The Right Prescription

Baucus Blunders

Before this is over, the mean-spirited Montana senator will be dubbed Mad Max.

By 9.23.09

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Senate Finance Committee Chairman Max Baucus has finally achieved broad bipartisanship with his new health overhaul plan. Nobody else has been able to unite 99 Senators behind any idea in health reform. But Baucus has managed to do just that, with 99 Senators unified behind the idea of NOT supporting his plan.

The plan is carefully crafted to scare away anyone interested in good public policy or just good politics (read re-election). The Baucus bill is grossly underestimated to cost almost $1 trillion in new spending, all financed by higher taxes on health care and health insurance, particularly union health plans, and Medicare cuts for senior citizens, while still leaving at least 25 million uninsured according to the CBO. It still provides for a government takeover of health care and the bureaucratic structure for government rationing of health care, increasing rather than lowering health costs overall.

What is most instructive about the bill is that it shows why Republicans and conservatives cannot support anything like what President Obama and the Democrats are talking about on health care. Below are the features of the Baucus plan that no Republican or conservative could possibly support, even though it is too "moderate" for the rest of the Democrat party.

Higher Health Costs

The Baucus plan is carefully structured to raise health costs for everyone, federal, state and local governments, businesses, and families. The CBO estimates it will raise federal spending by almost $1 trillion over 10 years, but the bill's spending would mostly be operational for only 6 of those years. That means the true 10-year cost once it is fully phased in would be closer to $2 trillion.

Health insurance prices will soar under the Baucus bill. One reason is that the government will force everyone to buy the health insurance coverage that the government insists you must have, which will include all the politically correct benefits like coverage for abortion that altogether add up to big costs. Insurance is also required to cover anyone who shows up no matter how sick they are and how expensive their health care will be (called guaranteed issue), and they can't be charged more for that coverage just because they may need highly expensive care (called community rating), which will raise insurance costs even more. The government will also limit the deductibles, co-payments, and out of pocket costs that people can choose for their health insurance. The Council for Affordable Health Insurance (CAHI), which includes some of the smartest free market economists on health care in the country, estimates that these factors alone would cause health insurance premiums to almost double.

Over 50 years old, I currently enjoy a health insurance plan with a $10,000 annual deductible that costs me under $260 a month. That's about $3,000 a year, and that is all I need because it protects me against the high costs of serious illness. But when President Obama and his socialist Democrats get done helping me, my insurance will probably cost more than twice that, which I will be compelled to pay for under threat of force.

The new taxes on health care and insurance in the Baucus bill will also increase health costs. The bill imposes a tax on higher cost health plans, mostly union health plans, equal to 35% of the cost above $8,000 for individuals and $21,000 for families. But those thresholds are indexed only to grow with general inflation, not health costs. So over time, more and more health plans will be subject to the tax. After just 10 years, the most popular plans in the Federal Employee Health Benefits program will be subject to a tax of almost $1,000 a year. This indicates that average health plans will be paying such a tax burden by that time. These higher costs will be paid by workers and employers.

But the bill includes another tax on all health insurance plans as well that has been overlooked, further increasing costs. Additional taxes are imposed on prescription drugs, medical devices, and clinical labs. All of these will mean higher costs for workers and their insurance plans. Employers who do not provide the government mandated health insurance will pay an additional tax of $400 for each worker eligible for government assistance to buy such insurance on his own. This will further increase costs for employers and cause some low and moderate income workers to lose their jobs.

A bigger impact than any of this will be the effect of incentives from the bill in increasing the demand for health care. With the government or insurance companies paid in part by the government paying the bill, consumers will have every incentive to demand more and more health care. This increased demand will just raise health care prices, meaning higher insurance costs as well.

Runaway Entitlements

The Baucus bill provides for a ridiculous runaway explosion in entitlement spending. Medicaid is already projected to cost almost $5 trillion over the next 10 years, reaching $674 billion for 2017. Yet the bill sharply expands Medicaid to everyone up to 133% of poverty, include childless adults not previously covered under the program.

Worse is a new middle class entitlement in the bill providing government subsidies to buy health insurance to everyone with incomes up to 400% of poverty, which is $88,000 for a family of four. Have Mr. Baucus and his fellow left-wing Democrats who think even his bill is not enough not heard of the long-term entitlement crisis? Are they completely ignorant of the long-term budget projections showing we can't even pay for the entitlement overpromises we have already made? The unfunded liabilities for Social Security and Medicare are now over $100 trillion, while our entire economy only produces $14 trillion a year, and that will be declining even more soon enough unless the current socialist reign of error in Washington is ended.

No they are not ignorant and yes they have heard of the entitlement crisis. After next year's midterm elections their plan will to suddenly be to announce, "Oh, my gosh, these long-term deficits are completely unacceptable." The establishment media will echo with wise Washington greybeards intoning that of course the only responsible course is massive, unprecedented tax increases, to Swedish socialist levels and beyond. Most Congressional Democrats secretly harbor dreams of returning to the glory days of 90% top income tax rates, placing a socialist cap on success in America.

Block grant Medicaid and SCHIP back to the states like we did so successfully in 1996 for AFDC, they'll say, and let each state design a true safety net to make sure no one suffers without essential health care. In their view, the federal government along with the states can spend enough to make sure that the uninsured that truly can't afford basic health insurance have the money they need to do so. But no Republican, conservative, or any grown-up who can count can support the massive entitlement spending increases in the Baucus bill, or the other Democrat health overhaul plans.

Higher Taxes, Higher Deficits

The Baucus bill provides for $350 billion in new taxes, all focused on health care, which, again, will raise health costs. This includes taxes on prescription drugs and "medical devices" including condoms, tampons, contact lenses, contact lens solution, hearing aids, home pregnancy tests, and blood glucose monitors to control diabetes. Last year when asking for our votes Democrats promised us they would not raise taxes "in any form" on people earning less than $250,000 per year. They were just going to rob from "the rich" to pay for merry making by the rest of us. They apparently do not know that condoms, tampons, contact lenses and hearing aids are used by people making less than $250,000 per hear, some of whom have diabetes. Or maybe they were lying. There is no honor among thieves.

In a letter to Baucus, Democrat Senators Amy Klobuchar, Evan Bayh, and Al Franken, including Republican Richard Lugar, write regarding the medical devices tax:

Recent independent estimates indicate that this tax could translate into an annual income tax surcharge of between 10% and 30% on medical device manufacturers. The amount of capital that these companies would have available to reinvest n product development and innovation would be threatened, dramatically reducing both the number of jobs in the industry and the types of devices available to patients….[W]e are concerned that this tax will stifle technological innovations that can improve patient outcomes and lower health costs.

Amen. So true. They can really think when they want to.

Workers who do not obtain the government mandated health insurance plan will have to pay a special tax of $750 to $950, or $1,500 to $3,800 per family, depending on income, another violation of the pledge not to raise taxes on the middle class. Employers not providing the government required health insurance will have to pay an additional tax of $400 per worker, as specified above.

Anyone, including Blue Dog Democrats, who took the Americans for Tax Reform Pledge not to raise taxes cannot vote for this bill without breaking faith with voters. For those Blue Dogs who refused to take the Pledge, now you can see what they had in mind.

CBO scores the Baucus bill as not increasing the deficit. But this is a fantasy, because the CBO fails to consider how the Baucus taxes will change behavior. The score assumes that most of the increased tax revenues, $215 billion, will come from the tax on high cost health plans. But employers will negotiate with their unions to avoid that tax, and it will not generate nearly that much. The rest of the tax revenues would come from working people and their employers, and they will fall short as well.

On the spending side, the government notoriously estimated in 1965 that Medicare would cost $12 billion in 1990. When 1990 came around, it actually cost $110 billion, 9 times as much.

Medicare Cuts

Senator Baucus provides for almost $400 billion in Medicare cuts in his bill. This includes $123 billion in cuts to Medicare Advantage. Almost one-fourth of seniors, about 10 million, have chosen the private insurance options in Medicare Advantage for their Medicare coverage because they get better benefits than through standard Medicare. (Note: I published an article over 20 years ago in The Yale Law and Policy Review proposing what has become Medicare Advantage). The insurance company Humana quite rightly wrote in a letter to its policyholders recently that because of these cuts, "millions of seniors and disabled individuals could lose many of the important benefits and services that make Medicare Advantage plans so valuable."

That understates the case, because with over $100 billion in cuts for such plans, seniors will lose a lot of the benefits they enjoy from Medicare Advantage today. Reflecting the outright fascism that is always just below the surface with "liberal" Democrats, Baucus complained to the Centers for Medicare and Medicaid Services (CMS) about this Humana letter. CMS ordered Humana to cease and desist, lamely claiming in old Soviet style fashion that the letter was "misleading and confusing," and opening a federal investigation threatening "compliance and enforcement actions."

The Wall Street Journal reported yesterday, "Nearly half of Humana's yearly revenue comes from Medicare Advantage" and "Humana could be fined or booted from Medicare Advantage altogether" just for exercising its free speech to tell the truth. But Baucus in a press release lauded this CMS action, saying:

It is wholly inappropriate for insurance companies to mislead seniors regarding any subject -- particularly on a subject as important to them, and to the nation, as health care reform….The…bill we released last week strengthens Medicare and does not cut benefits covered under the Medicare program….

But besides the cuts to Medicare Advantage, the Baucus bill includes almost $200 billion in additional Medicare cuts involving, as CBO explained, "[p]ermanent reductions in the annual updates to Medicare's payment rates" to doctors and hospitals for the services they provide to seniors. That will result in cutbacks by doctors and hospitals in the services they provide to seniors, the start of the health care rationing in the bill. The Baucus bill also creates a Medicare Commission of unelected bureaucrats with the power to adopt still more Medicare cuts in the future.

As the Journal concluded regarding the government's scandalous mistreatment of Humana, "This episode neatly shows how all U.S. health care will operate if Mr. Baucus's bill becomes law." But that is an overly polite understatement of the ugly reality. What the episode shows is that AMERICA IS NO LONGER A FREE COUNTRY while these left-wing extremist Democrats are in power.

Co-Op Foolishness

The Baucus bill also includes $6 billion in start-up funds "to establish health care cooperatives that would provide insurance coverage and operate as non-profit organizations," as the CBO explains. This is in service to the left-wing notion that insurance company profits are the problem in health care. But such profits are a negligible factor in health costs. As economist John Lott explains, "The Kaiser Foundation estimates that self-insured companies covered about 75 million out of 137 million workers in 2008." In the remaining market, Lott continues:

[T]he dominant players…are non-profits….In state after state, Blue Cross and Blue Shield hold the largest market share. On average, the largest non-profit holds over half of the "full" market share in…29 states. Why add another non-profit to the mix? Getting rid of profits would not make costs go down. They would go up, because without profits there would no longer be the same incentive to hold down costs. Profits are the reward firms get for figuring out what consumers want.

The other big problem in the Baucus bill is that it provides the foundation for government rationing of health care. This is done through bureaucracies granted the power to make decisions regarding "comparative effectiveness," which involves the government deciding what medical treatments work and what don't (as if faraway government bureaucrats are going to know better than your own doctor), "cost effectiveness," which involves whether particular medical treatments are worth the cost (as if the government can really make judgments about that either), and whether or when new medical technologies and breakthroughs can be adopted and implemented. When legislation talks about "quality," that is often defined to include cost control, meaning ultimately rationing.

The Baucus bill is hazardous to your health, as well as your wallet.

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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.