The True Cost of the Baucus Bill

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The health care proposal released by Senate Finance Committee Chairman Max Baucus has received criticism from Republicans and Democrats alike. Only the Congressional Budget Office has given it a seal of approval, calculating that it would actually reduce the budget deficit by $49 billion over the next decade.

But CBO does not calculate a vital part of the cost to American families-the financial burden of higher health insurance costs.

CBO estimates that the Baucus plan will cost $774 billion over ten years, and will be paid for by some combination of tax increases and spending cuts. Hardest hit are the more expensive health care plans, which would face an excise tax of 35% on premiums above $8,000 for singles and $21,000 for families.

Currently, the average cost of health insurance premiums is $4,824 for single coverage and $13,375 for family coverage, according to the Kaiser Family Foundation, so few plans would be liable for the 35% excise tax. But CBO expects this number to increase dramatically in the years ahead.

This new tax would bring in $215 billion over ten years, according a letter from CBO director Douglas Elmendorf to Mr. Baucus. In 2013, the first year of the
tax-conveniently scheduled after the 2012 election-revenues would be $5 billion. They are projected to grow to $53 billion in 2019, and at 15% per year thereafter. These revenues reflect expected higher insurance premiums that will bring so many more plans over the taxable threshold.

The increase in health insurance premiums would be a major cost of the Baucus plan to the American public. In 2019, in addition to the $53 billion in excise taxes on their health plans, Americans would be paying $150 billion on health insurance premiums above and beyond the level of $8,000 for singles and $21,000 for families, even adjusted for inflation. Altogether that would be over $200 billion per year.

The proposed excise tax, if passed, would be a blatant violation of President Obama's promise not to raise taxes on those making under $250,000 annually. However, the bigger "tax increase" would be the higher cost of insurance for all Americans because of the restrictions on the kinds of health insurance plans provided.

It's easy to see from the Baucus bill why the cost of health insurance is going to skyrocket. According to the Senate Finance Committee, "All plans would be required to provide primary care and first-dollar coverage for preventive services, emergency services , medical and surgical care, physician services, hospitalization, outpatient services, day surgery and related anesthesia, diagnostic imaging and screenings, including x-rays, maternity and newborn care, pediatric services (including dental and vision care), prescription drugs, radiation and chemotherapy, and mental health and substance abuse services. Plans would not be allowed to set lifetime limits on coverage or annual limits on any benefits."

No one knows precisely how high costs will go for these Cadillac plans. What is certain is that if the insurance companies stay in business every American would have to pay a far higher cost for health insurance. Since plans will have to accept everyone, regardless of health or pre-existing conditions, people won't even have an incentive to keep healthy.

The tax and the increase in premiums won't only be a problem for high-income Americans. Senator Jay Rockefeller, the West Virginia Democrat, complained about the burden of the tax on coal miners, saying on September 16 that "virtually every single coal miner is going to have a big, big tax put on them because the tax will be put on the company and the company will immediately pass it down and lower benefits." Coal miners, steel workers, and others with dangerous jobs tend to have higher costs of insurance.

It's possible that insurance companies would be driven out of business by the increased regulation, leaving Americans to get care from Mr. Baucus's non-profit Consumer Owned and Oriented Plans. Back in the 1960s, insurance companies abandoned many types of private policies for seniors after the implementation of Medicare. In that case, the plan would not pay for itself, because the government would not collect the $215 billion in planned tax revenue.

In addition to raising health insurance premiums, the Baucus bill has a fundamental inconsistency. It supposedly insures an additional 26 million Americans by spending $774 billion on existing programs and new subsidies. Yet it saves $409 billion by reducing the rates paid to doctors and hospitals under Medicare, Medicaid, CHIP, and other federal health programs. How can we have the manpower to extend coverage to more people if we reduce the amount we pay them by $409 billion?

CBO's job is to analyze the effects of legislative proposals on Uncle Sam's wallet. But what Mr. Baucus's health care plan would do to Americans' wallets is another story entirely.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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