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Eye on the News

Paul Howard
Obamacare’s Hidden Costs
Democrats have unleashed a tidal wave of unintended consequences.
13 May 2010

While the full cost of President Obama’s health-care legislation won’t be apparent until federal subsidies to the uninsured start flowing in 2014, Americans are getting an early glimpse of some of the unintended—but very costly—consequences of rushing through a 2,400-page bill affecting 17 percent of the economy. Since the president signed the bill into law on March 23, dozens of companies have reported to the Securities and Exchange Commission the losses that they expect to take as a result of the legislation. (Companies that offer drug benefits to their retirees will now be taxed for the partial federal subsidy that they receive for each retiree.) The U.S. Chamber of Commerce estimates that as many as 40 major companies will take a hit, for a total of $3.4 billion; other cost estimates run even higher.

After the firms made headlines with these reports, the White House and Democratic members of Congress slammed them for exaggerating the tax change’s effect. Congressmen Henry Waxman and Bart Stupak even demanded that four of the companies—AT&T, Deere & Company, Caterpillar, and Verizon—turn over all documents relating to the financial impact of health-care reform, along with “an explanation of their accounting methods.” In late April, though, Democratic staffers on the House Energy and Commerce Committee vindicated the firms, saying that they “acted properly and in accordance with accounting standards.” The independent Financial Accounting Standards Board confirmed this interpretation, as did the American Academy of Actuaries.

Here’s the irony. When Democrats removed the tax exemption for the subsidy, they claimed to be striking a blow against corporate welfare. What they ignored, however, was that the subsidy was actually a previous Congress’s attempt to protect taxpayers. In creating the Medicare Part D drug benefit in 2003, Congress added the subsidy—which amounted to about 28 percent of the cost of coverage—to encourage companies that already offered drug benefits to retirees to keep paying those benefits, rather than dumping them onto taxpayers. By taxing the subsidy, Democrats are effectively encouraging companies to scrap the benefit entirely and ask Uncle Sam to foot the bill.

The same corporate documents turned over to Congress also show that companies may be thinking about more than retiree drug benefits. They may, for example, be considering dropping employee health coverage and sending workers directly into the health exchanges provided under the new law. According to Fortune, a report that Hewitt Resources, an HR consulting firm, prepared for AT&T notes that “even though the proposed assessments . . . are material”—that is, even though firms that choose not to provide health insurance will be fined—these assessments are “modest when compared to the average cost of health care. . . . Employers may consider exiting the health care market and send employees to the Exchanges.” The same Fortune article suggests that “if 50 percent of people covered by company plans get dumped, federal health care costs will rise by $160 billion in 2016, in addition to the $93 billion in subsidies already forecast by the CBO.”

Companies already expect that Obamacare will increase health-care costs as 32 million uninsured people enter the health-care system and drive up prices, new regulations add to the cost of insurance premiums, and new taxes levied on drugs, medical devices, and health insurance get passed along to employers.

Still more costs are likely to ripple out from the legislation over the next few years. Democrats have set aside just $5 billion to fund new high-risk pools for the chronically ill and uninsured until the exchanges are up and running in 2014; the chief actuary for Medicare recently estimated that the money would run out in 2011 or 2012, “resulting in substantial premium increases to sustain the program.” The CBO also recently nearly doubled its initial estimate of the legislation’s implementation costs, to $115 billion over ten years.

Another $5 billion fund set up to offset health-care expenses for early retirees may turn out to be the biggest fiscal problem in the legislation—and eventually transform into a massive backdoor bailout for cash-strapped states. The fund is open to employees from both government and the private sector and is also set to expire in 2014—though the actuary expects it, too, to run out before then. The Obama administration claims that this subsidy will keep private employers offering early retirees health-care benefits, but that’s largely a smoke screen, since relatively few private-sector firms offer early retirement benefits. State and local governments, on the other hand, are hemorrhaging red ink for promises that they’ve made to public-employee unions: a November 2009 GAO report estimated that states and localities had more than $530 billion in unfunded liabilities for “post-employment” benefits, primarily for retiree health care. States like New York and California will undoubtedly leap at the chance to offload their early retiree costs onto the feds, and public-employee unions will push hard to expand funding for the program and make it permanent. Democrats envision union retirees transferring into the exchanges in 2014, but it’s hard to imagine unions surrendering their gold-plated plans when someone else is picking up the tab.

Finally, Congress is likely to pass a bill repealing massive planned cuts for physicians’ payments under Medicare. Current law projects a 21 percent drop in reimbursements, starting on June 1. To secure the American Medical Association’s support for health-care reform, Democrats promised to pass a “doc fix” rescinding those cuts. The Congressional Budget Office recently estimated that doing so would cost $276 billion over the next decade, nearly twice the savings that the CBO projected for Democrats’ health-care “reforms” over the same period.

In short, Obamacare is barely two months old, and the nation is already discovering what opponents of the legislation argued all along: that it will cost taxpayers far more than expected and send health-care spending into the stratosphere.

Paul Howard is director of the Manhattan Institute’s Center for Medical Progress.

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