The Public Policy

Obamacare Tragedy Primed To Further Explode the Deficit

But there is a way out.

By 7.6.11

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President Obama bludgeoned Obamacare through Congress on the claim, backed by CBO, that it would not add to the deficit, even though it adopts or wildly expands three entitlement programs.  As I discuss in my new book, America’s Ticking Bankruptcy Bomb, close analysis of the CBO score and additional new data indicates that, quite to the contrary, Obamacare will likely add $4 to $6 trillion to the deficit over its first 20 years, and possibly more.

Of course, the deficit is not the biggest problem.  Even bigger is that regardless of the deficit, Obamacare involves trillions of increased government spending and taxes.  Worst of all is that it involves a loss of control over, and the quality of, our own health care.  All of this is ultimately a tragedy because as my book also explains, the uninsured could all easily be covered without any individual or employer mandate for just a small fraction of the cost of Obamacare, as discussed below.

Deficits and Debt

CBO made three enormous conceptual errors in scoring the program as not adding to the deficit, explained in detail in my book.  The first relates to the new middle class welfare entitlement adopted by Obamacare, providing government handouts for the purchase of health insurance for families earning up to four times the poverty level, or $88,000 for a family of four, indexed to grow to over $100,000 shortly.

These health insurance handouts go only to those who buy insurance on their own individually through the state based health insurance exchanges established under the legislation.  Those who receive employer provided coverage are not eligible.  CBO assumed that only 19 million workers will qualify for the handouts, out of a work force estimated at 162 million in 2014 mostly still receiving employer provided coverage.  It consequently estimated the cost at only $450 billion over the first 10 years, or actually first 6 years of implementation of Obamacare.

But with the mandated insurance likely to cost $15,000 or more by 2016, employers will have powerful incentives to dump their employee coverage and pay the $2,000 per worker fine that applies to such termination of coverage.  Employers are all the more likely to do this, and just pay their workers higher wages in place of the health coverage, precisely because the workers would then be able to get the huge welfare handouts for purchasing their insurance through the exchanges, resulting actually in a net income increase.  As former CBO Director Douglas Holtz-Eakin reported in a paper for the American Action Forum,

             

“For example, a family earning about $59,000 a year in 2014 would receive a premium subsidy of about $7,200.  A family making $71,000 would receive about $5,200; and even a family earning about $95,000 would receive a subsidy of almost $3,000.  By 2018,…a family earning about $64,000 would receive a subsidy of over $10,000, a family earning $77,000 would receive a subsidy of $7,800 and families earning $102,000 would receive a subsidy of almost $5,000.”

In fact, in the exchanges, qualifying workers can even get subsidies covering their out-of-pocket expenses.

These are the reasons why a new study released by McKinsey & Company earlier this month concluded that Obamacare will result in “a radical restructuring of employer-sponsored heath benefits.”  It found that “30 percent of employers will definitely or probably stop offering” employer health coverage after Obamacare is implemented, and “among employers with a high awareness of reform, this proportion increases to more than 50 percent.”

In the Wall Street Journal on June 8, Grace-Marie Turner, President of the Galen Institute, estimated based on the numbers in the McKinsey report that as many as 78 million Americans would lose their employer provided coverage.  If those workers ended up receiving the new Obamacare exchange handouts, the estimated costs for those subsidies in the first 6 years alone would soar by 4 times, adding nearly $2 trillion to the costs and deficits of Obamacare during that time.

What happened to President Obama’s oft-repeated pledge that if you like your health insurance you can keep it?  Another transparent manipulation of the public was Obama telling us on national television there is no way Obamacare’s individual mandate can be considered a tax, and then sending his government lawyers into court to argue that the individual mandate is constitutional because it is simply a tax.  I predict that the Fourth Circuit Court of Appeals will issue a ruling soon upholding the individual mandate on the grounds that it is a tax.

The second conceptual fallacy in the CBO score was revealed in full by the 2010 Financial Report of the United States Government, released last December by the Treasury Department.  It documents the total present value of the future cuts to Medicare under President Obama’s policies already enacted under current law as $15 trillion, primarily in payments to doctors and hospitals for health care provided to seniors. 

 Such draconian cuts in Medicare payments would create havoc and chaos in health care for seniors.  Doctors, hospitals, surgeons and specialists providing critical care to the elderly such as surgery for hip and knee replacements, sophisticated diagnostics through MRIs and CT scans, and even treatment for cancer and heart disease would shut down and disappear in much of the country, and others would stop serving Medicare patients.  If the government is not going to pay, then seniors are not going to get the health services, treatment and care they expect. 

In fact, within a decade after Obamacare is implemented, Medicare’s payments to doctors and hospitals will be less than under Medicaid, where the poor face grave difficulties in finding timely treatment, and are documented to suffer worse health outcomes as a result.

 Medicare’s Chief Actuary reports that even before these cuts already two-thirds of hospitals were losing money on Medicare patients.  Health providers will either have to withdraw from serving Medicare patients, or eventually go into bankruptcy.  The unworkable, draconian effect of these Medicare cuts is why the U.S. Government Accountability Office issued a disclaimer of opinion on the Statement of Social Insurance component of the federal government’s 2010 Financial Statement, saying, “Unless providers could reduce their cost per service correspondingly, through productivity improvements, or other steps, they would eventually become unwilling or unable to treat Medicare beneficiaries.”

Yet, reversing these unworkable Medicare cuts would add $15 trillion to the future deficits caused by Obamacare.

Finally, the Obamacare tax increases won’t raise nearly the revenues that CBO projected.  The capital gains tax rate would increase by close to 60 percent in 2013, with the expiration of the Bush tax cuts and Obamacare applying the Medicare payroll tax to capital gains as well.  But over the last 40 years, every time the capital gains tax rate has been increased, revenues have declined.

Similarly, the tax rate on dividends would nearly triple in 2013, due again to the expiration of the Bush tax cuts and the application of the Medicare payroll tax to dividends as well.  The last time dividend taxes were that high, corporate dividend payments were greatly reduced.  Corporations just kept the money internally for corporate investment.  Corporate earnings are already subject to the 35 percent corporate income tax rate, which is on top of any tax on dividends.  So revenues from the tax on dividends will decline sharply as well, exactly the opposite of what happened when President Bush cut the tax rate on dividends in 2003.  CBO, of course, has a horrid record of wildly failing to estimate the revenue effects of tax changes relating to capital gains and corporate dividends in particular.

The Tragedy of Obamacare

My book explains the Obamacare tragedy by showing how everyone can be assured essential health care for just a small fraction of the cost of Obamacare.  Moreover, this is accomplished with no individual mandate and no employer mandate.  Obamacare, by contrast, for all of its trillions in future taxes and spending, and its individual and employer mandates, still does not cover everyone.

Such reform would begin with Medicaid, which already spends over $400 billion a year providing substandard health care coverage for 50 million poor Americans.  Congress should transform Medicaid to provide assistance to purchase private health insurance for all those who otherwise could not afford coverage, ideally with health insurance vouchers.  This one step would enormously benefit the poor already on Medicaid.  The program today pays doctors and hospitals only 60% of costs for their health care services for the poor.  As a result, close to half of all doctors and hospitals won’t take Medicaid patients.  This is already a form of rationing, as Medicaid patients find obtaining health care increasingly difficult, and studies show they suffer worse health outcomes as a result.  Health insurance vouchers would free the poor from this Medicaid ghetto, enabling them to obtain the same health care as the middle class, because they would be able to buy the same health insurance in the market.

 Ideally this would be done by reforming Medicaid financing to provide the federal assistance to the states for the program through fixed, finite block grants, which do not vary by matching increased state Medicaid spending as under the current system.  With finite block grants, states that innovate to reduce costs can keep the savings.  States that operate programs with continued runaway costs would pay those additional costs themselves.  Such reforms worked spectacularly to stop the runaway costs of the old AFDC program when Congress adopted welfare reform in 1996.  The voters of each state can then decide how much assistance for the purchase of health insurance to provide each family at different income levels to assure that the poor would be able to obtain essential health care.  This would rightly vary with the different income and cost levels of each state. 

This would not cost much because only about 12 million Americans arguably cannot afford health insurance without some public assistance.  Out of the 47 million uninsured we keep hearing about, 9.7 million are already eligible for current government programs like Medicaid or SCHIP but haven’t signed up.  Another 6 million are eligible for employer sponsored insurance but have not signed up for that either.  Another 9 million are in families earning more than $75,000 per year.  Another 10.2 million are immigrants, legal or illegal, and not U.S. citizens.  Just give the assistance necessary, counting what they can reasonably pay based on their income, to the 12 million Americans that need it to buy private health insurance.

But a second step is necessary as well to ensure a complete safety net.  Federal funding should also be provided to help each state set up a High Risk pool.  Those uninsured who become too sick to purchase health insurance in the market, perhaps because they have contracted cancer or heart disease, for example, would be assured of guaranteed coverage through the risk pool.  They would be charged a premium for this coverage based on their ability to pay, ensuring that they will not be asked to pay more than they could afford.  Federal and state funding would cover remaining costs.  Such risk pools already exist in over 30 states, and for the most part they work well at relatively little cost to the taxpayers because few people actually become truly uninsurable.

The law already provides that insurers cannot cut off already existing policyholders, or impose discriminatory rate increases, because they become sick while covered.  That would be like allowing fire insurers to cut off coverage for houses once they catch on fire.  If this law needs to be modernized, it should be.

With these reforms, those who have insurance can keep it, those who can’t afford it are given the necessary help to buy it, and those who nevertheless remain uninsured and then become too sick to buy it have a back up safety net in the risk pools.  Again this completely solves the problem of the uninsured without any individual or employer mandate, which are unnecessary gateways to enormous trouble.  Once the government adopts such mandates, it is inexorably led down the path to socialized medicine.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.