Health Care: How Expensive Is the Obama Plan?

When he addresses Congress tonight, one of President Obama's central tasks will be to convince Americans that he's serious about controlling health costs. Of course, the president already claims that he is. He's repeatedly emphasized the need to rein in runaway health spending, which he rightly portrays as increasing federal budget deficits and depressing workers' take-home pay. The trouble: many, if not most, experts don't believe him. Aside from rhetoric, they don't find much in Congress's various bills that would reduce the torrid pace of health spending.

Obama's task won't be made easier by a new report concluding that H.R. 3200—the main "reform" bill in the House—would increase government and private health spending over the next two decades. Here's what the study finds:

The study was conducted by the Lewin Group, a consulting firm that is owned by one of the nation's largest health-care insurers, UnitedHealth Group, and was commissioned by the Peter G. Peterson Foundation, an organization focused on budget deficits and rising federal entitlement spending for the elderly. "For health-care reform to be fiscally responsible, it must not just pay for itself over 10 years and beyond," said David Walker, former head of the Government Accountability Office and now president of the foundation. "It should also result in a significant reduction in the tens of trillions of dollars in the federal government's unfunded health-care promises."

All this highlights a dilemma for Obama. To much of his Democratic base, health-care reform means achieving the longstanding liberal goal of universal health insurance, or something close to it. But that costs more money. Meanwhile, many Americans want to spend less money on health care, because they fear higher premiums, out-of-pocket expense,s or taxes. In a recent opinion survey by the Kaiser Family Foundation, 51 percent of respondents said that health-care reform should expand insurance, and 49 percent favored tougher cost control. (People could choose more than one answer.)

Until now, Obama has tried to navigate around the dilemma by condemning high health costs but backing congressional proposals that mainly provide more coverage. Under H.R. 3200, the government would require most Americans to have health insurance and most businesses to provide it or pay a special tax, equal to 8 percent of payroll. Poorer Americans would either qualify for coverage under an expansion of Medicaid or, if they didn't receive insurance directly from their employers, could buy it on an "exchange" where competing plans—including a so-called public plan managed by the government—would be offered. People entitled to use the exchange could qualify for diminishing federal subsidies until their incomes reached four times the government's poverty line (or $88,000 for a family of four). Companies could also pay for their workers to buy insurance on the exchange.

It's these subsidies, plus the expansion of Medicaid—the federal-state insurance program for the poor—that constitute the program's major costs, estimated by Lewin at $4.6 trillion over two decades. Almost $1 trillion would be paid for by modest cutbacks in the existing Medicare and Medicaid programs, while slightly less than $1 trillion would come the new payroll tax. The biggest source of new funds would be a new tax on the rich: 1 percent on incomes from $350,000 to $500,000; 1.5 percent from $500,000 to $1 million; and 5.4 percent on incomes over $1 million. That would raise about $1.7 trillion over two decades, reckons Lewin.

Still, when all the program's various costs and revenues are totaled, the remaining gap is about $1 trillion, according to Lewin's math. The main reason, says John Sheils, a Lewin vice president and the study's main author, is that "there's nothing in the bill that slows health spending in the under-65 population." The modest cuts in the existing Medicare and Medicaid programs (mainly lower reimbursement rates for hospitals, drug companies, and medical-device manufacturers) don't come close to offsetting the costs of the new insurance coverage. The result is that the government's health costs, plus overall health spending, continue to increase as a share of GDP.

It's this grim math that frames Obama's political task tonight: to make proposals that will tame health spending—or, at any rate, to make people think he has.