Understanding the Baucus health bill

Understanding the Baucus health bill

Today is the third day of the Senate Finance Committee’s markup of the Baucus health bill, the “America’s Healthy Future Act of 2009.” I am going to summarize the bill in a manner similar to what I might have done for my colleagues while working in the White House.

Overview

The Baucus bill has the same basic structure as other health reform legislation being moved by the Democratic majority. This structure involves:

  • “insurance reforms” including guaranteed issue and renewal and a form of community rating;
  • an individual mandate to purchase insurance, enforced by a tax penalty for those who do not;
  • a mandate that most employers offer their employees health insurance or pay a penalty;
  • the creation of State-based insurance exchanges to restructure (“organize”) the non-employer health insurance market;
  • an expansion of Medicaid; and
  • subsidies for lower and middle-income people, but only for those who are not offered health insurance through their employer.

The spending increases are offset primarily by new taxes on health insurers and other industries in the health sector, penalty taxes paid by individuals and firms that do not comply with the mandates, and reduced payments to Medicare Advantage plans, drug manufacturers, and State governments.

According to CBO, about 83% of all Americans (excluding illegal aliens) have insurance now. The bill would increase that to 94%.

While the bill is the smallest of any being considered in Congress, it would still be an enormous increase in government taxation and spending. It would be the largest permanent expansion of government since the creation of Medicare and Medicaid in the 1960s, and is an order of magnitude larger than anything considered in at least the past two decades. Clever drafting led to CBO scoring the bill as deficit neutral in the short run and long run. This “good” CBO score means that this bill could avoid budget points of order in the Senate, even if the fast-track reconciliation process is used. At the same time, the bill would create several political dynamics that would make massive future government spending and deficit increases virtually certain.

The bill does not contain a “public option.” It instead contains a version of Senator Conrad’s co-op proposal.

Two sentence summary: Compared to other versions of health reform, the Baucus bill is a bit smaller, fully offset with different offsets than the House bill, and without a public option. Other than that it is quite similar to the House bill.

Significant things to know about the Baucus bill

Substantively meaningless hat-tips to the left and the right

  • Rather than a public option, the bill includes a version of Senator Conrad’s co-op proposal. It authorizes $6 B of loans and grants to newly formed non-profit co-ops in each State. In June I wrote about two variants of this idea. This is the less intrusive version that Sen. Conrad proposed, rather than the more harmful “public option in disguise” option floated by Senators Schumer and Rockefeller. If enacted as described by the Baucus document, these co-ops look wasteful but initially relatively harmless. There is a significant slippery slope risk that the Congress or Executive Branch would later try to apply new rules to the co-ops. There is also a short-term risk that the immediate legislative process will begin that transformation. As drafted, however, the co-op subtitle ranks low on my list of concerns.
  • In a hat-tip to the generally Republican proposal to allow people to buy health insurance sold in other states, the Baucus bill would allow States to form interstate compacts to allow insurance to be sold in multiple states. This misses the point entirely: since State insurance commissioners (and State legislatures) would negotiate these compacts, they are likely to contain all the cost-increasing insurance mandates of current State law. The point of the good proposal is to take power away from State insurance commissioners, and force State regulatory authorities to compete for business the way they do for incorporation laws (Delaware won) and state banking law (South Dakota Nebraska won).

Overlooked political flashpoints

  • Nobody has asked the question, “Will the Baucus bill increase or decrease health insurance premiums relative to current law?” CBO’s analysis instead blurs the question of how much health insurance will cost, with how much you will pay for your health insurance after new subsidies and taxes. I fear that these bills will increase the cost of health insurance, then shift those costs from premium payers to taxpayers. If I am right, then the Baucus bill cuts wages. If verified by CBO, that should be sufficient to kill the bill. Somebody in Congress needs to ask CBO this question.
  • The combination of guaranteed issue and community rating mean the bill would dramatically lower premiums for those with predictably high health expenditures, and would dramatically increase premiums for the relatively young and healthy. When combined with an individual mandate, the Baucus bill would force younger healthier Americans to pay higher premiums to cross-subsidize older and less healthy Americans. All those 20-something staff assistants will be subsidizing their 50-something bosses.
  • Assuming I’m reading this correctly, if you work for a big employer, you must take the insurance offered to you. You will not have the choice of going uninsured and paying the penalty tax. From page 29 of the Baucus mark:

Employers with 200 or more employees must automatically enroll employees into health insurance plans offered by the employer. Employees may opt out of employer coverage, however, if they are able to demonstrate that they have coverage from another source (e.g., through a public program such as Medicare, Medicaid or the Children’s Health Insurance Program or as a dependent in a spouse or other family member’s health benefits).

  • The bill creates a tremendous new inequity between low- and moderate-income workers whose employers offer them health insurance, and those whose employers do not. The bill would subsidize health insurance for the second group but not for the first. This “horizontal inequity” is unsustainable and is the primary reason why in practice this bill would lead to massively higher spending and bigger deficits than projected. Jim Capretta has written about this extensively. I will do so in the near future.

Individual mandate

  • President Obama told George Stephanopolous that the individual mandate is not a tax. The President was wrong, Mr. Stephanopolous was right. Page 29 of the Baucus mark says:

Excise Tax. The consequence for not maintaining insurance would be an excise tax.

The tax would not apply to everyone, though: “Exemptions from the excise tax will be made for individuals where the full premium of the lowest cost option available to them exceeds 10% of their AGI.” In addition, the mandate would not apply to those below the poverty line, in religious organizations, “experiencing hardships as determined by the Secretary of HHS,” or are Native Americans. (p. 29)

Turning the health insurance industry into a utility

  • Despite having no public option, the bill in effect turns the private health insurance industry into a utility, implementing public policy goals through privately owned firms. Health insurance would be transformed from what it is today, a highly imperfect voluntary financial arrangement, into a tool of mandated redistributive social policy. The insurance premiums you pay would consist in part of payments to others deemed by policymakers to be more deserving or needy than you. I believe that the power this gives to the government officials who would design those premium rules is one of the two most dangerous elements of this bill. The other is the long-term fiscal impact on taxes and spending.
  • The government would create standardized benefit packages, cost-sharing structures, and minimum actuarial values. The problem here is that the government can’t keep up with innovation, either in medical technologies, medical practices, or financing structures. Medicare is still based on an early 1960s Blue Cross insurance model, and just added a drug benefit six years ago. This new government control will crush innovation. Also, people are different. I believe we should not all be forced to fit into “bronze, silver, gold, and platinum” boxes. I would like a cheap copper box so I can have more cash for other needs.
  • Like the other bills, the new insurance rules would not apply to existing (“grandfathered”) health insurance plans. This creates a bifurcated dynamic with all sorts of unintended consequences. If the new rules are so great, why should anyone choose to avoid them?
  • A little-noticed element of the bill would immediately create a $5 B federal high-risk pool that is supposedly temporary. Since the new programs don’t start for several years, the uninsurable could buy “insurance” through this newly funded pot of money until 2013. In theory there would be no need for such a high-risk pool once the new all-encompassing program is started, but these things tend to have a way of morphing into permanent (spending) entities.
  • The State exchanges are going to be a bureaucratic and lobbying mess. In addition to all the normal bureaucratic wrangling, every health interest group will lobby 50 State legislatures and bureaucracies to protect their (generally financial) interests. The President and his Congressional allies argue these exchanges will be neutral marketplaces. I instead anticipate ugly stories about mismanagement, greedy self-interest, intergovernmental fights at all levels, and corruption.

Medicaid & Children’s Health Insurance

  • Medicaid consists of two populations: (1) kids and their parents; (2) seniors and disabled people getting subsidized long-term care. Medicaid does not today cover adults without kids. The Baucus bill would change this, making low-income childless adults eligible for Medicaid.
  • Medicaid is a shared State-Federal fiscal responsibility. The Federal share varies by State from 50% to about 83% in poorer states. For the proposed Medicaid expansions the Feds would pick up a much greater share of new spending – up to 95% in some cases. This would be a significant shift in the balance of paying for health care from the States to the Feds. Baucus did this to quiet the Governors who would otherwise oppose the bill.
  • The bill expands the Children’s Health Insurance Program (CHIP), requiring States to cover kids in families with incomes up to at least 250% of the poverty line. But CHIP would be transformed into a subsidy for the purchase of private health insurance sold on exchanges. I don’t like the expansion (from 200% to 250%), but do like the movement toward private insurance.

Higher taxes and spending

  • The bill is scored as deficit neutral in the short-run and long-run. Kudos to the clever Baucus staff who know how to take advantage of CBO scoring conventions. The likely reality will be far worse – the bill creates several policy pressure points that will inevitably lead to much higher spending and much higher budget deficits than are scored by CBO. They have addressed their biggest procedural and rhetorical hurdles. They have not solved the underlying policy problem. Despite the CBO score, if this bill becomes law I anticipate massive deficit increases for reasons I will explain in a future post.
  • In addition to massively restructuring the health sector, the Baucus bill would also be an enormous change in fiscal policy. The bill would create new entitlement spending equal to 0.7% of GDP, and growing seven percent per year for the long run. The bill would raise taxes by 1/3 of 1% of GDP in that same year. Our long-run fiscal problem is driven in part by the unsustainable growth of health entitlement spending, so the solution is to create a new unsustainable health entitlement??

Budgetary offsets

  • The bill contains an aggressive version of Senator Kerry’s proposal to tax insurers that offer high-cost health plans. I am torn on this one – it’s a variant of the most important policy change that needs to be made, so I like it. But it’s a stupid and inefficient variant that will cause unintended consequences.
  • The bill actually squeezes drug companies, States (through Medicaid), and Medicare Advantage plans to offset some of the spending increases. The bill purports to squeeze hospitals and other Medicare providers (but not doctors), but it doesn’t really do so. That’s a budget gimmick I will explain in a future post.
  • The bill also taxes drug manufacturers, medical device manufacturers, health insurance companies and clinical labs. These are big tax increases that will be passed through to those who buy health insurance. I like using the tax code to eliminate the incentive for people to buy expensive health insurance, as is clumsily done in the Kerry provision. These tax increases, in contrast, just make insurance more expensive without any positive incentives. This is redistribution of income from those who have health insurance to those who do not.

Coming soon

Like the other bills, the Baucus bill is enormous. The conceptual language description is 223 pages. The legislative language, when drafted, will be much longer. I apologize for losing some of my usual objectivity, but I was unable to control myself. I think this legislation would be disastrous.

You can anticipate follow-up posts on a few of the most important downsides of this bill:

  • an explanation of the consequences of the insurance “reforms”;
  • more on the “firewall” problem and the inequity these bills would create between those who get insurance through their employer and those who do not;
  • why I think this bill will lead to much bigger spending and much higher deficits than projected by CBO; and
  • maybe something more on the individual mandate.

I will also soon update my legislative forecast.

If you want the primary source documents, here they are:

Thanks for reading.

(photo credit: Center for American Progress Action Fund)

25 responses

  1. Pingback: Tweets that mention Understanding the Baucus health bill  |  KeithHennessey.com -- Topsy.com

  2. Keith – what I would like to see here is "your" alternative solution to these proposed bills. Is it your opinion that things should be left as they are, or is there an option based on your economic sensibilities that makes more sense to? Please excuse me if you have addressed this question previously.

      • Keith-

        I read your plan, and I generally like the elements, but i have two questions:

        1) I am not confident that any federal action will be able to defeat the powers of the states to regulate insurance. I don't think your examples of corporation law or banking law are readily applicable, since any health plan would have to set up a provider network (with associated contractual relationships) in the new state. This often encounters other legal obstacles, such as the various corporate practice of medicine preclusions. Overall, I am not sure the feds could write a law that passes constitutional muster. Do you?
        2) I still think your plan did not address the pre-existing condition issue. How would you feel about a guaranteed issue requirement, but without an individual mandate. Instead, the feds could grant the payers the option (but not the obligation) to charge the consumer up to two years of premiums (or to the last date of insurance) for the "penalty" for being bare. This would both encourage consumers to cover themselves, and steer folks toward higher deductible policies since the penalty and premiums are lower. Thoughts?

      • @Tim: re#2 I liked the idea of a two year penalty for non-insured to prevent folks from gaming the system. My wife asked, "what if they can't afford to pay the penalty?". I suppose we could always have the Feds garnish wages or lien property but seriously, the more likely outcome is to give them the healthcare without signficant penalty. Too bad. I liked this idea.

      • RedSt8r- Keep in mind that the premiums for high-deductible plans are pretty low. I am 53, and my plan (for me and my kids) is $153 per month ($10,000 deductible). This is typical. It would probably go up with guaranteed issue rules, but probably about 5%. Ergo my policy costs $1800 per year, versus a family average of about $15,000 now. Contrast that with Baucus' family penalty of $3800.

        Also, keep in mind that I could choose to by prepaid primary care for less than $2000 per year.

      • If a Federal Agency is going to mandate the coverage , will that kind of high deductible policy be available?

  3. Why A Strong Public Option Is Essential – By jacksmith – Working Class

    Robert Reich the pubic option: http://bit.ly/dDYSJ

    The public option is ESSENTIAL because over 200 million of you are trapped in the forest of the wolves. Which is the forest of the DISGRACEFUL, GREED DRIVEN, PRIVATE FOR PROFIT MEDICAL INDUSTRIAL COMPLEX! With no way out except through needless inhumane suffering, and DEATH. While the wolves tear at your flesh, and rip you limb from lib. Then feast on your lifeless bodies like a dead carcase for transplant parts.

    At the most vulnerable times of your lives (when you were sick and hurting), millions of you have had to fight and loose cruel, but heroic battles. Fighting against the big guns of the DISGRACEFUL, GREED DRIVEN, PRIVATE FOR PROFIT MEDICAL INDUSTRIAL COMPLEX! in the forest of the wolves. All because you have no place else to go. You have no other CHOICE!

    But the PUBLIC OPTION will give you someplace safe to go. And it will give us someplace safe to take you. The public option will be your refugium (your refuge). Where the wolves cannot get at you when your down, hurting, and vulnerable. Where everyone who needs it can find rest, security, comfort and the care they need. Protected by the BIG GUNS of We The People Of The United States. THE MOST POWERFUL PEOPLE AND COUNTRY ON EARTH.

    This is why it is so critical that we do not lead another 50 million vulnerable, uninsured Americans into the forest of the wolves, without the protections of a Strong Government-run public option. We The People Of The United States MUST NOT LET THAT HAPPEN to any more of our fellow Americans. If healthcare reform does not contain a strong public option on day one. YOU MUST! KILL IT. Or you will do far more harm than good. And millions more will die needlessly. Rich, middle class, and poor a like.

    To those who would continue to obstruct good and true healthcare reform for the American people, and who seek to trap millions more vulnerable Americans in the forest of the wolves. We will continue to fight you. We are prepared to wage all out war against you, and will eagerly DESTROY! you. Time…is…UP! YOU HAVE BEEN WARNED! No Co-op's! No Triggers!

    Healthcare reform can be the GREATEST! Accomplishment of our time and century. A time when future generations may say of us, that we were all, AMERICAS GREATEST GENERATIONS.

    BUT WE MUST ACT!

    I therefore call on all my fellow Americans and the peoples of the World. To join us in this fight so that we may finish becoming the better America that we aspire to be for everyone.

    SPREAD THE WORD!

    I have been privileged to be witness as many of you fought, and struggled to take your first breath, and your last breath on this earth. Rich, middle class, and poor a like. Life is precious.

    Whatever the cost. WE! MUST SUCCEED.

    God Bless You My Fellow Human Beings

    jacksmith – Working Class

    Senator Bernie Sanders on healthcare (http://www.youtube.com/watch?v=RSM8t_cLZgk&fe

  4. Dumb question: What is a "mark" and why is it called that? The word "mark" is all of a sudden being thrown around on TV and I'd never heard it before a few weeks ago. Is a "mark" a draft bill? Why don't they call it a draft bill? Thanks.

  5. This sounds like a plan that is not as well or carefully thought out as the Massachusetts Plan, yet the Massachusetts Plan is not only failing, US taxpayers are having to pony up for the subsidized part. Failing in just 3 years! What happens when we "discover" that we cannot afford the Government Health Care Plan either, on top of the failure of Social Security and Medicare and Medicaid? Who is making the plans to rescue us from disaster?

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  7. Once again Congress is leading the American public down the garden path…to the poor house. Everyone knows, especially those in Congress, that health care will cost more than projected. This is true of everything our government touches. With health care there will be one additional twist, you won't be able to find a doctor. It's a big problem now and it will only get worse. So plan on very long lines, long waits and then no service.

  8. Do I understand correctly that the very lush insurance plans now in existence for teachers or UAW members will not be changed by the act and that they will not have to pay the excise tax? Will there be a trigger to bring them under the act if they are renegotiated?

    • I have read that also, but only in a few places. If it is not true, then Obama will not only be breaking the promise of no tax increases for those with incomes below $250,000, but sticking it to his union supporters (who typically have some of the best plans out there) as well. That seems like a non-starter.

  9. Pingback: Finance Members Keep Baucus’ Frown Upside-down – Blog Watch

  10. Keith,

    As I understand it, the idea is get the healthy young people who don't currently have insurance to start paying premiums in order to subsidize the sick people in the system who "can't afford insurance".

    I see two problems with this:

    1) Doesn't this implicitly mean they plan to make premiums for healthy young people more expensive than statistically they should be in order to subsidize older people?

    I don't think they do this with car insurance. Young people pay several times what old people do for car insurance; I really don't think old people car insurance premiums subsidize young drivers.

    2) Most of the guys I know in their twenties fall into one of two categories: Either they already have their act together and have a real job with benefits, or they are still "finding themselves" while going from one lousy job to another. The first group already has insurance. The second group is broke and couldn't pay for health insurance or pay a penalty if you held a gun to their head. So neither group of young men are going to subsidize the old people.

  11. This is all too complicated and prone to failure. An administrative disaster would not be good for their reelection prospects. I think the Dems might pass any old thing they can in the House and Senate, put it into conference, and replace it all with "Medicare for All", supported by whatever Medicare tax increase is necessary to pay for it. At least the administrative machinery to implement "Medicare For All" already exists, and implementation will be relatively smooth. You can't say that for any of the other Democratic proposals.

    For all we know, this could have been their plan for a long time.

    Or maybe I am just making too much sense to be thinking like a politician.

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  14. I'm doing a paper on this bill right now and I think I'm going to get an F on it. I really don't understand this health care reform bill all to well.

  15. In many respects, relative to Europe, U.S. public policy and business culture have helped to foster a very dynamic, entrepreneurial culture that embraces risk taking and the centrality of small business (vs. say large industry) as an economic base. As a result, we have experienced both the associated benefits (innovation, faster growth) and costs (greater inequality, which typically results from a higher level of risk taking). Strangely, for a country so in love with this dynamic, small business model, we continue to have a bloated, inefficient "employer-based" health insurance system which is universally acknowledged not only to entail stupid incentives (e.g. it is more cost effective to pay administrators to deny coverage than to pay doctors to provide it) but to hamper the very dynamic, entrepreneurial culture we claim to love. In the rest of the world, "socialized medicine" helps support a dynamic private sector, by eliminating unnecessary health insurance risks and costs associated with quitting a job, starting a small business or going bankrupt…. all the things that come with entrepreneurial risk taking! Here in the US, our fear of "socializing" the health insurance industry has led to a far less effective capitalist economy in almost every sector….

  16. What is the bottom line? What does this "new bill" mean in black and white! It sounds like just another way for the goverment to get more tax money. Many people will not be able to afford "manditory" insurance, or the penalty if they can't. But like always the goverment will want the penalty fee , earmarked extra tax dollars… to pay for more goverment officials to make up more nonsense like this! What are they thinking…or are they?

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