SEPTEMBER 26, 2009
THE PUBLIC OPTION ROACH MOTEL
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The Healthcare Reform Bill proposed by Senator Baucus is an incomparably cynical piece of legislation creating a time bomb that will eventually destroy all private health insurance. Some of the inner workings the proposed legislation uses to set the fuse on the bomb independently offer a fascinating glimpse into the legislative soul of the majority party. If only the Senate would put this much cynicism into dealing with the Russians, where it could really be used, as opposed to inflicting healthcare reform on the American people.

On the inflation side, the proposed legislation will inevitably lead to sharply higher healthcare costs because it mandates or results in (1) more coverage requirements per person; (2) more people covered; (3) fewer doctors per patient to provide care; (4) more adverse selection; (5) tort lawyers being unreformed and unrepentant; (6) sharply higher healthcare unionization; and (7) foregoes stimulating private interstate competition to mention just a few.

Given the healthcare mandates listed above, we can expect inflation in healthcare to sharply exceed general inflation as measured by the CPI because the CPI includes smart, non-union private sector companies like WalMart, Google, and CVS seeking to reduce costs in the economically rational private economy which has to compete internationally while healthcare is overwhelmingly a domestic service industry with "reform" designed to further shield it from competition. We saw this at work last year. According to the BLS, the CPI rose about 0.1% last year while Kaiser Permanente estimates the comparable rise in the cost of the average family health insurance was 5% plan to $13,375.

The progressive Commonwealth Fund acknowledges these inflationary forces and uses them to project that without healthcare reform, the national average health insurance family premium will rise from $ 12,298 in 2008 to $ 23,842 in 2020, but will settle down to only $ 21,271 by then with reform.

I believe these numbers dramatically understate the inflationary forces at work in healthcare driven by government intervention. For example, unionized employees now only account for 10% of all healthcare workers. A recent study by the Heritage Foundation shows that the average unionized government worker makes double what the average private sector worker makes. If the SEIU can use healthcare reform, card check and mandatory arbitration to drive unionization to, say, 30% of all healthcare workers, 5% annual real price increases in health insurance costs will seem like the good old days.

There are other insufficiently addressed problems with unionized government workers providing healthcare. Some of it has been quite forcefully said: chances of survival of cancers and other life-threatening diseases are much greater in the U.S., than, say, in England or Canada, where rationing plays the main role in holding down costs. That is to say, some of healthcare savings may be paid for with higher mortality. And some of it is completely unaddressed except as mundane references to the DMV. Waiting times for every aspect of healthcare will expand to the point of outrage. Workers who used to be paid $15 an hour will now be paid $25 or $30 per hour to see patients whose time will increasingly be deemed worthless in the government's weighing of costs and benefits. Time will no longer be money for patients, only for the workers.

As these inflationary forces grow, and families begin to drop out of the private plans and seize the government option, the insurance companies will likely experience extreme adverse selection, driving premiums higher, accelerating the loss of insurance pool members, and setting up a vicious cycle which will eventually make the public option the only game in town.

Thankfully, Senator Baucus has completely changed the label of the "public option" to an insurance "cooperative" founded [and run] by the federal government and open only to new entities without existing insurance experience. Guided perhaps by the Commonwealth Fund projections of $21,271 for insurance for the average family, Senator Baucus created a "luxury" excise tax for all payments above $ 21,000 per year. . Given the real growth in healthcare costs, by 2020, the average family may easily be paying 25% of their income for healthcare.

The proposed bill leaves room for debate over whether private insurers will be wiped out as early as 2014 or as late as 2022. Of course, long before that the share prices of the private insurers will decline as the stock market discounts when they might be completely forced out of business. What is so stylish in Senator Baucus' proposal view is that it operates like the Alternative Minimum Tax (AMT), but on steroids. The AMT affected just a few hundred tax payers in its first year and took 40 years to swallow most deductions used by, say, [half] of America's meaningful income taxpayers. In contrast, according the Wall Street Journal, the Mercer Group estimates Senator Baucus' bill starts with 14% of health insurance contracts triggering the luxury tax on day one.

The Baucus proposal tidies things up within a decade. It allows President Obama, former Editor in Chief of Harvard Law Review, to say, "...if you like your insurance plan, no one will force you to change it." Of course, if your private insurance company is forced out of business by a combination of new burdens, dramatically higher taxes, and no access to fresh capital, well no one forced you.
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