Ethics & Public Policy Center

Expect Senate health bill to explode federal budget

Published in Omaha World-Herald on December 21, 2009


Under Senate Majority Leader Harry Reid's health reform plan, households getting their coverage through new “insurance exchanges” set up by the government would have their premiums capped if their incomes are between 100 and 400 percent of the federal poverty line. The federal government would cover the rest of the premium.

The Congressional Budget Office (CBO) expects this entitlement, plus a Medicaid expansion and tax credits for small businesses, would cost about $200 billion by 2019 and grow 8 percent annually every year thereafter.

But even that staggering sum doesn't reveal the true price tag of the Reid bill because, expansive as the entitlement is, Senate Democrats artificially keep the cost low by making most workers ineligible for it.

Workers who are offered qualified coverage by their employers, with employee premiums below specified “affordability” thresholds, would have no choice but to take their job-based plan with no subsidization.

True, the premiums would be paid largely by the employers — but, of course, when an employer pays for health insurance, it is really the worker who pays in the form of lower cash wages. That is the consensus of all credible economists, including those working at the CBO.

Let's imagine what this would mean in practice in the year 2016, by which time (according to CBO estimates) the average cost of family coverage would be $14,100. Consider a hypothetical family of four with an income at 200 percent of the federal poverty line (or about $48,000 in 2016).

Under the Reid plan, that family would pay 6.5 percent of its household income, or $3,120, as a premium. Their employer would pay a fee of $750 to cover some of the cost. The rest of the premium — $10,230 in this example — would get paid by the federal government.

By contrast, a worker with the same total compensation from his employer but with job-based insurance would enjoy a tax advantage of about $4,300 from employer-paid premiums. That's nearly $6,000 less in governmental support than the worker who is eligible for direct subsidization in the exchange.

According to the Census Bureau, in 2008 there were 127 million Americans age 65 and younger living in households with incomes between 100 and 400 percent of the federal poverty line. But the CBO assumes that in 2015, only 18 million people would get subsidized premiums in the Reid plan.

Of course, if enacted, that plan would be impossible to enforce such unfair disparities in federal support. Employers would find ways to place more low-wage workers into the exchanges, thus driving up the cost of subsidized insurance.

Congress also would respond to political pressure and liberalize the eligibility rules. Like almost every other entitlement ever enacted, this one would grow far beyond current projections. It's much closer to a $2 trillion program than the $900 billion advertised by Sen. Reid.

Truth be told, though, most Democrats would like a more expensive entitlement program. They just don't want to face up to the costs at this time, in this bill. Better to get it in place first, and then let it grow naturally as entitlements always do.

The only sure way to prevent enactment of another runaway benefit program sold on dubious assumptions and gimmickry is to produce a truly bipartisan measure with broad public support.

James C. Capretta is a scholar in the Economics and Ethics Program at the Ethics and Public Policy Center. He was an associate director at the White House Office of Management and Budget from 2001 to 2004, where he was the top budget official for health care.

Comments are closed.



RELATED PUBLICATIONS