Obama’s economic advisers opposed Obamacare

by Eric Shierman

In his book Confidence Men, Ron Suskind’s very long and detailed account of Obama administration economic policy uncovers a lot of news that has yet to be reported regarding its health care reform effort. What Suskind uncovers is policymaking so incompetent and so reckless, that it ought to give second thoughts to even his progressive base from supporting his reelection. Like so many of the muddled policies he ended up choosing, his economic advisers (progressives all) repeatedly warned him against pursuing healthcare reform in a weak economy. Obama is going into reelection with a litany excuses, but he owns Obamacare, producing change no one can believe in.

It starts in February 2009 when they have to make an early decision as to how much to budget for their efforts:

By early February, Obama needed to decide what to include in his 2010 fiscal year budget. Whatever decisions he made, they would need to be reflected in the budget, a signal of the administration’s policy intentions to Congress and the wider public.

But two of Obama’s main voices on health care, senior adviser Pete Rouse and Tom Daschle, Obama’s Health and Human Services designee, would not be in attendance. Rouse, though a Colby College graduate, had been born in New Haven and was an avid Yale hockey fan. He was missing the meeting to see his team play, his single concession to something other than work.

Like any good aid, Rouse did a little recon on what Obama could expect on health care.

“Mr. President, the deck is stacked against you.”

He was referring to the people who would be there – principally the economic team, several of whom had been on the fence about whether to begin with a health care battle. Now they were in concert: given the current economic crisis, it was a bridge too far.

The meeting went just as Rouse had predicted, with all Obama’s economic advisers against it, ever Peter Orszag!

The specific issue was over what sort of a placeholder the president should put in his proposed budget for health care reform. Should it be left blank, or undesignated; should it be designated as a “middle ground” of $650 billion, or should it be a trillion? “Mr. President, you know I support health care reform, I’ve been passionate about it for years,” Peter Orszag said, appealing to sensibilities he and Obama had long shared. “But until the deficit is below three percent of GDP, it may be fiscally problematic.”

This was particularly difficult for Orzag, who’d all but made health care reform in year one a precondition for his leaving CBO, But one of the reasons Orszag was always drawn to fundamental health care reform was budgetary: he believed that cost saving, using evidence-based breakthroughs and comparative effectiveness, would drive down health care expenditures and save the federal budget.

The problem was that by the time of this meeting Obamacare was all about increasing access with little by way of controlling costs. The economic team was adamant that this bill would harm the recovery. Right after Orszag surprised the room with his opposition to health care reform:

Summers and Geithner echoed his concern, but Obama cut in.

“Who here does think we should include health care in the budget?” he asked.

Mark Childress, Daschle’s chief of staff, meekly raised his hand.

“Thank you, Mark. I want you to channel Daschle.”

But, after a few minutes, it was clear that Childress was no match for the heavyweights in the room. Every point he made was mercilessly dissected, with the triumvirate of Summers, Geithner, and Orszag parsing the fabric of his argument and then eviscerating it with numerical data.

After a while, Obama had seen enough of the bloodbath. “Okay, enough, enough … I’ll be Daschle.”

Indeed he had to be Daschle because he would later be forced to withdraw his nomination for having been caught cheating on his taxes. Of course Geithner did too, but one would be an anomaly two would be a pattern.

He’d have to go forward without Daschle: his friend, guide, and teacher. It was no surprise that he played him with such force and passion in this important meeting. The practical result was that healthcare reform would now be the first priority of the Obama presidency. A lifelong consensus builder had stumbled into the first, and often most difficult, lesson of every new president: advisers advise, presidents decide.

Obama was very comfortable being the decider-in-chief.  Economics be damned, he was going to push though this long sought goal. We know surprisingly little about Obama which is remarkable for a guy that has written two memoirs, but anyone who has read them knows that Obama has lived a life of confidence reinforced by his surroundings. All his life he has been doted upon for his intelligence and his success in everything he has done. Flying high in his post-election approval ratings, Obama threw his economic advisers’ caution to the wind seeking historic greatness. He would be the man to forge universal health care and be transformational. Economic recovery? Heck we can do that too; we can do it all at one time. I can do economic recovery with my hands tied behind my back! So Obama proceeded to do just that, tie his hands and his feet into the tar pit of healthcare legislation at a time when America was in crisis.

Presidents are deciders, but they must also be held accountable for the decisions they make. Suskind’s book chronicles how Obama time and again disregarded consensus advice from his economic team:

He ran into a united front, philosophically, of Summers and Geithner. Both men viewed the U.S. economy as a sick patient, but one with strong, and often improbable, recuperative powers. One of Summer’s favorite phrases – often echoed by Geithner – was that, as policy makers, they should rely on Hippocrates’ dictum “first, do no harm.”

Who was he listening to? Suskind makes clear throughout his book that when push came to shove, the political advisers always won. Their short-term focus always trumped the long-term thinking of his economists. Part of this was due to Summers’ frequent filtering of economic advise to the president in coordination with the Chief of Staff office and Obama’s political advisers. Economically precarious decisions were made when Summers jumped ship from the economists to the politicos, as Christie Romer told Ron Suskind: “Larry fancies himself very good at politics, and he wanted to please Rahm. That created problems in terms of how things were decided.”

In addition to the direct harm that Obamacare would inflict from regime uncertainty to its budgetary costs, perhaps the greatest cost was on the time of his economic team being forced to fight a war of choice at the expense of time devoted to their core functions. On March 5th, 2009 as Citi’s stock price dropped below $1 a share, a major event was held at the White House to craft broad principles for healthcare reform from industry stakeholders. Geithner was told he had to be there, but as Suskind reports:

“You’ve got to fill in for me,” the Treasury secretary told Kreuger as their sedan pulled onto the White House grounds. “I’ll just make a quick appearance, show everyone I was there, and then slip out. I don’t have time for this today.”

Geithner was talking about the big Health Care Summit taking place at midday in the White House. The secretary, in other words, didn’t have time for what his boss considered the most important initiative of his presidency.

Later Kruger would have to make Treasury’s presentation. Afterwards a senator walked up to him and said:

“Tell your boss, Geithner, he shouldn’t be coming to things like this,” the senator said. “Someone needs to be working full time on the job of saving the economy.”

Clearly the president wasn’t. Now, with the precious opportunity of having brought official Washington together for the day in his house, the people’s house, Obama spent the next hour conducting a kind of after-noon talk show.

It was the people participating in that talk show that made the bill that finally got passed something everyone but the health care industry could hate. Conservatives hate Obamacare because it’s even worse than a single-payer system. Progressives hate it because it’s worse than both the status quo and Republican free-market alternatives. How did Obama help pass a law that is the worst of all possible worlds? The Health Care Summit made this perhaps the first major US law that was literally written by lobbyists:

Obama offered a few passionate remarks about reform, read the high-lights of what some people had said in their breakout sessions, and then answered a few questions from the audience. There were some special guests who needed to be cited. Key lobbyists were asked to stand and affirm their commitment to reform. They did, one by one – the lead lobbyist for the hospitals, for the doctors, for the nurses. Then the room quieted.

“Is Karen Ignagni here?” Obama said “Someone get her a mic.”

She was the lead lobbyist for the health insurance companies, and was given the keynote address. Like a business leader in Peron’s Argentina or Mussolini’s Italy she knew how to accept public demonization in exchange for private influence that results in public subsidies. In all its totality, it is hard to imagine a moment of corruption in American history that rises to the sheer scale of Obamacare.

One can only wonder what Hillary Clinton thought. Only months before, Obama had been bludgeoning her for having lobbyists working on her campaign. In fine retail politics, Obama looked Iowa voters in the eye and told them he would never allow a lobbyist into the White House. Obama savaged her in debates and campaign ads over a vote she cast for the government not negotiating lower prescription drug prices for Medicare part D

The very first deal they cut was with PHARMA! They got the same guarantee Hillary voted for and we got egg rolls.

When researching a book, Ron Suskind is a very thorough guy. He interviewed White House staffers of all levels to produce a book that really gives the reader the feel of a fly on the wall in the first two years of Obama’s economic policy making. Suskind was able to identify the moment that healthcare reform gave the industry exactly what it wanted, increased access to more customers with no effort to control costs:

In an e-mail sent to the senior staff on June 8, Orszag elucidated how the cost argument was dissolving, both inside the White House and beyond it. Mostly though, he and Zeke were left to watch as the expanded – coverage advocates – including  Nancy –Ann DeParle – ascended. The unspoken default was to do coverage first, pushing the moral issue of universal coverage, and at some point in the future, maybe years from now, the expanded mandate would force a cost crisis that would finally bring all combatants to the table to change the way health care was delivered in America.

This was a charge brought about by opponents of Obamacare at the time that seemed so conspiratorial it held little credibility. The idea Obama would intentionally set our healthcare system on a more accelerated path to destruction in the middle of a recession so that some day it might be reformed seemed an incredulous charge at the time. Suskind has uncovered from many sources to convey throughout the book how conscious and comfortable the administration’s political advisers were with this strategy and how demoralizing it was to his economic team, particularly Peter Orszag. Since most of the provisions do not kick in until 2014, the politicos understood that most people would assume some magical cost reduction shall occur then. The lobbyists who wrote the bill while it was hidden from the public know better, as did his economic team.

Having Obamacare scored for budget purposes was another matter. The once mighty CBO held both Reagan and Clinton accountable. OMB became deferential to the White House in the Bush years, losing its credibility when it low balled the cost estimates of the Prescription Drug Bill and the Iraq War. Obama inherited a CBO that more resembled a corporate auditor like Arthur Anderson or credit rater like Moody’s. The CBO knew who its real customer was and it was not the public. Orszag was given the humiliating job of using his inside knowledge of the CBO to game its methodologies enough to make an expensive bill that does not cut costs to at least get scored as budget neutral. Before this happened, the president held a secret meeting with the congressional Democrats who were frustrated an ashamed of the final product they would have to vote on:

It was closing in on midnight. Even if they had come to some agreement, the logistics of getting the blended bill through Congress would have been daunting, maybe even futile

Obama’s method, now clear to all participants, was to sketch over arching principles, wait until others had painted in those outlines with hard proposals, and then, at day’s end, step down from his above-the-fray perch to close the deal. Of course, the distance between overarching principle and concrete policy can be so vast that the former becomes invisible. As for the latter, others were left to bloody themselves with the hard negotiating over actual policy.

The result: everyone was exhausted. Obama offered his own suggestion, interesting but mostly fliers, to bridge the last $20 billion.

Henry Waxman, chairman of the House Energy and Commerce Committee, feeling an urge to affirm the president’s effort, said, “I don’t speak for the House, but you, Mr. President, have put forward a serious set of numbers.”

Pelosi just shook her head. “Mr. President, I agree with Henry on two points,” she said acidly, turning to Waxman. “The president put out a set of numbers, and you, Henry, don’t speak for the House of Representatives.”

Now she glared at Obama, and laced into him over the whole mess, an already stripped-down pair of bills, with Republican proposals, such as the health care exchanges, and competing, irreconcilable models for how to pay for the widened coverage, much less actually control costs. It was another strong woman lecturing Obama.

“Well, what do you suggest, Nancy?” Obama replied, brimming with frustration.

Pelosi shook her head. She felt she’d been making suggestions for a year. She’d pushed a proposal through the House nearly six months before and then watched the Senate dither. She’d been waiting for the White House – and, more specifically, the president – to take the lead. He never had.

Now it was too late. She had nothing to give.

Obama stormed out of the room, telling aides to clean up the mess.

The $20 billion gap proved to be way overly optimistic. Even when being generous, OMB saw a shortfall of $124 billion at best. How did this bill become budget neutral? Orszag delivered. First he was able to convince OMB to bend its rules regarding the use of established assumptions. The powerful story, told so many times by John Kitzhaber with such conviction that he had often convinced me asserts that a tremendous amount of saving is to be had by expanding Medicaid eligibility so that inexpensive preventive care would avert expensive catastrophic care that could not be denied. For many, this is so intuitive why bother with evidence?

There was none then, but OMB accepted. There is solid evidence now – evidence to the contrary. The first true randomized longitudinal study on Medicaid recipients was actually conducted here in Oregon and published last year. It’s called the Oregon Healthcare Experiment. It found that in addition to paying for all that preventive care that turns out not to be as cheap as claimed, emergency room visits actually remained the same, and expensive elective inpatient care rose. When it came out, I wrote about this study for the Oregonian which you can read more about here. In 2014, Obamacare will force states to increase their Medicaid eligibility to 140% of the poverty line. This will blow a huge hole in the budget, but the Obama administration was actually able to convince the OMB to let its model assume this would save money.

It still was not enough to bridge the gap to let a bill that was supposed to save money at least be budget neutral. Several gimmicks were employed. Like a SPV some corporations use to manipulate their earnings, an insolvent nursing home insurance program called CLASS was created for the sole purpose of gaming government cost accounting. Knowing it would eventually go bankrupt, it was created to show temporary revenue, knowing that revenue will eventually go away when the program gets shut down for insolvency. The idea was that it would only collect premiums for its first five years, an amount CBO estimated to be $70 billion. Rather than build up capital like a real insurance program, those premiums would help pay for Obamacare’s upfront costs. When the benefits came due, CLASS would then operate on a pay-as-you-go system that they thought could at best last until 2020. In other words a mini Social Security scheme was created to hide Obamacare costs – channeling Roosevelt?

The Obama administration had to stoop to the level of committing insurance fraud in the quest of selling Obamacare as budget neutral. Suskind reveals how torn young, idealistic, and well meaning lower level officials were in executing policies like this. Like Solyndra there is a paper trail here, and upon Republican take-over of the House, Fred Upton the new House Commerce Committee Chairman has uncovered emails that confirm Suskind’s account. This program did not make it to 2020; it did not even make it to 2012. With the change in control of the House came a change in control of government actuaries. OMB saw which way the winds were blowing as did Cathleen Sibelius. Last October CLASS was dismissed before it became too big a scandal, but another bigger Obamacare budgetary gimmick turned budgetary land mine is still out there waiting to go off.

Obamacare is also one of the largest higher education bills in recent times. Obamacare took over the student loan business. Government cost accounting does not take into account the probability that a borrower will default by marking to market the present value of its book of assets. Government cost accounting discounts to present value all assumed interest payments of a debtor and does not reveal to auditors a change in earnings until a debtor actually defaults. Using only-in-Washington accounting, Orszag got OMB to turn a money losing business for private banks into $68 billion in projected profits over the next ten years to hide Obamacare’s cost increases. If Bernie Madoff worked for the Orszag, he would have reminded his boss that fraud only lasts until people start asking for their money. This gimmick will start to dissolve in the next four years as all those sociology, women’s studies, and art history majors graduate to find they are little more than expensively trained unskilled labor.

Suskind reveals that moment for Orszag and so many of his peers that inevitably came: reflection. What have we done? The economists were depressed, but the political advisers were unfazed; the thinking was to turn this bill’s vice into virtue. They fell back to the realization that they were destroying the existing healthcare system so as to set it up for an eventual crisis that will lead to greater reform. At the earliest this crisis will happen after Obama’s reelection so what’s not to love?

The widened government mandate to cover everyone – especially as baby boomers aged, by the thousands per day, into Medicare – would soon enough turn the lack of serious cost controls into an existential budgetary crisis for America. Then something drastic would have to be done. The key: it would be government’s problem to solve. Somehow finding a way to make universal coverage affordable was now on their ledger, an entitlement.

After nearly twenty years in government, and through only forty-one years old, Orszag had lost his appetite for that battle, or for the American government’s ongoing and, it would seem, deepening bouts with budget crisis.

No one was more disappointed in Obamacare than its intellectual father, James Weinstein of Dartmouth University. A pioneer in evidence-based medicine, Weinstein knew the limits of his own work and saw how the industry had turned his review boards into regulatory captured stakeholder advocates. Suskind interviewed him extensively for this book:

In early August he was sitting in a dinner near Hanover reflecting with painstaking specificity about how bringing the first steps of analytical outcomes – based rigor to America’s bloated fee-for-service medical system was so important “that it should have been the first priority, even above the expansion of coverage.”

To spend a “once -in-a-generation” effort on extending coverage to the uninsured without any real teeth in using evidence about what was effective in reducing unnecessary procedures, and driving down costs – was a “stunning error.”

“It’s made things worse,” he said solemnly.

And then he got frustrated. “I can’t believe how wrong they got it. This was our one chance, and we completely blew it.”

Weinstein as an outsider, can only wonder how the Obama administration could make such a “stunning error.” Former White House officials told Suskind how this was no accident at all. This bill was written by the industry for the industry. Like pigs in trough thinking only about the present, industry stakeholders are pleased with their near-term prospects. Obama’s political advisers were happy to have the industry lobby to pass his bill. As the cost growth becomes worse than it was before, then heck we’ll take care of that crisis when it comes. In the mean-time Obamacare was “points on the board” as Rahm told the president.

Ron Suskind’s account of Peter Orszag tendering his resignation to Obama is priceless, but I am not going to give it to you. This book is only $9.99 on Kindle. Buy it and read it yourself. There is so much in this 500+ book I just cannot spoon feed all of it to you, but one minute of reading this book, authored by a progressive who himself once believed in Obama, is worth more than an hour of watching Fox News. The word is getting out about just how bad a record Obama will have to run on. The most devastating sources of that record come from his own side.