How the Baucus bill contradicts Obama's goals
One in a series: The senator's proposed compromise would inspire companies to dump their coverage and put a major burden on the middle class. Is that what Obama wants?
NEW YORK (Fortune) -- It's easy to see why the round of interviews President Obama gave on Sunday did little to dispel the public's confusion about his health-care agenda. The august group of network anchors and political commentators quizzing the president failed to ask him the following fundamental question: Why does the proposal Obama has been praising as the best way to achieve bi-partisan support actually contradict the Administration's stated goals?
That proposal was unveiled by Senate Finance Committee chairman Max Baucus last week as America's Healthy Future Act of 2009.
The bill, however, virtually guarantees two wrenching changes to the health-care system that Obama either strongly opposes or wishes to avoid.
First, it offers irresistible incentives for America's big employers to dump their coverage, shattering the system that's reigned since World War II.
Second, a look at the bill's numbers shows conclusively that the Baucus legislation would impose the equivalent of a giant tax hike on middle-class families, who would have far less money left over after buying insurance than they do today.
Our analysis is based on Senator Baucus' version of the bill called "Chairman's Mark." After encountering resistance from Democrats on the Finance Committee, the senator said Monday that he would make changes that would increase subsidies to lower-income Americans to make insurance more "affordable."
It isn't clear how big those extra subsidies would be, or how much they would increase the cost of the bill, now estimated at $774 billion. But so far, the proposed changes would do nothing to curb incentives for companies to drop their plans, or to ease the burden on Americans who don't qualify for subsidies, meaning most middle-class families.
First, let's examine the provisions that would motivate companies big and small to shed their health-care plans. The bill states that if an employer drops coverage, it must either cover the subsidies the federal government provides its lower-wage workers, or pay an annual penalty of $400 for everyone in its workforce, whichever is lower. The $400 will always be lower, and yes, that's $400, not a misprint.
So take a typical Fortune 500 employer, call it Acme International. Acme has sales of $10 billion and labor costs, salaries and benefits, of $6 billion for its 100,000 employees. Its health-care costs are 8% of the $6 billion, or almost $500 million.
If Acme kills its plan, its bill for health-care will drop from $500 million to $40 million, a reduction of 92%. The primary health-care reform bill in the House, HR 3200, would impose far stiffer penalties on companies that eliminate their plans, in the form of an 8% payroll tax. So under the House legislation, Acme wouldn't reduce its compensation costs right away by choosing "pay" instead of "play." Under the Baucus bill, dangling a 92% saving, it's practically certain that employers will drop their coverage en masse.
So what will the shift away from employer-provided benefits mean for workers? That's the second place where the Baucus plan's mechanics radically depart from Obama's stated intentions. Briefly, the Baucus plan provides the equivalent of a big raise for low-income workers, and what amounts to an ocean-going, fur-lined disaster for the middle class.
To prove the point, let's consider two examples. Take a family of four earning $40,000 a year. Acme, a big manufacturer, is currently providing $10,500 towards the family's $13,500 in coverage. The family is paying $3,000 from their own pockets, which costs them $2,550 in their 15% tax bracket. So they're getting $37,450 in pre-tax salary after paying their part for a generous plan.
Under the Baucus plan, in which Acme would probably drop its health-care plan, it would also be likely to give our $40,000 family a big raise in order to compensate for the loss of health benefits -- something on the order of $10,100 for what the company used to pay for health care (that's $10,500 minus the $400 penalty). The company will need to provide that raise to stay competitive. (For more on the impact on families, see my multi-part series on health care.)
So the family will have an extra $8,585 in after-tax income. It will also get a big subsidy towards buying health-care coverage under the Baucus bill, which limits what the family has to contribute towards coverage at around $5,260, with the government paying the rest through Premium Credits (pages 20-21 in the Baucus proposal).
So the family is getting $3,325 in extra pay (that $8,585 minus $5,260 in premium contributions) and is also saving the $2,550 that used to come from its own pocket, for a total gain of almost $5,900. It's the equivalent of a 16% raise. Best of all, our former $40,000 family is keeping its extremely costly health-care plan.
The changes Senator Baucus is proposing would actually increase the effective raise that low earners can expect, though the exact amount is still unclear.
Amazingly, the Baucus bill sentences middle-class Americans to a much different fate: either big pay cuts or coverage that's far inferior to what they enjoy today, or some combination of the two. Say our middle-class family of four now earns $75,000 at Acme. We'll spare you all the math, but it's now earning $72,900 after paying $3,000 towards the same $13,500 company plan enjoyed by the $40K family.
Under Baucus, this family would get a raise worth $7,070 after tax. But it's earning too much to qualify for any subsidy. So the family would have to go out and pay $13,500 for the same plan it got from Acme. After adding back the after-tax contribution it paid pre-Baucus ($2,100), the family is still worse off by over $4,300. That amounts to a 6% pay cut.
So what would the middle-class family do? To avoid a big pay reduction, it could afford a policy worth only around $9,000. That price would buy just a stripped down, high-deductible plan; it would be far less generous than the one the $40,000 family can keep, while Baucus boosts its paycheck.
In theory, the Baucus bill could make a wide swath of the public more price sensitive by pushing middle-class families into high-deductible, catastrophic care plans. But that's not at all what Obama says he wants. He consistently touts the virtues of extensive, costly coverage -- witness the long list of mandated benefits in both the House and Baucus bills. And why, if Baucus favors high-deductible plans where Americans pay more from their own earnings, doesn't he extend that discipline to lower-income families?
The big danger is that the middle class will suffer sticker shock and rebel. Congress will have no choice but to enact a highly subsidized public option resembling Medicare. That's the only way to restore generous plans to middle-class families at something approximating what they used to pay. Then America will be stuck with two subsidy systems, one for low earners, and the other for the middle class. At that point, all previous cost estimates get revised upwards, by factors of two, three or even more.
All told, the Baucus bill is really a giant tax game. It essentially strips the middle class of the employer-tax exclusion that allows employers to buy far more health care for their workers than those workers can buy for themselves. It raises pay, then taxes the money the employer formerly used to pay for coverage, so middle-class Americans have far less left over to purchase their own policies. It then transfers that money via big subsidies to low earners.
Despite its blatant contradictions, the Baucus bill could still be America's health-care future. It's astounding that America could embrace a shift this cataclysmic without even asking the right questions.