With the media predicting the downfall of healthcare reform before the August Recess, and prominent politicians setting new deadlines, the recent reports from the Congressional Budget Office (CBO) seem to put one more nail in the coffin.
CBO and the staff of the Joint Committee on Taxation (JCT) recently completed a report on the America’s Affordable Health Choices Act, which was released by the House Committee on Ways and Means on July 14, 2009.
One of their conclusions is that “the proposal, as drafted, would yield savings of $2 billion over the 2010–2019 period with a high probability that no savings would be realized. President Obama said this plan would save $10 billion. According to their report, the legislation would induce some people to move in and out of employment-based coverage. Several factors contribute to that conclusion:
- Workers who get insurance through their employer receive a significant subsidy because the cost of that insurance is not treated as taxable earnings for the worker and thus avoids both income and payroll taxes.
- On average, that tax exclusion gives workers a subsidy of roughly 30 percent for purchasing insurance through their employer—a subsidy that would be forgone if the employer chose not to offer coverage and the workers instead obtained coverage in the new insurance exchanges.
- Firms that decide to stop sponsoring insurance coverage for their workers would not be able to reduce their operating costs because, they would have to offer higher wages and other forms of compensation instead.
Under the proposal, nearly 90 percent of workers would be employed by firms that would either have to offer qualified coverage and contribute a significant share toward the premium or pay a tax equal to 8 percent of their total payroll.
That “play-or-pay” penalty would constitute a substantial portion of the average cost of providing insurance coverage, which has been estimated at about 12 percent of payroll currently (but which would rise over time). In dollar terms, the penalty would vary depending on a firm’s payroll, and would make no direct contribution to those workers’ insurance costs; they would then need to obtain coverage from another source in order to fulfill the individual mandate.
As a result, only a distinct minority of would be better off if their employer stopped offering coverage. Therefore, CBO noted that “employer-offered coverage would be the best option for the workforce overall, even with the new insurance exchanges.” Furthermore, the combination of the subsidy from the current tax exclusion and the penalty for firms that did not offer qualified coverage provides a strong financial reason for employers to continue offering coverage to their workers.
In addition, firms with lower-wage workers would probably decide not to offer coverage—both because the play-or-pay penalty for not offering coverage would be smaller in dollar terms and because their workers would be eligible for larger subsidies in the insurance exchanges (or through Medicaid).
Smaller firms (those with an annual payroll of less than $400,000) would either be exempt from the play-or-pay penalty or would pay a lower tax rate. However, small employers with low-wage workers would be eligible for a tax credit covering up to 50 percent of the employer’s contribution toward health insurance premiums. Consequently, CBO estimates that in 2016, about 3 million people (including spouses and dependents of workers) who would be covered by an employment-based plan would not have an offer of coverage under the proposal.
Approximately another 3 million people (including part-time workers) in 2016 would obtain coverage in the exchanges because the employer’s offer would be unaffordable and they would therefore be eligible to receive subsidies through the exchanges. In sum, CBO estimates that by 2016, about 9 million people who would otherwise have had employer coverage would not be enrolled in an employment-based plan under the proposal.
In addition, CBO estimates that about 12 million new people would be covered by an employer plan in 2016 because the mandate for individuals to be insured would increase workers’ demand for insurance coverage through their employer.
Under the proposal, firms with 20 or fewer workers would be given the option to let their workers buy coverage through the insurance exchanges starting in 2014, and larger employers would begin in 2015. It is estimated that only firms with 50 or fewer employees would be permitted to buy coverage through the exchanges, and about 6 million workers and their dependents would obtain coverage in that way. About one third of those enrollees would choose the public plan.
Analysts at the Lewin Group recently estimated that if all employers were given access to the insurance exchanges, more than 100 million people would end up enrolling in the public plan.
CBO predicted a much smaller total because:
- large employers would generally have lower administrative costs for health insurance than would plans offered in the exchanges,
- employees of large firms are less likely than those of small firms to find the option of purchasing coverage through the exchange attractive
- the public plan would probably have to incur much of the same cost in order to attract and retain members.
- the public plan’s premium would, on average, be about 10 percent lower than that of a typical private plan offered in the insurance exchanges.
Interestingly, the CBO uses these estimates on premiums from the Medicare Advantage. We wonder if they included in that estimate the millions of dollars that are lost to fraud and abuse claims each year, did CBO account for that.
Interestingly, offering more firms the option of letting their workers purchase insurance through the exchanges “would probably have a limited effect on the proposal’s net budgetary impact.” Basically, the only way for money to be generated from the public plan is if employers purchase a large amount of plans, which would increase their workers’ taxable compensation and thereby would generate slightly higher tax revenues.
Greater enrollment in the public plan would also increase the plan’s outlays and premium collections, which would be included in the federal budget, but as long as the public plan charged premiums that covered its costs (as it is supposed to do under the proposal), those amounts would be offsetting.
The report estimates that about 1 million people will switch from employment-based insurance or individually purchased coverage to Medicaid in 2016, with about 10 million new people in Medicaid under the proposal. This proposal would impose a considerable penalty on employers that did not offer qualified insurance and contribute a substantial share of the premium.
Accordingly, by 2012, all newly issued policies purchased by individuals would have to be bought through the insurance exchanges; as a result, the proposal’s effects on premiums outside the exchanges would be seen in premiums for coverage provided by or through employers. The magnitude of the effect on average premiums would probably be modest.
Effects on the Risk Pool
Under the proposal, however, full-time workers with an offer of coverage from their employer would generally be prohibited from receiving subsidies through the exchanges—a restriction known as a “firewall,” which CBO believes would be largely effective. Moreover, the proposal would allow premiums in the insurance exchanges to vary only by age and then only to a limited degree.
The main reason some people would be paying less for their coverage is because newly enrolled people would be making premium payments they would not otherwise have made—so the changes in premiums would largely represent a transfer among workers rather than an improvement in the efficiency of employment-based insurance plans.
The proposal would prohibit insurers from varying the premiums charged to employers to reflect differences in the health status or likely costs of their employees. That change would not apply to employers who chose to bear the financial risk of providing health insurance to their workers, but it would affect employers who purchased such coverage from an insurer. Those limits might not have a substantial effect on the average premium paid by employers, but they would tend to increase premiums for firms with relatively healthy workers and decrease them for firms with relatively unhealthy workers.
Effects of Cost Shifting
A less direct way in which the proposal could cause private-sector premiums to change is by affecting the extent of “cost shifting”—a phenomenon in which lower rates paid to health care providers for some patients (such as uninsured people or enrollees in government insurance programs) can lead to higher payment rates for others (privately insured individuals).
On the one hand, the proposal’s expansion of eligibility for Medicaid and other provisions would substantially increase enrollment in that program (by an estimated 10 million to 11 million people in the latter part of the 2010–2019 period). In addition, many provisions of the proposal would reduce payments to hospitals and other providers.
On the other hand, we estimate that the proposal would ultimately reduce the uninsured population by roughly two-thirds, which would greatly attenuate the pressure to shift costs that arises today when uncompensated or undercompensated care is provided to people who lack health insurance. One recent estimate indicates that hospitals provided about $35 billion in such care in 2008—an amount that would grow under current law but would be expected to decline considerably under the proposal.
The adverse effects on hospital finances stemming from greater enrollment in Medicaid, cuts in Medicare payment rates, and enrollment in the public plan would also have to be substantial to offset those savings for hospitals as a group. Overall, therefore, the effect the proposal would have on private-sector premiums via cost shifting is unclear.
Changes in Payment Methods
The proposal would also alter some of Medicare’s payment methods such as a demonstration project to examine the use of “accountable care organizations” and would make other modifications that could encourage reductions in health care spending. Some of these benefits could “spill over” to the private sector. However, such effects would probably represent a small fraction of privately insured medical costs over the next 10 years.
Impact on the Labor Market
Requiring employers to offer health insurance—or pay a fee if they do not—would be likely to reduce employment. Under the proposal, employers with annual payroll above specified levels would be required to offer health insurance to their workers and contribute a significant share toward the premium or pay a tax equal to as much as 8 percent of their total payroll. For the firms that chose not to offer qualified insurance, that penalty would increase the cost of employing each worker by somewhat less than 8 percent.
Through the insurance exchanges and expanded eligibility for Medicaid, the proposal would enhance access to health insurance for people who are not employed and would provide subsidies for insurance to people with income below 400 percent of the federal poverty level who do not have employment-based coverage.
Those provisions could encourage more people to retire before age 65, and they might lead some people to choose not to work at younger ages. The provisions might also lead to better matches between workers and jobs, because workers would not have to stay in less desirable jobs solely to maintain their health insurance.
Longer-Term Costs of the Proposal
The CBO estimates that the proposal as a whole would increase federal deficits by $239 billion over the 2010–2019 period. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.
Allocation of the Net Budgetary Impact Between Outlays and Revenues
Under the proposal, firms with relatively few employees and relatively low average wages would also be eligible for tax credits to cover up to half of their contributions toward health insurance premiums, which would reduce revenues by an estimated $53 billion over 10 years.
The Proposed Independent Medicare Advisory Council
The Administration’s proposal calls for an Independent Medicare Advisory
Council (IMAC) consisting of 5 members.
Recommendations for savings include:
- Setting quantitative goals for reducing outlays in the Medicare program.
- Broad changes in coverage benefit design, and payment and delivery systems.
- A fall-back mechanism if goals for cost reduction are not met.
- Independent verification of the expected reduction in program spending
- Work with HHS, CMS and other similar agencies
In the end this report found very little to get excited about in the current house version of healthcare reform. They looked all over for the “savings” but there were virtually none to be found.
The Blue Dog coalition in the Democratic Party (conservative democrats), are currently holding up this legislation in the Energy and Finance committee until they get compromises from Congressman Waxman so the bill won’t bankrupt the country and small business owners at the same time.