Hidden Assumptions in Baucus Health Plan Will Make Costs Jump

Published November 3, 2009

The Congressional Budget Office’s preliminary cost estimate of the Senate Finance Committee’s health care legislation added up to $829 billion over the first 10 years. Yet this estimate substantially understates the true cost of Sen. Max Baucus’s (D-MT) plan, because it is based on key assumptions that will never hold up over time.

Huge Tax Hike

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. Enrollees will pay it in the form of higher deductibles.

The tax would hit all coverage that costs more than $8,000 for individuals or $21,000 for families, in 2013. Those thresholds would be indexed to general consumer inflation plus one percentage point every year, even though health care costs are expected to increase at a much more rapid rate.

By 2019 and beyond, this tax would hit pretty much all middle-income households in America. 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.

Benefits Slashed

Second, there are big Medicare and Medicaid cuts. By 2019, the Congressional Budget Office 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, and Congress will hear immediate complaints from them.

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.

Firewall Restricts Choice

Finally, there is the so-called “firewall,” which is really central to how the whole bill works.

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 raised gradually 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—more than $9,000 in this example—would be picked up by other taxpayers.

If that sounds too good to be true, it’s because it is. 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.

Either Way, Workers Pay

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 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 employer-paid premiums are paid by workers, too, in the form of reduced wages.

Universal Coverage

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 in 2015 only 17 million people will get subsidized premiums in the Baucus plan. The vast majority of American workers would get no additional federal assistance because of the “firewall,” even as the government pushed the cost of compulsory health insurance much higher with regulations, taxes, and fees.

This is how Baucus shoehorns a $1.5 to $2.0 trillion “universal coverage” scheme into an $830 billion sack. 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—which would require raising taxes still higher.

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

James Capretta ([email protected]) is a fellow at the Ethics and Public Policy Center in Washington, DC. Portions of this column originally appeared on http://thenewatlantis.com. Reprinted with permission.

For more information …

Congressional Budget Office Letter: Preliminary Cost of Baucus Bill: http://www.cbo.gov/ftpdocs/106xx/doc10642/10-7-Baucus_letter.pdf

Congressional Budget Office Report: Analysis of Premiums: http://www.cbo.gov/ftpdocs/106xx/doc10618/09-22-Analysis_of_Premiums.pdf