Small Biz Health Care Daily: About Those Cost Estimates…

Government is notorious for being way off on how much new programs eventually wind up costing. One reason is that spending cuts or spending restraint that are promised when a bill is passed rarely come to fruition. For good measure, programs just keep on expanding, while government has no incentives to control costs.

Has that process already started with the health bill being considered in the U.S. Senate?

On Friday, November 20, The Hill reported the following:

Senate Democrats' newly unveiled healthcare bill could cost as much as $1.6 trillion over the next decade, nearly double the amount the Congressional Budget Office first predicted, a former CBO official said Friday. In an estimate released this afternoon by the conservative-leaning American Enterprise Institute (AEI), departed CBO analyst Joseph Antos stressed his former employer's prediction that the bill would cost $848 billion actually depends on future Medicare cuts and reforms Congress is unlikely to authorize or enforce.

Antos is worried that changes in reimbursements for doctors and hospitals will never materialize, and that the bill would add substantially to the deficit over the coming decade. His concerns are right on the mark. Interestingly, as The Hill noted, the actual CBO estimates hinted at similar concerns.

Interestingly
Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Small Biz Health Care Daily: Senate Bill’s Burdens on Entrepreneurs, Innovators, Investors and Businesses

Well, we’ve finally gotten the details on Senate Majority Leader Harry Reid’s government health care plan. As expected, it’s costly on so many fronts.

Let’s just take a look at some of the taxes and red tape costs that would hit entrepreneurs, businesses, innovators and their employees:

• An increase in the Medicare payroll tax for upper income earners. The total top tax rate for the self-employed would rise from 2.9% to 3.4%.

• A 40% excise tax on more comprehensive health insurance plans.

• Employers with more than 50 workers would face a “play-or-pay” penalty tax of $750 for each fulltime employee if they fail to offer health care coverage.

• An individual mandate for insurance coverage would carry a tax penalty for noncompliance.

• Employers would take on another mandated burden by having to report the value of health benefits on W-2 forms.

• Businesses also would have to send 1099-Misc forms to corporations.

• Over-the-counter, non-prescription medicines could no longer be purchased with pre-tax dollars through HSAs, FSAs, and HRAs.

• The penalty for withdrawing funds from HSAs for non-qualifying expenses would be doubled from 10% to 20%.

• Prescription drug manufacturers would be hit by an annual tax of $2.2 billion.

• Medical device manufacturers would be hit with an annual tax of $2 billion.

• Health insurance providers would face an annual tax of $6.1 billion.

• A 5% excise tax on elective cosmetic surgery.

None of this is good news if one is concerned about entrepreneurship, business investment and innovation, job creation, and economic growth.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Small Biz Health Care Daily: Reminder on What Drives Health Care Costs Higher

As the debate over health care policy continues hot and heavy in the Senate, it is critical to keep the basic economics straight.

The Obama White House and other supporters of injecting more government spending into the health care equation continually claim that this will somehow wind up controlling health care costs. That flies directly in the face of what has been a key driver of rising health care costs over the past four-plus decades, that is, third party payments – in particular, government as third-party payer.

In 1960, for example, 75% of national health care expenditures were private expenditures. In addition, 46% of national health care spending came from private out-of-pocket payments. Meanwhile, government’s share stood at 25%.

In 2006 (latest data), private expenditures accounted for 54% of national health care spending. Private out-of-pocket payments had plummeted to only 12% of national expenditures. Meanwhile, government expenditures had risen to 46% of total spending.

To review, the rise in third-party payments – in particular by government – means that health care consumers and providers have few, if any, incentives to be concerned about prices and utilization. For good measure, elected officials and government appointees also have few incentives to be concerned about costs as they are spending other people’s money. These developments and incentives coalesce to drive costs ever higher.

So, to the extent that the debate is focused on more government funding for health care, that means health care costs will be driven up, certainly not down.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Small Biz Health Care Daily: Samuelson on the Costs of Health Care Policy Malpractice

Are you in the mood for some straight shooting on the health care policy agenda being pushed by President Obama and congressional leaders? Well, a November 16 Washington Post column by Robert Samuelson gets a good number of things right.

Samuelson does an excellent job at hitting on both the economic and political realities of this health care effort, as opposed to the claims made by supporters.

For example, Samuelson notes the following:

• Their far-reaching overhaul of the health-care system -- which Congress is halfway toward enacting -- would almost certainly make matters worse. It would create new, open-ended medical entitlements that threaten higher deficits and would do little to suppress surging health costs. The disconnect between what President Obama says and what he's doing is so glaring that most people could not abide it. The president, his advisers and allies have no trouble. But reconciling blatantly contradictory objectives requires them to engage in willful self-deception, public dishonesty, or both.

• Obama's top economic advisers assert that the present proposals would slow the growth of overall national health spending. Outside studies disagree. Three studies (two by the consulting firm the Lewin Group for the Peterson Foundation and one by the Centers for Medicare & Medicaid Services, a federal agency) conclude that various congressional plans would increase national health spending compared with the effect of no legislation. The studies variously estimate that the extra spending, over the next decade, would be $750 billion, $525 billion and $114 billion. The reasoning: Greater use of the health-care system by the newly insured would overwhelm cost-saving measures (bundled payments, comparative effectiveness research, tort reform), which are either weak or experimental. Though these estimates could prove wrong, they are more plausible than the administration's self-serving claims.

Indeed, any serious consideration of health care plans featuring more government regulations, mandates, spending and taxes must come to the conclusion that health care costs will rise substantially. It’s simple economics, no matter what the Obama administration might claim. Those costs, though, will take on varying shapes, including more taxpayer dollars spent, increased private-sector costs, reduced access to quality care and treatments, less investment and innovation, and/or more.

Small businesses today face large annual increases in the cost of health care coverage. That only promises to get worse with these big government health care schemes, due to reduced choices in the marketplace, higher taxes (such as income tax rates and “play or pay” penalties), and mandates and regulations driving up insurance costs.

Samuelson correctly concludes that this is not reform, it’s malpractice.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Small Biz Health Care Daily: Health Care and Start Ups

According to the Post-Bulletin, a Minnesota business owner named Jim Gander does not think that the health care measure winding through Congress will affect his 26-year-old, 125-employee business.

However, Gander is worried “that the proposed legislation will snuff out start-up companies in the crib.”

Gander is incorrect and correct.

He is wrong to assume that the big government health care mess being pushed through Congress will not affect his firm. After all, he will not be able to avoid the fallout from less competition in health care coverage, and the increased costs that come with more government mandates, regulations, programs, spending and taxes, not to mention less competition and fewer choices.

However, Gander is correct in noting that such costs would raise the cost bar much higher for start-ups to get off the ground. Snuffing out start-up firms is one of those quiet, but economically deadly costs that lurks around the health care debate.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Small Biz Health Care Daily: New York Costs for All

New York ranks among the most costly states in most things – especially things tied to government spending, regulation and taxation. That includes health care coverage. New York regulates, and costs escalate.

A November 12 op-ed from The Wall Street Journal by an independent businessman – a writer – living in New York makes some critical points about the national health care debate.

Andrew Heinze noted:

• I'm a registered Democrat living in New York City, and I buy my own health insurance. But now, having seen the health-care reform bill that passed the House, I'm preparing for life without health insurance.

• Before I come to the big question—why will I lose this insurance plan if anything like the House bill becomes law?—I want to address a smaller one. Why do I choose the Empire "Tradition Plus" plan instead of a comprehensive HMO-type plan that covers physician fees, prescriptions, etc.? Because, unlike other states, New York already mandates two things that the current federal health-care reform will mandate. The first mandate prohibits insurers from denying coverage because of a pre-existing medical condition. The second mandate prohibits insurers from denying coverage, or determining prices, based on age. The result is that HMO plans in the state are now very expensive.

• The House health-care reform bill hinges on what it calls a "qualified" health-care plan. Individuals will be required by law either to buy a plan that meets the criteria of a qualified health-care plan or pay a fine. What are those criteria? They're the basic components of a comprehensive HMO-type plan, which means that Empire's "Tradition Plus" will not qualify because it covers only hospital costs. In other words, if President Obama signs into law the kind of health-care reform bill that is currently on the table, I will have only two choices: buy an expensive qualified plan or pay a fine for being uninsured.

Heinze also noted that there is nothing in ObamaCare that would reduce his costs in New York. Instead, New York’s misguided regulatory costs would spread elsewhere. Does the rest of the nation really want to be like New York?

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Small Biz Health Care Daily: ObamaCare and Small Business

Despite opposition from the business community and ever-mounting concerns from consumers (who are voters and taxpayers as well), the Obama White House and congressional leaders keep pushing ahead with big government health care.

Even though these politicians continue to claim that these measures would be good for small business, in reality, the problems for small businesses would be formidable, including facing new mandates and taxes, and higher costs.

Sally Pipes, author of The Top Ten Myths of American Health Care, wrote a piece for the November 6 Investor’s Business Daily titled “Health Reform Would Bury Small Business.” She noted the following:

• Several new studies show that ObamaCare will dramatically increase health costs for most small businesses.

• One study relied on actuarial data from WellPoint, a large health insurer that provided customer data in 14 states where it operates Blue Cross plans. The report concluded that 70% of small businesses would experience higher health insurance premiums if the Democrats' health plan passes.

• … a different study, produced by Blue Cross Blue Shield and the consulting firm Oliver Wyman … estimated that the average small business would experience a 19% jump in premiums within the first five years of ObamaCare's passage.

• A third study, from America's Health Insurance Plans and PricewaterhouseCoopers, found that the reform bill approved by the Senate Finance Committee would result in a 28% increase in premiums for firms with fewer than 50 workers by 2019.

Why would this be the case? A key issue that Pipes highlights is the imposition of new mandates and regulations that would raise the cost of health insurance.

What does that mean for small businesses? Pipes writes: “Managers would likely compensate for these new costs by discontinuing health benefits, cutting wages, holding off on new hires or even laying off workers. Can the Democrats' efforts really be called ‘reform’ if they'd leave workers and businesses alike worse off?”

Good question.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Bank to Expand Small Biz Lending

The story on credit for small business has been a tough one for some time now. Either small businesses are not expending and borrowing due to their economic outlook, or they are finding it hard to get credit.

So, a November 10 Reuters report is a welcome signal.

Reuters noted that JPMorgan Chase & Co. is going to increase its small business lending by $4 billion this year, while adding 300 bankers to serve the small business community. In total, the plan is to boost lending by $10 billion for firms with annual sales of less than $20 million, with 325 new bankers targeted at this group.

For good measure, Reuters noted that JPMorgan back in the summer repaid the $25 billion it received in TARP money.

These are positive developments in a tough climate for small business. Small business is critical to our economic recovery, not government stimulus or bailout efforts. Indeed, the key right now is to get bad government policies out of the way, along with the commensurate costs and uncertainties, so the private sector can get to work building, investing and innovating. Efforts like that announced by JPMorgan are big plusses.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council