The Right Prescription

The Great Socialist Takeover

Obama's usurpation of health care means less health care, shoddier health care, costlier health care.

By 8.5.09

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Forthcoming this week from the Heartland Institute will be my comprehensive study on the Obama/Democrat government takeover of health care. That study presents my thorough analysis of the health care overhaul bills supported by President Obama now working their way through Congress.

Despite the talking points we are now hearing to the contrary, the bottom line is that the Obama/Democrat health overhaul legislation would result in thorough and detailed government control over health care, government rationing that will deny you health care, severe loss of freedom of choice and control over health care, disabling, record high taxes that will leave America uncompetitive in the world economy, higher, not lower, overall health costs, and higher not lower federal spending and deficits. The study explains all of these results in complete detail.

This all translates into a major decline in the standard of living for the American people. Today Americans enjoy the most advanced, sophisticated, cutting edge health care in the world, with those deprived of essential health care flocking to our shores from the world over seeking survival. But under the Obama/Democrat health regime, this will be gone, replaced by the outdated, failed, throwback, socialized medicine policies of foreign countries that reflect their lower standards of living.

This will be true most of all for our nation's seniors, who are most in need of high quality medical care. As former Clinton advisor Dick Morris, author of the incisive new book Catastrophe, argues:

Obama's health care proposal is, in effect, the repeal of the Medicare program as we know it. The elderly will go from being the group with the most access to free medical care to the one with the least access. Indeed, the principal impact of the Obama health care program will be to reduce sharply the medical services the elderly can use. No longer will their every medical need be met, their every medication prescribed, their every need to improve their quality of life answered.

Loss of Freedom of Choice: Obama's Public Option Government Health Insurance Plan

President Obama says a cornerstone of his plan is that if you like the health insurance you have today, you will be able to keep it. But under the Obama/Democrat plan, if you have employer provided health insurance, that won't be your choice. It will be your employer's choice. Your employer may decide to dump you into the so-called public option, government insurance plan, and pay the 8% payroll tax. If the employer's work force averages $50,000 a year in wages, then the employer would only have to pay $4,000 per year per worker under the payroll tax, which may well be a considerable cost savings from his current health coverage.

Even if you purchase health insurance directly on your own, you will not be able to keep that insurance if your insurer is driven out of business by the public option, government health plan. One big reason this will happen under the Obama health plan is that the government has the power to dictate what the doctors and hospitals would be paid by the government plan. Medicare now pays doctors almost 20% below market rates, and hospitals more than 30% below market, with Medicaid paying 30% to 40% less than that. The health overhaul bills now pending in fact both say that the government public option will pay doctors and hospitals under the Medicare rates to start, but the government is expressly given the power to change that over time and pay even lower rates, as it has under Medicaid.

Private health plans will not be able to compete with a public government plan that has lower costs because it dictates lower payment rates to doctors and hospitals. Indeed, the current experience with Medicaid and Medicare is that these government plans drive up the cost of private health plans, as doctors and hospitals underpaid by the government health plans try to recover the losses by charging more to privately insured patients. Private health plans trying to compete with the government public option would consequently be at even more of a competitive disadvantage. The Lewin Group, an independent health care consulting firm, estimates that as a result of these factors the cost of the private health insurance options for family coverage under the House bill would be increased by $2,148 a year in 2010 as compared to the public option, a competitive disadvantage of almost 25%.

The public option, government insurance plan is also likely to be subsidized by the taxpayers over time, while the private plans will be subject to discriminatory new tax burdens. The Lewin Group estimates that because of all these illegitimate competitive disadvantages for the private plans, "about 88.1 million workers would shift from private employer insurance to the public plan" to start, about two-thirds. Almost half of those insured in the individual market would soon be forced into the new public option as well. The end result over time is likely to be a government single payer monopoly, with all of the private plans driven out of business.

Choice under Obama's health plan will also be greatly restricted because the government will mandate that you buy the health plan the government decides you must have. You will consequently be forced to pay the costs of all the politically correct benefits the government will require, regardless of whether you want those benefits.

Obama likes to say that he wants a government public option health insurance plan to keep the insurance companies honest. But once the public option has driven those insurers out of business and becomes a government monopoly, who is going to keep the government honest?

How the Obama Plan Will Ration and Deny You Care

The health care rationing under the Obama plan begins with the government public option health insurance plan sharply underpaying doctors, hospitals, and other health providers, as discussed above. Any private plans that do manage to survive will be able to do so only by paying what the government plan pays. So the government will end up dictating all payments to health providers in any event.

Doctors and hospitals will consequently begin to restrict their care to fit what the government will pay. Their practices will shrink to avoid the more expensive medical services and treatments that the government payments will not sufficiently cover.

But this underpayment has a second order effect on investment in the health care industry, which is far more powerful. Investors are not going to finance acquisition of the latest, most advanced equipment and technologies with the government slashing compensation for the services such technologies provide. Investors are also not going to finance expanded or new hospital facilities or clinics, or even the full maintenance of existing ones. This is how the long waiting lines for diagnostics, surgery, and other referrals begin to develop. This is why in other countries with national health plans or socialized medicine, facilities seem old, aged, and deteriorated.

Vast new realms of innovative, new health services and care opened up by modern science will lag unutilized. Drug companies will also cut back sharply on investment in new, cutting edge, restorative, painsaving, or lifesaving miracle drugs. Many people will suffer or die unnecessarily as a result.

We will see the same impact on investment in human capital in health care as well as physical capital. The supply of doctors, surgeons and specialists will decline. When this is combined with the effects of greater demand for health care from the formerly uninsured, and from everyone else due to the incentive effects of the system as discussed below, the severity of inadequate supply of health care becomes even more acute.

Obama repeatedly says that under his health reform plan if you like your doctor you will be able to keep him or her. But the question is whether under his reform plan your doctor will be willing to keep you, when the government refuses to pay adequately for the health care services you want and need.

A recent report from President Obama's Council of Economic Advisors (CEA), which he has touted as showing how his health plan would reduce health costs, elaborates even more explicit and comprehensive government rationing of health care. The CEA report says 30% of American health care is waste, which government bureaucracy is going to eliminate under Obama's health reforms. What is the difference between waste and the health care you want? Answer: a government bureaucrat.

The CEA says the government will reduce health costs by deciding for doctors and hospitals across the country what health care works and what doesn't. Even worse, it will decide what health care is cost effective, which means the government will decide whether your health care is worth the cost, not you and your doctor. This will be enforced through the payments to doctors and hospitals. Those who follow the government's dictates on your health care get paid, those that don't don't get paid.

The CEA report projects a frightening picture of a health care system run by government bureaucrats, with health costs as the primary concern, not you and your health.

The Black Hole of Socialized Medicine

President Obama insists that his national health plan will reduce costs. But if it is going to reduce costs, why do taxes have to be increased to pay for it? Taxes have to go up under Obama's plan because even with the health care rationing, total costs will go up not down under the plan.

Obama's plan would increase costs first by expanding Medicaid, the government program providing medical assistance to the poor. That program is already projected to cost almost $5 trillion over the next 10 years, reaching $674 billion for 2017. Obama's plan would expand coverage under Medicaid to those earning up to 133% of poverty. That would increase costs for federal and state budgets already mostly in deep deficit.

Obama's plan would increase costs further by providing federal assistance for the purchase of health insurance for families earning up to $88,000 in the House bill, and over $100,000 in the Senate bill. This is a massive increase in welfare with a new entitlement irresponsibly added on top of the runaway, financially intractable entitlement promises we have already made.

Costs for health care will also go up because the Obama plan, like all national health plans, will increase the demand for health care. Expanded health insurance coverage for the uninsured will, of course, add to this demand. But with the government paying for health care or for insurance that pays for health care, everyone will have new incentives to increase the demand for health care. With the government, or an insurance company paid by the government, paying the bill, the incentive is to consume health care until the net benefit from it is equal to zero, rather than equal to costs as in an efficient market. In other words, consume it until it hurts. This increased demand will further increase prices for health care. The Obama health plan will also sharply reduce the supply of medical care, as discussed above, resulting in further price increases.

These increased prices for health care mean the price for insurance that workers and families have to pay will go up as well. New regulatory burdens under the Obama health plan, such as guaranteed issue and community rating, will also sharply increase insurance premiums, as they always have in the past. Health insurance costs will increase even more because the government will be mandating exactly what benefits must be covered, again forcing you to pay for benefits you may not want. Private health insurance costs will also rise because of the cost shifting from the "public option" government health plan paying doctors and hospitals well below market rates.

Employers not providing health insurance will have to pay a new 8% payroll tax, which may cost you your job. This is a heavy new burden sharply raising employment costs for small business, which will result in still higher unemployment. Employers already providing insurance will have to pay the higher insurance costs explained above.

Cost estimates for the Obama health plan from the Congressional Budget Office (CBO), have ranged around $1.5 trillion. But independent private estimates have ranged even higher, $3.5 trillion to $4.1 trillion. While Obama says his health plan will reduce federal deficits, even the CBO says it will increase the deficit by hundreds of billions, even with all the tax increases in the plan. This year's deficit is already ballooning over $2 trillion, the largest in history by far, almost 10 times Reagan's largest deficit.

The House bill also includes new income tax surcharges on small businesses and others. Along with the Obama tax rate increases already planned for 2011, the top marginal federal tax rate will soar to almost 48% from 35% today. Counting state income taxes, the average top income tax rate in America would climb to about 52%.

Such tax rates would be almost the highest in the world, higher than in socialist Europe, formerly socialist India, and Communist China. Only three countries, Denmark, Sweden, and Belgium, out of the 30 Western countries measured by the OECD, would suffer under higher top marginal tax rates. If you are a blue-collar worker with a job in manufacturing, say goodbye to it as it moves to South Korea, where the total top marginal tax rate is 38.5%. The U.S. rate would be over 35% higher, completely uncompetitive. The U.S. rate would also be higher than in France, Germany, Canada, and Poland, among 22 others in the OECD.

Indeed, in 5 states politically dominated by liberal Democrats, California, New York, New Jersey, Hawaii, and Oregon, the total top tax rate would be higher than in socialist Sweden. The Tax Foundation reports that 10 states would suffer total top tax rates above 54%, which is higher than in socialist Belgium at 53.7%. Indeed, the Tax Foundation reports 39 states would suffer total top tax rates over 50%.

Moreover, the economically sensitive federal capital gains tax rate would be almost doubled from 15% today to 26.5%. The tax on corporate dividends would be more than tripled from 15% today to 46%.

No one, not even CBO, is taking into account the economic cost of these tax increases, which is an additional cost on top of the estimated costs for the Obama/Democrat health plans. But these tax increases will translate into still higher unemployment, fewer jobs, lower wages, and still slower economic growth.

Peter Ferrara is Director of Entitlement and Budget Policy for the Institute for Policy Innovation, and General Counsel of the American Civil Rights Union. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is a graduate of Harvard Law School and Harvard College.

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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.