Thursday, July 23, 2009

Obamacare could cost more than 4.5 trillion

I recently read that Medicare costs about ten times as much as the Congressional Budget Office estimated it would. This result is in keeping with the CBO's track record on spending estimates -- i.e. not very good. So I wasn't at all surprised to read that the cost of Obamacare might top $4.5 trillion ($4,500,000,000,000).

The House version of the health care reform bill proposes a payroll tax on those firms that are not providing workers with health care. The tax varies by payroll size, reaching a top rate of 8 percent, but the rate is much lower for the smallest businesses.

For an outfit with a payroll of less than $250,000, the tax is zero. Clearly, firms facing no tax, as well as others, would prefer this subsidized or no-cost government insurance to private plans. As many small firms switch from private plans to low or no cost, taxpayers will foot the bill.

Perhaps CBO underestimated how many small businesses there are or how many workers are employed by such firms. The Census Bureau shows that firms with fewer than 10 employees have an average payroll of just $91,000. Firms with fewer than 10 employees employ 12.3 million people and pay $18.5 billion a year in health insurance, which amounts to the substantial sum of $185 billion over 10 years. Most, if not all, firms in this category would want to switch to the no-cost government health plan because they would be freed from these billions in insurance fees.

This single example implies that the cost of health care change is almost 20 percent higher than CBO claims. But that is just part of the tab. There are surely many smaller firms that would want to switch to low-cost government insurance.

CBO -- incredibly -- assumes that only 3 million people will switch from employer-provided coverage to government insurance. But the Lewin Group, a health care policy research and management consulting firm, estimates that 119 million Americans will switch from their current private insurance to government insurance. If these figures are accurate, the program's cost could easily be $4.5 trillion over 10 years, not the $1.04 trillion CBO is claiming. That new financial burden would be a disaster for the deficit.

I thought this plan was supposed to save us money.

Update: I said above that I recently read that Medicare ended up costing about ten times what was estimated. I'm pretty sure I'm remembering that right, but I don't have a link. John Stossel writes today: "In 1965, hospitalization coverage under Medicare was projected to cost $9 billion by 1990. The actual price tag was $66 billion. " I don't know if he's looking at the same parameters as the stat I'm recalling, but even his lower numbers make the point.

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