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The expansion of health insurance in Massachusetts has been largely financed by the federal government. In an October 21 article in the New England Journal of Medicine, Joel Weissman and JudyAnn Bigby paint a sanguine picture of the cost (to Massachusetts anyway) of expanding health insurance through the state’s 2006 reforms.

The article reports that in the 2006 fiscal year prior to reform, relevant state expenditures on healthcare totaled $1.4 billion. Comparable expenditures are estimated at $2.0 billion for fiscal year 2009, including $805 million in premium subsidies for Commonwealth Care—an annual growth rate of 12.3 percent.

The article reports that “federal financial participation” (including from a special Medicaid waiver) as a source of revenues is projected at $1.3 billion for 2009, a $584 million increase from the pre-reform amount of $688 million in 2006, for an annual growth rate of 22.7 percent.

While other revenue sources changed from 2006 to 2009, the increase in total state expenditures of $591 million is approximately equal to the $584 million increase in federal funding.

A letter to President Obama from 23 prominent economists and published in a New York Times blog recommends four key measures for healthcare reform: deficit neutrality during a ten-year budget window, an excise tax on high-cost insurance plans, a Medicare commission to suggest changes in “the quality and value of services,” and delivery system reforms to address how “hundreds of billions of dollars are spent on care that does nothing to improve outcomes.” The signers endorse reform based on the Senate Finance Committee bill as meeting those objectives.

Neither the Senate Finance Committee bill nor the version approved on November 21 by the Senate for floor debate would likely make a significant dent in federal healthcare spending. Projected reductions in Medicare spending will help finance Medicaid expansion and hundreds of billions of dollars in premium subsidies to persons and families with income up to 400 percent of the federal poverty level. The Congressional Budget Office’s cost, revenue, and deficit projections depend on numerous assumptions and are subject to considerable uncertainty, as well as to pay-go accounting. The cost projection of about $850 billion from 2010 to 2019 would be significantly higher if not for the delayed implementation of Medicaid expansion and premium subsidies. The projected cost for the first ten years after coverage expansion takes effect (2014-2023) is reported to be $1.8 trillion.

The CBO projects ten-year deficit reductions of $102 billion and $72 billion, respectively, from the House and Senate bills, due to projected net receipts from creation of a federal long-term care insurance program, without reflecting the new program’s projected accrual of liabilities. The projected Medicare savings assume that payment rates for many providers would be held below the rate of inflation and that a proposed independent Medicare commission would be “fairly effective in reducing costs.” In his November 19 commentary on the Senate bill projections, CBO Director Douglas Elmendorf stated that extrapolations beyond ten years indicate that Medicare spending growth will average 6 percent over the next two decades (2 percent real growth per beneficiary), compared with annual growth of 8 percent the past two decades (4 percent real growth per beneficiary). He concluded (emphasis added): “Whether such a reduction in the growth rate could be achieved through greater efficiencies in the delivery of healthcare or would reduce access to care or diminish the quality of care is uncertain.”

The economists’ strong statement that “hundreds of billions of dollars are spent on care that does nothing to improve outcomes” implies that there is a large free lunch to be eaten if we just permit panels of experts to tell us “what tests and treatments work and which ones do not.” But there is no free lunch in healthcare reform, regardless of the signers’ wishes.

Substance notwithstanding (to be sure, it’s awful), the updated healthcare reform bill being pushed by the House Democratic leadership contains inflammatory language that makes no pretense of objectivity or decorum. Here are two examples that appear early in the bill’s 1990 pages:

Section 101 calls for the immediate establishment of a federal high-risk pool to offer subsidized health insurance for uninsured people with pre-existing health conditions. It includes a subsection entitled (p. 20) “Protection Against Dumping Risks by Insurers.”  A dispassionate and decorous alternative would be: “Prevention Against Subsidized Rates Attracting Currently Insured People.”

Section 104 calls for immediate federal regulation of health insurance rate changes. It’s entitled (p. 31) “Sunshine on Price Gouging by Health Insurers.” A dispassionate and decorous alternative would be: “National Regulation of Health Insurers’ Rate Changes.”

If the issue of healthcare reform were not so serious, it would be difficult to take this stuff seriously. As it stands, the inclusion of such language in the House bill is, for lack of a better word, frightening.

In a September 30 op-ed, “Abortion and Health Care Reform,” The New York Times opines:

In a rational system of medical care, there would be virtually no restrictions on financing abortions. But abortion is not a rational issue, and opponents have succeeded in broadly denying the use of federal dollars to pay for them, except in the case of pregnancies that result from rape or incest or that endanger a woman’s life.

The writer apparently is ignorant of basic principles of rational insurance design and purchasing. Ethical issues notwithstanding, it can be highly rational for people to be unwilling to pay premiums for coverage of an elective procedure that they are quite sure they will never want or need, and/or which they can pay for out-of-pocket at a cost no greater than the annual charges for the typical cell phone. And it can be quite rational for voters to decide not to include such coverage in federally funded programs. To be sure, abortion often is not a subject for rational discourse—just read the Times’s op-ed.

The long-awaited “Framework for Comprehensive Health Reform” released by Senator Baucus and the “Bipartisan Six” is marginally less prescriptive than H.R. 3200 (and the proposal of the Senate Committee on Health, Education, Labor, and Pensions). The proposal also is alleged to be moderately less expensive than H.R. 3200.

Examples of increased flexibility include: (1) its proposed individual coverage mandate would be less comprehensive given an “affordability” exception, (2) it proposes creation of state-level co-ops instead of a government health insurance plan, (3) health insurance exchanges would be organized at the state rather than national level, and (4) it would permit greater variation in health insurance premiums in relation to a person’s age (reducing premium subsidies from young to old).

Overall, however, the Wall Street Journal’s recent lead editorial, “The Peril’s of BaucusCare,” hits the nail on the head. The proposed Baucus compromise reflects the same basic “government knows best” philosophy and therefore has substantially the same drawbacks as H.R. 3200.

Regarding financing, the Baucus outline proposes lower limits on tax-exempt flexible savings account contributions, and excise taxes on high cost insured and self-insured plans, which in effect would scale back the tax advantage of rich employer-sponsored plans. But, while the proposal eschews income tax surcharges on the affluent, it instead proposes annual fees beginning in 2010 of $6 billion on the “health insurance sector,” $4 billion on the “medical device manufacturing sector,” $2.3 billion on the “pharmaceutical manufacturing sector,” and $750 million on “clinical laboratories.” Moreover, it apparently threatens nonprofit hospitals with a loss of tax-exempt status unless they satisfy new requirements for meeting community needs. Taxing healthcare services and insurers would obviously make healthcare and insurance less rather than more affordable. This bright idea represents pure political expediency.

It’s time to go back to the drawing board.

Scott Harrington is an adjunct scholar at the American Enterprise Institute.