The Interview With Fred Hiatt

I guess the President made more news last night in this interview with Fred Hiatt than at his press conference. Reporters should have been briefed on it.

First, the President basically confirmed that expansion of MedPAC, to have an independent body of experts determine reimbursement rates and reforms to Medicare, would be a component of the House and Senate bills. I was initially skeptical of this idea, but I think the Speaker's addition of Congressional input on appointees makes it a nice compromise, and taking the complicated business of delivery system reform away from parochial interest makes sense as well.

At this point, I am confident that both the House and the Senate bills will contain what we've been calling MedPAC on steroids, the idea that you continually present new ideas to change incentives, change the delivery system, understanding that because this is such a complex system we're not always going to get it exactly right the first time, and that there have to be a series of modifications over the course of a series of years, and we have to take that out of politics and make sure that an independent board of medical experts and health economists are providing packages that are continually improving the system. So I think there's general consensus that that is one of two very powerful levers to bend the cost curve.

Second, the President endorses some modified version of the employer deduction, along with John Kerry's idea of taxing insurance companies' highest-cost benefit plans as a way to get at the same pot of cash:

Obama: Now, the second idea, which is the one that got more attention, even though Elmendorf, I think, has emphasized the benefits of a MedPAC board, as well, was the elimination of the tax exclusion [on employer-provided health insurance]. And I've been very clear on my position that I think to add additional costs to families right now when they're already seeing their premiums doubled is not the kind of health reform that I'd like to see, but I believe that there may be ways of getting at the same principle.

For example, you could conceivably set up an index of some sort that makes sure that health care inflation -- or to make sure that the exclusion only accommodates a certain amount of health care inflation -- as opposed to 8 percent or 9 percent, or what have you -- without burdening current plans, but over time assuming -- if we're assuming that health care inflation is going to continue to be a problem, that you could get at the problem in that way.

Hiatt: A kind of cap, but one that doesn't hurt anybody --

Obama: Currently.

Hiatt: -- at the current level?

Obama: Exactly. You're also seeing, I think, some interesting discussions in the Senate Finance Committee about a variation that goes after the insurance companies, as opposed to directly taxing the benefits.

Because this is Fred Hiatt he was talking to, the conversation was consumed with long-term costs and entitlements. Hiatt is practically the king of the fiscal scolds. The President still wants universal access and lower costs for individuals, which is separate from lower budget costs. But I agree that you can do both at the same time, and that now is a great time to do that. As Obama said in this interview, "I think it's important for us to make sure that 46 million people who don't have health insurance get it. And I think it's important for us to bend the cost curve, separate and apart from coverage issues, just because the system we have right now is unsustainable and hugely inefficient and uncompetitive."

And both go hand in hand. Removing the hidden tax of the uninsured visiting ERs will lower costs, and the mechanism is expanding access. Offering a public plan will expand access, and by forcing competition, in the process lower costs. There's a lot in health care reform that can be symbiotic, just as there's a lot that works at cross-purposes.

On long-term budget issues, I think it's important to recognize this:

Obama: We have a structural gap that has to be closed.

Hiatt: So can I ask you how you think about the timing and politics of closing that structural gap?

Obama: What I think has to happen is if we can show that we have a disciplined health care reform package that is serious about cost savings and is deficit-neutral, you combine that with the pay-go rules that we have been promoting and I believe that we can get through Congress, and you are imposing some discipline on the appropriations process -- and I thought that the F-22 victory yesterday was a good example of us starting to change habits in Washington -- then I think we're in a position to be able to, either at the end of this year or early next year, start laying out a broader picture about how we are going to handle entitlements in a serious way.

It may start with Social Security because that's, frankly, the easier one. And I think that it's possible to also look at tax reform and think about are there ways that we can maybe even lower marginal rates but eliminate all the loopholes and have that a net revenue generator. I think there are going to be a bunch of things that we can take a look at, but I think health care reform combined with pay-go, combined with how we deal with appropriations bills over the next six months will help lay the foundation for us to be able to make some of these broader structural changes.

The challenge I've got, Fred, is that obviously -- our biggest problem right now in terms of short-term deficit is the recession. And nobody -- no economist I've talked to thinks that it would be wise for us to start early, start now, in reducing government outlays, when states are already cutting back drastically, and you'd have a hugely destimulative effect on the economy. But we have to begin to prepare on the midterm and the long term. And that's why I think health care reform is so important.

The House actually passed paygo legislation yesterday. And I get from this that Obama is open to reducing the defense budget over time - he checked himself at one point, saying that non-defense discretionary spending cannot be lowered to bring us in line on the budget. But people might go nuts about his fleeting mention of Social Security. The only way Social Security changes are "easy" is through raising the cap. Anything else will be met with howls of disapproval from Obama's own base. And they won't pass Congress. I think the tax reform idea in the main, lowering rates but broadening the capture by getting rid of loopholes, is a good one as well.

There can be a lot of minefields in talking to Fred Hiatt, but I think the President did well. He held firm against deficit reduction at a time of near-Depression, and he forced Hiatt to live up to his rhetoric and recognize that the main reason our long-term budget outlook is bleak right now is due almost entirely to health care.