The Baucus Bill: An October Trick

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WASHINGTON--It's October, the month of trick or treat, and Congress is trying to come up with a trick. The Congressional Budget Office's estimate of Senate Finance Chairman Max Baucus's health reform bill makes it looks like a treat-it's projected to reduce the federal deficit by $81 billion over the next 10 years-but in reality it's a Nightmare on Pennsylvania Avenue.

Yesterday CBO came out with its second estimate of the Baucus bill, reflecting the original bill together with amendments that have been hammered out over the past three weeks in committee deliberations. Only in government accounting could an additional 29 million people receive new health coverage with a savings of $81 billion. By this congressional logic, America could insure all 6 billion people in the world at a savings of trillions of dollars.

CBO estimates that the $829 billion bill (over ten years) would be paid for partly with additional taxes-on expensive health insurance plans, on employers who do not provide the right kind of health insurance, and on people who do not sign up for insurance-and partly through savings in Medicare and Medicaid.

The Baucus bill would require everyone to purchase health insurance or face penalties. Americans with incomes up to 300% of the poverty line (currently $66,000 for a family of four) who are not covered by an employer plan would receive tax credits to purchase health insurance plans in an "exchange."

Plans purchased in the exchange would be Cadillac plans, with generous coverage and no lifetime or annual limits on any benefits. Only Americans under 25 would be allowed to purchase "young invincible" plans, catastrophic insurance against major accidents. Most Americans would have to pay a far higher cost for health insurance, since plans would have to accept everyone, regardless of health or pre-existing conditions.

The Baucus bill would be paid for in two major ways-an excise tax on expensive plans and savings from Medicare. CBO underestimates the true cost of both components.

Take the excise tax increase, for instance. The more expensive health care plans would face an excise tax of 40% on premiums above $8,000 for singles and $21,000 for families, bringing in $201 billion from 2013 through 2019. Today health insurance premiums cost on average $4,824 for singles and $13,375 for families.

What CBO doesn't tell Americans is that their health insurance premiums would increase substantially in the decades ahead. The level of health insurance premiums does not have to be incorporated in CBO estimates, because it is not a tax and it is not paid by the federal government. In 2019, in addition to $46 billion in excise taxes, Americans would be paying over $100 billion in higher premiums.

Since CBO forecasts increases in excise tax revenues of 10% to 15% annually after 2019, health insurance premiums must also rise by the same percent annually. This government mandate will amount to a steady drain on Americans' pocketbooks, a tax under another name.

Turning from taxes to savings, nearly 90% of the $404 billion Medicare and Medicaid savings would be from Medicare in the period 2013 to 2019. Thereafter, savings would be expected to continue at the rate of 10% to 15%. Of all demographic groups in America, the elderly would be the biggest losers under the Baucus plan.

CBO estimates that Medicare Advantage plans, popular bundled health maintenance organizations serving 20% of Medicare patients, would be cut by $117 billion.

Under "Ensuring Medicare Sustainability," more than $200 billion would be cut from payments to hospitals, elder care, doctors, and hospices. Payments to Medicare doctors would be cut by 25% in 2011.

Another $55 billion would be saved by "Improving Payment Accuracy," as if one can magically reduce government spending by increasing accuracy. A Medicare Commission would propose further cuts.

The government would persuade doctors to cut Medicare costs by associating more tests with lower reimbursements. Ranked in order of spending per patient, every year the top 10% of physicians would have their reimbursements cut. Since by definition there would always be 10% of physicians in the top 10%, they would have an incentive to avoid the sickest patients or the specialties with the most tests.

America's elderly might soon discover that if they were sick they would be shunned by many doctors, if the bill operated as planned.

But it's more likely that the $360 billion of Medicare savings would not materialize, and that the Baucus bill would add to the deficit rather than reducing it. After all, Congress regularly overrides an existing law requiring Medicare payments to doctors to be cut when the program is in deficit, as it is today. Why should the new law be any different?

As CBO director Douglas Elmendorf so aptly wrote in his letter to Mr. Baucus yesterday, the "mechanism governing Medicare's payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments...The long-term budgetary impact could be quite different if those provisions were ultimately changed and or not fully implemented."

Should some version of the Baucus bill pass, Medicare spending could decline as projected, with catastrophic consequences for seniors' health care. Or, Congress could back away from cuts as it has in the past, with catastrophic consequences for the deficit. Either way, it's no treat for America.

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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