Published July 23, 2009
According to the Congressional Budget Office's preliminary cost estimate for the legislation, the net impact of the bill's coverage provisions on the federal budget deficit would be $1.042 trillion over a decade. But that includes $208 billion in new taxes and fees paid by employers through 2019. Extending Medicaid coverage and subsidizing premiums for lower-income households getting coverage through the new “exchanges” would cost $1.211 trillion over 10 years.
In addition, the House bill would also repeal the Medicare physician payment provisions which are scheduled under current law to cut fees dramatically every year beginning in 2010. That's a major demand of the nation's physicians and helped House leaders secure the endorsement of the American Medical Association. But it was not cheap. Replacing the current payment system with one that does not assume large fee cuts will cost $229 billion between 2010 and 2019. Throw in some smaller items — $10 billion in higher Medicaid allotments for Puerto Rico and other territories, for instance — and the bill’s spending is about $1.5 trillion, not $1 trillion, over a decade.
So what would the House bill do to pay for this?
First, there is the income tax surcharge for households with incomes above $350,000 per year. That provision would increase taxes by $543 billion through 2019. There are also other, smaller tax hikes in the bill which would raise an additional $43 billion over 10 years. Together with the employer “pay or play” taxes and payments to the exchanges, the bill's total 10-year tax increase is about $800 billion.
The bill would also cut Medicare and Medicaid spending by about $450 billion on a net basis, excluding the payment increases for physicians. The biggest cut would occur in Medicare Advantage, the private insurance part of Medicare. CBO estimates the House bill would reduce Medicare Advantage payments by about $160 billion over a decade. That's likely to force some five million enrollees out of their current coverage and back into traditional fee-for-service Medicare, with all of its incentives for fragmentation and volume.
All in all, the bill would increase the federal budget deficit by $239 billion over the coming decade – that's on top of the $11 trillion in deficits projected by CBO for the Obama budget plan over the period from 2009 to 2019. House Democrats argue that they should not have to pay for the costs of the physician fee change, which explains why the bill is not budget neutral. But that doesn't mean there won't be additional federal borrowing to pay doctors more through Medicare. There's no getting around that economic reality.
In sum, then, the House bill would increase spending by $1.5 trillion, not $1 trillion, and partially offset that spending with $450 billion or so in Medicare and Medicaid cuts and $800 billion in new taxes. Even in Washington, those are big numbers.
But that's still not the whole story. The bills in both the House and Senate are likely to be even more costly than these estimates indicate because of the untenable inequities they create.
To keep the costs of the bills “down,” the authors have written so-called “firewall” provisions into them, which intentionally lock most Americans into enrollment in job-based plans, whether they like them or not. Employers would be heavily penalized if they don't offer coverage to full-time employees, and workers would be too if they don't enroll themselves and their families into the plans they have been offered at the workplace. But the new federal premium subsidies are only available to persons who get their insurance through the exchanges.
The result: The House and Senate bills look far less expensive than they otherwise would because tens of millions of households would be ineligible for federal subsidies because of their employment status. For instance, the Census Bureau reports that there are 102 million people in households with incomes between 150 and 400 percent of the poverty line, but CBO assumes there will be only 20 million people getting insurance through exchanges in 2014.
While it is true that employer-paid premiums are also subsidized by the federal government, the tax subsidy for such insurance is less generous for taxpayers with lower incomes because they pay taxes at low marginal rates. For instance, a plan costing $12,000, if fully paid for by an employer, would enjoy an implicit subsidy of about $3,600 for a person in the 15 percent tax bracket (including payroll taxes). The House bill, however, would cap premiums for persons in the exchange at a percentage of their income. A family at 200 percent of the federal poverty line would pay no more than five percent of their income toward coverage, or about $2,200 in 2009 for a family of four. That means the government subsidy would be just under $10,000 for such a family.
Thus, two families, identical in all respects including total income, could get very different levels of federal support for health insurance in the bills as currently written, depending entirely on who they work for.
That would be unlikely to sit well with a lot of people, which means it also wouldn't survive long as governmental policy. As always, the preferred solution for politicians would be to expand eligibility for the entitlement to more people, perhaps with targeted breaches of the “firewall.” And if that were to occur, as seems inevitable if the current bills were to pass, their true cost would only then become apparent, and it's much, much more than what we are hearing about today.
— James C. Capretta is a Fellow at the Ethics and Public Policy Center. He served as an associate director at the White House Office of Management and Budget from 2001 to 2004.