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Critical Condition

NRO’s health-care blog.

CBO and a Firewall That Will Never Hold



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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 Sen. Baucus is offering to those getting insurance in the exchanges.  At 200 percent of the federal poverty line, the foregone 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 Sen. 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.



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