CBO


CBO and a Firewall That Will Never Hold

The Congressional Budget Office (CBO) has issued a preliminary cost estimate (available here) for the Senate Finance Committee bill, as amended during committee consideration.

The cost over ten years will be advertised as only $829 billion. But after all that spending, there would still be 25 million uninsured Americans in 2019.

Even so, CBO’s estimate of the Baucus plan substantially understates its true cost because it is based on key assumptions that will never hold up over time.

First, there is the new tax on so-called “high-cost” health-insurance plans. The Democrats are trying to sell this as a tax on insurers. But no one is buying that, especially not the unions. It’s the insurance enrollees who will pay it, in the form of higher deductibles and cost-sharing to keep premiums below the thresholds. The tax would hit all coverage that costs more $8,000 for single people or $21,000 for families in 2013. Those thresholds would be indexed to general consumer inflation (the CPI) plus one percentage point every year, even as health-care costs are expected to increase at a much more rapid rate. So by 2019 and beyond, this tax would hit pretty much the entire middle class of America very hard. The Baucus plan is counting on $46 billion in revenue from it in 2019, with annual increases in the revenue generated of 10 to 15 percent thereafter. With each passing day, this revenue source will lose political support.

Second, there are the Medicare and Medicaid cuts. By 2019, CBO expects them to reach nearly $100 billion annually, including more than $20 billion from Medicare Advantage plans. That’s a direct hit on benefits for seniors, many of whom signed up with Medicare Advantage because they can’t afford Medigap premiums. The last time Congress went down this road of arbitrary, across-the-board cuts, it was only a matter of months before they were scrambling to restore the cuts.

Third, the Baucus plan assumes deep and continuous cuts in physician fees that no one supports or believes will occur. Restoring those cuts would add more than $200 billion to the plan’s bottom line.

Finally, there is the so-called “firewall,” which is really central to how the whole bill works. CBO’s assessment of the Baucus bill is built on the dubious assumption that Congress can hand out a lucrative new entitlement to a limited number of low- and moderate-income voters while denying it to tens of millions of others.

The centerpiece of the Baucus plan is a promise to all households with incomes between 100 and 400 percent of the federal poverty line that the premiums they owe for health insurance will be limited to a fixed percentage of their income. At the low end of this income range, families would pay no more than 3 percent of their income — initially — toward health insurance. The premium cap would be gradually raised as incomes rise until it reaches a little more than 13 percent for families with incomes between 300 and 400 percent of the poverty line.

CBO estimates the average cost of subsidized family coverage at $14,400 in 2016. Under the Baucus plan, a household with an income at 200 percent of the federal poverty line — or about $48,000 for a family of four in 2016 — would pay about $5,300 toward this insurance, so long as they were getting it through one of the insurance “exchanges” established in the bill. The rest of the premium — over $9,000 in this example — would be paid by the federal government.

If that sounds too good to be true, it’s because it would be, for the vast majority of workers — at least as the Baucus plan is currently written. All but the smallest employers would be required to offer qualifying coverage to their full-time workers to avoid hefty taxes, and the employees would have no choice but to take what is offered to avoid paying a penalty tax themselves. The “firewall” thus prevents workers from exiting employer-based plans for the exchanges.

The Baucus plan would appear to establish a limit on premiums for these employees too, at 10 percent of their income. For a breadwinner with a spouse and two children and an income at twice the poverty rate, that would mean paying no more than $4,800 as the employee share of the premium for an employer-sponsored plan. But where would the rest come from? Not the federal government. The employer would be required to pay the other $9,600. But as CBO — and most every economist — notes, employer-paid premiums are paid by workers, too, in the form of reduced cash wages.

Of course, employer-paid premiums do come with a federal tax preference, but it is worth much less for most low- and moderate-wage workers than what Senator Baucus is offering to those getting insurance in the exchanges. At 200 percent of the federal poverty line, the forgone tax liability on an average employer-sponsored plan is about $4,300 (including payroll taxes), or nearly $5,000 less than what is being promised to households with the same income in the insurance exchange.

According to the Census Bureau, in 2008, there were 127 million Americans under the age of 65 living in households with incomes between 100 and 400 percent of the federal poverty line. But CBO assumes that, in 2015, only 17 million people would get subsidized premiums in the Baucus plan. The vast majority of American workers would get no additional federal assistance due to the “firewall,” even as the government pushed the cost of compulsory health insurance much higher with regulations, taxes, and fees. This is how Senator Baucus shoehorns a $1.5 to $2.0 trillion “universal coverage” scheme into an $830 billion sack.

But will it last? Congressional Democrats are already racing ahead with amendments to demonstrate their commitment to insurance “affordability” for the middle class. It would be only a matter of time before Congress responded to the inevitable political pressure and expanded the entitlement, perhaps in steps, to larger and larger numbers of Americans.

The history of federal entitlement programs is one of growth and expansion. The new entitlement in the Baucus plan will be no exception. Indeed, it is likely to become the fastest-growing one ever enacted, with costs far in excess of what CBO has assigned to the bill as currently written.

posted by James C. Capretta | 8:10 pm
Tags: Max Baucus, CBO, Medicare cuts, gold-plated plans, firewall
File As: Health Care

The House Bill: A $10 Trillion Unfunded Liability

Amid all the flurry of news in the hectic last days before the House recessed for the August break, something important went largely unnoticed — a development that should be the knockout blow to the kind of sweeping health-care bill the Obama administration is pushing, at least as it has been cobbled together in the House.

In a July 26 letter to the Ranking Republicans on four key committees (Ways and Means, Energy and Commerce, Education and Labor, and Budget), the Director of the Congressional Budget Office (CBO), Doug Elmendorf, made it clearer than he ever had before that the bill, in its original July 14 form, would dramatically widen the already large gap between long-term government revenue and spending. Here’s the key paragraph:

Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time. The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.

In other words, CBO expects the spending in the bill would grow at a rate of least 8 percent annually into the indefinite future, while the revenue to pay for it will only grow at about 5 per cent per year. Hence the “substantial increases” in federal budget deficits beyond 2019.

Although CBO declined to specify any actual deficit numbers beyond 2019, they can be easily calculated, in rough terms, from the information provided in Elmendorf’s letter.

By 2030, if the spending associated with the coverage provisions rises 8 percent per year after 2019 and the revenue rises by 5 percent, the bill would add more than $200 billion per year to currently projected budget deficits. By 2048, the annual deficit increase would top $1 trillion — and only go up from there.

Of course, the federal government is already in a deep hole due to the projected rapid cost increases in Social Security and Medicare. The trustees for those programs reported earlier this year (see here and here) that Social Security’s seventy-five year unfunded liability stands at $5 trillion, while Medicare’s has reached at an astounding $36 trillion.

It is possible to do a similar “unfunded liability” calculation for the new entitlement spending in the House bill. Assuming a discount rate of 5.7 percent per year, the bill would add more than $10 trillion over seventy-five years in new unfunded government obligations.

Of course, some amendments were adopted to assuage the Blue Dogs in the Energy and Commerce Committee. The fate of those amendments is uncertain at best, however, as Speaker Pelosi has indicated the contents of the yet-to-be-written merged bill from the three committees will be decided later (to attract votes of course). But even if the Blue Dog amendments survive, they would do very little to change the basic direction of the bill’s long-term costs.

CBO recently projected that the federal budget deficit is already on track to reach nearly 15 percent of GDP in 2035, well above the historical average of about 2 to 2.5 percent. The last thing Congress should be doing is making the problem worse with new runaway costs. Indeed, the president himself has said he won’t accept a bill that makes our long-term budget problem worse. How he squares that with full support for the emerging House bill is anybody’s guess.

posted by James C. Capretta | 5:44 pm
Tags: House bill, projected costs, Doug Elmendorf, CBO, spending, deficit, Medicare, social security, Blue Dogs, Nancy Pelosi
File As: Health Care

The Prognosis for ObamaCare

The House bill would add $239 billion to the federal budget deficit over the coming decade, according to Congressional Budget Office (CBO) projections. That’s bad enough, coming as it would on top of the $11 trillion in deficits that are already expected to occur over the period 2009 to 2019 under the Obama budget plan.

But that’s really just the beginning of it.

Yesterday, CBO confirmed that the House bill would do even more fiscal damage in its second ten years. Here’s the crucial paragraph, from a letter sent by CBO director Doug Elmendorf to the four Ranking Republicans on the key House committees:

The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year-budget window.

That really should do it. The Blue Dogs are in this fight, in part, because of their stated concerns over growing budget deficits and unaffordable entitlements. The president reiterated again last week that he is determined to sign a bill that slows the pace of rising costs and improves our long-term fiscal outlook.

Well, here’s a bill that would go in exactly the opposite direction from what the authors say is their objective, according to CBO. It would add a third runaway health care entitlement program to the two already on the books (Medicare and Medicaid) with no prospect in sight that spending on any of them will ever come in line with the government’s revenue base. A back-of-the-envelope estimate indicates the House bill would run up a cumulative federal budget deficit of at least $700 billion in its second ten years, and possibly much more. That’s on top of budget deficits that are already unsustainable and that will put the American economy at considerable risk of crippling interest rates or hyper-inflation.

This is not a close call. The Democrats have no choice. For the sake of the country, they have to go back to the drawing board and work with Republicans on something much more sensible.

[To read the NRO symposium on ObamaCare in which this post originally appeared, with Newt Gingrich, David Gratzer, and Amy Menefee, click here.]

posted by James C. Capretta | 12:50 pm
Tags: CBO, deficit, ObamaCare, House Bill, Doug Elmendorf, Blue Dogs, projected costs
File As: Health Care

Who Would Pay the Kerry-Baucus-Obama Tax on Insurance?

The desperate search continues.

Shortly after the July 4th congressional recess, Senate Majority Leader Harry Reid effectively killed the idea of placing a cap on the amount of employer-paid premiums that can be paid on behalf of a worker and still remain tax free. Unions have always been vehemently opposed to any limitation on the tax-preferred status of job-based plans, and imposition of a dollar cap on tax free employer-paid premiums would also have violated President Obama’s already shaky promise (see the House-passed “cap and tax” bill) to not raise taxes on households with incomes below $250,000 per year.

Senator Reid’s firm opposition sent Finance Committee Chairman Max Baucus back to the drawing board. He had been counting on the $320 billion raised over a decade from the “tax cap” idea to partially pay for his reform plan. He has now spent the better part of two weeks rummaging around for ideas that can plug the $300 billion hole in a politically safe way that also unites all Democrats on the committee and a Republican or two. Let’s just say it’s not likely to be a very long list.

Congressional Budget Office (CBO) Director Doug Elmendorf complicated matters further with his assessment of the bills under consideration in the House and the Senate Health, Education, Labor, and Pensions (HELP) Committee. Elmendorf told the Senate Budget Committee last week that these bills don’t go nearly far enough to change the financial incentives which are driving up costs. He also noted that an important way to emphasize cost control would be to put into the bills a limitation on the tax-preferred status of expensive job-based plans — exactly the idea which Senator Reid had rejected only days before. Indeed, it is not a coincidence that the one reform with the most potential to instill some much-needed financial discipline into the health sector without overbearing governmental regulation is also the one change senior congressional Democrats most vigorously oppose.

Which brings us to the idea du jour. In private negotiating sessions taking place in the Finance Committee, Senator John Kerry has apparently floated an alternative taxation idea. Why not tax the insurance companies which are selling expensive policies instead of taxing the job-based benefits of workers?

Sounds great, right? A tax on for-profit health insurers. Really, what’s not to like?

As is often the case in Washington, this is not a new idea either. It was proposed by Senator Bill Bradley during the debate on the Clinton health care plan in 1994 for the very same reasons it is being considered today. It has superficial political appeal — for a day or two. No one likes insurers anyway. Perhaps unions and the broader public can go along with a tax that seemingly hits distant and despised companies and not them. And maybe the CBO Director will look as favorably on this kind of tax in terms of potential cost-control as he does the traditional “tax cap” idea.

But, of course, the reason why a tax on insurance might actually have a beneficial impact on the pace of rising health care costs is that insurers will never pay it.

For starters, such a tax couldn’t be structured to apply only to insurance companies. Many employers, especially large ones, self-insure rather than purchase insurance for their workers directly from other companies. To raise any significant revenue at all, and to treat all health insurance equally, the Kerry-Baucus-Obama insurance tax would have to apply to self-insuring employers too. That fact, by itself, is likely to reduce its political appeal in coming days.

Furthermore, no insurer or employer will pay a new tax on insurance and simply reduce their profits by a like amount. If the federal government imposes such a tax, insurers and employers who would otherwise have to pay it will make adjustments to their plans and products to bring costs down and avoid the tax. That’s the point, anyway, even according to the proponents. But that means higher deductibles for the plan’s enrollees. More cost-sharing when patients see their physicians or fill prescriptions. More restrictive networks of preferred providers. There’s no way around the fact that it’s the plan’s enrollees who will pay more, not the insurers or the employers.

Of course, in a competitive labor market, if employers cut their health costs, they can pay their workers more in cash wages, and that’s what CBO is very likely to assume would occur with the Kerry-Baucus-Obama tax. That means a substitution of taxable wages for tax-free fringe benefits. Federal tax collections will indeed go up, but it's workers who will be paying more, even as they get less expansive health insurance. Indeed, there is no way around the fact that any effort to get Americans into less expensive insurance will increase costs for the middle class, and that’s exactly what would happen with this proposal too.

But that won’t stop Senate Democrats from trying to have it both ways. They want CBO to give them credit for adopting incentives for large-scale enrollment in less expensive health insurance, even as they also proclaim that no middle class family will pay more taxes or more for health care either. That contention — that they have somehow found the health-care free lunch — won't stand up to even modest scrutiny. Indeed, that’s why the Bradley tax didn’t break the logjam in 1994. No one was fooled. And they won't be this time either.

posted by James C. Capretta | 5:22 pm
Tags: Harry Reid, cap and tax, Max Baucus, CBO, Doug Elmendorf, HELP, insurance tax, ClintonCare, tax cap
File As: Health Care

On-the-Fly Audacity

Yesterday, the Director of the Congressional Budget Office (CBO) did everyone a favor and spoke some serious truth to power: The health care bills under consideration in Congress will make our long-term budget outlook worse, not better, Elmendorf said, and that would be very bad for our economic future.

Elmendorf’s assessment, welcome as it certainly was, shouldn’t have been a surprise to anyone, especially the Democratic authors of the bills now under consideration. They more than anyone else should know that the bills moving through their committees would add massive new entitlement spending to the federal budget while making only the most marginal of changes to the prevailing financial incentives which are pushing costs up rapidly every year. What did they think Elmendorf would say?

Still, Elmendorf’s assessment seems to have caught some Democrats by surprise, starting with the president. Just days earlier he told a gathering of skeptical Blue Dog Democrats that they should get behind the House bill because it would deliver savings beyond the ten-year window. That wasn’t a credible assertion even then (see this post from Tuesday), but, in the wake of Elmendorf’s testimony, it really has no standing.

So what’s the administration next move? Desperate times apparently call for some serious audacity.

Today, the Obama administration delivered one of the more remarkable presidential power grabs seen in recent memory (the transmittal letter is here, and a section-by-section description of the proposal is available here).

The president has decided — just days before the deadline he himself set for passage of health care bills in both chambers of Congress — that he wants to create a new and very powerful executive branch agency, the Independent Medicare Advisory Council (IMAC), which would be accountable only to him and have the authority to re-write the Medicare program from top to bottom by executive memo. Now that’s audacious.

The council would be made up of five members, all selected by the president and confirmed by the Senate. The president could fire any one of them for cause. They would have two jobs. First, each year, the council would make recommendations to the president regarding inflation updates to Medicare’s payment rates for hospitals, doctors, and other suppliers of services. Those recommendations, if approved by the president, would automatically go into effect in thirty days unless Congress passed a resolution disapproving them — which the president would also have to sign into law. Of course, if the president approved the council’s original package of recommendations, it is unlikely he would sign a congressional disapproval resolution overturning them. So, as a practical matter, the proposal would force Congress to find a two-thirds supermajority to stop presidentially-approved IMAC recommendations from going into effect.

That would be a remarkable shift of power on its own, but the president’s proposal doesn’t stop there. Not only would the council make recommendations on payment updates, it would also have the authority to propose other “Medicare reforms” which would go into effect unless Congress could muster veto override majorities in opposition. What are “Medicare reforms”? From the write-up, it seems they could be just about anything. Changes in beneficiary cost-sharing. New rules for establishing qualified hospitals and doctors. Penalties for physicians who don’t follow government guidelines. Pretty much anything except for the payroll tax and premium structure. The only parameters are that the “reforms” must improve the quality of medical care and the efficiency of Medicare operations.

The administration is touting this as a belated cost-control idea. It’s not. By itself, it doesn’t change anything, as there are no hard targets that must be hit. So it doesn’t answer the Elmendorf critique that the bills now moving in Congress, even if such a provision were added to them, don’t bend the cost-curve of governmental health spending.

Still, the fact that the administration is pushing this bill at all speaks volumes. Here’s a Democratic president telling a Democratic Congress that it can’t be trusted to run Medicare anymore. That’s stunning, especially so because Democrats, including the president, are working feverishly to exert additional governmental control over health insurance for working age Americans. If Congress can’t run Medicare well, what possible rationale is there for standing up another government-run insurance plan?

Nonetheless, the audacity is something to behold. Certainly unilateral executive branch authority to re-write entitlement programs from scratch would have come in awful handy during the Reagan and Bush years. But that may dawn on others as well. Like Medicare beneficiaries, physicians, hospitals, labs, nursing homes, and, of course, House and Senate members too. Good luck, Mr. President.

posted by James C. Capretta | 11:55 am
Tags: CBO, Doug Elmendorf, Blue Dogs, House bill, IMAC, Medicare, cost control
File As: Health Care

The Presidentís Reckless and False Health Care Claim

It’s now a clear pattern. When the president senses his position is vulnerable to a factual criticism, he asserts emphatically that the opposite is true — without ever providing evidence to back up his claim.

Here’s the latest example. According to Politico, President Obama told skeptical Blue Dog Democrats last evening that they should support the health care bill emerging in the House because it would produce savings beyond the ten-year budget window.

Oh really. Says who?

The context here is crucial. It’s already abundantly clear that the federal government cannot afford its existing health care commitments. The Congressional Budget Office (CBO) recently projected that Medicare and Medicaid costs will nearly double in twenty-five years, from 5.3 percent of GDP today to 10.0 percent in 2035 (this assumes continuation of current policy with regard to physician fee updates). The Medicare Trustees projected in May that the program’s 75-year unfunded liability has reached $36 trillion.

Moreover, the federal government is projected to run massive budget deficits for the foreseeable future. In 2009, the government has already run up a deficit of $1 trillion through June, and it could reach $2 trillion before it’s over at the end of September. CBO expects the Obama budget plan would increase the government’s debt by $11 trillion from the end of 2008 to the end of 2019. Running up government debt at that kind of pace would put the nation’s economy at considerable risk, to put it mildly. At some point, lenders would demand higher returns for their lending, pushing interest rates up and choking off growth, or the Fed would partially monetize the debt with even easier money and rapid inflation.

It is in this context that Democratic leaders in the House and Senate are trying to rush health care bills to their respective floors for consideration before the August congressional break.

The centerpieces of the bills are the creation of a new, massive entitlement to health insurance subsidization and a large expansion in Medicaid eligibility. The House bill, unveiled today and available here, would add $1.2 trillion in federal costs over a decade with just these two expansions, according to CBO. And the trend is even more alarming. Between 2018 and 2019, federal costs for the new entitlement and the enlargement of Medicaid would increase by a combined 8.9 percent.

That shouldn’t be surprising though, because that’s basically the rate at which Medicare and Medicaid have been growing for more than four decades. And there’s nothing in the House or Senate health care bills which would lead one to assume a new health entitlement program will grow at a more moderate pace in the future than the ones already on the books have done in the past. CBO has said repeatedly that slowing the pace of rising costs will require a fundamental restructuring of financial incentives, for consumers and suppliers of medical services. Nothing currently on the table in Congress comes close to meeting that test.

That was essentially the message CBO delivered to members of the Senate Health, Education, Labor, and Pension committee last week. In response to a question from Sen. Judd Gregg, CBO Director Doug Elmendorf said a bill which simply expanded coverage without fundamental reform “puts an additional long-term burden on top of an already unsustainable path” (Elmendorf’s testimony can be seen here, with his response to Senator Gregg at the 1 hour, 38 minute mark).

Moreover, it seems that President Obama’s own budget director agrees with CBO. Last week, Peter Orszag delivered a letter to House leaders saying their bill doesn’t go nearly far enough to slow the pace of rising costs. But even that didn’t stop the president from saying otherwise in his desperate attempt to round up votes.

The federal government’s budget is already knee-deep in debt, largely because politicians have promised that better days ahead will make all budgetary problems go away. They haven’t, and the current president is making the situation much worse. The last thing any member of Congress should do is simply take the president’s word for it that the health care bills under consideration will ultimately “bend the cost-curve.” If he really believes that — because no one else really does — he should provide some hard evidence to back up his claim. And that’s not a theoretical possibility. He could ask his independent projection experts — not his political appointees — to provide directly to Congress and the public, without review by anyone else, their best estimates of what these bills would do to the long-term (25- or 50-year) budget outlook. Those estimates would be taken much more seriously than unsubstantiated assertions which run against commonsense and all evidence.

posted by James C. Capretta | 9:11 am
Tags: ObamaCare, Blue Dogs, House bill, CBO, projected costs, deficit, HELP, Doug Elmendorf, Peter Orszag, cost-curve
File As: Health Care

Let the Unraveling Begin

The Obama administration has been desperately trying to create a sense of momentum around its health-care push, which is why it is touting the latest “deal” with hospital associations so heavily.

But there are clear signs that Congressional Democrats and the Obama White House have steered the health-care effort into seriously choppy political waters.

Consider:

  1. Yesterday, Senate Democratic leaders all but rejected Senate Finance Committee Chairman Max Baucus’s months-long effort to impose a limit on the tax preference for employer-paid premiums as a way to pay for his reform plan. Media reports indicate he was hoping to generate $340 billion from such a tax to pay for his plan, but that looks highly unlikely now. House leaders were never much interested in the idea, given the adamant opposition of organized labor, and won’t include it in their bill. Revising the tax treatment of job-based insurance was the one potential “reform” with some potential for bipartisan appeal, as it could, under the right circumstances, encourage more cost-conscious consumption of health care. Senator Baucus had been planning to take up consideration of his bill — with the tax on benefits in it — in his committee next week. Where is he going to find a politically palatable $300 billion in a matter of days, let alone one that can also appeal to committee Republicans?
     
  2. Party activists pushed Congressional Democrats over the July 4th recess to write a bill reflecting long-standing party goals — which means government-run insurance and near-total government control. This push has made the chances for bipartisan compromise — already remote — even less likely. In response to the pressure, Senate Majority Leader Harry Reid told Senator Baucus that he is not authorized to cut any deals with Senator Charles Grassley, the ranking Republican on the Finance Committee, which would bind the rest of the Democratic caucus. Senate Democrats have now committed themselves to including a muscular, government-run insurance option in the bill — which is, rightfully, a deal-breaker for the vast majority of Republicans. Indeed, at this point, it is hard to see why Senator Grassley or any other Republican senator would continue to negotiate with Senator Baucus or Senator Reid at all, as it is beyond obvious that Congressional Democrats are only interested in Grassley’s views until they can get a bill off the Senate floor — and even then, they are not interested in true bipartisanship but only enough to get two or three Republican votes.
     
  3. Congressional Budget Office (CBO) Director Doug Elmendorf explained in a letter to Sen. Judd Gregg that adding Medicaid coverage for persons with incomes below 150 percent of the poverty line to the Kennedy-Dodd legislation under consideration in the Senate Health, Education, Labor, and Pensions Committee (HELP) would increase the cost of that bill by around $500 billion. That would put the total cost of the bill at about $1.1 trillion, but it is likely to go even higher because states will balk at picking up their part of the tab for the new Medicaid coverage. Thus, when all of the details are finally in the bill, the Kennedy-Dodd plan is likely to cost close to $1.5 trillion over a decade. But even with this massive expenditure, Elmendorf predicted there would still be 15 to 20 million uninsured Americans.
     
  4. In testimony before the HELP Committee today, Elmendorf said this about the Kennedy-Dodd proposal: “This bill will add substantially to the long-term spending burden for health care on the federal government.” Recall that President Obama pledged to oppose any bill that does not — eventually — “bend the cost-curve” and reduces the government’s long-term cost burden.
     
  5. Rumors are circulating that House leaders are apparently considering a trifecta of popular “pay fors”: $500 to $600 billion in Medicare cuts, a new surtax for households making more than $250,000 per year, and $350 billion in funding from the so-called “pay or pay” employer mandate — while unemployment heads toward 10 percent. All of these proposals are going to generate substantial controversy and opposition, to put it mildly. The surtax would come on top of the Obama administration’s plan to let the Bush tax cuts expire for upper-income households, which would increase the top rate from 35 to 39.6 percent. A new, three-percentage point surtax, for instance, would push the top income tax rate to 42.6 percent — a rate not seen in more than two decades.
     
  6. Oh, and those momentum-generating “deals” with PhRMA and the hospital associations — turns out they aren’t deals after all. House Energy and Commerce Committee Chairman Henry Waxman said today that neither he nor the White House is bound by them, and a White House official agreed. Moreover, it remains unclear how much federal savings they will generate anyway, as they have not yet been assessed by CBO. So what do the deals signify exactly?

The Obama White House and its congressional allies have built expectations among their core supporters that this is the year to pass a government takeover of American health care. With expectations set so high, most elected Democrats have concluded they have no choice but to set out on a forced march to try to do exactly that — despite unified Republican opposition. But a partisan bill means that Democrats own all of the messy and unattractive details too. The debate is no longer about vague concepts of “coverage” and “cost-control” but who pays and who is forced out of their job-based plans. The more people learn about these details, the less they will like them —which is why the Democratic committee chairmen are working desperately to shorten the time between a full public airing and a vote. They’re hoping there won’t be enough time for public opposition to put a halt to the proceedings.

posted by James C. Capretta | 5:40 pm
Tags: ObamaCare, House bill, Max Baucus, Harry Reid, Charles Grassley, CBO, Doug Elmendorf, HELP, cost-curve, mandate, pay or play, Henry Waxman
File As: Health Care

Senate Democrats Opt for Regressive Mandates

President Obama and his congressional allies greeted the Congressional Budget Office’s latest estimates of the Kennedy-Dodd legislation with great enthusiasm. The cost had come down, we were told, even as more people would get covered.

But, as others have already noted, there was an awful lot of spin in the media coverage of what CBO actually said. For starters, it’s clear the Kennedy-Dodd bill, even as amended, would still cost a fortune. CBO’s new estimate shows a ten-year cost of about $600 billion for the bill, but that estimate excludes the cost of covering Americans with incomes below 150 percent of the poverty line under Medicaid, which is not yet part of the Kennedy-Dodd draft but is central to the overall Democratic reform framework. That addition alone would add at least $500 billion to $600 billion to the tab, and perhaps much more, putting the total cost of Kennedy-Dodd, even as revised, at well over $1 trillion for the decade.

Still, CBO did say Kennedy-Dodd 2.0 would cost less than the original version. In mid-June, CBO projected that the health-insurance subsidies provided in the original bill would cost $1.279 trillion over a decade. But, in the new version of the legislation, those subsidies would cost $723 billion over ten years — or $556 billion less.

So how does the new, apparently leaner Kennedy-Dodd bill cut the subsidy costs?

Part of the answer is a scaling-back from an outlandishly expansive starting point. The original version of Kennedy-Dodd contemplated subsidizing households with incomes all the way up to 500 percent of the poverty line. Even House Democrats found that to be too much. So Kennedy-Dodd 2.0 now sets the income limit at 400 percent of poverty.

But, beyond the lower income threshold, Senate Democrats, including Finance Committee Chairman Max Baucus, have also discovered the budgetary virtues of heavy-handed government decrees. If you want to expand insurance coverage, you can simply make people sign up for a plan — whether they want to or not. And to keep costs down for the government, you subsidize only those who get insurance outside of the workplace — and then write rules that make it nearly impossible for anyone to fall into that category. Presto! Government-run health-care paid for with the hidden taxes of government mandates.

According to the Census Bureau, there are about 102 million Americans under age 65 living in households with incomes between 150 and 400 percent of the poverty line — the presumed target population for subsidized insurance in the Kennedy-Dodd bill. But CBO said only about 20 million people in 2014 would get the subsidies under the revised version of the legislation. That’s because the authors sought to create a so-called “firewall” to prevent most workers from getting insurance outside the workplace if their employer offered a plan. And, of course, the bill would also impose severe, per-worker penalties on any employer that didn’t offer approved coverage. Only workers who would have to pay more than 12.5 percent of their income for a job-based plan could opt to get their insurance through the subsidized insurance arrangements, which CBO apparently assumes will be a relatively small number of people.

What’s ironic is that mandating enrollment in job-based insurance is about the most regressive way possible to expand coverage. Despite the perceptions, employment-based health insurance is financed by workers, not firms. The premiums for coverage implicitly reduce the cash compensation workers take home. In most companies, workers pay the same implicit premium for health insurance regardless of their age or health status or salary. That means the cost of enrolling in job-based coverage falls more heavily on low-wage workers than higher-salaried employees, which is why such a large percentage of the uninsured are in households that have access to a plan but choose not to enroll.

Democrats used to be sympathetic to the financial strain these workers are under. But that was before CBO said their sympathy would be expensive. So now the emerging plan is to make tens of millions of Americans pay more than they do today for government-approved insurance organized by their employer. That’s really their only choice. If they don’t take it, they will face a large financial penalty. Great deal, huh?

Congressional Democrats are between a rock and a hard place. They desperately want to pass a bill they can label “universal coverage,” but they have no coherent plan for making health-care provision more efficient and less costly. Thus, expanding coverage with new federal subsidies for a large segment of the population in the current cost environment is prohibitively expensive. Presented with these facts, the lead Democratic Senators could have chosen to write a more sensible reform plan focused first on building a functioning marketplace in which cost-conscious consumers would drive out unnecessary costs. But, instead, they have decided to plow ahead with their “universal coverage” plan, only now they want to impose the high cost of it on struggling workers. Their only hope is that the bill will pass before the public discovers what they are up to.

posted by James C. Capretta | 5:13 pm
Tags: ObamaCare, CBO, HELP, Medicaid, projected costs, Max Baucus, mandate, universal coverage
File As: Health Care

Rushing Headlong Toward a Crisis

President Obama has made passage of an expensive new entitlement to health insurance his top legislative priority this year even as it has become abundantly clear that his fiscal policy is driving the country headlong toward a crisis.

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.

posted by James C. Capretta | 10:08 pm
Tags: ObamaCare, CBO, deficit, HELP, projected costs
File As: Health Care

The Baucus Planís Penalties on Work

Late last week, Senator Max Baucus, chairman of the Senate Finance Committee, tried to jump-start the push for a sweeping health care bill by letting it be known that he has made progress toward a “bipartisan” deal in his committee on a health care plan.

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.

posted by James C. Capretta | 10:57 am
Tags: Max Baucus, CBO, entitlement, universal coverage, projected costs, mandate, pay or play
File As: Health Care

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