Health Care


HHS Actuary Says House Bill Will Increase Health Spending

October 22, 2009 • Yesterday, the Chief Actuary at the Department of Health and Human Services, Rick Foster, issued a lengthy memorandum (available here in PDF format) analyzing the House version of health-care reform. The memo makes several devastating points about the House, not the least of which is that it would increase overall national health spending, not reduce it. I will have much more to say about this memo shortly.

posted by James C. Capretta | 1:08 pm
Tags: Rick Foster, HHS, increased spending, House bill
File As: Health Care

On Deficits and Doctors

October 19, 2009

Late last week, Senate Budget Committee Chairman Kent Conrad told his fellow Democratic colleagues that he wouldn’t play along with their transparent scheme to offload $247 billion — the amount needed to pay for the so-called Medicare “doc fix” over ten years — from Obamacare onto another piece of budget-busting legislation. For that bit of independent thinking, Senator Conrad is getting his own, personal meeting today with the president of the United States in the Oval Office.

Why would the president drop everything to have a last minute, one-on-one meeting with a single Democratic Senator? Because he will do anything to get a bill done this year, and Democratic strategists have told him that running the “doc fix” as a standalone measure is key to passing a governmental takeover of American health-care, which is their goal. They may be right.

Some kind of “doc fix” provision has been enacted every year since 2002 to override the current Medicare physician-payment rule, known as the “sustainable growth rate,” or SGR, formula. Ironically, the SGR is a prime example of how the kind of health-care central planning at the heart of Obamacare will inevitably run amok. Medicare administrators have been trying for two decades to use bureaucratically-devised payment schemes like the SGR to keep total physician spending in line with overall growth of the economy. But Medicare’s payment regulations can only control prices, not volume. So as use of services has gone up, the SGR formula has called for large, annual reductions in the per service fees Medicare pays to physicians. In recent years, Congress has regularly overridden the SGR formula on an ad hoc basis to avoid the 10 to 20 percent cuts in payment rates that would otherwise have occurred. Under current law, application of the SGR formula would result in a 21 percent reduction in physician fees in 2010.

Everyone knows that won’t happen because neither party supports such deep cuts in physician fees. The only question is how it will get fixed.

House Democrats, sensing an opportunity, offered to include a full SGR repeal in their health-care plan if the American Medical Association (AMA) were to endorse the bill. Tens of thousands of U.S. physicians are adamantly opposed to government-run health-care and would never have agreed to compromise their principles for short-term financial gain. But the AMA bureaucracy is another matter entirely. They worked overtime to get their leadership to accede to the deal.

Then came the president’s September speech to a joint session of Congress, during which he pledged to hold the line on the health-care plan at “only” $900 billion over a decade. The House bill overshoots that mark by about $300 billion at last count, and that’s before Democratic leaders engage in a round of aggressive vote-buying.

And, so, faced with a budget constraint, enterprising Democrats settled on a solution. Instead of one budget-busting bill, why not two? The plan now is to try to pass a full SGR repeal, at a cost of $247 billion over a decade, separate from the health-care bill, thus allowing more spending all around.

The only problem is that even some Senate Democrats find this scheme too shameless by half to support. Senator Evan Bayh said last week that he agreed with Senator Conrad that a physician-fee fix should not add to the nation’s already skyrocketing debt.

Indeed, despite the setting, there’s no reason today’s meeting should have changed Senator Conrad’s mind. The facts are on his side.

On Friday, the Treasury Department announced that the federal government ran a $1.42 trillion budget deficit in 2009, or about 10 percent of GDP. That’s the largest nominal budget deficit in history, and the largest as a percentage of GDP since World War II. From 1789 to 2008, the federal government borrowed about $5.8 trillion. In just two years, 2009 and 2010, the government will borrow nearly $3 trillion more. Further, the Congressional Budget Office (CBO) expects the federal government’s debt to exceed $14 trillion by 2019, and that’s before the full force of the baby boom retirement has hit the government’s books. The Obama administration’s budget plan would make this very daunting budgetary outlook much worse.

In this environment, the last thing our nation needs is another piece of legislation — after all of the bailouts and buyouts of 2009 — to dump $250 billion more onto the pile of debt that will be passed on to the next generation of taxpayers. Doctors’ fees in 2010 will not get cut. That’s a certainty. It only costs about $11 billion to fix the problem next year.

Indeed, this really shouldn’t be a close call for any politician claiming to be a fiscal conservative. The Democratic plan would add $250 billion to the federal budget deficit over a decade, thus allowing an even more expansive entitlement in Obamacare. That should be enough to draw unified Republican opposition. And if Senator Conrad and a few of his colleagues don’t buckle, there should be more than enough votes to defeat this blatant attempt to force taxpayers to pay yet again for plans hatched entirely for political reasons.

posted by James C. Capretta | 6:18 pm
Tags: Conrad, physician-fee fix, deficit, Obamacare
File As: Health Care

The Baucus Death Spiral

October 14, 2009

Full disclosure: I do consulting work for private health insurers, but I had no prior knowledge of the PriceWaterhouseCoopers study before it was released. Having said that, its conclusions were not at all surprising, nor was the heated reaction of the Obama White House. Democrats understand how dangerous the PwC study is to their effort to pass a health-care bill because it exposes a crucial and irrefutable flaw in the health-care plan approved this week by the Senate Finance Committee.

And what is that flaw? In short, the plan sponsored by Finance Committee Chairman Max Baucus would almost certainly lead to a death spiral in many private health insurance markets.

Insurance death spirals occur when regulators force insurers to offer coverage (“guaranteed issue”) at premiums below the known risk of those they are insuring, without any assurance that the shortfall can be made up elsewhere. When insurers comply with these rules and offer relatively low cost health insurance policies to all comers, quite predictably, many sick people step forward to sign up. When the insurers then try to turn around and charge higher premiums to the relatively healthy to cover their costs, the healthy, also quite predictably, are more reluctant to enroll because they can see the premiums they would have to pay would very likely exceed their health-care costs. So they often say ‛no thanks’ to the insurance and decide to take their chances by going without coverage instead. As more and more healthy people exit the marketplace, insurers are then forced to raise premiums for everyone who remains, which only further encourages the lower risks to opt out. This vicious cycle of rising premiums and an increasingly unhealthy risk pool is called a ‛death spiral’ because it eventually forces the insurer to terminate the plan.

This is not a hypothetical, textbook scenario of what might happen to a poorly run insurance market. It has happened before — many times and in many places. See, for instance, the experience in Kentucky, and in Washington state, and in Maine too. There’s no reason it couldn’t happen nationwide.

The Obama White House and congressional Democrats convinced themselves months ago that they could avoid the fate of these failed state reform efforts by forcing the young and healthy to buy insurance, whether they wanted it or not. And so, all of the bills under consideration in the House and Senate would make government-approved health insurance enrollment compulsory for all Americans. Those not complying would have to pay a new tax, collected by the IRS.

But the assumption that Congress would be able to hold the line and permanently sustain a punitive new tax on Americans for not buying government-approved insurance was always dubious. And, sure enough, Democrats, staring political reality in the face, have been backing away from a tough “individual mandate,” step by step, ever since they returned from their August recess. The Finance Committee adopted amendments that delayed the mandate’s full implementation and dramatically reduced the tax penalties for non-compliance.

But as Democrats watered down the mandate, there was no commensurate adjustment in the insurance rules. The Baucus plan continues to require insurers to take all comers without regard to health risk starting in 2013. And therein lie the makings of an insurance market fiasco.

Robert Laszewski, a long-time observer of the health insurance scene and no political partisan, wrote a devastating blog post on Monday documenting the folly of the Baucus plan. He cites several very real examples of low- and moderate-wage families that would clearly be better off financially if they paid the tax and waited to sign up for insurance until they were really sick. It’s hard to imagine any insurance actuary coming to a different conclusion about what would happen if the Baucus plan were actually enacted into law.

Of course, the insurance industry is bringing renewed attention to this problem because it is hoping to get a tougher mandate back into the Senate bill. That seems highly unlikely at this point, and would be a real mistake in any event. The problem with Obamacare is not insufficient governmental force; the problem is that the Democrats are pursuing the wrong goal. They are desperate to enact something they can call “universal coverage” without any coherent plan to slow the pace of rising costs. In that context, a new entitlement for subsidized insurance is exceedingly expensive, which is why the sponsors try to hide some of the costs behind mandates, hidden taxes, compulsion, and insurance regulation. However, as they are now finding out, there’s no free lunch here. Someone has to pay for it all. It’s just a question of who and how much.

What Democrats should be doing is working with Republicans on a sensible plan to gradually introduce reforms that would inject more market discipline into the health sector, thus making coverage more affordable for everybody. If, however, they insist on trying to pass something like the Baucus plan instead, they should be informed of the consequences, whether they like them or not. As matters stand now, if the Baucus bill were to become law, in a couple of years Congress would be forced to take up the issue again to clean up the mess the bill will have created.

posted by James C. Capretta | 3:00 pm
Tags: Max Baucus, Finance Committee, insurance death spiral
File As: Health Care

CBO and a Firewall That Will Never Hold

October 7, 2009

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

A 70 Percent Tax on Work

October 6, 2009

President Obama said Monday that the debate on health care has gone on long enough, and now is the time to pass something.

But does Congress, let alone the public, really understand what these bills would mean for the health sector and the wider U.S. economy? In 1994, the Congressional Budget Office (CBO) issued a lengthy assessment of the Clinton administration’s proposal, covering everything from its distributional consequences to the budgetary treatment of its various moving parts. The public should get the same kind of thorough review of what Obamacare would mean before Congress takes any further steps toward passage.

For instance, there hasn’t yet been a thorough analysis of what the bills moving in the House and Senate would mean for work incentives among low-wage families. A cursory review indicates that Obamacare would impose a massive new implicit tax on low-wage households, effectively penalizing the family that tries to do the right thing by working their way into the middle class.

According to CBO, family coverage in 2016 is likely to cost about $14,400 under the so-called “silver option” in the health-care reform plan sponsored by Senate Finance Committee Chairman Max Baucus. In the Baucus plan, a family of four at the poverty line (about $24,000 in 2016) would have pay to about $1,400 toward coverage, with the federal government paying the other $13,000 on their behalf. In addition, the government would also provide $3,500 to reduce the family’s deductible and co-payment costs for health services. Thus, the new entitlement provided by the Baucus bill would be worth a whopping $16,500 for a family at the poverty line.

As incomes rise, however, the Baucus bill cuts the value of the entitlement. A family with an income at twice the poverty line, or $48,000 in 2016, would get $9,072 in federal assistance for coverage — still a substantial sum. But it’s $7,400 less than the family would get if they earned half as much. The Baucus plan thus imposes an implicit marginal tax rate of about 30 percent ($7,400/$24,000) on wages earned by families in this income range.

And that would come on top of the high implicit taxes already built into current law. Low-wage families with children also get the Earned Income Tax Credit (EITC). The EITC boosts incomes for those with the very lowest wages, but it is also phased-out as incomes rise. Past a certain threshold (about $21,400 in 2016), the EITC is reduced by $0.21 for every additional $1 earned. Throw in the individual income tax rate (15 percent) and payroll taxes (7.65 percent), and the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers.

The more Obamacare is rushed through Congress, the more likely it is to produce highly regrettable unintended consequences. Surely even the Democrats in Congress can see how damaging it would be to send signals to low-wage breadwinners that it no longer makes sense to seek a higher-paying job.

posted by James C. Capretta | 10:13 am
File As: Health Care

The Public Option Contradiction

October 1, 2009 • Perhaps the most fundamental question in the health care debate is this: what process has the best chance of producing continuous improvement in the efficiency and value of patient care? President Obama and many Democrats believe new and improved versions of governmental control can do the job. Yet we have nearly half a century of experience with the government running the Medicare program in a way that increases costs for everyone, not just seniors. That's the subject of an op-ed I wrote, up at Kaiser Health News today and available here.

posted by James C. Capretta | 1:21 pm
File As: Health Care

This “Public Option” Resuscitation Program Won’t Work

September 29, 2009 • House Speaker Nancy Pelosi has stated on numerous occasions that the health-care bill she plans to bring to the House floor will include the so-called “public option” because a bill couldn’t pass in the House if the public option were left out of it. Of course, she said that in June, and in July, and in early September too, and still no bill is heading to the House floor for a vote anytime soon.

So, yes, there would seem to be a vote problem in the House, but solving it is not quite as simple as including a government-run plan in the legislation. The truth is that Speaker Pelosi and her lieutenants are having trouble finding a majority to pass anything because their starting point is far too liberal for many rank-and-file Democrats.

Indeed, it seems the president himself doesn’t much like the House bill anymore. In his prime-time speech to a joint session of Congress earlier this month, he said he wanted a bill that costs no more than $900 billion over ten years, doesn’t increase the federal budget deficit “one dime,” and is paid for with offsets coming from within the health-care system. The House bill, as passed by three committees this summer, fails all of these tests. A back-of-the-envelope estimate indicates the House legislation would add about $10 trillion in unfunded liabilities to the federal books over 75 years.

Moreover, the president didn’t mention the signature “offset” in the House bill — a new surtax on upper-income households — when he explained to Americans how he planned to make the numbers add up. The omission spoke volumes. Are House Democrats really going to support a massive income-tax increase that President Obama himself has walked away from?

For now, it seems the answer is yes, because they have no alternative, which is why House leaders are working overtime to convince the Blue Dogs and others that the bill really isn’t as liberal as it seems.

Hence the flurry late last week around the “cost-saving” potential of a “strong” public option. It seem the Congressional Budget Office (CBO) has produced estimates for House leaders indicating that a government-run plan built on Medicare payment rates would cost $85 billion less than one that had to negotiate fees with willing suppliers of services. This was touted in several blogs as evidence that support of a “strong” public option is actually the fiscally conservative position (see this post by Ezra Klein).

The confusion of government price setting with efficiency really goes to the heart of the entire debate. Yes, Medicare does dictate payment rates to hospitals, physicians, and others. On paper, that can, for a time, look cheaper. But hardly anyone believes that is really the solution to our long-term cost problem. In fact, a consensus is finally forming that Medicare’s current fee-for-service payment systems are really the problem, not the solution. Medicare’s payment rules are arbitrary, shift costs to others, promote fragmentation and autonomy among health-care providers instead of integration, and reward volume instead of quality and efficiency. A growing chorus, including the leaders of the Mayo Clinic, says what’s really needed is a far-reaching reform of how health care is actually delivered to patients. The last thing we need is for more of the health-care system to adopt Medicare’s payment rules.

Of course, then there is the issue of government-driven rationing of care. Sector-wide price controls always lead to a reduction in the number of willing suppliers of services. If proponents of widespread adoption of Medicare’s payment schedules really got their way, it would only be a matter of time before demand far outstripped supply for any number of critical services and procedures. And waiting times would get much longer.

There’s a right way and wrong way to promote more efficiency in American health care. Price controls, from long experience, are clearly the wrong way, which is why an effort to sell a “strong public option” on cost grounds is a dead end.

posted by James C. Capretta | 10:15 am
File As: Health Care

The Death of Medicare Reform

September 23, 2009

The greatest threat to the nation’s long-term prosperity is rapidly escalating entitlement costs. The Congressional Budget Office (CBO) projects that between 2010 and 2030, federal spending on Social Security, Medicare, and Medicaid will increase from 9.8 percent to 14.4 percent of GDP. It will only get worse from there.

Now, unfortunately, the Obama White House and its allies in Congress are pushing for changes in the health-care bills that would make really fixing the entitlement problem nearly impossible.

At the heart of the rise in entitlement costs is the Medicare program. For months, the president and his aides suggested that they could neutralize Medicare’s rapid cost growth with targeted interventions in the health sector that would make care delivery more efficient. The cost curve could be bent, we were told, with painless investments in information technology, comparative effectiveness research, and prevention and wellness efforts.

This line of argument was quickly discredited by CBO. The core problem, CBO noted, is financial incentives. Providers of medical care increase their income when they deliver more services, and beneficiaries are largely insulated from the additional costs of higher use, since those costs are paid by a third party. No amount of federal spending on health IT is going to change that.

And so the Obama administration went back to the drawing board and returned in July with another idea: the IMAC. That’s the proposed independent commission that would have the power to make sweeping changes in the Medicare program. In the original White House version, the IMAC’s recommendations would have gone into effect automatically unless Congress could muster a two-thirds majority to stop them. The commission was to have broad authority to rewrite the Medicare program from top to bottom.

I noted at the time that this was an especially audacious proposal, representing as it did a massive, unprecedented power grab by the White House. Under the Obama IMAC, the president would pick all the commissioners, and the process gave him the power to reject the commission’s annual recommendations if he wanted to — but if he accepted them, they would be nearly impossible to block in Congress.

Now Senator Max Baucus (D.-Mont.) has taken the IMAC idea and made a few very revealing changes (see page 156 of the chairman’s mark). For starters, the commission would have many more members — 15, as opposed to 5 in the original IMAC — and the expectation is that they would look very much like the members of the existing Medicare Payment Advisory Commission, or Medpac, which means there will very likely be representation from insurers, physicians, hospitals, and other segments of the health sector, in addition to some academic experts.

In addition, the commission’s mandate would be very different in the Baucus version. It would be required to come forward with recommendations to hit specific spending-reduction targets each year, beginning in 2015, but the kinds of changes it could recommend would be very limited. As stated in the Baucus mark, the commission could not make recommendations that would change the structure of the Medicare entitlement. Amendments that altered “cost-sharing, benefits, or eligibility” would be off-limits.

What does that leave? Price controls, of course. Inevitably, the Baucus commission would feel the same political pressures Congress does today, which means it would resort to the same kinds of arbitrary, across-the-board price cuts that are routinely adopted whenever budgetary targets must be hit. Just look at the health-care bill Senator Baucus is pushing through his committee this week. It is filled with cuts in payment rates for hospitals, insurers, and others, as well as new industry-specific taxes. These kinds of cuts and fees make no distinctions based on quality or value; all providers are treated exactly the same, no matter how well or badly they treat their patients.

If the Baucus commission is adopted, we can expect more of the same in perpetuity as the commission is charged with hitting future budgetary targets. Worst of all, with the commission making annual provider-payment recommendations, Congress will have a ready excuse for never taking up what’s really needed to fix the entitlement problem: a fundamental reform that brings the same kind of competitive structure used in the drug benefit to the rest of the program. And that’s a disaster that would last for generations.

posted by James C. Capretta | 9:43 am
File As: Health Care

Let the Unraveling Continue

September 22, 2009

In July, House Democratic leaders were insistent that they had the votes to pass a bill with a new, aggressively managed government-run insurance option for the under-65 population, total federal costs approaching $1.5 trillion over a decade, and a new surtax on upper income taxpayers to pay for about one-third of it.

Where is that bill now?

It never came up for a vote, and there’s no plan to bring it up in coming days, even though Congress has now been back for two weeks from its summer recess. What’s the holdup? Well, it turns out the President of the United States — who was telling House members in July that it was critical to pass their bill before the August recess — doesn’t really like the House version after all. In his speech to Congress just after Labor Day, President Obama spelled out several key objectives for a bill that the current House version does not come close to meeting. The president said he wanted a bill that costs no more than $900 billion over a decade (the House bill’s price tag is at least $1 trillion, but it’s really far higher than that when properly assessed); doesn’t increase the deficit by “one dime” over ten years, or ever (the House bill would increase the government’s unfunded liabilities by about $10 trillion over seventy-five years); and is financed with Medicare and Medicaid cuts and a new tax on higher-cost insurance plans (the House bill imposes new taxes on higher income households, which the president essentially killed by never mentioning). He also all but said that dropping the government-run insurance option would be fine with him — letting even more air out of that particular, sinking balloon.

So much for the inevitability of the House plan.

But what about the Baucus plan, released last week?

Again, the White House and Senate Democratic leaders are hoping its introduction and the scheduling of a markup in the Senate Finance Committee will create a sense of irresistible political momentum that will feed on itself. “Closer than we’ve ever been before.” “Doing nothing is not an option.” “Now is the time for action, not debate.” Etc. Etc.

But the Baucus plan suffers from the same problem that derailed the House bill: the more the public hears and learns about it, the less they like it.

In particular, there are three key provisions in the Baucus plan that are on very shaky ground politically, so much so that it’s hard to see how they survive intact.

First, there’s the so-called “individual mandate.” This is the key provision of Obamacare. It turns out that the grand plan to finally bring civilized, “universal coverage” to America amounts to nothing more than a hefty, regressive tax on low and moderate wage working Americans. They must either buy government-approved health insurance — the cost of which is driven up by excessive government regulation — or they must pay a $3,800 per household tax to the IRS. Sunday, President Obama tried to argue that this kind of overt government coercion doesn’t amount to a tax. Good luck with that argument.

Second, there are the cuts in Medicare Advantage (MA) payment rates, which Democrats have targeted for nearly three years now. President Obama keeps trying to sell these cuts as nothing more than reductions in profits for insurance companies, but senior citizens know better. Today, about 20 percent of the Medicare population is in MA plans (the private insurance option in Medicare), and most of them get coverage that goes well beyond what’s offered by traditional Medicare. If $120 billion is taken out of MA payment rates, as suggested by Senator Baucus, there will be large cuts in benefits for many millions of seniors and many will also be forced out of their current MA plans. So much for the promise that Americans can “keep the insurance they have today.” In the coming weeks, the Medicare population is likely to turn even more decisively against Obamacare as they hear and learn more about these cuts.

Third, there’s the new tax on high-cost insurance plans. Here especially, the president has no one to blame but himself for the fix Democrats are in. Many conservatives actually favor reforming the tax treatment of health insurance to foster cost-conscious consumption in a competitive marketplace. But President Obama won the election last November in part because he attacked his Republican opponent, Senator John McCain, for endorsing a proposal to convert the job-based tax preference into individual tax credits. In scores of ads, the Obama-Biden campaign warned that the McCain plan would tax workplace health benefits “for the first time in history.” Now, the president and Senator Baucus want to do exactly that — without admitting that’s what they are doing. It won’t work, though, as this story in the New York Times demonstrates, because it is obvious to all that the Baucus tax on insurers and employers will get passed on to workers and individual insurance enrollees, including many middle income households and union members.

The White House and their allies in Congress could avoid the political fallout associated with these highly controversial provisions if they worked with Republicans on a sensible, measured, bipartisan bill that covered more people with voluntary enrollment in a reformed marketplace, not heavy-handed government coercion. But Democrats are bound and determined to try and pass something akin to the Great Society, despite clear signals from the public that they aren’t interested in any such thing. Much hangs in the balance.

posted by James C. Capretta | 10:20 am
File As: Health Care

Who’s Really Paying for Obamacare?

September 16, 2009

The health-care debate is finally turning to the core issue: who is really paying for Obamacare?

Here’s a hint: it’s not the rich.

The House bill and the proposal unveiled this week by Senate Finance Committee Chairman Max Baucus are built on three key provisions: a requirement that individuals secure “qualified coverage” or pay a hefty tax to the federal government (the so-called “individual mandate”); a requirement on most employers to offer “qualified coverage” to their full-time workers; and a “firewall” that requires most working Americans to sign up with insurance offered on the job without any additional governmental assistance.

In recent days, there have been a number of stories reporting on Democrats who are fretting that the subsidies for insurance under consideration in the Finance Committee are too meager (see this story in today’s Wall Street Journal and this column by Ruth Marcus in the Washington Post). These pieces focus on the provision in the Baucus plan that would limit the total premium a low-income household must pay — if they get their insurance through the “exchanges” — to a fixed percentage of their income. So, for instance, a family at 200 percent of the federal poverty line — $44,100 for a family of four in 2009 — would be required to sign up with insurance costing about $13,375 (the average cost for employer-sponsored family coverage in 2009). Under the Baucus plan, the family’s premium would be capped at about 8 percent of their income, or $3,538. The rest of the cost — nearly $10,000 — would be paid by the federal government (with perhaps a $400 per worker offset from some firms). House and Senate liberals are complaining that these caps on premiums in the exchanges should be lower — and thus the governmental subsidies higher. Of course, liberalizing those subsidies in the Baucus plan would push the price tag higher too, probably well above the president’s stated commitment to keep it to no more than $900 billion over ten years.

But there’s an even bigger issue here which is not yet getting the attention it deserves. Yes, the individual mandate would be a heavy burden for those low-income households getting their insurance through the exchanges. But it will be much, much worse for the far greater number of working Americans who will have no choice but to sign up with their job-based plans. The whole point of the so-called “firewall” is to prevent these workers from accessing the additional federal assistance for premiums that are only available for coverage offered in the exchanges. That’s how Senator Baucus and other Democrats jam their $2 trillion schemes into $900 billion sacks. Full-time workers have to have insurance, and they really have no choice but to take what’s offered at work. Period. The Baucus plan says these workers will get a ceiling on their premiums too — set at 13 percent of their income. But where would the rest come from? Not from the federal government. Employers would be paying these premiums on behalf of their workers, but, in competitive labor markets, employer-paid premiums also get paid by workers in the form of lower cash wages, as the Congressional Budget Office (CBO) has confirmed.

So, for low-wage, full-time workers who are offered qualified coverage on the job, the hidden and implicit taxes of Obamacare are truly stunning. A worker with an annual income at 200 percent of the federal poverty line — again, $44,100 if the worker is married with two children — could be required to sign up with insurance costing $13,375 per year. The employee portion of the premium would be notionally capped at 13 percent of annual income, or $5,720. The employer would pay the other $7,655 — but the employer portion too would come out of the worker’s take-home pay (possibly after some period of adjustment). Employer-paid premiums are tax-subsidized, but this existing federal tax subsidy is worth much less for low-wage workers than their higher-salaried colleagues and it’s certainly worth much less than the subsidies being proposed for insurance secured through the exchanges. At 200 percent of the federal poverty line, the foregone tax liability on an average employer-sponsored plan is likely to be about $4,000 (including payroll taxes). The other $9,000-plus in health insurance premiums — regardless of how it is split between worker and firm — would be shouldered by the worker himself. At $44,100, a $9,000 health insurance premium amounts to 20 percent of income.

The president and his allies in Congress are trying to convince Americans that they have found a painless way to achieve “universal coverage” that will involve no sacrifice from anyone. But the truth is that the Democratic plans all depend on coercion and hidden and regressive taxes. Low- and moderate-wage workers are the ones who will pay the bulk of the costs. Indeed, last week, the Lewin Group found that the House bill would increase costs for households with at least one uninsured member by $1,400 per year, on average. The same is almost certainly true of the Baucus plan. “Taxing the uninsured” is not likely to be a winning slogan for Obamacare. But it’s an accurate description.

posted by James C. Capretta | 12:37 pm
File As: Health Care

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