Senate Committee's Health Insurance Plan Doesn't Add Up

(MoneyWatch)  The great magicians on the Senate Finance Committee have pulled the rabbit out of their hat to reduce the 10-year cost of their reform plan to $1 trillion. And what have they come up with? According to Senator Kent Conrad (D-ND), they've cut the cost mainly by reducing eligibility for government subsidies. For example, the income limit at which a family of four would receive federal subsidies for buying mandatory insurance would be lowered from 400 percent to 300 percent of the federal poverty level, or $66,000.

To put this in perspective, about 40 percent of U.S. families have household incomes in excess of that amount. Also, where the cost of living is highest, in places like the New York metropolitan area and the San Francisco Bay region, $66,000 does not go very far for a family of four.

Let's dig a little deeper. In northern New Jersey, the least expensive Horizon Blue Cross Blue Shield PPO with decent benefits now costs a family in which the oldest adult is 45-49 years old $945 per month, or $11,340 a year, if they buy that insurance on their own. The Blues' nongroup HMO family plans start at $1262 per month, or $15,144 a year, for an HMO with coinsurance. (That in itself is an eye-opener: when did HMOs start to cost more than PPOs?)

This is not the full cost of insurance to the family. The effective federal tax rate for a family with earnings of $66,000 a year is 11.3 percent. That means they'd be paying 19 percent to 26 percent of their take-home income (before state and local taxes) for health insurance. And it doesn't include other out of pocket costs, such as copayments and coinsurance.

Assuming that we had health insurance exchanges, and that everyone were covered, insurance costs might drop a bit. A public plan in such an exchange, the Commonwealth Fund calculates, could lower premiums by as much as 25 percent if all providers were paid at Medicare rates. But even if that were true, insurance would still cost our New Jersey family at least $9,375 if their breadwinners were not covered by their employers. And as health costs continue to soar, more and more people will be thrown into the individual insurance market.

President Obama has made it clear that he won't accept a health reform plan that increases the budget deficit, and Congressional Democrats are determined to come up with a package that will meet this requirement. This makes sense, but it's crazy to require consumers to buy insurance that's unaffordable to most people who don't have employer-subsidized coverage. Instead of putting so much of the burden on consumers, reformers should think about how to restructure the health care delivery system so that it costs less and delivers more value for the money. Moves in that direction will arouse opposition in the healthcare industry, but my feeling is that many healthcare providers are ready for change.