In June, the Congressional Budget Office (CBO) took another, more complete look at President Obama’s budget plan and found the following: a $2.7 trillion spending increase over ten years, not counting the full costs of a health-care plan; annual deficits exceeding $600 billion every year — and rising as the years pass; a cumulative ten-year budget deficit of $9.1 trillion; and $17 trillion in government debt at the end of 2019.

And that might be the rosy scenario.

For starters, there are the budgetary risks associated with Obamacare. It’s all but certain to have additional deficit spending in its early years, which is why the president wants to change the traditional budget rules and require a deficit-neutral bill only over a full decade. That means all of the “financing” can be back-loaded, and later pushed back again. Sort of the “glad to pay you Tuesday for a hamburger today” version of budget discipline. Moreover, CBO has already estimated that the cost of the new health-insurance entitlement program in the Kennedy-Dodd legislation would rise very rapidly — 6.7 percent per year — when fully implemented. So even if the bill is “financed” over ten years, over the longer run, it will add to the massive unfunded liabilities associated with Medicare and Medicaid.

Then there’s the interest rate assumptions used to make the ten-year projections. Many forecasters, including CBO, use rather benign assumptions of where real interest rates are headed because the economy is expected to remain soft for some time. But what if the flood of government debt leads some important lenders to demand higher returns?

Yesterday, CBO provided some illuminating projections of what would happen under just such scenarios. For instance, if interest rates on government debt in the coming decade roughly tracked the experience of the 1980’s, the Obama budget plan would run entirely off the rails in very short order. By 2014, the annual deficit would exceed $1.1 trillion, and it would cross $2 trillion in 2019. Over ten years, the higher interest rates alone would force the government to borrow an additional $5 trillion, with the nation’s debt topping $22 trillion at the end of the decade — or more than 100 percent of GDP.

But even if interest rates followed a path closer to what the latest Blue Chip forecasts indicate, the nation’s debt will still rise more rapidly than CBO’s base assumption would indicate. Instead of $17.1 trillion of debt at the end of 2019, it would be $18.3 trillion. And the deficit in 2019 alone would exceed $1.3 trillion.

The Obama administration is pursuing a reverse of the “starve-the-beast” strategy. Pile on spending and new programs in the current recession, and then, after the fact, push for the mother of all tax increases as the only way to defuse the ticking time bomb of runaway government debt. Fortunately, the public is beginning to stir. They have seen spend-and-tax before, and it’s not what they thought they were voting for in November.

Of course, no one knows for sure what’s in the Baucus plan except for a handful of people. There have been two Congressional Budget Office (CBO) tables provided to the committee indicating how much alternative versions of plan would cost over the coming decade, but neither estimate been released to the public by the committee. The insistence on complete secrecy just days before a planned markup of the bill would seem to contradict pronouncements of total confidence in its popularity and inevitability.

Still, despite the secrecy, some of the details are now clear enough to make some analytical judgments — thanks, in part, to a post by Ezra Klein of some slides which apparently reflect where the emerging plan now stands. And it is clear from the details provided in those slides that the draft Baucus plan would impose severe financial penalties on the earned income of low-wage workers.

The centerpiece of the Baucus plan is a new entitlement to health insurance premium subsidies. The very lowest income households (perhaps below 133 percent of the federal poverty line, or about $29,300 for a family of four in 2009) would get full subsidization of their premiums, likely worth about $12,000 per year. That subsidy would then get phased down as household income rises. In the original Baucus plan, the cut-off point was 400 percent of poverty, or $88,200 per year. But CBO said that plan would cost $1.6 trillion over a decade, a figure that stunned and appalled Democrats. Senator Baucus and his staff subsequently vowed to cut back the total governmental cost of the plan to under $1 trillion over ten years — without abandoning their goal of “universal coverage.” How to do that? Continue to make people buy the insurance — the so-called “individual mandate” — but give them less by way of subsidization when they do so. The new Baucus plan would cut subsidies off at 300 percent of poverty, or $66,150 for a family of four.

But phasing out subsidization of expensive health insurance plans in this manner imposes very high implicit tax rates. If the total premium for an average health insurance plan for a family costs $12,000 per year, under the updated Baucus plan a worker would lose $.33 in health premium subsidization for every $1 earned in the phase-out range. That implicit 33 percent tax rate would be come on top of existing federal payroll and income taxes, as well as the implicit taxes associated with phasing-out the earned income tax credit, food stamps, and housing vouchers. Quite literally, if the Baucus plan were to pass, it would not pay for millions of lower income Americans to take higher paying jobs because much of the wage gain would be lost to the government.

The problem would be compounded by Senator Baucus’s elaborate “pay or play” scheme. Several options are presented in the slide deck, but it’s clear that the most likely scenario is a penalty on employers if they don’t provide government-approved insurance for lower wage workers and their families who would be eligible for premium subsidization if they weren’t enrolled in a job-based plan. This is a transparent effort to push more costs onto employers in order to keep the overall federal costs of the Baucus plan to “just” $1 trillion.

But what will employers do if faced with such a requirement? For starters, they will avoid hiring low wage workers, as the “pay or play” mandate wouldn’t apply to workers with higher incomes. Is that what the Democrats really intend? Moreover, to avoid paying the penalty, firms would re-organize themselves so that they contract with other firms for low-wage labor instead of hiring the workers directly themselves.

After the success of welfare reform in 1996, you’d think Congress would have learned that the last thing they want to do is to penalize work among low-wage households. It’s completely counterproductive to make such households ever more dependent on government assistance. But that’s exactly what the emerging Baucus plan would do.

The problem of course is that most Democrats don’t want a “down payment” or “progress” toward their goals. They want the whole thing: a full government takeover, and so-called universal coverage. They see this year as perhaps a once in a generation moment to get what they want, and they aren’t about to settle for something less until its clear they can’t get it.

Which is why Democrats have dug in for a fight even as it has become increasingly apparent that passing a government takeover of American health care on a partisan basis will be exceedingly difficult. Senate Majority Leader Harry Reid has been downplaying the importance of “bipartisanship” in health care, and suggesting that perhaps he only needs, or wants, a handful of Republicans to support the bill Democrats are trying to write in the Senate. Meanwhile, Senator Chuck Schumer has let it be known that he is not willing to abandon the concept of a muscular, government-run insurance plan just to get Republicans on board.

But it is hard to overstate the difficulties Democrats will face if they try to pass the kind of bill they are talking about on an entirely, or even mainly, partisan basis. It is chock full of controversy. The price tag (at least $1 trillion in new spending). The largest tax increase in decades, which would hit the middle-class too. The movement of tens of millions of people out of job-based coverage and into government-run insurance. Deep, arbitrary, and cost-shifting cuts in Medicare’s reimbursement rates. Job-killing mandates on employers. And, most especially, the prospect of government intrusion into medical practice and the rationing of care. These are all highly unpopular steps with most voters, and the Democratic strategy is predicated on somehow getting all of them passed in one bill.

So what’s the Democratic game plan to overcome all the obvious political obstacles? Hard to know for sure, but it looks mainly like a “make it up as you go” approach. Cut a deal with Pharma today. Extract some Medicare savings from hospitals tomorrow. Float a “co-op” as a fig leaf for government-run insurance to entice some Republicans. Keep working the deals and hope it adds up at some point to a bill. Above all, of course, “keep moving forward” to hold everyone at the so-called table.

It might work. But it might not too. The primary problem for Democrats is not stakeholders. It’s the general public. They were told “reform” would leave them alone if they liked their coverage — and their premiums would go down too by $2500 per year. But the bills the Democrats in Congress are now writing will increase costs for people with insurance and shift tens of millions of them out of the employer plans they generally like. That’s not the deal they are expecting to be offered, and they aren’t likely to agree to it anytime soon.

For months now, going all the way back to the early days of the 2008 campaign, President Obama has been promising Americans that, if they like the insurance plan they have, they will get to keep it. He didn’t just mention this once or twice. It was a staple of his pitch, repeated over and over again.

Of course, he made the promise for sound political reasons. His strategists are listening carefully to what their focus groups have to say, and they are hearing the same message Americans have been delivering on health care for years. Yes, many voters wouldn’t mind seeing health-care reform pass in Congress because they perceive problems of cost and coverage that they would like to see fixed. But they don’t want to trade in their good job-based insurance for an untested, government-heavy program.

The problem for President Obama is that he and his allies want to pass an untested, government-heavy program — but without saying so.

Every bill now being drafted in Congress would establish a “pay or play”-type choice for employers: Employers must either offer government-approved coverage to workers (“play”) or pay a tax to the government instead to partially cover the costs of their premiums for insurance secured through a new “exchange” system. For years, Democrats have argued that this construct would ensure that reform “builds upon” the employer-based insurance system. But, in fact, the Democratic approach to reform would have exactly the opposite effect. Employers would get burdened with new costs and insurance requirements, even as the government used price controls to offer a government-run insurance option with artificially low premiums and provided new subsidies for coverage only for workers getting insurance through the “exchange.” That’s a recipe for dismantling job-based insurance. The Lewin Group has estimated that, assuming certain plausible specifications, some 119 million people would end up leaving job-based coverage for a government-run plan as employers opted to “pay” rather than “play.”

Faced with incontrovertible evidence that he and his allies have no intention or ability to fulfill their commitment to Americans regarding their current coverage, President Obama decided today at his press conference to try to redefine the promise. What he meant, he now says, is that the government wouldn’t force people out of their health-care plan. If tens of millions of people get pushed out of their current coverage, it would be because firms chose to drop their insurance plans — never mind the fact that they would do so based on the financial incentives the government put in place.

The president’s “clarification” seems highly unlikely to be the final word on this. For starters, it doesn’t matter much to the voting public who pulls the trigger. They don’t want today’s stable, job-based coverage turned upside by “reform.” When they hear that tens of millions of people will get moved out of employer plans and into the “government option,” they will wonder if they themselves will have to switch insurance — and most don’t want to. The president’s comments today aren’t likely to put their fears to rest.

Then there’s the issue of the president’s credibility. The straightforward commitment that “you can keep what you have” was stated over and over again. In fact, it helped the president get elected in the first place. If his clarification today was what he meant all along, why didn’t he just so say sooner? That question seems likely to cross a few people’s minds.

But what about the bill the Senate Finance Committee is trying to put together? There, the committee chairman, Senator Max Baucus from Montana, is desperate to strike a deal with the so-called “coalition of the willing” — four Republicans on the committee who have been willing to talk with Baucus on what might be possible in a bipartisan bill. Senator Baucus apparently realizes that there is significant value in the label “bipartisan compromise.”

Here, it is important to remember that Senator Baucus’s strategic objective is to get a bipartisan bill, yes, but only if Democrats can claim the product provides “universal coverage.” That’s what motivates him in this debate — and most Democrats for that matter.

But he has a cost problem too. CBO informed him that an earlier draft of his plan would increase federal spending by $1.6 trillion over ten years, which apparently sent shock waves through the Democratic ranks this week.

In response, Senator Baucus has pledged to produce a bill that only costs $1 trillion over ten years, even as he remains committed to “universal coverage.”

Senator Baucus’s effort to produce a new, “scaled-back” plan is apparently reflected in options covered in a slide deck used at a recent committee meeting — and obtained and posted by Ezra Klein of the Washington Post.

Based on what’s contained in these slides, it is hard to see how the re-tooled Baucus plan would have appeal to any Republicans.

For starters, it’s still a massive tax-and-spend bill. At a minimum, it’s going to cost $1 trillion over ten years to stand up a new health-care entitlement for tens of millions of households. To pay for it, Senator Baucus wants to impose a hugely unpopular tax on the middle-class and cut Medicare’s payment rates to hospital and other suppliers of medical services. The more the public learns of this plan, the less they will like it.

Then there’s the Democratic push to include a government-run insurance option in the reform plan. Senator Baucus knows this is an issue which could drive Republicans out of the negotiating room. And so he is looking for a way to pass a “government option” without calling it that. Enter Senator Kent Conrad. He has suggested a so-called non-profit insurance “co-op” as a substitute for an overt Medicare-like plan (Keith Hennessey, as usual, is all over it with a dead-on critique here). All that one really needs to know about the Conrad co-op is what’s stated in the Finance Committee’s slides: The “advisory boards” of the co-ops would report to the HHS Secretary, who would make the “final decision about approvals of business plans and distribution of funds.” Enough said.

Finally, there are the onerous mandates. How does Senator Baucus plan to fit a $2 trillion scheme into a $1 trillion sack? Make someone else pay, of course. The Baucus plan would impose costly new mandates on both individuals and employers to purchase insurance. Several options are presented in the slides, but the thrust is clear: Employers will be forced to offer and pay for government-approved insurance or pay a new tax, and individuals would pay a fine too if they failed to enroll in an approved product.

Senator Baucus is starting from the same flawed premise as the president and his Democratic counterparts at the other relevant committees. They are bound and determined to pass “universal coverage” without any coherent plan to slow the pace of rising costs. That’s a recipe for onerous mandates, costly new entitlement spending, high taxes, counter-productive regulation, and ultimately government-imposed cost-controls and rationing. In short, all of the bills, including Senator Baucus’s, plant the seeds for a full government takeover of American health care.

What’s needed is sensible, gradual reforms of today’s tax law and entitlement programs to build a functioning marketplace with cost-conscious consumers and effective government oversight. But Congress won’t be able to consider such an approach unless and until it’s clear to all involved that Obamacare, of whatever variety, cannot pass.

For starters, there’s the sheer hypocrisy of it all (see this and this). Recall that then-Senator Obama based his final push for the presidency in October 2008 largely on a coordinated attack on the health-care plan put forward by his Republican opponent, Sen. John McCain. Senator Obama told Americans that the McCain plan would be bad for the country because it would tax employer-paid health benefits “for the first time in history” and impose damaging Medicare cuts to partially pay for the costs of the tax credits McCain was offering.

Well, guess what?

President Obama is now all in for massive Medicare cuts, and he’s changed his tune on taxing health benefits too.

The Obama plan to cut Medicare’s reimbursement rates should be exhibit A in the case against ObamaCare. This is what governments do when they run health-insurance plans. They promise targeted “reforms” to root out waste and inefficiency, but what they actually deliver is indiscriminate, across-the-board price controls that do nothing to change the underlying cost structure of health-care. These cuts won’t “bend the cost-curve”; they will simply further widen the gap between public and private payment rates, thus shifting more of the costs to private premium payers.

President Obama and his aides have talked incessantly about how they want to even out regional disparities in spending that don’t produce better health outcomes. The emphasis should be on quality, not quantity. But their actual proposals make no such distinctions. The highest quality, lowest cost hospitals will get cut just as much as the highest cost, lowest quality hospitals. There’s no purchasing of “value.” It’s reimbursement cuts for everyone, no matter how well or badly they treat patients.

None of this should be surprising, though. The idea that the government could hire a bunch of analysts to run the U.S. health-care system from Washington with precise and painless efficiency was always a fiction. The only reliable and lasting way to drive greater efficiency in health-care is with cost-conscious consumers in a reformed marketplace. Absent that, the government will always resort to arbitrary cost-cutting to meet budget targets, with no distinction made between high-value and low-value care. And with price cuts come waiting lists and queues. Call it ObamaCare.

But Obamacare was never inevitable, and it is getting less so by the day.

The reason is simple: There is no coherent and credible plan to pay for it. Most observers expect the legislation will cost somewhere between $1.0 trillion and $1.5 trillion over ten years.

This week we got a glimpse into the challenge the Democrats are now facing. The staff director of Joint Tax Committee sent the letter linked below to Finance Committee Chairman Max Baucus outlining a few potential ways to raise taxes in the health-care bill. For weeks, Senator Baucus has been letting everyone know that he believes an important “pay-for” is capping the amount of premiums an employer can pay for a worker on a tax-free basis. JCT’s letter to Senator Baucus specified two options for doing so that are noteworthy. The first would set a cap at the actuarial value of the standard Blue Cross/Blue Shield option offered to federal employees. JCT estimates that this option would increase federal revenue by $418.5 billion over ten years. The second option would set the cap at the same level as the first but apply it only to households with higher incomes ($100,000 for single filers and $200,000 for couples). This option would only raise $161.9 billion over ten years — which means the cap which would apply regardless of income would increase taxes on middle and lower income families by $260 billion over ten years.

The Democrats are thus faced with an impossible choice. They can either impose a large new tax on the middle-class — thus breaking the president’s campaign pledge to only target the rich and angering their union allies. Or they can apply the cap just to upper income households — and fall far short of the revenue necessary to pay for their expensive new entitlement.

The administration may be hoping they can avoid endorsing any cap on employer-paid premiums by upping the ante in Medicare cuts. But that will be no picnic either. The president’s budget called for about $300 billion in Medicare savings over ten years. Now they are talking about perhaps $500 to $600 billion. But cuts of that magnitude will generate intense opposition from doctors, hospitals, nursing homes, insurers, and others — and rightfully so. Arbitrary price cutting drives willing suppliers out of the marketplace, which is what causes waiting lists and rationing.

Reality is starting to sink in. It’s one thing to promise massive new subsidies for insurance. It is quite another to put together a realistic plan to pay for the program, especially on a partisan basis. There is simply no politically easy or safe way to raise $1.5 trillion for a government takeover of American health care. Rank-and-file Democrats are starting to find that out.

On Tuesday, President Obama sent a letter to Senators Kennedy and Baucus outlining what kind of bill he wants and will support. And what he wants is a government takeover of American health-care, plain and simple.

Sure, the letter’s only three pages long (that constitutes a “plan” in this administration). But it was probably written to give the senators some political cover for the more controversial provisions they plan to pass, and thus it contains just enough coded language to confirm that all involved are planning to hand full control over American health-care to the federal government.

For starters, President Obama unequivocally endorses the creation of a new government-run insurance option for working age Americans and their families. For weeks, Senator Baucus has hinted that, well, maybe such an option isn’t necessary. That led many on the left to put pressure back on Democrats in Congress to deliver what they had promised — or else. With the president’s re-endorsement of the idea (he supported it during his campaign), it is now inconceivable that the Democrats won’t include a heavily price-controlled government-run plan in the bill they try to pass.

The Obama letter also endorses a so-called “individual mandate” — a requirement that everyone enroll in some kind of insurance or pay a penalty. During the 2008 campaign, then-Senator Obama made a big deal of opposing this idea — which was the centerpiece of Senator Hillary Clinton’s reform agenda. Now, however, he has flip-flopped — as Politico reported — and endorsed it, so long as “hardship” cases are exempt.

The individual mandate has long been accepted orthodoxy among most Congressional Democrats. For them, the real goal is to be able to say they passed “universal coverage,” and the only way they can say that they did is if they make those who would opt out enroll in something anyway.

Moreover, the individual mandate is the excuse for everything else they want to do. The government can’t make people buy insurance if they can’t afford it, so there needs to be an expansive new health-insurance entitlement program (Sen. Kennedy’s outline would allow everyone up to 500 percent of the poverty line qualify). And if there’s a mandate, the government must define what qualifies. And on and on.

The primary obstacle in the way of rapid passage of the emerging Democratic plan remains cost. The bill will be enormously expensive, at a time when the federal government is already running massive budget deficits. Despite all of the talk of “bending the cost curve,” the Democrats have offered nothing that would put a dent in rising costs. And many rank and file Democrats are likely to balk at Senatir Baucus’s push to tax employer-paid premiums.

So what’s their way out? A gimmick, of course.

The Obama letter floats the idea which has been making the rounds among Democrats for weeks. Instead of making tough budgetary choices themselves, they are now hoping they can simply require some unelected, unaccountable advisory group — the Medicare Payment Advisory Commission (MedPac) — to find the savings for them.

This is the worst of all possible worlds. Call it the black box of government-driven rationing of care. MedPac — or any other federal agency for that matter — would be working from the same laundry list of price-controls and fee cuts that Congress has always used to try to control costs in governmental health programs. The idea that somehow an existing or new agency will discover new ways to painlessly reduce costs is a fiction. They would end up doing what every other government around the world has done — impose artificial cost limits on providers of services, which will reduce the number of willing suppliers and lead to waiting lists and queues.

Perhaps in this sense President Obama’s letter is a blessing. It is now much clearer how the Democrats plan to impose bureaucratic rationing of care on the public. This should become the basis for determined opposition, inside and outside of Congress.

[Cross-posted at the Corner]