The White House estimates that the President’s Proposal for health care reform would cost approximately $950 billion over a ten year window.  Here, James Capretta explains why this is unlikely to be the case and how President Obama’s plan would far exceed this cost estimate.

As Kay Cole James, a former director of OPM, points out the FEHBP works because OPM plays the neutral role of an umpire: federal employees choose the private plan they like from a wide variety of different plans, all of which compete against each other to attract the most enrollees. The federal government provides its employees with a defined contribution towards their health costs, and it doesn’t micromanage their choices. OPM allows variety and flexibility in the program, and limits its regulatory role to ensuring consumer protections. Majority Leader Harry Reid’s (D-NV) proposal would have OPM sponsor new multi-state plans. OPM would set the premiums for plans it sponsors.

This new role for OPM is the Senate alternative to the House passed “public option”. But ordinary Americans should be leery of the difference. According to James, “this arrangement seems to be a “public option” in “private” option disguise… Because OPM would not merely serve as the umpire overseeing competition among private health plans. It would also become a health-plan sponsor, fielding its own team of players to compete against the existing private plans in every state.”

Given this new role, OPM could engineer a crowd out other private insurers in the market. Furthermore, Section 1334 of the Senate health care bill allocates “such sums as may be necessary to carry out this section”. If the OPM-sponsored health plans were not profitable, it is thus conceivable that the taxpayer could end up footing the bill. This, along with the federal power to set rates and benefits, could easily end up as the public option that Senate liberals envisioned all along.

Says James, “OPM’s job is to serve the federal civilian work force and its retirees, while enforcing merit principles in hiring and stopping prohibited personnel practices. It’s not OPM’s job to compete against private health plans.” The best features of the FEHBP- broad consumer choice and intense Multi-plan competition, free of heavy regulation and massive bureaucracy, and governed by approximately 80 pages of statutory text- are worthy of replication. Giving OPM the power to sponsor “multi-state” health plans in competition against the private sector is not the same thing.

In order to pressure more businesses into providing health care for their employees, the House bill includes an incremental payroll tax on employers that fail to do so. This tax starts at 2% for employers with total annual payroll of $500,000 and increases to 8% on total annual payroll of $750,000 or more. This tax would affect all employers, even those with 25 employees or fewer, since it is based on total payroll, not number of employees.

This tax will add significantly to small business expenditures, regardless of whether they choose to offer health benefits to their employees or not. According to the bill, if employers do offer benefits, they cannot come out of employee’s wages, and they must meet the federal requirements concerning covered benefits. If they choose not to add health care to their expenses, small businesses will instead pay the tax.

However, the structure of the tax causes it to go further than acting simply as an incentive to offer health benefits to employees. Ligon writes: “the employer mandate structure in the House-passed health care bill would create a strong disincentive for a business to expand compensation or even acquire new workers.” This is because, as a business nears a higher payroll bracket, it also risks spending a much higher percentage of its earnings to pay the penalty tax. For example, an employer with total payroll of $499,999 would have paying a $10,000 penalty if it increased its payroll just one dollar. Undoubtedly, this would cause any small business owner to reconsider before offering bonuses or wage increases to its workers.

In the Senate bill, employers with 25 workers or fewer are exempt from paying a penalty for not offering health care to its employees. Not only does the House bill eliminate this exemption, but it also penalizes small business such that employers with 25 workers or less could end up paying the full 8% payroll tax. Ligon estimates that as many as 68,288 small businesses could fall in the highest marginal penalty range (8%).

Businesses affected by this tax would clearly react to its ramifications, especially during a period of economic downturn. Those who could not afford to offer health benefits or pay the higher tax would look for other ways to outmaneuver the government. This would most effectively be done by containing or reducing wages, and failing to hire additional workers. With an unemployment rate stagnating at 10%, this is the opposite direction in which Congress should be sending small business.

The Washington Post’s EJ Dionne’s had an op-ed yesterday detailing six policy areas where House Democrats believes they can pull the Senate health care bill further to the left. For every issue that Dionne identifies, a House victory would lead America even further down the path to government run medicine:

1. A National Health Insurance Exchange
A national exchange would create a vehicle for federal regulation of insurance policies and one-size-fits-all health plans that don’t necessarily meet the needs of all Americans. This threatens the federalist division of power between the national government and the states, and undermines the capacity of the states to function in this vital area of public policy. A national exchange would also pre-empt the states in pursuing their own efforts to expand coverage, or, for those states that would like to experiment with an exchange, it would encroach on the states’ abilities to tailor their state-based exchanges to their specific needs. A health insurance exchange, unfortunately, can mean many different things, from a facilitator of consumer choice and open competition to a restriction on both. For those interested in the concept, states based insurance exchanges have to be done right. Simply having the states administer a federal exchange makes matters worse, by hampering or even killing off state innovation.

2. Higher Subsidies for Exchange Enrollees
Offering higher subsidies to the few who are able to join the exchange will heighten the effect of the inequity among workers created by the Senate bill. This change would also add billions to the cost of the bill at the same time that other changes would lower revenue. This increases the likelihood that billions of dollars spent on health care reform will be added to the federal deficit.

3. Further Expansion of Medicaid
Both bills already significantly expand Medicaid eligibility. If the negotiations result in the raising Medicaid eligibility to 150 percent of the federal poverty level (FPL), as the House bill does, the Office of the Actuary estimates that TK million uninsured Americans would gain coverage through Medicaid. Anytime there is a public program expansion, one is going to see a “crowd-out” of private health coverage. Americans should not be fooled—the real story is these bills would expand coverage by putting millions of Americans into Medicaid, one of the country’s most poorly functioning health care programs. In that sense, contrary to false rhetoric by Congressional champions, both bills are a deliberate prescription for lower quality of care for millions of Americans.

4. A Weaker Excise Tax on High-Cost “Cadillac” Insurance Plans
To pay for the proposal, both bills depend on raising taxes to help pay for its trillion dollar “reforms.” The President has indicated he supports the Senate version, which would impose a new excise tax on so-called “Cadillac” plans. There is great opposition to the tax among unions, whose members, overwhelmingly middle class, tend to enroll in such plans. But, getting rid of the excise tax all together is not an option since it would have to be replaced with another revenue raiser; higher taxes somewhere else. Negotiations could end up creating more special interest exemptions – this time for unions – and leaving the non-union workers with “Cadillac Plans” to foot more of the bill. Look for new inequities being piled upon the variety of inequities already created by the House and Senate legislation.

5. The Ugly Nelson Deal: More Cost-Shifting All Around
Politicians, eager for “free” federal taxpayers money, are now looking to secure the same sweetheart deal for their states that Senator Ben Nelson (D-NE) got for Nebraska. Called the “Cornhusker Kickback”, in the Senate bill, Nebraska’s Medicaid expansion would be paid for with federal taxpayer dollars. Under the Nelson-Reid agreement, the federal government would fully fund the expansion of Medicaid in Nebraska. Extending this deal to all 50 states would superficially appeal only to those state taxpayers who don’t share the sense of national embarrassment that stirs the massive opposition of the straight shooting, good hearted, solid folks in Nebraska. But of course, such a “deal” would only sharply increase the federal cost of the bill, shifting these costs back to state taxpayers as federal taxpayers instead. In an absurd process, taxpayers would see the costs shifted right back to themselves by the politicians promising something for nothing. Furthermore, if and when, if ever, the federal Medicaid matching rate expires, state taxpayers would be forced to make up the difference in funding on their own, forcing them to either cut funding to other programs or raise taxes, yet again.

6. More Micromanagement of Health Insurance
Both bills already transfer massive regulatory authority over health insurance plans to the federal government. Negotiations will likely add additional control to regulate and oversee the management of insurance companies. This could include increasing the medical loss ratio, removing antitrust exemption for insurance companies, more stringent age rating for premiums, and a heightened ability of the Department of Health and Human Services (HHS) to review premium increases. All of these regulatory schemes would stifle consumer choice in the insurance market, undercut real market competition, and result in a government-run health care system, with or without the public option.

More and more, it seems that members of Congress are less interested in enacting meaningful change to the health care system that Americans actually want; and they are more concerned with getting the right number of votes for something, anything, that they can somehow call “reform”, even though the vast majority of Americans vehemently disapprove of what they are doing.

And read up on the newly released manager’s amendment that is being pushed through Congress with a planned Christmas Eve vote.