The Baucus Health Care Plan: Here Be Accounting Tricks

The long-awaited and much-derided Sen. Max Baucus Chairman’s Mark intended to serve as the foundation for the Senate Finance Committee bill has, shall we say, a very limited audience. For once, I agree with Sen. Mitch McConnell when he writes, “The only thing bipartisan is the opposition.” But even if the proposal that took months to hammer out has zero Republican votes and progressive Democrats openly frustrated, there is one constituent who is quite impressed -- the Congressional Budget Office, which gave the Baucus bill inarguably the most impressive score of any health care proposal for cost reduction. But the reasons why Baucus’ plan appeals to the CBO are the very same reasons it is being vilified everywhere else... and why it's unlikely to become more popular the more people study it.

For starters, it’s not a surprise that the CBO looked upon the bill so favorably. After all, CBO Director Doug Elmendorf was photographed being in the room while “the gang of six” bipartisan negotiators were hammering out a deal. (In fact, there are more pictures of Elmendorf with the gang of six than there were pictures of gang of six participant Sen. Jeff Bingaman!) It’s also certainly the case that CBO’s rules for giving good scores on health care reform should be easy to predict by now. After all, HR 3200 yielded a very good score, as did the Wyden-Bennett plan. HR 3200, however, is also a textbook example on how to get, essentially, rogered by the CBO’s strict rules process. The House had fixed the Medicare Sustainable Growth Rate in its Paygo bill, netting a surplus of $265 billion. House leaders presumed that, since it was health care-related, that surplus should apply to HR 3200. The CBO did not agree, and when it proclaimed that HR 3200 would yield a $249 deficit, opponents of the bill had a new talking point –- even though the House health care reform effort creates a $16 billion surplus!

The point was clear to the gang of six: play by the CBO’s rules if you want your proposal to live. However, my Spidey-sense began to tingle yesterday when Sen. Kent Conrad requested CBO also score the Baucus bill in a 20 year-window. It’s an unusual move. But much like a lawyer only asks a question in front of a jury that s/he knows the answer to, Conrad knew what was coming. A $774 billion price tag over 10 years (even better than what Baucus himself reported), and a $49 billion surplus within the first 10 years. In short, the Baucus bill not only wouldn’t add to the deficit, it would reduce it. Extended out to a 20-year window, and the health bill would save hundreds of billions of dollars for the federal government.

Unfortunately, how it achieves those jaw-dropping savings is likely to be a ticking political time bomb.

We know the CBO has a terrible track record at estimating savings derived from the health care system that comes from improved quality of care. Even though things like coordinate care, increased prevention, Health IT, and system reform have yielded savings both outside this country and in the VA, the CBO is conservative in its estimation. What it does score very well are explicit cuts to providers and hospitals, regardless of the effect on quality.

So that’s what the Baucus bill gives them.

The granddaddy of this approach is the Medicare Sustainable Growth Rate (SGR). Instituted by a Republican Congress as part of the Balanced Budget Act of 1997, the SGR establishes a target total cost for physician payments in Medicare each year based not on how much health care costs have gone up, but by the increase in gross domestic product (GDP). If physician payments are on track to exceed the target, they’re cut across the board. Simple as that. You can see why the accountants like it. But the problem is that health care costs go up much more rapidly than GDP. Every year, physicians lobby Congress to put a one-year moratorium on the SGR cuts. Every year they do, predominately with Democratic votes. But the SGR has never been changed, such that if it took effect this year (it won’t) it would be a 21% cut across the board for doctors. It’s a great accountant trick -- George W. Bush’s budgets always indicated that the SGR would take effect for each of the next ten years, making the deficit projections look a few billion dollars better each time. But it was all a gimmick. The Obama budget presumed the SGR is fixed and didn’t bank on those savings. The House bill would have fixed the SGR permanently, and takes the cost of doing so into account. But the Baucus bill does the same old crap -- it puts a moratorium on the SGR for one year, and presumes the budget includes savings from the SGR in all subsequent years.

Which, of course, it still won’t.  But the deficit fighting powers of the Baucus bill look much better as a result of the tried-and-true gimmick.

Problem number 2 is the controversial excise tax on health insurance plans. For individuals with an insurance plan above $8,000 or a family above $21,000, they’re hit with a 35% excise tax on the value of the plan above that threshold. Since the average plan is about $5,000 for an individual and $13,000 for a family, it doesn’t seem to be hitting that many people. But here’s the catch. Those thresholds go up every year, tied to inflation. But health insurance has been rising at three times the rate of inflation for the past decade! Sure enough, looking at the CBO score (page 17), the excise tax brings in more and more money each year, up to $215 billion. In fact, once it’s instituted, it is also projected to bring in at least 15% and up to 30% more each year. Why? Because more and more insurance plans will cross that threshold as insurance premiums continue to rise. Indeed, the CBO projects a steady increase in revenue of 15% each year after the 10-year budget window based on this tax. I’m sure they love the downward pressure on premiums, hence the favorable score. But since insurance companies have already made it clear that they’ll pass the tax on to their customers directly -- and there’s nothing to prevent them -- you’re talking about hundreds of billions of dollars in new taxes, much of which comes from the pockets of middle-class employees.

But the real jaw-dropper comes from Baucus' Medicare Commission. You’re recall that CBO had previously scored a proposal from the White House to create a board modeled on the Medicare Payment Advisory Committee tasked with making recommendations to reduce costs and improve quality. The board’s recommendations would be voted on up or down by Congress, with no amendment, allowing for tough cost-cutting decisions to be made in an atmosphere divorced from partisan or regional politics. CBO scored the savings at a meager $2 billion, although it conceded there were so many factors of uncertainty that the actual savings “could eventually achieve annual savings equal to several percent of Medicare spending.” Well, the Baucus bill has a similar board called the Medicare Commission, and the CBO scores it as “reduc[ing] Medicare spending by an additional $23 billion.” That's ten times as much. What gives?

The short answer: the Baucus Medicare Commission (pg. 159) doesn’t just exist to target savings and improve general payment – it has to cut Medicare by a fixed amount every year. Its primary goal to “target reductions to sources of excess cost growth” (improving the health care system is listed as goal #2 and considering the effect of beneficiaries is #4). Whereas the White House proposal didn’t have fixed percentages carved in stone, the Baucus bill does. Starting in 2014, cost growth above the Consumer Index couldn’t exceed 0.5% for Medicare, or it would have to be cut. What happens if cost growth is already at 0.5% or under? Then the Commission has to cut it to zero. The underlying assumption here is “by any means necessary.” And that goes up every year, forcing cuts of additional 1.0% savings in 2016, 1.25% in 2017, 1.5% in 2018, etc.

Does that seem familiar? It should. It’s basically the SGR writ large. Only unlike the SGR, you can’t easily put a moratorium on the Commission’s cuts. Baucus has put together a complicated scheme whereby if the Commission can’t come up with cuts, the Secretary of HHS must. If she can’t, the Senate Finance Committee (natch) must. Resistance is futile. Your Medicare will be cut. Congress could still find a way to stop it each year, but then those savings won’t be realized after all.

Baucus and Conrad, obsessed as they are with getting a good CBO score, got exactly what they wanted. But in the process they created a bill that also leaves 17 million Americans (25 million total people) uninsured, doesn’t do nearly enough to make health care insurance affordable to enough of the middle-class, creates a tax that threatens to grow by 15% each year, and wraps it in a package that is susceptible to all the charges of gimmickry, rationing, and government control the opposition can throw at it.

And you thought it couldn’t get worse.

(Photo credit: http://www.flickr.com/photos/americanprogressaction/ / CC BY-ND 2.0)