The Right Prescription

Obamacare Starts Squeezing the Private Sector

Over the next six months Republicans will have to do much more than just show that Obamacare won't work.

By 3.30.10

The news on healthcare reform this week is that right off the bat, the major corporations are discovering they will be losing stunning amounts to taxes as a result of Obamacare.

Caterpillar, the first to speak out, reported it will take a one-time write-down of $100 million in order to account for the elimination of a federal tax refund it has been receiving for providing drug benefits to its retired employees. In the following days, AT&T, Verizon, 3M, Deer & Co., and AK Steel Holdings announced they would take similar write downs. AT&T's new tax bill will come to over $1 billion. The news is a body blow to major companies hoping to recover profitability and add jobs.

If all this sounds familiar, it should. It is exactly what Republicans predicted would happen if Obamacare became law. If existing employee benefits were taxed or made more expensive, the GOP argued, employers would either have to absorb the loss or start pushing their employees into whatever "government option" became available. When the Bush Administration adopted Medicare Part D in 2003, companies threatened to do just that, dropping their coverage and letting retirees buy into the federal program. The government offered a tax refund of about $650 per retiree in order to keep Part D costs down. Now the Obama Administration has decided to eliminate the tax refund in order to pay for the larger entitlements in the new bill.

All this, however, was too much for Henry Waxman, chairman of the House Energy and Commerce Committee. He demanded that CEOs from the major companies appear before him on April 21 to explain just what's going on. "These assertions appear to conflict with independent analyses," said the chairman, "which show that the new law will expand coverage and bring down costs."

"When I use a word, it means exactly what I want it to mean, no more, no less," says Humpty-Dumpty in Alice and Wonderland. "When we pass a law, it will do exactly what we want it to do," say the Democrats in Congress. Never mind economics, never mind common sense.

This is typical of Washington -- too many lawyers, too few people who understand business or energy or insurance or medicine or whatever the government has decided to regulate. The laws of a society are supposed to administer justice and make things run smoothly. Instead, the law in America has become a tool for forcing other people to do what you want. That's why everybody wants to become a lawyer and nobody wants to become an engineer, scientist, doctor or -- god forbid -- an insurance company executive. Now that the results of Obamacare are emerging, the demonization of insurance companies that greased its passage will soon extend to American business as a whole.

Republicans are taking heart in this, and well they should -- up to a point. The battle over the next six months will be to convince the public whether or not Obamacare is working as planned. CNN got the ball rolling the first day by discovering two people who will benefit from the new legislation:

Erica Mohamed, 31, of Houston, Texas, is separated, and has a 6-year-old son, Jeremiah, with a rare congenital heart disease called Tetralogy of Fallot. He has had three open-heart surgeries already, and will need to have another procedure to remove a stent in early adolescence. Mohamed's job, through which she gets insurance, is not secure.…

Ira Bennett, 47 and self-employed without insurance, is HIV-positive, and had a heart attack in his early 40s. He estimates his income is about $500 a month from doing yard work and watching a friend's house. Since he couldn't pay for the $70,000 bill for his heart attack treatment, the costs fell to the state and federal government. Paying for his AIDS medications, costing around $2,000 a month, also falls to federal funding through the Ryan White Care Act.

Whether such heart-tuggers will resonate with the public is an open question. What is interesting to note is that in each of these instances, the unfortunate individuals did receive medical care -- and very expensive care at that. Obamacare's only apparent improvement will be to transfer these costs to commercial insurers.

The result is easy to predict -- although you'd never convince Rep. Waxman of it. Insurance company costs will soar from taking on hordes of people with pre-existing conditions. They will try to raise premiums -- at which point Rep. Waxman will proclaim, "Our analysis said premiums should go down, not up!" That will bring a call for federal price controls. This melodrama is already being played out in Massachusetts, where an identical reform has produced the highest insurance rates in the country. At some point here, the voice of Rep. Dennis Kucinich will begin to echo through the land: "Why not just turn the whole thing over to the federal government?"

That's one scenario. The other is that the American public will not be fooled by any of this. They will recognize that it the evil insurance companies and businesses are not to blame, but that it is Congress that has created a flawed system. In a restrained and dignified manner, they will express their verdict by voting the Democrats out of office next November and replacing them with knowledgeable legislators -- preferably non-lawyers and non-career-politicians -- who can understand the situation.

THIS IS WHAT MOST of us would prefer. But I would add one caveat to all this. Take another look at those Caterpillar/AT&T/3M numbers. Caterpillar's $100 million represents only one small portion of the health benefits the company is now conveying to its retired employees. Imagine the value of all the health benefits passing to all its employees, working and retired. It obviously exceeds $1 billion. And that's just one company.

What the Caterpillar/AT&T/3M numbers reveal is that employee healthcare benefits have become a huge underground economy operating outside the conventional system. Remember, all these benefits are tax-free. Because the government doesn't take a share, both employers and employees have come to prefer expanded health and retirement benefits to ordinary compensation. (How many people are holding jobs "just for the benefits"?) This distortion is what is ailing the healthcare economy.

Intelligent observers have noted this all along. Writing in the Wall Street Journal, Holman Jenkins concludes:

Let us flip back to an epic series of Senate Finance hearings in 1992. They represented a remarkable meeting of minds across a broad swath of health-care wonks and economists (not interest groups) that the original sin was the exclusion of employer-provided health insurance from taxable income -- imposed carelessly by the IRS in 1943 so defense contractors could compete for workers without transgressing Roosevelt-era wage and price controls. [My emphasis.]

Outlining his plan for healthcare reform in Imprimus, Congressman Paul Ryan says the same thing:

One, we should equalize the tax treatment of people paying for health care by ending the current discrimination against those who don't get health insurance from their jobs -- in other words, everyone paying for health care should receive the same tax benefits.

The exclusion of health benefits from taxation has left nearly half the population in tax-free employer benefits plans while the other half roams the wilderness, trying to buy insurance that is subject to both taxation and expensive state mandates. Employer benefits plans are not "insurance" at all, they are prepaid medical care. Often they come with few or no deductibles or co-payments. Because half the population is getting this huge tax-free benefit, the insurance companies are asked to provide the same thing to the other half without the tax advantages. Naturally, they cannot do it. Their costs are driven even higher by expensive state mandates and the removal of a very healthy portion of the population -- the corporate work force -- from national insurance pools. Viewing this situation, the Democrats have discovered an "insurance crisis" and decided only a government takeover of the healthcare industry will do.

The fairest and most efficient reform would be to give everyone the same tax benefits. Allow individuals to put aside $3,000-5,000 tax-free to cover their medical expenses. A portion could be used to buy "catastrophic coverage," which is really plain ordinary health insurance for major expenses. This is what medical savings accounts (MSAs) do. Indiana has provided coverage for 45,000 low-income individuals by giving them $1,100 tax-free for their medical expenses and covering them beyond that up to $300,000 through commercial insurance policies. Unfortunately, the program -- which is highly successful -- is outlawed by Obamacare. Congress does not like to see people left to handle their own affairs.

There's one other caveat in here worth noting as well. Labor union members in private corporations -- almost all covered by "health benefits" -- are now a minority of union members. The majority is working for the government. But governments won't face the same squeeze as Caterpillar, 3M and AT&T. After all, governments don't pay taxes. While Caterpillar, Verizon, and other major employers will be forced to cut back somewhere, government employment will just keep getting bigger and better.

In fact, many observers are predicting Obamacare may be the tipping point where -- as in Europe and most of the world -- government becomes the "employer of first choice." The salaries and benefits of government employment already exceed those of the private sector. With the pressure Obamacare is placing on private corporate benefits (but not government benefits), these advantages will only get better. Moreover, Obamacare is creating government jobs. The IRS is already gearing up to hire 17,000 new employees to enforce the new taxes and mandates. As Washington prospers, so the rest of the country continues to stagnate.

The only alternative is that Republicans and Tea Party rebels seize control of the government next November and institute a healthcare reform that distributes health benefits in a fair and just manner while saving the private enterprise system. Otherwise, we may already be past the tipping point.

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William Tucker is news editor for