Senator Max Baucus (D-MT), chairman of the Senate Finance
Committee, has finally unveiled "America's Healthy Future Act of
2009," a major health care reform proposal.
While the Baucus bill is an ambitious attempt to resolve the
legislative logjam in Congress, it still contains the most
objectionable features of the liberal health policy agenda that
Heritage Foundation analysts, and many others, have detailed
A critical issue is whether the bill expands the size of
government. The Baucus bill would clearly expand the size of
government dramatically, and this is a huge failing. Another
dimension is whether it would increase the budget deficit in the
near term or the long run. On this, the jury is still out. The
Congressional Budget Office (CBO) has provided a 10-year
preliminary scoring of initial specifications of the Baucus
proposal. Before the Senate Finance Committee begins to mark up a
bill, the CBO should provide a detailed, comprehensive scoring of
the Baucus proposal over 20 years and provide an estimate of the
net deficit effects over the long run similar to the Trustee's
projections for Social Security.
Same Flawed Approach
These policy flaws are embodied in several provisions of the
Baucus health bill:
Higher Taxes. During the 2008 presidential campaign and
at the inception of the current national health care reform debate,
the President promised that with the enactment of his agenda, the
typical American family would see an annual $2,500 reduction in
health care premium costs.
The Baucus bill would, however, impose new fees on drugs and
medical devices. Also, beginning in 2013, the bill would impose a
new federal excise tax on high cost health insurance plans. The tax
would be applied to health plans valued at $8,000 for single
policies and $21,000 for family policies. Because not all workers
in such plans are high income, many will likely be on the receiving
end of a middle class income tax increase, which contradicts
President Obama's promise that "if your family earns less than
$250,000 a year, you will not see your taxes increased a single
dime. I repeat: not one single dime."
An Individual Mandate. Starting in 2013, almost everyone
who does not have coverage would be required to purchase health
insurance at a minimum level to be specified in the bill. However,
this minimum level is not specified enough to estimate
The tax penalty would be based on two income bands. For those
with incomes between one and three times the federal poverty level,
the penalty would be $750 per person, with a maximum of $1,500 per
family. This penalty could apply to individuals with incomes as low
as $10,831 a year. For those with incomes above that level, it
would be $950 per person with a maximum of $3,800 per family.
In order to enforce these provisions, the Baucus bill would
require individuals, health insurers, employers, and government
health agencies to report detailed health insurance information on
all Americans to the IRS, adding significant administrative costs
and reducing privacy protections. The IRS would also be required to
report personal income data to state exchanges, insurance
companies, and employers, because premium credits and out-of-pocket
limits would depend on income.
An Employer Tax Penalty. Employers with more than 50
employees that do not offer health coverage would have to pay a tax
for each employee whose family income is low enough to qualify for
a premium credit.
The tax penalty would impose a substantial cost on employers who
hire or continue to employ workers from low-income families. The
penalty would be the harshest for companies with many higher-income
employees who hire lower-income support staff. The inevitable
result would be that these companies lay off support staff, and
companies with mostly low-income employees would be forced to
downsize or cut wages to make up for the new taxes. However, since
the credits are based on family income rather than individual
income, employers would be discouraged from hiring sole family
How would they know the income of potential hires? By requiring
employers to pay taxes based on employees' family income, not just
their pay, companies would have to be informed of their employees'
family income from other sources. Employees might not want to
provide this information to their employers, but it would be
required in order to comply with the law.
Suppose an employer decides to provide insurance, instead of
paying the tax. In that case, the employee will be required to
enroll in the employer's plan regardless of cost and will get a tax
credit if that cost exceeds 13 percent of family income. The
employer will then be assessed a tax of that same amount. It is, in
effect, a 100 percent tax on health insurance whose value exceeds
13 percent of income.
This tax could turn out to be substantially higher than the tax
penalty for not providing insurance in the first place--and this
tax would apply only to workers from lower-income families.
The incentives for the employer are clear: offer less-generous
health insurance to lower the amount of the tax, drop insurance
completely if the tax is lower that way, and either cut the pay of
the lowest-paid employees to make up for the tax or lay off workers
from low-income families and avoid the tax completely, or both.
The net result is unambiguous: higher taxes, lower incomes, and
job losses for low-income working families.
A Flawed Co-op for Insurance. The bill would create a new
co-op for health insurance. A number of the conditions placed on
co-ops are non controversial; but there are a couple that are
unnecessary or even confusing.
While the Baucus provision does prohibit government sponsorship
of a co-op in any form and at any level of government (it would be
as strong as the Part D prohibition in the Medicare prescription
drug program), it is still an invitation to federal control. There
are two reasons why this is true. First, it provides for an
unnecessary $6 billion in federal funding for startup loans and
grants. Second, it gives broad latitude to the Secretary of Health
and Human Services (HHS) to regulate co-ops and to try to promote
them in all 50 states.
Public funding is not needed, however, as there is already
sufficient private funding available. Furthermore, the Baucus bill
authorizes HHS "to use planning grants to encourage formation of
new organizations or expansion of organizations currently
participating in the CO-OP program."
Also, while one of the conditions is that co-ops be
member-governed (that is a good thing), they could not be
member-owned (that is a bad thing). The Baucus bill applies to them
the 501(c)3 provisions prohibiting inurement, meaning that members
cannot share in the profit of the co-op.
In sum, while the Baucus bill drops explicit endorsement of a
public option, the legislation creates a co-op that is literally an
acronym for a new federal program--not the empowerment of existing
co-ops or a level playing field for the creation of new ones
through changes in the federal tax code. It thus could be a back
door to a public plan flying under a different flag.
Federal Insurance Rules. The Senate Finance bill would
establish a federal comprehensive minimum benefit package. It would
prohibit insurers from imposing annual or lifetime limits on
benefits and set annual out-of-pocket cost-sharing maximums for all
Coverage would be guaranteed issue, and insurers could not
impose pre-existing condition exclusions on applicants. However,
insurers would be allowed to adjust premiums charged for plans
based on geography, age, and family composition.
These rules would be applied to both the individual market and
the small group market, both inside and outside of the new
exchanges. However, they would not be applied to the large group
Insurers would also be required to participate in a new
reinsurance pooling mechanism designed by HHS, though funding would
be entirely from transfers among participating insurers, with no
As with the other bills, the Baucus plan would federalize the
regulation of health insurance in HHS. In addition, the bill would
effectively annex state insurance departments to serve as branch
offices of HHS, administering and supervising HHS programs (such as
the reinsurance pooling) and enforcing the new and detailed federal
health insurance laws and regulation.
Medicare and Medicare Advantage. The bill would add an
annual wellness visit for Medicare beneficiaries without any
co-payment or deductible, remove co-payment and deductibles for
preventive screenings, apply "evidence based" research for the
delivery of medical services, order a GAO study on the impact of
immunizations, and authorize $100 million over five years for HHS
to establish a "healthy lifestyle" initiative among Medicare
The bill would also make numerous changes in physician and
hospital payments. It would establish value-based purchasing for
hospital and doctor services, requiring reporting and compliance
with government guidelines on the delivery of medical services.
Hospitals and physicians that do not comply would get lower
The problem with this approach is that it could either bias or
compromise the independent professional judgment of physicians or
medical specialists in the delivery of patient care. For the
record, this policy contradicts the longstanding statutory
prohibition against federal interference in the practice of
HHS would establish quality reporting standards for long-term
care facilities, cancer hospitals, and skilled nursing facilities
plus new authorities and funding for HHS to develop and enforce
quality standards. The bill would also adjust physician payment and
create new payment systems for hospitals to reduce patient
readmission. It would also establish an "Innovation Center" to test
new payment models, as well as a pilot program to test "payment
bundling" for the treatment of various conditions.
In Medicare Advantage, the bill would change current law to base
Medicare payment to private health plans on competitive bids rather
than the current statutory benchmarks. While this is an improvement
over the provisions of the House bill, it does not go far enough:
The competition among plans should not be confined to private plans
alone but should also include traditional Medicare. The new payment
should be transformed into financing a premium support system
broadly similar to that which exists in the Federal Employees
Health Benefits Program.
Medicaid Expansion. All adults with incomes at 133
percent of poverty ($14,440 for single person) would be eligible
for Medicaid under the bill.
The current and very broken Medicaid program is unsustainable
for states and poorly serves the needy and the indigent who depend
upon it. The Medicaid expansion is based on budget assumptions that
Medicaid is cheaper than private coverage because of low provider
But those lower rates also limit access. Those on private
insurance are more likely to receive the preventive care all
individuals should have. Since the private sector does it better,
does it not make more sense to use the dollars for Medicaid in the
private market instead?
Under the Baucus bill, there is no real relief for states in the
cost of the current program. States will still face a steep budget
cliff in December 2010 when the federal matching formula for
Medicaid payment expires. Adding additional costs through expansion
of eligibility and benefits is adding people to a sinking boat.
Even with the federally financed enhanced match rates, states will
still face increased costs. So will individuals and families.
The Baucus bill also fails to provide the states with the
flexibility they desperately need to manage their current program
in an effective and cost-efficient manner.
Despite the Baucus bill being seen as a "great compromise," the
American public will continue to ask important questions such as
"How much money will be spent to substitute public spending for
private spending?" and "How many low-income Americans will be
forced to spend more on health care than they currently do today?"
Taxpayers should know more about the real impact of the Baucus bill
on their lives before Senators vote on such a measure.