fall, by design, on a narrow swath of taxpayers: high income Americans, in the form of higher Medicare taxes; health insurers offering high cost plans; medical device manufacturers; employers who decline to provide health coverage to their workers. The Congressional Budget Office projects that the higher taxes they pay, combined with spending cuts in Medicare, will not only cover the $940-billion, 10-year cost of the program but trim $138-billion from the federal budget deficit.

The effects on the overall economy are uncertain. The CBO estimates that the legislation would extend insurance to 32-million more Americans. More than coverage expansion, Mr. Obama has emphasized the potential for controlling health costs, which threaten to bankrupt government, business and families alike.

But that won’t be easy, considering that health costs have outpaced overall inflation for decades.

American healthcare reform
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One major provision designed to control costs – the so-called “Cadillac tax” on high-value insurance plans – was delayed in its implementation until 2018 because of political resistance; that largely came from labor unions which have negotiated high-value plans in collective bargaining. Skeptics warn that future Congresses may decide to kill it altogether.

Other cost-control steps include reforms in health service delivery intended to make care more efficient by reimbursing doctors and hospitals for an overall course of treatment, rather than individual procedures that give providers incentives to offer unnecessary services. A Medicare advisory commission would get new power to force cost-saving changes that advocates believe would ripple through the broader health care system.

The benefits of those steps remain speculative, however. If they don’t work, health care inflation could continue unabated or grow even worse.

One major question will be the durability of the legislation itself. President Obama, among others, has noted that major social legislation needs some level of bi-partisan consensus to endure through shifting political winds. This Democratic triumph has come over sustained, unified and bitter Republican opposition.

Some prominent Republicans, citing public opposition as expressed in polls, have vowed to seek its repeal. In 1989, Congress repealed the so-called “catastrophic care” Medicare coverage plan enacted a year earlier, after protests from senior citizens irate about a new surtax.

But repeal anytime soon appears unlikely. Polls are mixed. Democrats remain confident that the most popular portions of the bill, such as elimination of insurance companies’ ability to deny coverage for pre-existing conditions, will help it withstand Republican assault even if Democratic majorities are weakened or wiped out in November elections.

“Resistance to it after passage will likely have a relatively short half-life,” said Brookings Institution analyst Tom Mann. One reason: the legislation was substantially modeled on previous Republican proposals, including the plan that Mr. Obama’s potential 2012 Republican challenger Mitt Romney enacted as governor of Massachusetts. Mr. Obama retains his veto pen at least through 2012.

“The real threat to the legislation will probably come from states,” observed Ron Haskins, a key Republican staff aide when Congress passed welfare reform in 1996. Facing severe budget woes, some states could seek to ignore requirements for expanding Medicaid, whose costs are borne jointly by Washington and the states.

Others could seek to pass laws exempting citizens from the individual coverage mandate. If they succeed, that could threaten the viability of government-operated insurance exchanges, which will depend on spreading risk over a broad group of customers to keep insurance premiums low.

A more immediate question is how this political victory will affect Mr. Obama and his party immediately in this mid-term election year. At minimum, delivering on a decades-long Democratic goal that he promised in his campaign boosts Mr. Obama’s standing .

Republicans, seeking to capitalize on public disdain for Washington, continue to hammer away at the awkward maneuvers Democrats have used to drag the legislation over the finish line. “But the real process issue for the voters has been the gridlock in Congress and the failure to get anything done,” said Democratic pollster Geoff Garin.

Victory on health care gives Democrats a powerful answer to that complaint. And it allows the party to turn unequivocally to economic anxieties that have made this election year so hazardous for Mr. Obama’s party.

“Winning begets winning,” said Congressional analyst Norman Ornstein of the American Enterprise Institute. “Pulling this victory out empowers and energizes Democrats and Obama for the rest of the year.”

How that energy will translate into further action remains unclear. Democrats remain confident they can muscle through financial regulation legislation even without broad bipartisan support, counting on Wall Street’s unpopularity to force at least a few Republicans to break ranks and halt a filibuster. With unemployment still hovering around double digit levels, 11 Senate Republicans went along with the $35-billion jobs bill that Mr. Obama signed last week.

But breaking through on the more controversial priorities of immigration reform and a cap-and-trade system to limit carbon emissions may now be more difficult without active Republican assistance, and political cover. For Democrats in competitive districts, the health care debate heightened the sense of political risk associated with Mr. Obama’s ambitious agenda.

The president and Democratic leaders “have used up a huge amount of capital with their own folks,” observed Sheila Burke, one-time chief of staff to then-Senate Republican Leader Bob Dole. “How many times will these guys go to the well? Is this the right time to push them on cap-and-trade or immigration?”

A few Republicans, notably Sen. Lindsey Graham of South Carolina, are actively negotiating with Democrats on both issues. But their prospects for pulling a significant number of fellow Republicans behind bi-partisan compromises appear poor.

That’s largely because the 2010 political environment, even more than mid-term elections typically do, still favors the party out of power. Republican leaders know that, despite the Democrats’ health care victory, they are likely to have more leverage after November elections, not less.