The Pelosi Bill Explained

The Wall Street Journal called it “the worst bill ever.” It’s easy to see why.

For individuals: Get insurance or else. The government will tell you what minimum insurance coverage you have to buy, where you must get it and what premium you will have to pay. Refusing to buy this insurance will result in a fine (tax) equal to 2½% of your income. If you don’t pay the fine, you could go to jail.

When the Pelosi bill was released, this song was played at the press conference:

The more you see, the less you know
The less you find out as you go
I knew much more then than I do now.

For employers: Provide insurance or else. For most people of working age, the government will tell your employer what type of insurance coverage the company must provide; and companies failing to provide it will face a tax equal to 8% of your wage income. Nominally, employers will be required to pay 72.5% of the premium for workers and 65% for families. However, economic theory teaches — and empirical evidence confirms — that employee benefits and labor taxes are completely borne by workers themselves in the form of less take home pay. Thus, the combined penalty workers face for failure to insure is 10.5% of income.

During last year’s presidential primary, Senator Obama criticized Senator Clinton’s proposal to mandate coverage by asserting she would try to force people to buy something they cannot afford and then tax them when they don’t buy it — leaving them worse off than they were. Exactly the same criticism applies to Pelosi’s play-or-pay mandates.

Encouraging employers to drop health insurance coverage. Many of those who do not get health insurance from an employer will be forced to buy it in a government-regulated health insurance exchange — where they will receive subsidies, depending on their income. For below-average-income employees, for example, these subsidies are far more lavish than the tax subsidy available for employer-provided insurance. At 150% of the federal poverty level ($33,100 for a family of four), for example, a worker would pay no more than 3% of income in premiums. At 300% of the poverty level ($66,200), a worker would pay no more than 10.7%. These numbers and all subsequent numbers are for year 2016 and are based on the Congressional Budget Office (CBO) analysis.

The best way to think about the options here is to consider the employer and employee combined. Is it in their collective interest to buy insurance at the place of work, or to drop coverage, pay the fine and send the employee to the exchange? Let’s assume (a) minimum family coverage costs $15,000, (b) the employee as well as the employer is able to pay premiums with pretax dollars, (c) the employee’s income is $54,000 and (d) the marginal tax rate is 30%.

Now let the employer drop coverage and pay taxable wages instead. After taxes, the employee’s take home pay will increase by $10,500. The 8% penalty for failure to insure is equal to $4,320 and let’s assume that the fine is not deductible. At this point the employee is ahead by $6,180. Now, if the employee is able to buy health insurance in the exchange for no more than 7.2% of income ($3,900) as outlined in the bill, there is a net profit of $2,280. And the lower the employee’s income, the more profitable this decision becomes. Note: You will not be able to make this decision as an individual. If your employer decides that dropping coverage is good for the group as a whole, you will be swept up in the change.

This is why millions of people will lose their current employer coverage, despite President Obama’s promise that you can keep your current plan if you like it. (Lewin estimates 19 million would lose coverage under the Senate bill.) These people will be forced into Medicaid where there is already rationing by waiting or into a health insurance exchange where health plans will have an economic incentive to underprovide to the sick (see below), if they obtain new insurance at all.

Encouraging healthy people to be uninsured. The previous example showed why millions of workers and their employers will find it advantageous to drop employer coverage. There is nothing special about the Pelosi bill in this regard. All the bills before Congress create lavish subsidies in the exchange that are not available to people who get insurance at work. So there will be a strong incentive to reorganize or adjust in order to qualify for the greatest subsidies.

Yet, having decided to end employer coverage, does it really make sense to rush to buy insurance in the exchange? Why pay expensive premiums for health insurance right now if you do not have any health problems? Under the Pelosi bill, there would be no reason to do so. People would be able to wait until after they get sick to insure and they would be able to do so without any additional financial penalty.

In our example, the penalty for not entering the exchange and buying insurance is 2.5% of $54,000, or $1,350. That’s definitely less than the $3,900 premium that purchased insurance would require.

Encouraging others to overinsure. For those who do insure and have health problems, there is a different perverse incentive: They can buy more generous coverage. Although they will have to pay the full extra cost of such coverage, the extra premium will be community-rated. This means they pay average cost for a plan under which they expect above-average utilization.

Making health insurance more costly. Whenever guaranteed issue (plans have to sell to all comers) and community rating (same premium for all — or almost the same) have been imposed, insurance becomes more expensive. We previously reported that in New York’s individual market, premiums are $9,036 for singles and $26,460 for families. Also as previously reported, studies by BlueCross, WellPoint, the insurance industry trade association (AHIP) and every other public and private study are all predicting soaring premiums — a 50% average increase by one estimate, with premiums tripling for the young and the healthy by another.

Creating perverse incentives for health plans. In the exchange, health plans would be free to set their own premiums, but they would be required to charge the same premium to all enrollees. This means the plans would make a profit on healthy enrollees and suffer a loss on less healthy enrollees. Consequently, the plans would have strong financial incentives to attract the healthy and avoid the sick. After enrollment, their incentives would be to over-provide to the healthy (to retain their membership and attract more of them) and under-provide to the sick (to discourage their continued membership and repel others like them). Already, in the federal employee system, health plan advertisements during open enrollment period picture young, healthy families — never people with costly illnesses. And some plans discriminate against sicker enrollees to keep costs down for healthier ones.

Taxing capital. The bill contains $572 billion in new taxes, including a 5.4 percent surtax on people who earn more than $500,000 ($1 million per couple). Since this tax will mainly fall on investment income, it is basically a tax on capital. The response will be a lower capital stock and a smaller national income in the future. It is always bad economic policy to tax capital to pay for current consumption. To tax capital to pay for wasteful health care spending that promises miniscule health benefits at the margin is especially bad policy.

Taxing labor. In Texas, about 30% of the population of working age is uninsured. The Pelosi bill would impose a 10.5% tax on the wage income of all these people — unless they buy health insurance that in most cases will cost more than 10.5% of income. The only people who will be able to escape this dilemma will be those that qualify for Medicaid — imposing a new, hefty burden on taxpayers. The economic damage this will cause to the Texas economy will be devastating.

Higher marginal tax rates. A family of four with an income just over three times the poverty line, or $78,000 in 2016, would get a (premium plus out-of-pocket expenses) subsidy of $1,200. But that’s $7,600 less than the family would get if they earned $54,000. The plan thus imposes an implicit marginal tax rate of about 32 percent ($7,600/$24,000) on wages earned by families in this income range. Throw in the individual income tax rate of 15 percent, a payroll tax rate of 15 percent and a 4 percent state and local income tax, and the effective tax rate on a middle-income family reaches 66%!

Penalties for seniors. Like the other health reform bills on Capitol Hill, the Pelosi bill makes seniors pay for a very large portion of the cost of reform. For example, there will be $426 billion of reduced spending on Medicare and Medicaid — almost all of it directed at seniors. As many as 8.5 million seniors will lose their Medicare Advantage insurance. In contrast to the Baucus bill in the Senate, the Pelosi bill gives the government more authority to push Medicare enrollees into managed care plans that have economic incentives to deny patients care.

Exacerbating the problems of cost, quality and access. Like the Baucus bill in the Senate, the Pelosi bill will increase demand, but it will do nothing to increase supply. This almost certainly will lead to higher prices and more health care spending. As previously explained, there are no realistic offsetting provisions for controlling health care costs. Also as previously explained, the perverse incentives of managed competition will encourage health plans within the exchange to underprovide care to the sickest enrollees.

Even if the number of people who are nominally insured rises, access to care may actually decrease. As demand increases and supply does not, the waiting costs of care will rise for almost everyone and the money cost of care will rise for most people. (Remember: The vast majority of people are getting no new government subsidy.) Massachusetts cut the number of uninsured in half. But waiting times to see a new doctor in Boston are twice as long as in any other U.S. city and the number of people seeking nonemergency care at hospital emergency rooms is as high today as ever.

Comments (15)

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  1. Stephen C. says:

    Good post. I can’t believe Pelosi played that song. What was she thinking?

  2. Nancy says:

    Stephen, Nancy Pelosi doesn’t think.

  3. Bruce says:

    I agree with the Wall Street Journal. This is the worst bill ever.

  4. Bret says:

    You would think that after their trouncing last night, these people would be a bit more timid about their plans to takeover one-sixth of the US economy.

  5. DoctorSH says:

    Nancy, Harry and Barack seem to be acting together to purposely throw our healthcare system and our country off a cliff, to set up a European style socialistic government.
    So they really do not care that their party got trounched in the election yesterday. Their overall vision remains the same!

  6. Stan Ingman says:

    Just like car insurance. Are you against car insurance ?

  7. Bob B says:

    I think the second 1000 pages gets worse. we must unite and fight, Resd this book and arm yourself. This book is dynamite on the issues.

  8. Larry C. says:

    Hard to believe the country is taking this nonsense seriously.

  9. Devon Herrick says:

    The Pelosi bill is 2,000 pages of pork for special interests and dumb ideas for the left-wing of the party. You would think the Democrats would at least try to tread lightly considering 85% of the population likes what they have.

  10. Dr. Gregory Garamoni says:

    A Second Open Letter to The Blue Dog Coalition

    November 4, 2009

    Dear Member of the Congressional Blue Dog Coalition:

    Angry constituents this past summer made it clear to Members of Congress that HR 3200 was too expensive, too intrusive, too impractical — and was being rushed too quickly through the House for Members and their constituents to comprehend the intended and unintended consequences of this bill on our health care system and our faltering economy.

    We at Doctors on Strike for Freedom in Medicine were among those angry constituents at Tea Parties, Town Hall Meetings, and internet discussion forums. We are a grassroots coalition of patients, doctors, and business owners founded on July 4, 2009 to encourage health care reforms that preserve, protect, and promote individual rights and freedom in health care.

    Launched four months ago on July 4th, our website has been visited by 9505 times by 7921 people from 2481 cities in 79 countries around the world, including all 50 states in America. Our message is getting through to Blue Dog constituents who rightly expect you to safeguard the rights of patients, doctors, and business owners from any governmental intrusion during the health care reform process.

    Over 600 people have thus far signed our recently posted “Petition to Protect Doctor and Patient Rights” to get Congress to vote against any legislation that provides for any:

    –Public plan option,

    –Mandates that force individuals to buy insurance coverage,

    –Mandates that force employers to provide insurance coverage,

    –Surcharges that force some groups to pay for the healthcare of other groups, and

    –Provisions that might allow HHS to force doctors to participate in public plans.

    About 97% of the petitioners have responded “Yes” to the question: “Should doctors ‘go on strike’ by refusing to participate in any new government-run healthcare plan?”

    Another 86% of the petitioners have responded “Yes” to the question: “If ObamaCare is approved, should doctors ‘go on strike’ by stopping their participation in other government-run healthcare plans (Medicare, Medicaid, TRICARE, SCHIP)?”

    We are now urging you to oppose HR 3962: “The Affordable Health Care for America Act” because this 1,990-page behemoth is — like HR 3200 — too expensive, too intrusive, too impractical, and is again being rammed down our throats.

    We ask that you vote against HR 3962 because it contains so many poisonous provisions — ones that are patently immoral, arguably unconstitutional, fiscally irresponsible, demonstrably ineffective, and, as recent polls show, politically unpopular.

    If you do not find these arguments against HR 3962 persuasive, we would appeal to your political self-interest before you vote on HR 3962 and whatever health care reform bill might eventually emerge from both Houses of Congress.

    Think about how many different groups of likely voters will be hurt by HR 3962: seniors (due to Medicare cuts), the young and healthy (due to individual mandates), doctors (due to government intrusion into decision-making and reduced Medicare payments), small businesses (due to mandated insurance for employees and the surcharge on wealthy business owners), the wealthy (due to the surcharge on millionaires), medical device manufacturers (due to increased taxes), and — last but not least — the millions of health care policy holders who would have to pay significantly higher premiums (due to taxes on insurance, costly mandated coverage by HHS, and shrinking risk pools).

    Think about the possibility that these voters would be so hurt by HR 3962 that Republicans, Libertarians, and Ross Perot-style Independents could easily mobilize them to vote many incumbent Democrats out of office in 2010 and 2012.

    Think about the electoral consequences of forcing Americans to buy expensive health insurance while they learn that Congress has failed to address the root causes of rising health care costs.

    Think about how — as our economy continues to falter in 2010 and beyond — the 2009 Tea Parties and Town Hall Meetings would be dwarfed by a rapidly spreading, Dresden-like firestorm of popular resistance to any more federal intrusion into our lives.

    Think about how HR 3962 would be a prescription for economic, health care, and electoral disaster: Surely, a bad bill would be worse than no bill, not only for our economy and our health care system, but also for your political career.

    Finally, think about this: A Blue Dog voting for HR 3962 might very well be committing an unnecessary, career-ending act of political suicide.

    Dr. Gregory Garamoni
    Doctors on Strike for Freedom

    P.S. We are encouraging patients, doctors, and business owners from all over America to call, email, or fax the Blue Dogs to urge them to reform healthcare in a fiscally and ethically responsible manner that fully respects the rights of doctors and patients to make healthcare decisions without any government interference. To this end, we have compiled a list of the Washington phone numbers along with a complete list of the Washington and District fax numbers for all 52 members of the Blue Dog Coalition

  11. Alyn Ford says:

    John… have now reviewed the bill… good post.

  12. Ken says:

    Good point, Devon. The Democrats seem not to care that 85% of the people like what they have. The desire to push everyone around and tell them what to do is just too strong.

  13. What's Really Broken? says:

    I just sent Mrs. Pelosi the following email:

    I’m trying to understand; is it possible because the Bible tells us to: obey authority – honor governing institutions/rulers – do not break the law – that you feel justified in creating any type of government?

    How can I make sense of what is happening in OUR federal government, except to accept that in November 2009, the majority of Congress and the President simply do not believe in freedom; do not believe in Life, Liberty and the Pursuit of Happiness; and certainly, do detest our system of justice, not to mention, capitalism? I’ve concluded that the LEFT believe in UTOPIA, and believe they should do whatever they can to CREATE UTOPIA – no matter who they hurt, no matter who they steal from, no matter the whining and bellyaching, unless it’s coming from the non-producers…

    Mrs. Pelosi, you have proven that women don’t do things better than men when they have power. You’re just as arrogant, you’re just as lazy, and let’s face it, you’re having as much fun as any man in your powerful position.

    I just bet that the word “lazy” catches your eye more than any other word I’ve yet used. I say LAZY because the REAL work that needs to be done is just too hard; it’s so much easier (and FUN!) to create yet another government infrastructure, create more legislation (it’s FUN!) that drains creativity, entrepreneurship, and yes, life-force (not to mention, creates more criminals – I find it very interesting that so many of the folks that almost moved into government staff positions hadn’t paid their taxes or unwittingly hired illegal aliens! Hmmmm…..) — all by STEALING from PRODUCTIVE CITIZENS and eliminating free enterprise.

    You know something, Mrs. Pelosi? It’s really not good enough that, when your life is over, it is said of you: She did what she thought was right. After all, what you are thinking when you do wrong really doesn’t matter.

  14. Ron Bachman says:

    Redistributing Wealth through Health Reform

    “Joe the Plumber” elicited a response from candidate Obama exposing his administration’s ultimate goal of redistributing wealth. With centralized power and federal control, more than $1 trillion will be redistributed under the guise of health reform.

    Personally earned wealth and benefits will be taken from Medicare beneficiaries, adults under age 30, owners of individual policies, those insured under small group plans, and health conscious Americans. This is not robbing from the rich to give to the poor this is pork-barrel politics unlike anything Americans have ever seen.

    There are four methods to redistributing wealth through health reform: (1) lower government funding of Medicare, (2) add taxes, fees and penalties on private insurance and medical supplies, (3) implement price controls, and (4) add costly mandates. These approaches allow government to draw monies from targeted populations and reallocate wealth and benefits to politically favored groups.

    Medicare beneficiaries. Health reform proposals will take $400-500 billion from Medicare. Twenty-two percent of Medicare beneficiaries are covered by Medicare Advantage, who will be hit with $114 billion in reduced funding. Seniors will lose in other ways. Lower physician reimbursements will lead to longer waiting, less time with a doctor, lower quality of care, and fewer available specialists.

    Adults under age 30. Many uninsureds are working adults under age 30. They need affordable products responsive to their needs. Legislation will not allow young adult insurance to be reduced below 50% of aged 60-64 premiums. Young adult claims are only 20% of older adult claims. By ignoring reality, premiums for adults under age 30 will be artificially increased by government price controls making their insurance even more unaffordable. A PricewaterhouseCoopers (PwC) study estimated premiums would increase by 59-63% for ages 18-24. Insurers have estimated young adult premiums will likely increase by 100% or more. If they don’t pay the price controlled higher premiums they will face fines and penalties.

    Individual and small group plans. A report by the consulting firm Oliver Wyman estimated individual health premiums will increase an additional 60-73%. The PwC report calculated an average increase of $4,000 for small group participants. None of the proposals lower the cost of health insurance as promised by candidate Obama. It is no wonder that the Congressional Budget Office estimates that there will still be 25 million uninsureds.

    Healthy Americans. Financial rewards for health status from exercise or diet will be made illegal. Plans cannot provide financial incentives for following doctor’s orders, lowering blood pressure, or to keeping cholesterol levels in check. Those taking personal responsibility to improve their health would have to pay for those making unhealthy risky choices.

    The monies taken from the above would be redistributed to the lower income nonelderly, community organizing groups, and entities relying on government grants and funding for special interest project funding.

    Free coverage will be provided to 14 million new Medicaid enrollees, many of whom are currently covered under private plans paid for by employers. Additional federal subsidies are provided for those earning up to $66,000. Up to forty-nine percent or more than 148 million Americans may become eligible for government subsidies.

    Organizations relying on government funding of special interest projects will enjoy billions of dollars in grants are allocated for studies, research, development, implementation, and other consulting arrangements by the many new committees, departments, working groups, panels, boards, and other new government entities.

    The overall goal of health reform is not about improving health or healthcare. The proposals do not expand access to care, improve quality, or lower costs. The proposals do not address the current high number of uninsureds. The impact will be to create dependence on government, expanded government employment, and enrich more government consultants.

    Joe the Plumber was attacked for discovering the truth. Evident in recent elections, regular citizens are engaged in a populist movement to tell government to lower spending, eliminate pork barrel projects, stop the redistribution of wealth policies, and rely on the intelligence and ingenuity of the American people to create jobs and solve their own problems. Health reform is needed, but many want to focus on the uninsured and those in real need of financial support. Americans are a generous people, we can help those who need help, without destroying the greatest healthcare system and economy the world has ever seen.

  15. Linda Williams says:

    exactly how long has pelosi got left in office? I will be so glad when she is voted out of office.. maybe then she will see that you DO have to listen to the American people. I am disgusted about the vote in the House yesterday. What was it 2 votes or 5 votes, have heard both ways.. All the thousands of emails, letters, people standing on Congressional Hill.. for what, a House of Rep and Senate that is NOT listening to the American People. My husband and I are on Medicare, we are very concerned, we also have AARP policy, which we plan on dropping. thanks, Linda Williams