Tomi Lahren Is What’s Wrong with Obamacare

Over the weekend, as commentators Chelsea Handler and Tomi Lahren engaged in a political debate, a comment by the latter unwittingly pointed to one of the singular problems of Obamacare. When Handler asked what health plan she belonged to, Lahren responded, “Luckily I am 24 so I am still on my parents’…” Cue sarcastic laughter from the crowd.

The liberal audience in Pasadena mocked Lahren for her hypocrisy—attacking Obamacare while benefiting from it by staying on her parents’ health insurance—but they weren’t wrong in their criticism. While Lahren rightly pointed out that Obamacare “fails the very people that it’s intended to help,” if she wants to know the root cause of that failure, she should look in the mirror.

The Slacker Mandate Is Aptly Named

Since then, the case against this particular mandate has only increased. A National Bureau of Economic Research paper released last year found a significant economic impact: “We find evidence that employees who were most affected by the mandate, namely employees at large firms, saw wage reductions of approximately $1,200 per year. These reductions appear to be concentrated among workers whose employers offer employer-sponsored health insurance; however, they do not seem to be only borne by parents of eligible children or parents more generally.”

As the Wall Street Journal noted last year, the paper made clear that “no alleged government benefit is free and people should be allowed to make the trade-offs for themselves.” Apparently, however, alleged “conservative” Lahren believes otherwise.

The Tomi Lahren Case Study

Lahren’s comments provide a perfect case study against the under-26 mandate, in two respects. First, the “dependent” mandate has few statutory limits—whether income, lack of access to employer coverage, or both. That a pundit like Lahren can hold lucrative media contracts while remaining on her parents’ health coverage speaks to the absurdity of Obamacare’s definition of “dependent.”

Second, it proves Lahren’s criticism of Obamacare that the law “fails the very people it’s intended to help.” Because Lahren refuses to buy her own insurance plan, she raises premiums 1) for her parents’ co-workers, who have to pay for Lahren’s health costs as part of their coverage and 2) on insurance exchanges, where individuals are older and costlier than average precisely because many young adults remain on their parents’ policies.

With upper-middle-class households largely obtaining coverage through employers, and households of more modest means going through exchanges instead, the under-26 mandate represents a sizable transfer of wealth from the working class—who pay higher premiums—to the affluent—who gain the benefit of “free” coverage for their children. So Lahren is correct that Obamacare “fails the very people it’s intended to help”—because of people like her, who grab government “benefits” irrespective of the other individuals those “benefits” harm.

The end of the 2012 Joint Economic Committee paper noted that “a welfare state administered by the private sector, yet mandated by government, remains a welfare state at its core.” If Lahren wants to help the people Obamacare hurts, or even if she just wants to adhere to the conservative political beliefs she purports to follow, then perhaps she should use the coming weeks to explore her own health insurance options, rather than remaining part of the Obamacare welfare state she claims to abhor yet perpetuates.

This post was originally published at The Federalist.

Profits Before Principles: How AARP Wins When Seniors Lose

A report originally compiled by staff for Sen. Jim DeMint.

REPORT HIGHLIGHTS

  • AARP functions as an insurance conglomerate with a liberal lobbying arm on the side.  Independent experts and former AARP executives admit that the organization’s billions of dollars raised from its business enterprises – most notably the sale of health insurance plans – have compromised the organization’s mission and independence.
  • AARP depends on profits, royalties, and commissions to make up over 50% of its annual budget.  Membership dues from seniors account for only about 20% of AARP’s revenue.
  • AARP’s $458 million in health insurance revenue in 2011 would rank it as the nation’s sixth-most profitable health insurer.
  • The health care law, which AARP lobbied heavily for, could lead to over $1 billion in new AARP health insurance profits over the next decade by forcing seniors off Medicare Advantage plans into Medigap supplemental coverage.
  • AARP earns more profit the higher premiums rise on seniors in Medigap plans, charging a “royalty fee” of 4.95% of every premium dollar paid by seniors on these plans.
  • In 2011, AARP failed to disclose to its senior membership that it lobbied Congress to oppose Medigap reform, legislation that could lower senior premiums by as much as 60%, and save seniors $415 per year on average.
  • AARP could lose as much as $1.8 billion in revenue over ten years if Medigap reforms pass and successfully lower senior premiums.
  • Documents show close coordination between Obama Administration and AARP, including efforts to deceive the public.  In November 2009, a senior AARP executive wrote to the White House saying “we will try to keep a little space between us” on health care – because AARP’s “polling shows we are more influential when we are seen as independent, so we want to reinforce that positioning….The larger issue is how best to serve the cause.”
  • AARP has benefitted by supporting the Obama Administration’s unpopular health care law.  Unlike other forms of insurance, AARP’s Medigap insurance plans were exempted from many of the health care law’s mandates, including the ban on pre-existing condition discrimination.
  • The Obama Administration has not publicly criticized AARP’s business practices, even though it has publicly attacked other insurance companies with much smaller profit margins than those generated by AARP’s Medigap insurance.
  • Democrats continue to praise AARP – HHS Secretary Sebelius called them the “gold standard” for “accurate information” – even though AARP earns more profit the higher Medigap premiums rise for seniors.

Even though President Obama has criticized Republicans for placing seniors at the mercy of insurance companies, the health care law he signed allows organizations like AARP to continue discriminating against Medigap applicants with pre-existing conditions.

 

Introduction

The AARP bills itself as the nation’s premier senior advocacy group, but has opposed important reforms to Medigap supplemental insurance that would save seniors, on average, hundreds of dollars a year.

Why? There are $1.8 billion reasons.

The reforms currently being proposed to Medigap would drastically reduce the “royalty fees” AARP generates by peddling insurance to its members by an estimated $1.8 billion over ten years. If AARP supported these reforms, which are sure to save seniors money, the lobbying group would lose billions.

This report shows how the AARP has a history of being compromised by its lucrative insurance businesses.  The pressure group’s opposition to Medigap reform is just the latest instance where its financial enterprises have trumped the well-being of its members.

AARP is mounting a “You’ve Earned a Say” campaign to solicit member viewpoints about how to reform entitlements, but our examination of the organization’s actions over the years shows AARP executives, who seek to boost their bottom lines, always have the biggest say.

The AARP Empire

Founded in 1958, AARP is now an organization with an annual budget exceeding $1 billion.  The organization spent $206 million to acquire its headquarters building in Washington, DC more than a decade ago.[1]  According to its most recently filed tax returns, AARP spent more than $246 million on postage, and over $280 million on compensation in 2010.[2]  In that same year, AARP provided compensation of over $100,000 to 543 separate employees, including one senior executive who received nearly $1.2 million in compensation.[3]

While AARP claims to be a membership-driven organization, in reality most of its revenue comes not from member dues but from “royalty fees” generated from the sale of other products, namely health insurance.  “Royalty fees” are payments AARP receives for putting its brand name on certain products and services.  So while insurance companies provide a tangible product and service in exchange for the premiums they charge, AARP receives more than half a billion dollars per year for essentially playing the middle man.

According to its 2011 financial statements, more than half of AARP’s revenue came from royalty fees – over $704 million of its $1.35 billion in total revenue last year.[4]  Revenues from health insurer United Health Group comprised nearly two-thirds of AARP’s total “royalty fee” revenue, or $457.6 million.[5]  By comparison, in 2011 AARP generated only $265.8 million from membership dues – just over half the amount received from the sale of AARP-branded insurance products.[6]

AARP’s royalty fees have risen significantly in recent years, making the organization ever more dependent on the sale of insurance policies to fund AARP’s massive payroll.  Between 2001 and 2011, AARP’s total royalty fees rose by more than 350% – from $196.7 million in 2001 to over $704 million last year.[7]  Much of this increase comes from additional health insurance-related revenue.  Over the past five years, AARP has generated over $2 billion in revenue from United Health Group alone – $284 million in 2007,[8] $414 million in 2008,[9] $427 million in 2009,[10] $441 million in 2010,[11] and $458 million in 2011.[12]

AARP’s $458 million in insurance revenue in 2011 would rank it as the nation’s sixth-most profitable insurer, based on data collected by Fortune magazine.[13]  For instance, insurer Health Net generated only $204 million in net revenue last year – on over $13.6 billion in total revenue.[14]  By contrast, AARP’s $458 million in insurance-based “royalty fees” go directly to the organization’s bottom line.

AARP’s Questionable Insurance Practices

Even as it claims to be a non-profit advocacy organization, AARP has received criticism from many quarters for its heavy reliance on revenue from insurance sales.  Marilyn Moon, a former AARP executive, said “there’s an inherent conflict of interest” because AARP is “very dependent on sources of income.”[15]

AARP’s dependence on “royalty fee” income has resulted in numerous controversies over the years.  For instance, in 2008 a congressional inquiry[16] found that AARP was using potentially misleading language in its marketing materials; seniors thought they were buying comprehensive health insurance, but in reality purchased policies covering only a limited amount of health costs.  Following a public outcry, AARP ordered an investigation,[17] and eventually stopped selling these types of limited benefit plans.[18]

More recently, the tax implications of AARP’s significant “royalty fees” have come under scrutiny.  An investigation by several members of the House Ways and Means Committee last year raised questions about whether or not AARP’s licensing revenue should be considered “royalty fees” or “commissions.”[19]  If the revenue in question should in fact be classified as “commissions,” then AARP could owe significant amounts of back taxes on billions of dollars in revenue.  The Ways and Means members referred the matter to the Internal Revenue Service, and requested an IRS investigation.[20]

The Medigap Cash Cow

The Ways and Means member investigation also made clear that one of AARP’s prime sources of revenue is the sale of Medigap-branded supplemental insurance plans.  AARP does license Medicare Advantage plans, along with a Medicare Part D prescription drug plan.  However, AARP receives a flat financial payment from United Health Group for its Medicare Advantage and Part D plans, regardless of the number of people enrolled in each plan.  Conversely, AARP receives a percentage of total Medigap premiums paid – meaning that while AARP receives no financial benefits if its Medicare Advantage or Part D plan enrollment rises, it will receive a windfall if its Medigap plan generates additional customers, or those customers pay higher premiums.

The health care law includes more than $300 billion in cuts to Medicare Advantage.[21]  As a result of these payment reductions, enrollment in Medicare Advantage plans will be cut in half, with 7.4 million fewer seniors enrolled.[22]  Many of these 7.4 million seniors will need supplemental coverage through Medigap, to fund catastrophic expenses not covered by Medicare.

Because the health care law will have the effect of migrating millions of seniors from Medicare Advantage plans – which are less lucrative financially to AARP – to more-lucrative Medigap supplemental coverage, the Ways and Means member report concluded that the organization could receive a windfall exceeding $1 billion over the next ten years thanks to the law.[23]

Medigap Reform with Bipartisan Appeal

The potential Medigap-related windfall for AARP resulting from the health care law is not the only instance in which the organization’s financial interests have coincided with its policy positions.  In recent months, a renewed focus on reforming entitlements, and making Medicare more sustainable, has prompted new attention to various proposals to reform Medigap plans.  While these plans would benefit most seniors financially, they would harm AARP’s financial interests – so perhaps not surprisingly, AARP has decided to oppose them.

Under the proposals being discussed, the traditional Medicare program would be reformed to provide catastrophic coverage, while Medigap would provide limited supplemental coverage.  For the first time in the program’s history, seniors would know their Medicare costs would not exceed a set amount.  In exchange, Medigap supplemental coverage, which covers co-payments and deductibles, would also be reformed, so that seniors would face an out-of-pocket deductible not covered by insurance.

Reform to Medigap insurance plans has generated bipartisan appeal.  Versions of this reform have been proposed by the Simpson-Bowles Commission,[24] the Rivlin-Domenici commission on debt and deficits, [25] Sens. Tom Coburn (R-OK) and Joe Lieberman (D-CT),[26] and even President Obama’s most recent budget.[27]  Policy-makers in both parties believe that, by limiting first-dollar coverage of medical expenses through Medigap, seniors would serve as smarter purchasers of health insurance, such that overall spending in Medicare might decline modestly.

Although some seniors might pay slightly more out-of-pocket under these changes, a study from the Kaiser Family Foundation said that “the savings for the average beneficiary” under Medigap reform “would be sufficient to more than offset his or her new direct outlays for Medicare cost sharing.”[28]  According to Kaiser, nearly four in five Medigap policy-holders would receive a net financial benefit from this reform – with those savings averaging $415 per senior each year – because creating a new deductible for all Medigap plans will cause premiums to fall.[29]

Under Medigap reform, seniors would spend much less money on premiums.  Just as with automobile insurance, or with Health Savings Account policies for individuals under age 65, adopting a higher deductible would yield significant premium savings for Medigap policies.  The Kaiser study found that under one proposed reform, Medigap premiums would plummet by an average of over 60%, from nearly $2,000 per year to only $731.[30]  Because less money from Medigap policy-holders would be diverted to administrative overhead, seniors would be able to keep their own money to finance their own health care.

AARP Wins When Seniors Lose

The overall premise of Medigap reform is simple: Less money going to insurance companies means greater financial savings for most seniors.

Unfortunately for AARP, things are not that simple.  As one independent financial adviser has said, AARP’s sales tactics are a “dirty little secret” that are “all about fattening the coffers of the organization.”  And the biggest “dirty little secret” of all is that AARP has a major financial incentive to keep premiums high for seniors.[31]

The House Ways and Means Committee members’ investigation last year found that AARP receives a percentage of each senior’s Medigap premium dollar.[32]  The organization’s “royalty fee” totals 4.95% of every premium dollar paid.  So, similar to a salesman pushing the most expensive product in order to receive a higher commission, regardless of the customer’s needs,  AARP has an incentive to sell more Medigap policies – and to sell the most expensive Medigap policies – even if seniors do not need the insurance.  The higher the cost of seniors’ Medigap policies, the more money AARP makes.

Based on AARP’s existing contractual arrangements and the Kaiser Family Foundation study projections, it is relatively simple to calculate the projected financial loss to AARP under Medigap reform.[33]   If premiums decline by more than $1,200 per year, as the Kaiser study predicted, AARP stands to lose an average of $62 in “royalty fees” for every senior enrolled in its Medigap insurance.  With nearly 3 million seniors enrolled in AARP’s Medigap plan, those numbers add up – over $181 million in one year, and $1.8 billion over the course of a decade.[34]  With the organization generating total revenue of $1.35 billion in 2011, Medigap reform would result in an immediate loss of over 13% of AARP’s annual revenue.[35]

AARP’s Covert Campaign to Kill Medigap Reform

Given its financial interest in keeping Medigap premiums high, it is perhaps unsurprising that AARP engaged in a covert lobbying campaign designed to kill Medigap reform, and keep its existing “royalty fee” regime in place.  Last year AARP wrote to members of the congressional “supercommittee” on deficit reduction, asking them not to include Medigap reforms – which, as noted above, would benefit four out of five Medigap policy-holders, but significantly harm AARP’s financial interests.

AARP published excerpts of their letter to the “supercommittee” on its website.[36]  But AARP has yet to put anything on its website indicating that the organization has been privately contacting Members of Congress, asking them not to reform Medigap – and preserve AARP’s lucrative Medigap commissions.

Two years ago, an AARP spokesman told CNN that the organization doesn’t lobby Congress on Medigap issues “at all.”[37]  While the organization is apparently trying to keep its actions secret, the fact remains that AARP is lobbying Congress against Medigap reform, opposing changes that will just so happen to save AARP members tens of billions, but that would also cost AARP billions.

AARP Works Against Its Members

Whereas last year AARP actively lobbied against Medigap reforms that would help its members but hurt AARP financially, three years ago the organization did NOT lobby for Medigap reforms that would help its members but could hurt AARP financially.  Specifically, even after enactment of the health care law, Medigap plans are still permitted to impose waiting periods on senior citizen applicants with pre-existing conditions.  AARP, despite its stated support for ending pre-existing condition restrictions,[38] imposes waiting periods on its own members applying for Medigap coverage[39] – and stood idly by as an attempt to end this practice within Medigap was stricken from the health care bill before it became law.

Section 1234 of House Democrats’ June 2009 health care discussion draft would have prohibited pre-existing condition discrimination for certain Medigap applicants – achieving one of AARP’s chief goals.[40]  However, last year the Washington Post claimed that the Medigap provision “was dropped from the legislation during congressional negotiations because it would have increased Medicare costs, according to a House Democratic congressional aide.”[41]

The Congressional Budget Office scored provisions eliminating pre-existing condition discrimination in Medigap as costing about $400 million per year.[42]  However, AARP had previously stated that the organization “would gladly forego every dime of revenue to fix the health care system.”[43]  As noted above, its $700 million in “royalty fees” last year far exceeds the $400 million annual cost of ending Medigap pre-existing condition discrimination.  It remains unclear why this provision was dropped from the bill, if AARP was so interested in foregoing profits in order to help its members.

In addition to allowing AARP to continue imposing waiting periods on Medigap applicants, the law enacted in March 2010 also exempted AARP’s lucrative Medigap policies from several other new insurance regulations.[44]  At a December 2009 hearing,[45] AARP’s Board Chair claimed to have no idea that legislation that she and the AARP had previously endorsed included numerous exemptions for Medigap plans, including an exemption from the ban on pre-existing condition discrimination.[46]

After the numerous Medigap-related exemptions included in the health care law were publicly exposed, AARP eventually endorsed legislative changes to end some of the exemptions.[47]  However, despite this public turn-around, AARP has yet to explain to the public why it allowed these exemptions to be enacted in the first place – if the organization is not motivated by its own financial interests, as it claims.  Moreover, the organization has not apologized to its members for failing to act and end pre-existing condition discrimination in Medigap plans two years ago, and the impact such failure has had on AARP’s own members.

Members REVOLT

Documents released by a House Energy and Commerce Committee oversight investigation reveal just how strongly AARP members opposed their organization’s behavior during the health care debate three years ago.  The files show overwhelming opposition from AARP members to the legislation, based on summaries of AARP call center activity:

July 23, 2009 – 77 members support; 1,031 oppose

July 28, 2009 – 36 members support; 4,174 oppose

July 29, 2009 – 23 members support; 2,656 oppose[48]

On a single day (July 28, 2009) during the height of the debate, 1,897 individuals cancelled their membership in AARP to protest its position on the health care bill.[49]

The documents also reveal that AARP members were well aware of the organization’s financial conflicts, and believed that these conflicts were influencing AARP policy.  One member from Oklahoma called in and complained that:

AARP has a conflict of interest between selling insurance and helping senior citizens.  Until it decides which one is more important, the $$$ or the people, it is deceiving old folks into thinking it works for their benefit.  Actually it works for the insurance companies [sic] benefit and interests, which is why it is so gung-ho on the health care reform bill….Not OK with me.[50]

Members also complained about “perceived partisanship on AARP’s part” – and the documents reveal this to be an accurate concern.  In November 2009, a senior AARP executive wrote to the White House saying “we will try to keep a little space between us” on health care – because AARP’s “polling shows we are more influential when we are seen as independent, so we want to reinforce that positioning….The larger issue is how best to serve the cause.”[51]  In other words, the organization was attempting to protect its image by publicly deceiving its members – acting detached in public, even as AARP was frantically lobbying behind the scenes to ram the legislation through for the good of the liberal cause.

AARP’s Misguided Political Focus

It is perhaps unsurprising that AARP would focus on “serv[ing] the cause” of liberalism, because many of its senior executives have strong liberal connections.  When the organization hired its current CEO, Barry Rand, one Capitol Hill publication noted that “New AARP Chief Gave Big to Obama.”[52]  Indeed, Mr. Rand has given tens of thousands of dollars in contributions to liberal Democrats over the years.[53]  Many other members of AARP’s executive team also have strong connections to liberal causes; the head of AARP’s government relations and advocacy program was a senior adviser in the Clinton Administration,[54] while other AARP key executives have worked for Sen. Ted Kennedy,[55] Rep. Geraldine Ferraro,[56] and the National Wildlife Federation, a liberal environmental group.[57]

The political philosophy of the organization’s leadership results in AARP mounting advocacy campaigns trumpeting liberal talking points that frequently have little basis in fact.  For instance, in September 2011 AARP released an advertisement with seniors claiming that “I paid into my Medicare,” and decrying any efforts to “cut our benefits.”[58]  However, the ad did not acknowledge what an Urban Institute study makes clear: Most seniors receive more in Social Security and Medicare benefits than they paid in taxes during their lifetime.[59]  An Associated Press story based on the Urban Institute study – “What You Pay for Medicare Won’t Cover Your Costs” – was initially placed on aarp.org, but was later removed from the website, perhaps because its conclusions represent inconvenient truths to AARP.[60]

Other ads run by the AARP during last year’s debt limit debate were also debunked as false and misleading.  In June 2011, the Washington Post’s “Fact Checker” column awarded an AARP ad four “Pinocchios” for “perpetuat[ing] the worse stereotypes about how easy it would be to balance the budget.  At a time when the nation’s fiscal crisis – amid the looming retirement of the baby-boom generation – demands informed and reasoned debate, the AARP misinforms its members about the choices the nation faces.”[61]

Of course, AARP has a financial interest in misinforming its members – because the organization derives much of its revenue from preserving the status quo.  In launching a “multi-million dollar” ad campaign featuring misleading claims, AARP made clear it wanted no changes to the existing Medicare benefit structure.[62]  As outlined above, changes to the Medicare benefit – such as Medigap reform – would cost AARP billions, while saving many seniors hundreds of dollars per year.  By blocking reforms that would dent its profits, AARP hurts seniors two ways – first, by preventing seniors from saving hundreds of dollars in Medigap premiums, and second, by leaving the Medicare program less solvent for future generations.

Democrats Encourage AARP’s Abuses

Even as AARP racks up billions of dollars in insurance profits by overcharging seniors for Medigap plans, Democrats encourage these abuses by giving AARP special favors, and ignoring its questionable sales tactics.  As noted above, the health care law exempted AARP’s lucrative Medigap insurance plans from the ban on pre-existing condition discrimination, thus allowing AARP to continue to impose waiting periods on individuals applying for coverage.  However, that’s not the only exemption that Medigap coverage received in the law; Medigap insurance was also exempted from:

  • The law’s $500,000 cap on executive compensation for insurance industry executives. [63]  Thanks to this exemption, AARP can continue to pay its senior executives more than $1 million in annual compensation.[64]
  • The tax on insurance companies that will total more than $14 billion per year.[65]   Medigap insurance received this exemption even though AARP generates more money from insurance industry “royalty fees” than it received from membership dues, grant revenues, and private contributions combined.[66]
  • The requirement imposed on other health insurance plans to spend at least 85 percent of their premium dollars on medical claims.[67]  Medigap policies are currently held to a far less restrictive 65 percent standard, and the difference can be used to fund higher profits to AARP paid out of the pockets of its senior citizen members.[68]

In addition to these numerous exemptions for Medigap insurance provided in law, the Administration provided a further exemption for Medigap coverage during the rulemaking process.  The Department of Health and Human Services’ rule on insurance rate review exempted Medigap plans from further scrutiny of their premium increases.[69]  In arriving at this determination, HHS concluded that insurance plans like Medigap coverage “do not appear to be a principal focus of the Affordable Care Act” – meaning that because Medigap plans were exempted from the law’s other regulatory requirements, they should be exempted from rate review as well.[70]

Obama Administration Hypocrisy

The frequent exemptions given to Medigap insurance – a product line where AARP holds the largest market share – directly contradict the claims made by Democrats about the 2,700 page health care law.  For instance, Department of Health and Human Services Secretary Kathleen Sebelius’ official biography claims that she “is implementing reforms that end many of the insurance industry’s worst abuses.”[71]  However, with respect to Medigap insurance, that claim is entirely false.  Because Medigap plans were exempted from the law’s new requirements, organizations like AARP can continue to discriminate against applicants with pre-existing conditions, and overcharge seniors in order to generate greater profits.

Even as the Obama Administration fails to acknowledge that the health care law exempts Medigap insurance from all of its new requirements, it has attacked conservatives’ Medicare reform proposals for granting too much power to insurers.  In her speech to the 2012 Democratic National Convention, Secretary Sebelius criticized Republicans for “let[ting] insurance companies continue to cherry-pick who gets coverage and who gets left out, priced out, or locked out of the market.”[72]  And in his speech to the same convention, President Obama said that “no American should have to spend their golden years at the mercy of insurance companies.”[73]  Given that the legislation President Obama signed into law exempted Medigap coverage for seniors from virtually all of its new regulatory requirements, it is more than a little hypocritical for his Administration to criticize others for leaving seniors to the mercy of insurers.

The Administration has yet to answer a basic question at the heart of the numerous exemptions granted to Medigap insurers in their 2,700 page health care law: If the law’s protections are so good, then why are seniors left out of its supposed benefits when it comes to their supplemental insurance?  Unfortunately, the answer could be that AARP has been unwilling to forfeit its profits, and so the Obama Administration has looked the other way as the organization continues to take advantage of seniors.

Kathleen Sebelius: Watchdog or Lapdog?

Even as it has been willing to politically strong-arm insurance companies with whom it disagrees, the Obama Administration’s Department of Health and Human Services has failed to confront AARP about its questionable business practices.  In March 2010, as the Administration was gearing up to ram through its health care law, Secretary Sebelius asked other insurers to “give up some short-term profits” for the nation’s good.[74]  At the time, estimates by Fortune magazine indicated that health insurer profits averaged about 2.2 percent.[75]  Yet Secretary Sebelius made no such request of AARP to give up some of its revenues – even though its Medigap profit margin was 4.95 percent, more than double that of the insurance industry as a whole.

Shortly after the health law passed, Secretary Sebelius undertook a publicity campaign to “encourage” insurance companies to ban rescissions and extend coverage to young adults under age 26 earlier than was required under the law.  While the Secretary made very public efforts to have insurance companies “abandon…efforts to rescind health insurance coverage from patients who need it most,” she made no attempt to encourage AARP and other Medigap insurers to stop discriminating against applicants with pre-existing conditions.[76]  At an implementation briefing to Congress shortly after the law passed, Senate Republican staff asked HHS officials why the Department was asking other insurers voluntarily to change their business practices, but was not asking AARP to stop discriminating against Medigap applicants.  While Jeanne Lambrew, head of the Department’s Office of Health Reform, promised to look into the matter, the Department never took action.

Rather than ask AARP to reform its business practices, Secretary Sebelius instead has blindly offered the organization praise.  In an October 2010 speech to the AARP convention, she hailed the organization as “the gold standard in cutting through spin and complexity to give people the accurate information they need to make the best choices.”[77]  Even though AARP has a strong financial conflict-of-interest in its Medigap insurance – because the organization earns more profit when seniors pay more in premiums – Secretary Sebelius still claimed that AARP constituted “the gold standard” in giving “accurate information.”

The National Association of Insurance Commissioners (NAIC) has previously expressed strong concerns about the percentage-based compensation model under which AARP receives much of its revenue.  In fact, Section 18 of NAIC’s Producer Model Licensing Act recommends that states require explicit disclosure by insurers, and clear written acknowledgement by consumers, of any percentage-based compensation arrangement, due to the potential for abuse.  As a former insurance commissioner, Secretary Sebelius should be well aware of the financial conflicts inherent when an organization like AARP receives a percentage of every Medigap dollar paid by seniors.  Yet the Secretary apparently ignored these concerns, and went on to praise AARP as a source of impartial advice, even though even former AARP executives have criticized the organization as hopelessly compromised by financial conflicts-of-interest.

In her time heading HHS, Secretary Sebelius has undertaken clearly political actions, including those that violated the law.  Just last week, the Office of the Special Counsel publicly released a report concluding that the Secretary engaged in political activity that violated the Hatch Act prohibitions on federal officials campaigning for partisan political causes.[78]  It is therefore quite reasonable to ask whether Secretary Sebelius has also engaged in a pattern of politically-motivated selective enforcement – attacking other insurers when convenient, but failing to examine AARP’s questionable business practices, because AARP supports the President’s liberal causes.

As noted above, AARP executives e-mailed the White House in November 2009 stating that “the larger issue is how best to serve the cause.”  It would thus appear that both AARP and the Administration recognize their political interests are aligned.  Certainly the Administration’s actions – exemptions for Medigap coverage included both in statute and in rulemaking; attacks on insurers with smaller profit margins than AARP; failure to criticize AARP’s percentage-based compensation model – are consistent with a governing philosophy that permits AARP to engage in questionable and abusive behavior towards seniors, so long as AARP funnels the profits from said behavior back into supporting the Administration’s liberal causes.

In April 2010, Secretary Sebelius wrote to insurers to stop rescinding insurance policies earlier than required under the law, encouraging them “not to wait until the fall to do the right thing.”[79]  America’s seniors have been waiting for years for Secretary Sebelius, and the entire Obama Administration, to do the right thing – to apply the law fairly, without regard to political persuasion.  Unfortunately, the facts suggest that the Administration has knowingly looked the other way, and failed to take on AARP over its business practices – because political advantage outweighs the need for impartial enforcement, or extending the supposed benefits of the health care law to senior citizens.

Conclusion

Though it purports to be a seniors advocacy organization, AARP functions in many respects as an insurance conglomerate with a liberal lobbying arm on the side.  Independent experts and even former AARP executives have admitted that the organization’s billions of dollars raised from its business enterprises – most notably the sale of health insurance plans – have compromised the organization’s mission and independence.  As one consultant put it: “Either you’re a voice for the elderly or you’re an insurance company – choose one.”[80]

As this report has demonstrated, AARP has acted against its members’ interest, but in its own financial interests, on several occasions during the major health care debates of the past several years.  First AARP endorsed a health care law that gave its most lucrative product offering – Medigap insurance – a major opportunity to solicit new members, exempted those Medigap plans from the law’s regulatory regime, and allowed AARP to continue imposing waiting periods on the sickest seniors looking to buy Medigap coverage.  More recently, AARP has engaged in a covert lobbying campaign designed to kill Medigap reforms that would benefit nearly four in five policy-holders and improve Medicare’s solvency – but could cost AARP billions.

This year, AARP has embarked upon a “You’ve Earned a Say” campaign, purportedly designed to solicit members’ opinions on ways to reduce the deficit.  However, the organization has yet to solicit members’ viewpoints about its own actions.  For instance:

  1. How many members know that senior AARP executives have received over $1 million in compensation from the organization – and that 543 individuals received over $100,000 in compensation last year?
  2. How many members know that AARP has generated over $2 billion in revenue from selling health insurance plans in the past five years?
  3. How many members know that AARP imposes waiting periods on Medigap applicants with pre-existing conditions – and stood idly by as provisions to eliminate Medigap pre-existing condition discrimination were stricken from the health care law?
  4. How many members know that nearly four in five Medigap plan holders would financially benefit from reforms, to the tune of several hundred dollars per year?
  5. How many members know that Medigap reforms that would help seniors could cost AARP billions of dollars in lost revenue?

At the very least, AARP should be up-front and honest with its members about the massive financial stake it has in this debate.  Better yet, the organization should start thinking less about its bottom line and more about its members, and endorse reforms that will help the vast majority of Medigap policy-holders.

 

[1]Behind the Veil: The AARP America Doesn’t Know, report by Reps. Wally Herger and Dave Reichert, March 29, 2011,  http://herger.house.gov/images/stories/pdf/20110329aarpreport.pdf, p. 6.

[2]AARP Inc., 2010 Internal Revenue Service Form 990, http://www.aarp.org/content/dam/aarp/about_aarp/annual_reports/2010_990_aarp.pdf, p. 1.

[3] Ibid., pp. 8-9.

[4] AARP Inc., 2011 Consolidated Financial Statements,  http://www.aarp.org/content/dam/aarp/about_aarp/annual_reports/2012-05/Consolidated-Financial-Statements-2011-2010-AARP.pdf, p. 3.

[5] Page 9 of the AARP 2011 financial statements notes that “the service provider United Healthcare Corporation accounted for 65% of total royalties earned in 2011 and 2010.”  65% of the total $704 million in royalties equates to $457.6 million received from United Healthcare.

[6] Ibid., p. 3.

[7] Letter from AARP Chief Operating Officer Thomas Nelson to Rep. Dave Reichert, November 2, 2009, pp. 3-4.

[8]AARP Inc., 2008 Consolidated Financial Statements,  http://assets.aarp.org/www.aarp.org_/TopicAreas/annual_reports/assets/AARPConsolidatedFinancialStatements.pdf, pp. 4-9.

[9]Ibid., pp. 3-9.

[10]AARP Inc., 2009 Consolidated Financial Statements, http://assets.aarp.org/www.aarp.org_/cs/misc/2009_aarp_consolidated_financial_statements_12_31_09.pdf, pp. 3-9.

[11] AARP Inc., 2010 Consolidated Financial Statements, http://www.aarp.org/content/dam/aarp/about_aarp/annual_reports/2010_aarp_consolidated_financial_statements_12_31_10.pdf, pp. 3-9.

[12] AARP Inc., 2011 Consolidated Financial Statements.

[13] Fortune 500, Health Care: Insurance and Managed Care, May 23, 2011, http://money.cnn.com/magazines/fortune/fortune500/2011/industries/223/index.html.

[14] Ibid.

[15] Gary Cohn and Darrell Preston, “AARP’s Stealth Fees Often Sting Seniors With Costlier Insurance,” Bloomberg December 4, 2008,  http://www.bloomberg.com/apps/news?pid=newsarchive&refer=&sid=a4OkPQIPF6Kg.

[16] Letter from Senate Finance Committee Ranking Member Chuck Grassley to AARP CEO William Novelli, November 3, 2008, http://www.grassley.senate.gov/news/upload/110320081.pdf.

[17] Robert Pear, “AARP Orders Investigation Concerning Its Marketing,” New York Times November 18, 2008,   http://www.nytimes.com/2008/11/19/us/19insure.html?_r=1.

[18] Emily Berry, “United Stops Selling AARP Limited-Benefit Insurance,” Amednews.com May 28, 2009,  http://www.ama-assn.org/amednews/2009/05/25/bisd0528.htm.

[19] Behind the Veil: The AARP America Doesn’t Know.

[20] Letter from House Ways and Means Committee Members Wally Herger, Charles Boustany, and Dave Reichert to Internal Revenue Service Commissioner Douglas Shulman, December 21, 2011,  http://waysandmeans.house.gov/uploadedfiles/letter_to_irs-shulman_12-15-11.pdf.

[21] Congressional Budget Office, score of H.R. 6079, Repeal of Obamacare Act, July 24, 2012, http://cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf.

[22] Robert Book and Michael Ramlet, What Changes will Health Care Reform Bring to Medicare Advantage Plan Benefits and Enrollment?, Medical Industry Leadership Institute- Carlson School of Management, October 2011, http://americanactionforum.org/sites/default/files/Embargoed_Book+Ramlet_MILI-Working-Paper_2011-10-13_Final.pdf.

[23] Behind the Veil: The AARP America Doesn’t Know, Table 4, p. 16.

[24] The Moment of Truth, report of the National Commission on Fiscal Responsibility and Reform, December 2010,

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf, p. 39.

[25] Restoring America’s Future, report of the Bipartisan Policy Center’s Debt Reduction Tax Force, November 2010, http://bipartisanpolicy.org/sites/default/files/BPC%20FINAL%20REPORT%20FOR%20PRINTER%2002%2028%2011.pdf, pp. 52-53.

[26] Overview of Coburn/Lieberman Medicare reform proposal, June 2011, http://www.coburn.senate.gov/public/index.cfm?a=Files.Serve&File_id=1ea8e116-6d15-46ba-b2e0-731258583305.

[27] White House Fiscal Year 2013 budget submission to Congress, February 2012, http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf, p. 35.

[28] Kaiser Family Foundation, “Medigap Reforms: Potential Effects of Benefit Restrictions on Medicare Spending and Beneficiary Costs,” July 2011, http://www.kff.org/medicare/upload/8208.pdf, p. 8.

[29] Ibid.

[30] Ibid., Exhibit 2, p. 6.

[31] “AARP’s Stealth Fees Often Sting Seniors With Costlier Insurance.”

[32] Behind the Veil: The AARP America Doesn’t Know.

[33] Kaiser Family Foundation, “Potential Effects of Benefit Restrictions on Medicare Spending and Beneficiary Costs,” Exhibit 2, p. 6.

[34] Behind the Veil: The AARP America Doesn’t Know, Table 2, p. 9.

[35] AARP Inc., 2011 Consolidated Financial Statements, p. 3.

[36] AARP Press Release, “AARP to Super Committee: Don’t Cut Medicare, Social Security Benefits,” October 19, 2011, http://www.aarp.org/about-aarp/press-center/info-10-2011/aarp-to-super-committee-dont-cut-medicare-social-security-benefits.html.

[37] Carol Costello, “150,000 Seniors In Revolt,” CNN American Morning January 6, 2010, http://www.cnn.com/video/?/video/politics/2010/01/06/costello.aarp.health.care.cnn.

[38] AARP Press Release, “AARP Thanks Senate for Passing Health Care Reform,” December 24, 2009,  http://www.aarp.org/about-aarp/press-center/info-03-2010/aarp_thanks_senateforpassinghealthcarereform.html.

[39] New York State Department of Financial Services, list of insurers offering Medicare supplemental coverage, http://www.dfs.ny.gov/insurance/caremain.htm#insurer.

[40] House Tri-Committee Health Reform Discussion Draft, June 19, 2009, http://democrats.energycommerce.house.gov/Press_111/20090619/healthcarereform_discussiondraft.pdf, p. 358.

[41] Susan Jaffe, “Medigap Supplemental Coverage Can Be Too Pricey for Younger Medicare Beneficiaries,” Kaiser Health News March 7, 2011,  http://www.washingtonpost.com/wp-dyn/content/article/2011/03/07/AR2011030703978.html.

[42] Congressional Budget Office, preliminary estimate of House Tri-Committee Health Reform Discussion Draft, July 7, 2009, http://democrats.energycommerce.house.gov/Press_111/20090708/cbomedicare.pdf, p. 4.

[43] Letter from AARP Chief Operating Officer Thomas Nelson to Rep. Dave Reichert, November 2, 2009, p. 4.

[44] Karl Rove, “ObamaCare Rewards Friends, Punishes Enemies,” Wall Street Journal January 6, 2011, http://online.wsj.com/article/SB10001424052748704405704576063892468779556.html.

[45] House Energy and Commerce Subcommittee on Health hearing, “Prescription Drug Price Inflation: Are Prices Rising Too Fast?” December 8, 2009, http://energycommerce.house.gov/hearings/hearingdetail.aspx?NewsID=7588.

[46] AARP Press Release, “AARP Endorses Affordable Health Care for America Act,” November 5, 2009, http://www.aarp.org/about-aarp/press-center/info-11-2009/affordable_health_care_act_endorsement.html.

[47] Letter to the Editor, Wall Street Journal, by AARP President Lee Hammond, January 11, 2011, http://www.aarp.org/about-aarp/press-center/info-01-2011/aarp_letter_to_theeditor.html.

[48] House Energy and Commerce Committee, investigation into closed-door Obamacare negotiations, supplemental materials for June 8, 2012 memorandum, http://archives.republicans.energycommerce.house.gov/Media/file/PDFs/060812relevantdocsmemoIII.pdf, pp. 63-68.

[49] Ibid., p. 73.

[50] Ibid., p. 79.

[51] Ibid., p. 88.

[52] Jeffrey Young, “New AARP Chief Gave Big to Obama,” The Hill March 12, 2009, http://thehill.com/business-a-lobbying/3963-new-aarp-chief-gave-big-to-obama.

[53] Ibid.

[54] “AARP Leadership Profile: Nancy LeaMond,” http://www.aarp.org/about-aarp/executive-team/info-2009/Nancy_Leamond.html.

[55] “AARP Leadership Profile: Debra Whitman,” http://www.aarp.org/about-aarp/executive-team/debra_whitman/.

[56] “AARP Leadership Profile: Kevin Donnellan,” http://www.aarp.org/about-aarp/executive-team/info-2009/Kevin_Donnellan.html.

[57] “AARP Leadership Profile: Cindy Lewin,” http://www.aarp.org/about-aarp/executive-team/info-2010/cindy_lewin.html.

[58] Michael Muskal, “AARP Ads: Hands Off Social Security and Medicare,” Los Angeles Times September 21, 2011, http://www.standard.net/stories/2011/09/21/aarp-ads-hands-social-security-and-medicare.

[59] Gene Steuerle and Stephanie Rennane, “Social Security and Medicare Taxes and Benefits Over a Lifetime,” Tax Policy Center, June 2011, http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf.

[60] While the Associated Press story from December 30, 2010 has been removed from the AARP website, it can still be found at http://www.cbsnews.com/2100-204_162-7197847.html.

[61] Glenn Kessler, “AARP’s Misleading Ad about Balancing the Budget,” Washington Post June 20, 2011, http://www.washingtonpost.com/blogs/fact-checker/post/aarps-misleading-ad-about-balancing-the-budget/2011/06/17/AGQKRsYH_blog.html.

[62] AARP Press Release, “AARP Launches New TV Ad Calling on Congress to Protect Medicare and Social Security from Harmful Cuts,” June 16, 2011, http://www.aarp.org/about-aarp/press-center/info-06-2011/aarp-launches-new-tv-ad-calling-on-congress-to-protect-medicare-and-social-security-from-harmful-cuts.html.

[63] Section 9014 of the Patient Protection and Affordable Care Act (PPACA) as amended, http://housedocs.house.gov/energycommerce/ppacacon.pdf, pp. 816-18.

[64] AARP Inc., 2010 Internal Revenue Service Form 990, pp. 8-9.

[65] PPACA, Section 9010(h)(3)(C) as amended, p. 815.

[66] AARP Inc., 2011 Consolidated Financial Statements,  p. 3.

[67] PPACA, Section 1001, p. 22.

[68] Section 1882(r)(1) of the Social Security Act, 42 U.S.C. 1395ss(r)(1).

[69] Department of Health and Human Services, Rate Increase Disclosure and Review, Final Rule, Federal Register May 23, 2011, http://www.gpo.gov/fdsys/pkg/FR-2011-05-23/pdf/2011-12631.pdf, pp. 29966-67, 29985.

[70] Department of Health and Human Services, Rate Increase Disclosure and Review, Proposed Rule, Federal Register 23 December 2010, http://www.gpo.gov/fdsys/pkg/FR-2010-12-23/pdf/2010-32143.pdf, pp. 81007, 81009, 81026.

[71] Official HHS Biography of Secretary Kathleen Sebelius, http://www.hhs.gov/secretary/about/biography/index.html.

[72] Remarks by HHS Secretary Kathleen Sebelius at the Democratic National Convention, September 4, 2012, http://dyn.politico.com/printstory.cfm?uuid=CB187143-9624-3760-BC9CC2DBE9C60BD7.

[73] Remarks by the President at the Democratic National Convention, September 6, 2012, http://www.whitehouse.gov/the-press-office/2012/09/07/remarks-president-democratic-national-convention.

[74] Jane Norman, “Sebelius Urges Health Care Insurers to Trim Their Profits,” CQ HealthBeat March 10, 2010, http://www.commonwealthfund.org/Newsletters/Washington-Health-Policy-in-Review/2010/Mar/March-15-2010/Sebelius-Urges-Health-Insurers-to-Trim-Their-Profits.aspx.

[75] “Top Industries: Most Profitable,” 2009 Fortune 500, http://money.cnn.com/magazines/fortune/fortune500/2009/performers/industries/profits/.

[76] HHS Press Release, “HHS Secretary Kathleen Sebelius Urges Wellpoint to Immediately Stop Dropping Coverage for Women with Breast Cancer,” April 23, 2010, http://www.hhs.gov/news/press/2010pres/04/20100423a.html.

[77] Remarks of HHS Secretary Kathleen Sebelius at AARP Orlando@50+ Conference, October 1, 2010, http://www.hhs.gov/secretary/about/speeches/sp20101001.html.

[78] Office of Special Counsel, File No. HA-12-1989 (Kathleen G. Sebelius), September 12, 2012, http://www.osc.gov/documents/hatchact/Hatch%20Act%20Report%20on%20HHS%20Secretary%20Kathleen%20Sebelius.pdf.

[79] HHS News Release, “Momentum Building on Sebelius’ Challenge to Insurers to Ban Rescission Before Law Takes Effect in September,” April 28, 2010, http://www.hhs.gov/news/press/2010pres/04/20100428a.html.

[80] Cited in Dan Eggen, “AARP: Reform Advocate and Insurance Salesman,” Washington Post October 27, 2009,  http://www.washingtonpost.com/wp-dyn/content/article/2009/10/26/AR2009102603392_pf.html.

 

Updated JEC Member Viewpoint: Sen. Jim DeMint on the $840 Billion Price Tag of Obama’s Broken Promise on Premiums

This Member Viewpoint by Sen. Jim DeMint was originally published by the Joint Economic Committee.

A $12,791 Difference for the Average Family, $4,318 for the Average Individual

When campaigning for the presidency, then-candidate Barack Obama repeatedly promised that under his health care reform proposal, health insurance premiums would go down by $2,500 by the end of his first term.1 The end of President Obama’s first term is now approaching, and the change in average family premiums is surprisingly close to candidate Obama’s promise: the problem is, that change is in the wrong direction. Instead of falling $2,500, the average employer-sponsored family premium has increased $3,065.2

The difference, then, between candidate Obama’s promise and President Obama’s record is $5,565.3 But that is just the difference for 2012. If the promised $2,500 decline is allocated proportionally over four years and across different plan types, the cumulative gap between actual and promised premiums for private employer based health insurance equals $12,832 for the average family and $4,331 for the average individual (excluding any rebates).4

Of course, to be fair, the Medical Loss Ratio (MLR) provision of Obamacare will result in some health insurance enrollees receiving rebate checks from their insurance providers. This provision is Obamacare’s attempt at driving down insurance costs by dictating how insurance companies can spend money freely given to them by employers and individuals who wish to purchase their services. For the 2011 plan year, an estimated $1.3 billion in rebate checks will be sent to about 16 million enrollees, for an average rebate amount of $85.5 Assuming a similar level of rebates go out in 2013 for the 2012 plan year, the MLR rebates reduce the gap between promised premiums and actual premiums by only three-tenths of one percent, to a cumulative difference of $12,791 for the average family and $4,318 for the average individual. That is $12,791 less money that was spent (on something other than health insurance), saved, or invested by the average family and $4,318 less by the average individual.

When you add up all the extra money – beyond the level promised by candidate Obama – Americans have spent on health insurance over the past four years, the economy-wide impact is an astounding $840 billion.6 That’s as much as the President’s failed stimulus package, and not so far off from the initially reported $940 billion ten-year cost of Obamacare (the updated ten-year cost is $1.76 trillion, not including the costs of implementation).7 What’s worse though is that this figure will only rise over time as Obamacare’s many taxes and regulations continue to drive up the cost of health insurance.
In terms of full-time jobs, the $840 billion difference is equivalent to the cost of private-sector employers supporting an average of 3.2 million jobs each year between 2009 and 2012, and a total of 5.2 million jobs in 2012 alone.8

With more than $840 billion less in Americans’ pockets than Obama promised, it’s no wonder our economy continues to struggle. It is the government-knows-best view of the Obama Administration and Democrats in Congress that has contributed to the American economy stalling out. His promise to reduce premiums by $2,500 and his administration’s estimate that the stimulus would cut the unemployment rate to 5.6% (by August 2012) show President Obama’s conviction that government is the solution to driving down costs and creating jobs.9 Unfortunately, that conviction has proven unfounded. Excessive government spending and intervention have not driven down health insurance premiums by $2,500, but rather contributed to a $3,065 increase. And unprecedented deficit-financed stimulus spending has not brought the unemployment rate down to 5.6%, but rather kept it up above 8% with employers and investors holding back as Obamacare and other regulations have increased their costs and as unsustainable deficit spending has given rise to fear over coming tax hikes.

 

Analytical Appendix

Population and Insurance Coverage

The Census Bureau publishes data on the number of people in the United States with health insurance coverage. These data are broken down into private insurance coverage and government insurance coverage. Within private coverage, the data are segmented into individuals with employment based health insurance and direct purchase health insurance. The data from the Census Bureau are available through 2011. Data for 2012 are estimated based on the average annual percentage increase in each category of insurance from 1995-2011.
For allocation of insured individuals between individual or self-only plans and family plans, data were taken from the 2011 Medical Expenditure Panel Survey (MEPS). These data show that individual or self-only plans made up 50.2% of all private sector employer health plans while family plans comprised the remaining 49.8%. This breakdown was also applied to the direct purchase market and across all years. The resulting allocation of individuals across private plan types is shown below.

For each family plan, there are assumed to be 3.05 members. This statistic is based on a breakdown of direct purchase family policies by size from ehealthinsurance.com, and it assumes an average of eight members per plan within the category of 6+ members.

Premium Costs

Data on average annual premium costs for employment based health insurance come from the Kaiser Family Foundation Annual Employer Health Benefits Survey. Data on premium costs for direct purchase health insurance come from the ehealthinsurance.com Annual Cost and Benefit Reports. As of this updated publication, the data on direct purchase plans from ehealthinsurance.com were only available through 2011. The analysis conservatively assumes no rise in direct purchase premiums from 2011 to 2012.

Promised Reductions

The promise of a $2,500 reduction in the average family premium by the end of President Obama’s first term is applied as a $625 per year reduction in costs for the average family premium (-$625 in 2009, -$1,250 in 2010, -$1,875 in 2011, and $-2,500 in 2012). The applicable promised reduction for the average individual or self only premium is $927 for employer based health insurance and $1,077 for direct purchase health insurance. These individual premium promised reduction amounts are based on the ratio of individual to family premium costs in 2008, when the promise was made. At that time, the average employment based individual premium was equal to 37.1% of the average family premium (.371*-$2,500 = -$927) while the average direct purchase individual premium was 43.1% of the average direct purchase family premium (.431*-$2,500 = -$1,077).

Aggregate Estimates of the Broken Promise

For aggregate estimates of amounts paid for health insurance vs. those promised, the number of people in each insured group (individual employment based, individual direct purchase, family employment based, and family direct purchase) was multiplied by the difference between the promised premium cost and the actual premium cost in each year from 2009 to 2012. The sum of additional premium costs across these privately-insured individuals and families from 2009 to 2012 amounts to $843 billion ($843,135,995,165). The new Medical Loss Ratio (MLR) component of the Affordable Care Act is estimated to result in roughly $1.3 billion ($1,343,496,719) in rebates to be paid by insurers to enrollees (beginning in August 2012) for the 2011 plan year. In keeping with the conservative estimate that direct purchase premiums did not rise from 2011 to 2012, MLR rebates in 2013 (for the 2012 plan year) are also assumed to hold steady at $1.3 billion. Excluding the $2.6 billion of cost-reducing MLR rebates, the total gap between promised and actual premium costs equals $840 billion ($840,449,001,727).

Jobs Equivalent Cost Estimates

Estimates translating the annual cost differences between promised and actual premiums into the cost of private-sector job creation were obtained by dividing the total economy-wide cost difference for each year by the average employee compensation for full-time, private-sector employees in that year. Compensation data come from the Bureau of Labor Statistics Employer Costs for Employee Compensation Survey (data were available through the second quarter of 2012). The table below shows the annual jobs equivalent costs estimates.

 

Endnotes

1 Freedom Eden, “Obama: 20 Promises for $2,500,” March 22, 2010, http://freedomeden.blogspot.com/2010/03/obama-20-promises-for-2500.html.
2 Kaiser Family Foundation, Annual Employer Health Benefits Surveys 2008-2011, http://www.kff.org/insurance/index.cfm.
3 Data on 2012 premiums costs for direct purchase premiums were not yet available. This analysis relies on a conservative estimate that direct purchase premiums will not rise in 2012, but will remain constant at their 2011 level.
4 Data on private, direct purchase health insurance premiums for 2008-2011 come from ehealthinsurance.com. See Analytical Appendix for a detailed analysis of estimates.
5 Kaiser Family Foundation, “Insurer Rebates under the Medical Loss Ratio: 2012 Estimates,” April 2012, http://www.kff.org/healthreform/upload/8305.pdf
6 See Analytical Appendix.
7 Congressional Budget Office, “Estimate of direct spending and revenue effects for the amendment in the nature of a substitute released on March 18, 2010,” http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr4872_0.pdf, and “Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act,” March 13, 2012, http://cbo.gov/publication/43076.
8 Estimates based on data from the Bureau of Labor Statistics Employer Costs for Employee Compensation Survey (quarterly data through the 2nd quarter of 2012) and private-sector, full-time employee compensation. In the first two quarters of 2012, the average cost of employee compensation was $67,020.
9 Unemployment estimate comes from: Christina Romer and Jared Bernstein, “The Job Impact of the American Recovery and Reinvestment Plan,” January 9, 2009, http://www.politico.com/pdf/PPM116_obamadoc.pdf.

JEC Member Viewpoint: Sen. Jim DeMint on the $805 Billion Price Tag of Obama’s Broken Promise on Premiums

This Member Viewpoint by Sen. Jim DeMint was originally published by the Joint Economic Committee.

 

When campaigning for the presidency, then-candidate Barack Obama repeatedly promised that under his health care reform proposal, health insurance premiums would go down by $2,500 by the end of his first term.1 The end of President Obama’s first term is now approaching, and the change in average family premiums is surprisingly close to candidate Obama’s promise: the problem is, that change is in the wrong direction. Instead of falling $2,500, the average employer-sponsored family premium has increased $2,393.2

The difference, then, between candidate Obama’s promise and President Obama’s record is $4,893.3 But that is just the difference for 2012. If the promised $2,500 decline is allocated proportionally over four years and across different plan types, the cumulative gap between actual and promised premiums for private health insurance equals $12,271 for the average family and $4,177 for the average individual.4

Of course, to be fair, the Medical Loss Ratio (MLR) provision of Obamacare will result in some health insurance enrollees receiving rebate checks from their insurance providers. This provision is Obamacare’s attempt at driving down insurance costs by dictating how insurance companies can spend money freely given to them by employers and individuals who wish to purchase their services. For the 2011 plan year, an estimated $1.3 billion in rebate checks will be sent to about 16 million enrollees, for an average rebate amount of $85.5 Assuming a similar level of rebates go out in 2013 for the 2012 plan year, the MLR rebates reduce the gap between promised premiums and actual premiums by less three-tenths of one percent, to a cumulative difference of $12,230 for the average family and $4,163 for the average individual. That is $12,230 less money that was spent (on something other than health insurance), saved, or invested by the average family and $4,163 less by the average individual.

When you add up all the extra money – beyond the level promised by candidate Obama – Americans have spent on health insurance over the past four years, the economy-wide impact is an astounding $805 billion.6 That’s as much as the President’s failed stimulus package, and not so far off from the initially reported $940 billion ten-year cost of Obamacare (the updated ten-year cost is $1.76 trillion, not including the costs of implementation).7 What’s worse though is that this figure will only rise over time as Obamacare’s many taxes and regulations continue to drive up the cost of health insurance.

In terms of full-time jobs, the $805 billion difference is equivalent to the cost of private-sector employers supporting an average of 3 million jobs each year between 2009 and 2012, and a total of 4.7 million jobs in 2012 alone.8

With more than $800 billion less in Americans’ pockets than Obama promised, it’s no wonder our economy continues to struggle. It is the government-knows-best view of the Obama Administration and Democrats in Congress that has contributed to the American economy stalling out. His promise to reduce premiums by $2,500 and his administration’s estimate that the stimulus would cut the unemployment rate to 5.7% (by July 2012) show President Obama’s conviction that government is the solution to driving down costs and creating jobs.9 Unfortunately, that conviction has proven unfounded. Excessive government spending and intervention have not driven down health insurance premiums by $2,500, but rather contributed to a $2,393 increase. And unprecedented deficit-financed stimulus spending has not brought the unemployment rate down to 5.7%, but rather kept it up at 8.2% with employers and investors holding back as Obamacare and other regulations have increased their costs and as unsustainable deficit spending has given rise to fear over coming tax hikes.

Analytical Appendix

Population and Insurance Coverage

The Census Bureau publishes data on the number of people in the United States with health insurance coverage. This data is broken down into private insurance coverage and government insurance coverage. Within private coverage, the data is segmented into individuals with employment based health insurance and direct purchase health insurance. The data from the Census Bureau goes through 2010. Data for 2011 and beyond is estimated based on the average annual percentage increase in each category of insurance from 1995-2010.
For allocation of insured individuals between individual or self-only plans and family plans, data was taken from the 2011 Medical Expenditure Panel Survey (MEPS). This data shows that individual or self-only plans made up 50.2% of all private sector employer health plans while family plans comprised the remaining 49.8%. This breakdown was also applied to the direct purchase market and across all years. The resulting allocation of individuals across private plan types is shown below.

For each family plan, there are assumed to be 3.05 members. This statistic is based on a breakdown of direct purchase family policies by size from ehealthinsurance.com, and it assumes an average of eight members per plan within the category of 6+ members.

Premium Costs

Data on average annual premium costs for employment based health insurance come from the Kaiser Family Foundation Annual Employer Health Benefits Survey. Data on premium costs for direct purchase health insurance come from the ehealthinsurance.com Annual Cost and Benefit Reports. As of publication, the data from both of these sources was only available through 2011. The analysis conservatively assumes no rise in premiums from 2011 to 2012.

Promised Reductions

The promise of a $2,500 reduction in the average family premium by the end of President Obama’s first term is applied as a $625 per year reduction in costs for the average family premium (-$625 in 2009, -$1,250 in 2010, -$1,875 in 2011, and $-2,500 in 2012). The applicable promised reduction for the average individual or self only premium is $927 for employer based health insurance and $1,077 for direct purchase health insurance. These individual premium promised reduction amounts are based on the ratio of individual to family premium costs in 2008, when the promise was made. At that time, the average employment based individual premium was equal to 37.1% of the average family premium (.371*-$2,500 = -$927) while the average direct purchase individual premium was 43.1% of the average direct purchase family premium (.431*-$2,500 = -$1,077).

Aggregate Estimates of the Broken Promise

For aggregate estimates of amounts paid for health insurance vs. those promised, the number of people in each insured group (individual employment based, individual direct purchase, family employment based, and family direct purchase) was multiplied by the difference between the promised premium cost and the actual premium cost in each year from 2009 to 2012. The sum of additional premium costs across these privately-insured individuals and families from 2009 to 2012 amounts to $807 billion ($807,326,158,132). The new Medical Loss Ratio (MLR) component of the Affordable Care Act is estimated to result in roughly $1.3 billion ($1,343,496,719) in rebates to be paid by insurers to enrollees (beginning in August 2012) for the 2011 plan year. In keeping with the conservative estimate that premium costs did not rise from 2011 to 2012, MLR rebates in 2013 (for the 2012 plan year) are also assumed to hold steady at $1.3 billion. Excluding the $2.6 billion of cost-reducing MLR rebates, the total gap between promised and actual premium costs equals $805 billion ($804,639,164,694).

Jobs Equivalent Cost Estimates

Estimates translating the annual cost differences between promised and actual premiums into the cost of private-sector job creation were obtained by dividing the total economy-wide cost difference for each year by the average employee compensation for full-time, private-sector employees in that year. Compensation data comes from the Bureau of Labor Statistics Employer Costs for Employee Compensation Survey (data for 2012 was available only through the first quarter). The table below shows the annual jobs equivalent costs estimates.

 

Endnotes

1 Freedom Eden, “Obama: 20 Promises for $2,500,” March 22, 2010, http://freedomeden.blogspot.com/2010/03/obama-20-promises-for-2500.html.
2 Kaiser Family Foundation, Annual Employer Health Benefits Surveys 2008-2011, http://www.kff.org/insurance/index.cfm.
3 Data on 2012 premiums costs for both employer based and direct purchase premiums were not yet available. This analysis relies on a conservative estimate that premiums will not rise in 2012, but will remain constant at their 2011 level.
4 Data on private, direct purchase health insurance premiums for 2008-2011 comes from ehealthinsurance.com. See Analytical Appendix for a detailed analysis of estimates.
5 Kaiser Family Foundation, “Insurer Rebates under the Medical Loss Ratio: 2012 Estimates,” April 2012, http://www.kff.org/healthreform/upload/8305.pdf
6 See Analytical Appendix.
7 Congressional Budget Office, “Estimate of direct spending and revenue effects for the amendment in the nature of a substitute released on March 18, 2010,” http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr4872_0.pdf and “Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act,” March 13, 2012, http://cbo.gov/publication/43076.
8 Estimates based on data from the Bureau of Labor Statistics Employer Costs for Employee Compensation Survey (quarterly data through the 1st quarter of 2012) and private-sector, full-time employee compensation. In the 1st quarter of 2012, the average cost of employee compensation was $66,960.
9 Unemployment estimate comes from: Christina Romer and Jared Bernstein, “The Job Impact of the American Recovery and Reinvestment Plan,” January 9, 2009, http://www.politico.com/pdf/PPM116_obamadoc.pdf.

 

JEC Report on Obama’s $800 Billion Broken Promise

Sen. DeMint has released a JEC Member Viewpoint (available online here) quantifying the cost of President Obama’s broken promise to reduce premiums, which reveals another way Obamacare has fallen short for the American people.  The report finds the cumulative cost (through 2012) of Obama’s broken promise on premiums is $805 billion.  During the past four years, the average family has spent $12,230 more on private health insurance than candidate Obama promised, while the average individual has spent $4,163 more.  What’s more, the $805 billion cost of President Obama’s broken premium promise “is equivalent to the cost of private-sector employers supporting an average of 3 million jobs each year between 2009 and 2012.”

Even as the Administration attempts to trumpet its medical-loss ratio rebates as a “benefit” of Obamacare, the below chart demonstrates how $1.3 billion in rebates for both 2011 and 2012 will be dwarfed by the more than $800 billion cost of Obama’s broken premium promise:

Four years ago, candidate Obama repeatedly promised premiums would go down by $2,500 – and his campaign advisors told the New York Times that “we think we could get to $2,500 in savings by the end of the first term, or be very close to it.”  But as today’s report demonstrates, struggling American families – to say nothing of the American economy as a whole – have paid dearly for President Obama’s failure to deliver.  Any way you slice it, that’s not reform.

JEC Member Viewpoint: Sen. Jim DeMint on Mandates to Cover Dependent Children

This Member Viewpoint by Sen. Jim DeMint was originally published by the Joint Economic Committee.

Numerous press reports in recent weeks have focused on what actions Congress may take in the event that Obamacare is repealed, or struck down in its entirety by the Supreme Court.  Many of these stories have focused on the law’s new mandate requiring insurers to cover policy holders’ children under age 26.  Several Members of Congress have expressed support for this provision, and one has even proposed extending the mandate for coverage of dependent children to all those under age 31.[1]  If the latter proposal passes, 28-year-old Mark Zuckerberg, with an estimated net worth of $17.5 billion, would be one of those eligible for dependent coverage under his parents’ health insurance.[2]

While the Obama Administration has attempted to use the under-26 mandate to sell their unpopular health law, the mandate itself is not without costs and perverse incentives, both to the health system and the economy as a whole.  A closer examination of the costs of this new government mandate reveals it may not be the panacea supporters have claimed.

Impact on Costs:  In its interim final rule implementing the under-26 mandate, the Administration claimed the provision would impose transfer costs of $3.5-$6.9 billion annually, and would raise premiums by 1 percent per year.[3]  However, a George Mason University study released in January found that the Administration omitted several key components in its regulatory impact analysis for this rule, understating its cost, potentially by billions.[4]  Given an average premium for employer-sponsored insurance of $15,073 in 2011,[5] an under-26 mandate raising costs by 1 to 3 percent would increase premiums by $151 to $452 per year.[6]  Conservatives have frequently criticized Obamacare for raising health insurance premiums, in direct violation of candidate Obama’s promise to lower them.[7]  Even the Administration admits that the under-26 mandate has led to higher premiums for businesses and families.

Impact on Coverage:  While many press reports have focused on the “children” obtaining coverage thanks to the under-26 mandate, fewer have examined how many individuals have lost coverage due to the federal requirements.  However, studies suggest these numbers are not insignificant.  For instance, multiple[8] studies[9] have suggested that every 1% increase in premiums increases the number of uninsured by approximately 200,000-300,000 individuals nationwide.  With the under-26 mandate raising premiums by at least 1%, and potentially much more for some plans, it is reasonable to conclude that hundreds of thousands of individuals have lost coverage – because they were priced out of the individual market, or because their employers decided to stop offering coverage – as a result of the new requirements.  These newly uninsured individuals represent what authors William Graham Sumner and  Amity Shlaes famously referred to as the “Forgotten Men” – the individuals suffering harm as a result of government intervention.

Meanwhile, the mandate would turn one of the health market’s few remaining natural incentives on its heads, discouraging young adults from purchasing insurance for themselves.  Instead of mandating that health insurance plans include family coverage for adult children, policy should encourage all young adults to purchase an individual health plan that they can afford and keep throughout their lives.

Impact on Jobs:  The under-26 mandate could have a negative impact on jobs and the economy, in two respects.  First, to the extent that businesses are forced to absorb the billions of dollars in costs associated with the mandate, they would prove less eager to take on additional workers, or increase hours for existing workers.  Second, numerous[10] studies[11] have illustrated that extended unemployment benefits tend to lengthen the average duration of unemployment, and increase the unemployment rate, by discouraging individuals from looking for work.

For similar reasons, some would argue that the under-26 mandate likewise provides financial incentives that discourage work, thereby increasing unemployment.  Both the Congressional Budget Office and then-Speaker Pelosi have admitted that Obamacare’s health insurance provisions will hinder the labor market.  The CBO stated that the law as a whole will “discourage work,”[12] reducing the labor supply by about 800,000 jobs.[13]  Pelosi encouraged young people to “leave your work” and “go be creative and be a musician or whatever,” because Obamacare would provide them with health insurance, thanks to the under-26 mandate and similar provisions.[14]

The heightened focus on under-26 coverage in many respects focuses on the symptom of a larger problem.  Put simply, fewer Americans would need to remain on their parents’ health insurance if they had stable, full-time work.  As of last year, a majority of firms, and more than five of six firms with more than 25 employees, offer insurance coverage to their workers.[15]  However, most firms do not offer health benefits to part-time or temporary workers.[16]  Recent surveys indicating that half of all recent college graduates are unemployed or under-employed – a devastating indictment of the Obama Administration’s failed economic policies – illustrate the real reason why the under-26 provision has attracted so much attention:  Because millions of young Americans can’t find full-time work.[17]

Given prolonged economic stagnation and its toll on young Americans, economic growth and job creation – not new government mandates – should take precedence.  Just as conservatives insisted on reducing the length of extended unemployment benefits as part of the payroll tax extension earlier this year, removing disincentives for young people to seek full-time employment may be one ingredient necessary to restoring the job market to full strength.

As policymakers ponder the fate of the law in the wake of the Supreme Court’s ruling, Congress would be wise to consider the economic impacts listed above.  Re-instituting a government mandate on the private sector would have significant economic costs, and would also undermine the cause of individual liberty in the process.  A welfare state administered by the private sector, yet mandated by government, remains a welfare state at its core.

 

[1] Louise Radnovsky, Naftali Bendavid, and Sara Murray, “Tension in GOP Over Health Care Response,” Wall Street Journal May 23, 2012, http://online.wsj.com/article/SB10001424052702304019404577420210854278188.html.

[2] “Mark Zuckerberg,” Forbes 400 Profile, http://www.forbes.com/profile/mark-zuckerberg/.

[3] “Interim Final Rules for Group Health Plans and Health Insurance Issuers Relating to Dependent Coverage of Children to Age 26 Under the Patient Protection and Affordable Care Act,” Federal Register May 13, 2010, http://www.gpo.gov/fdsys/pkg/FR-2010-05-13/pdf/2010-11391.pdf, Tables 1 and 5, pp. 27127-29.

[4] Christopher J. Conover and Jerry Ellig, “Beware the Rush to Presumption, Part A: Material Omissions in Regulatory Analyses for the Affordable Care Act’s Interim Final Rules,” Mercatus Center Working Paper 12-01, January 2012, http://mercatus.org/sites/default/files/publication/Beware_the_Rush_to_Presumption_PartA_ConoverEllig.pdf, pp. 14-15, 40-49.

[5] 2011 Kaiser Family Foundation/HRET Employer Health Benefits Survey, http://ehbs.kff.org/pdf/2011/8225.pdf, Exhibit 1.1, p. 1.

[6] Bruce Japsen, “Young Adults’ Coverage May Cost Parents Even More,” New York Times Prescriptions blog, November 23, 2011, http://prescriptions.blogs.nytimes.com/2011/11/23/young-adults-coverage-may-cost-parents-even-more/

[7] Freedom Eden, “Obama: 20 Promises for $2,500,” http://freedomeden.blogspot.com/2010/03/obama-20-promises-for-2500.html.

[8] Todd Gilmer and Richard Kronick, “It’s the Premiums, Stupid: Projections of the Uninsured through 2013,” Health Affairs Web Exclusive, April 5, 2005, http://content.healthaffairs.org/cgi/content/full/hlthaff.w5.143/DC1.

[9] Government Accountability Office, Impact of Premium Increases on Number of Covered Individuals is Uncertain GAO Report HEHS-98-203R, July 7, 1998, http://archive.gao.gov/paprpdf2/160930.pdf, pp. 3-4.

[10] Bhashkar Mazumder, “How Did Unemployment Insurance Extensions Affect the Unemployment Rate in 2008-10?” Chicago Fed Letter No. 285, April 2011, http://www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2011/cflapril2011_285.pdf.

[11] Lawrence F. Katz and Bruce D. Meyer, “The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment,” NBER Working Paper No. 2741, October 1988, http://www.nber.org/papers/w2741.pdf.

[12] Congressional Budget Office, “The Budget and Economic Outlook: An Update,” August 2010, http://cbo.gov/sites/default/files/cbofiles/ftpdocs/117xx/doc11705/08-18-update.pdf, Box 2-1, Effects of Recent Health Care Legislation on Labor Markets, pp. 48-49.

[13] Lester Feder and Kate Nocera, “CBO: Health Law to Shrink Workforce by 800,000,” Politico February 10, 2011, http://www.politico.com/news/stories/0211/49273.html.

[14] Nicholas Ballasy, “Pelosi to Aspiring Musicians: Quit Your Job, Taxpayers Will Cover Your Health Care,” CNS News May 14, 2010, http://cnsnews.com/node/65950.

[15] 2011 Kaiser Family Foundation/HRET Employer Health Benefits Survey, Exhibit 2.3, p. 37.

[16] Ibid., Exhibits 2.5 and 2.6, p. 39.

[17] Associated Press, “Half of New Graduates are Jobless or Underemployed,” USA Today April 23, 2012, http://www.usatoday.com/news/nation/story/2012-04-22/college-grads-jobless/54473426/1.

JEC Releases Report on Obamacare’s $4 TRILLION in Tax Increases

Today, JEC issued a Tax Day report on the tax increases in Obamacare.  The major takeaway from the report is that while CBO scores Obamacare as raising taxes by $800 billion over 10 years, the law actually will raise taxes by $4 trillion over 25 years.  The total number of tax increases will explode outside the first decade because the law’s new “Cadillac tax” (which doesn’t take effect until 2018) is not indexed to medical inflation, and the “high-income” tax is not indexed to inflation at all.

As a result, the non-partisan Congressional Budget Office (CBO) concluded last year that Obamacare would raise taxes by 1.2 percent of GDP in 2035 (see Table 6-2 on page 65 here).  Multiplying the average tax increase impact as a percentage of GDP by the CBO’s estimated economic output for the next 25 years reveals that Obamacare will raise taxes by approximately $4 trillion between now and 2035.

To put Obamacare’s tax increases in further perspective, the law will raise taxes by “only” $15 billion this year, but that number will skyrocket to $320 billion – or nearly $3,300 for a family of four – by 2035.

Sen. DeMint has also written an op-ed in today’s Investor’s Business Daily on the issue.  Overall, the report – and the $4 trillion in massive tax increases facing the American people thanks to Obamacare – illustrate perfectly why the 2700-page measure must be repealed.

JEC Member Viewpoint: Sen. Jim DeMint on Obamacare’s $4 TRILLION Tax Increase

This Member Viewpoint by Sen. Jim DeMint was originally published by the Joint Economic Committee.


Highlights

  • Based on CBO data, Obamacare will impose $4 trillion in new taxes by 2035.
  • The “Cadillac” tax will lead to reduced medical benefits and higher taxes across all income classes.
  • The “high-income” surtaxes are not indexed and will eventually hit low- and middle-income families who simultaneously receive Obamacare’s subsidies.
  • Despite President Obama’s campaign promise to reduce average family premiums by $2,500, families are now paying almost $2,400 more.
  • Obamacare’s $4 trillion in taxes across all sectors and income classes will diminish economic growth as the private sector faces both higher prices and lower incomes.

There are many reasons Americans dislike Obamacare: its tremendous and rising costs, which CBO recently revealed to have risen by $51 billion since just last year; the Administration’s unprecedented mandate that all employers, even religious schools and hospitals, pay for employees’ abortion-inducing drugs, sterilization, and contraception; and tens of millions of employees soon to be wondering what happened to President Obama’s promise that, “if you like your insurance, you can keep it.”1

With the April 15th tax deadline just past and individuals and businesses freshly reminded of the $2.3 trillion they paid in federal taxes in 2011, Obamacare will unload an additional $4 trillion in new taxes onto the economy between now and 2035.2 The tax burden may be relatively light this year, at just $15 billion, but come 2035, that burden will be magnified more than 20-fold to $320 billion. Even if the economy in 2035 is not already crushed by the growing burden of old-age entitlements, Medicaid, and a bloated government sector consuming as much as a third of the entire economy, will it really be able to handle an additional $320 billion in new taxes – the equivalent of $3,290 for a family of four?3,4

The Administration would like you to believe that these taxes will not be paid by ordinary, middle-income Americans. Rather, they allege the taxes will be paid by insurance companies that offer “Cadillac” health plans, “high-income” earners and investors, medical device companies, insurance providers, drug manufacturers, and tanning salons. But, in reality, a substantial portion of Obamacare’s $4 trillion in new taxes will be paid by average, everyday Americans.

Take the “Cadillac” tax for example. Not only will the tax quickly begin to hit “Honda” insurance plans because its threshold is not indexed to medical inflation, but it will cause employers to reduce healthcare benefits or drop healthcare coverage entirely. Ironically, the establishment of medical loss ratios within Obamacare makes it nearly impossible for insurance companies to actually pay the “Cadillac” tax because they must devote 80% to 85% of the premiums they charge to the direct provision of healthcare benefits. When scoring the bill, the Congressional Budget Office recognized that the bulk of revenues from the “Cadillac” tax would not be paid by platinum health insurance plans, but rather by employees who are forced to exchange tax-free health insurance benefits for taxable wages after employers reduce or eliminate health insurance.

Next up are the so-called “high income” surtaxes equal to 0.9% of wages above $200,000 for individuals and $250,000 for married couples, and 3.8% of investment income above those amounts. Although classified as “high-income” taxes, the $200,000 and $250,000 thresholds are not indexed for inflation. This means that in just 10 years from now, the so-called “high-income” thresholds will have effectively ratcheted down to $152,000 and $190,000 in today’s dollars. And 40 years from now, when today’s young workers are retiring and beginning to draw down on their investment income, those thresholds will have dropped to $66,000 and $83,000 in today’s dollars.5 In other words, low- and middle-income families who receive subsidies under Obamacare will simultaneously be “high-income” earners taxed to support those subsidies.

And then there are the taxes on the healthcare industry: the insurance companies providing healthcare plans and the companies that develop and manufacture life-saving drugs and medical devices. Taxing these healthcare components will simply drive up the cost of the products and services they offer. The cost of drugs and medical devices will rise, adding a double-whammy to health insurance costs which will be driven up directly by the tax on insurance companies and indirectly by the rising cost of drugs and medical devices paid for by insurance companies.

President Obama campaigned on a promise to reduce the
average family’s health insurance premium by $2,500 within his first term. Yet just the opposite has occurred – the average family is now paying $2,400 more for health insurance.6 Obamacare’s upward pressure on health insurance premiums now and into the future was confirmed by a recent estimate from the Joint Committee on Taxation which concluded that repealing Obamacare would reduce premiums by 2% – 2.5%.

Faced with higher prices across the healthcare sector, consumers will be able to deduct even less of their
healthcare expenses as the cap on itemized deductions falls to 7.5% of AGI (from 10%) and a $2,500 limit for
Flexible Spending Accounts (FSAs) is imposed.

Despite Democrats’ and the Administration’s rhetoric that we can somehow provide insurance to all by simply
holding down costs and making the wealthy pay their fair share, nothing is further from reality. Obamacare
will impose $4 trillion in new taxes on the economy between now and 2035 and these taxes will not be
restricted to the wealthy and profitable healthcare businesses. Instead, the weight of $4 trillion in new taxes
will be spread across all sectors and all income classes as incomes and economic growth decline.

 

1 President Barack Obama, weekly address, August 15, 2009, http://www.youtube.com/watch?v=1LRcLMScEqo.
2 The $4 trillion estimate of new taxes from 2012-2035 is based on CBO’s score of the 2012-2021 revenue provisions (represented as a percent of
GDP) contained in its estimated cost of repeal of Obamacare, including an estimate of 0.70% of GDP in 2021 (excluding the effects of the individual
mandate penalty). In CBO’s 2011 long term budget outlook, the tax provisions of Obamacare are said to rise to 1.2% of GDP by 2035. A straight-line
increase in revenues as a share of GDP, from 0.70% in 2022 to 1.2% in 2035, was applied, along with CBO’s estimates for real GDP, to generate
total tax increases from 2012-2035 of $3.989 trillion in real, 2011 dollars.
3 According to CBO’s June 2011 Long Term Budget Outlook, total federal government spending will equal 33.9% of GDP in 2035.
4 Calculation based on CBO’s projection of a $320 billion tax increase in 2035 (real 2011 dollars) and the Census bureau’s projected population
estimate of about 390 million people in 2035.
5 Estimates based on the social security actuaries’ annual inflation assumption of 2.8% for its intermediate estimates.
6 Kaiser Family Foundation, Employer Health Benefits 2011 Annual Survey, 2011, http://ehbs.kff.org/?page=charts&id=2&sn=16&ch=2116.