The Agenda

The Baucus Plan

Via Ezra Klein’s Washington Post blog I’ve just downloaded Max Baucus’s $900 billion healthcare framework, which reflects the thinking of the “Bipartisan Six,” which sounds like the name of a team of superheroes with the power to bore their enemies to death. Below you’ll find some preliminary thoughts. This will be a long post, I’m afraid.

Drug prices

Beginning in 2010, in order to have their drugs covered under Medicare, manufacturers must provide a 50% discount off the negotiated price for brand-name drugs covered on plan formularies when beneficiaries enter the coverage gap.

This proposal will probably backfire. In a 2007 CBO report, Peter Orszag, now President Obama’s OMB director, noted the following:

A vivid example is the Medicaid “best price” provision, which essentially requires manufacturers

to give the Medicaid program rebates that are at least equal to the largest private rebates they

provide. After those provisions were enacted, private purchasers who had been receiving the

largest price concessions saw their rebates decline.

That is, Medicare prices will decline and prices for those insured privately will increase. This is the kind of short-term thinking that led to the unrestrained growth in private insurance premiums after the Balanced Budget Act of 1997. The impetus for this proposal seems to be political: it will go into effect before the midterm congressional elections.

Health insurance exchanges

The proposal calls for state-based health exchanges, as opposed to a national exchange or regional exchanges. Will state-based exchanges have enough scale to work well?

Insurance Reform in the Non-Group Market

Plans will be subject to severe restrictions; premiums can only vary according to age, family composition, region, and, interestingly enough, tobacco use. Many proposals have suggested that insurers be limited to charging premiums only on the basis of regional and demographic factors. But if we include tobacco, one wonders why we don’t also include, say, alcohol use. (As a near-teetotaler, I have a special interest in this subject, as do America’s devout Mormons and Muslims.)

“Young Invincibles”

Young adults will be allowed to purchase catastrophic coverage, which is (mostly) good news.

Health Care Affordability Tax Credits

As expected, the Baucus framework offers somewhat less generous assistance to families; rather than extending to 400 percent of the poverty level, subsidies extend to 300 percent. My main concern is that the structure of subsidies might lead to a high effective marginal tax rate, but we’ll know more soon enough.

Small Business Tax Credits

Speaking of strange incentives, assistance to small business owners works as follows:

Credits are again limited to firms with fewer than 25 employees and average wages below $40,000, and the maximum credit available would be 50%.

So what happens when you give your employees a raise? I have to assume I’m missing something here.

Individual and Employer Mandates

The individual mandate is fairly straightforward; if you can’t demonstrate that you have coverage, you pay a fine. For most individuals, the fine won’t be much of a deterrent in itself. It will, however, swell the size of the IRS and create a massive enforcement headache. Some form of automatic enrollment might actually prove more cost effective.

Employers with more than 50 full-time employees are penalized for not offering coverage, and the fine is tied to the cost of direct taxpayer subsidies to the employees. This is not a very strong employer mandate.

CO-OPs

This aspect of the Baucus framework seems fairly inconsequential; basically, it authorizes start-up funds for state-based non-profit insurers chartered to lower costs and improve benefits relative to the competition. CO-OPs offering integrated care, like Kaiser Permanente or the Mayo Clinic, will receive a strong preference.

Risk Sharing

Rather discouragingly, the framework only includes the following on the vitally important subject of risk.

To protect newly reformed markets against adverse risk selection and facilitate market entry of new plans, the proposal includes three mechanisms to share risk: risk adjustment, reinsurance and risk corridors.

I’m a huge supporter of the reinsurance approach, which has the potential to sharply reduce or even eliminate the need for private insurers to engage in adverse selection. But I haven’t seen any details.

Medicaid

The fundamental problem with Medicaid is that it divides responsibility between the states and the federal government in a manner that encourages the worst kind of buck-passing; James Capretta explains this in great detail in his National Affairs essay on the middle class social contract.

The Medicaid program, meanwhile, fuels growth in health-care costs because it is financed with a flawed system of federal-state matching payments, with no limit on the amount that can be drawn from the Treasury each year. For every dollar of Medicaid cost, the federal government pays, on average, 57 cents; the states pick up the rest. But it’s the states, not the federal government, that call the shots in the program’s management: They determine who is eligible for what, and how much to pay hospitals and doctors for services. Under this arrangement, if governors or state agencies want to reduce Medicaid’s cost to their budgets, they have to cut the program by $2.30 to save $1.00 — because the other $1.30 belongs to the federal government. Paying the full political price for benefit cuts while getting less than half the economic benefit obviously does not appeal to most state politicians. So instead, they spend most of their energy devising ways to maximize what they can get from the federal government while minimizing the state contribution.

The Baucus framework will do nothing to change this.

Revenue

To my chagrin, the Bipartisan Six has embraced John Kerry’s kludgy idea for a “High Cost Insurance Excise Tax.” Because the Obama campaign fiercely attacked John McCain for his proposal to limit the tax subsidy for high-cost employer-provided health plans, Democrats have concluded that they can’t simply adopt the McCain approach. And so they’ve done the next best thing: adopt a crude and ineffective replica. The other revenue measures seem trivial and inadequate.

Unfortunately, there is good reason to believe that this proposal will bear close resemblance to the health reform plan that eventually passes. My rough guess is that costs will continue to grow unabated and that the mandates will prove close to unenforcable. The plan would be greatly improved by jettisoning everything but the individual mandate and adding a publicly-chartered non-profit reinsurer along the lines proposed by Professor Harold Luft.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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