The stimulus bill and American health care – Pacific Research Institute

The stimulus bill and American health care

Orange County Register, March 1, 2009
Tom Daschle’s nomination to be secretary of Health and Human Services misfired, but that has not stopped President Barack Obama from loading billions of dollars onto the wagon of government-run health care. And he wants to shovel them in as fast as possible.

On Feb. 4, the president blew the doors off the State Children’s Health Insurance Program by increasing the income limits for eligibility, thereby roping in 4.1 million more children by 2013. This is on top of the 7 million children already captured by SCHIP. The bill more than doubles federal SCHIP spending to $70 billion over five years, up from the $30 billion “baseline” estimated by the Congressional Budget Office. The president should have slowed down.

Seven of 10 uninsured children are already eligible for taxpayer handouts through SCHIP or Medicaid. What’s more, the program doesn’t just cover the uninsured, but picks off many who already have coverage. This is known as “crowd-out,” and will likely account for more than half the kids newly dependent on government-run health care.

Last week, the president signed the so-called stimulus package, which contains a number of bad provisions for health care. Two provisions that stand out are increased government control of health services for low-income Americans and an extremely expensive disruption of employer-based health benefits.

The stimulus plan throws another $90 billion over the next two years at Medicaid, the joint federal-state program for low-income residents. Medicaid has always motivated states to “race to the bottom.” The poorer a state is, and the more of its own residents’ money it blows on Medicaid, the more money it attracts from Uncle Sam. The stimulus bill makes this incentive worse.

A state will attract even more federal Medicaid dollars if it has a high unemployment rate, so the bill actually rewards states for bad policies that drive up unemployment!

Medicaid also deploys another “hidden tax.”

On average, Medicaid programs pay doctors 56 percent of what private payers do, and hospitals only 67 percent. Providers make up the difference by increasing costs to private payers by about 15 percent. The bigger Medicaid grows, the bigger the cost-shift.

I roughly estimate that the stimulus will increase the “hidden tax” by about $18 billion this year, driving premiums for private health insurance up to just under $900 billion from a “baseline” of $879 billion this year. But there are more hidden taxes.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) is the program by which people who lose their jobs continue health coverage under their employer-based plan. Prior to this stimulus plan, someone who lost a job was able to continue health coverage by paying 102 percent of the total premium for his former employer’s plan, usually for up to 18 months. COBRA’s biggest flaw is that the former employee has up to 60 days to decide to take it up.

In most states, the law allows underwriting for risk in the individual market. Obviously, a smart former employee waits two months to see if he gets sick. Then, he can immediately claim COBRA coverage, paying little more than the same premium as the rest of the (healthier) employees at his former workplace. However, if he remains healthy, he can ignore COBRA and buy a low-price individual policy. Former employees who take up COBRA coverage have medical claims 145 percent greater than active employees, whose premiums rise to pay these higher costs.

The stimulus amplifies COBRA’s problems by subsidizing premiums by 65 percent for nine months, at an estimated cost to taxpayers of $25 billion, over the next two years. It is difficult to estimate the impact on premiums for private insurance. It certainly increases the reward for staying unemployed or seeking only a part-time job without health benefits.

Barack Obama may have failed to date to nominate a tolerable health czar, but he has managed to increase the fragmentation, bureaucracy, and cost of health care for all Americans. Quite an achievement for about one month in office.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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