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Back in March, the Congressional Budget Office (CBO) estimated that the new health legislation would reduce the federal budget deficit by about $140 billion over the next ten years and by about 0.5% of gross domestic product in the decade after that. Ever since, analysts have been debating whether we should believe those estimates. Some say the legislation will deliver much larger budget savings than those modest estimates suggest, while others insist it will greatly increase future deficits.

That debate reflects two types of uncertainty about the legislation’s fiscal impact.

The first is technical. As physicist Niels Bohr (not Yogi Berra) once said, prediction is difficult, particularly about the future. CBO had to make hundreds of educated guesses about future health costs and how consumers, employers, providers, insurers, state governments, and federal officials will respond to dramatic changes in the insurance market. Some of those assumptions will be wrong. But observers disagree on which ones and in what direction.

The second uncertainty is political. The new law will change the landscape for future health policy debates. Those changes (which rightly fall outside the scope of CBO cost estimates) may make it easier or harder for future policymakers to address our long-run budget challenges. I suspect that these political uncertainties are the main reason that optimists and pessimists disagree so strongly on the law’s budget impact.

Pessimists argue that to pay for coverage expansions, the legislation ate up budget savings that could otherwise have been used to address our long-run fiscal challenges. By “emptying the quiver” of some desirable policy options, the health law thus indirectly worsened the long-run budget outlook in a way CBO could not capture.

The pessimists also predict that future Congresses will water down or eliminate some budget savings. To make the budget numbers work, lawmakers combined a large helping of dessert (most notably health insurance for an additional 31 million Americans) with a large serving of spinach (for example, a new excise tax on “Cadillac” insurance plans and cuts in Medicare provider payments). History suggests, however, that policymakers often lose their appetite for the greens (see, for example, physician payments in Medicare).

The optimists believe that the fiscal impact will turn out better than CBO predicted. They note the law includes numerous experiments aimed at uncovering ways to rein in health costs while maintaining or improving quality. Among them: restructuring provider payments, increasing funding for comparative effectiveness research, and creating a new independent board to review Medicare payments. We don’t really know how to reduce medical costs today, but by trying many different approaches and learning from their results, the law will eventually enable future Congresses to adopt the most promising reforms.

Successful health reform may also improve future budget politics. Some past proposals to reduce federal involvement in health care – such as increasing the Medicare eligibility age or rolling back the enormous tax subsidy for employer-provided health insurance – have foundered on fears that some people would lose insurance. But by covering millions of uninsured, the health law reduces that risk, and policymakers may be able to take hard steps that until now have been politically impossible.

It’s hard to know how these political uncertainties will balance out. The law did indeed remove some arrows from the policy quiver, and it is easy to imagine policymakers backing down from scheduled spending cuts or tax increases. So the pessimists have a strong case. But the optimists are also right that if the new law succeeds, it will open new ways to rein in federal health spending. I certainly hope so.

This post first appeared on TaxVox, the blog of the Urban-Brookings Tax Policy Center.

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The first rule of hospitals is to try to stay out of them. Unfortunately, that rule must sometimes be broken. So let me suggest a second rule: no one should be alone in a hospital.

Hospitals can work miracles, saving lives and improving quality of life. But they can still be dangerous and (ironically) inhospitable places. Patients need someone by their side not just to provide comfort, but often to monitor their care and act as their advocate.

A natural corollary is that patients should be free to choose as their companions and advocates whomever they most trust in those roles.

I thus find it astounding that, at least until last night, hospitals could refuse to honor advance directives in which a patient had specified who they wanted to have visitation rights and the power to make decisions on their behalf. As President Obama wrote in a memo to HHS Secretary Sebelius:

Yet every day, all across America, patients are denied the kindnesses and caring of a loved one at their sides — whether in a sudden medical emergency or a prolonged hospital stay. Often, a widow or widower with no children is denied the support and comfort of a good friend. Members of religious orders are sometimes unable to choose someone other than an immediate family member to visit them and make medical decisions on their behalf.

Also uniquely affected are gay and lesbian Americans who are often barred from the bedsides of the partners with whom they may have spent decades of their lives — unable to be there for the person they love, and unable to act as a legal surrogate if their partner is incapacitated.

The President’s executive order forbids this conduct for any hospitals that receive Medicare or Medicaid money:

It should be made clear that designated visitors, including individuals designated by legally valid advance directives (such as durable powers of attorney and health care proxies), should enjoy visitation privileges that are no more restrictive than those that immediate family members enjoy.

You should also provide that participating hospitals may not deny visitation privileges on the basis of race, color, national origin, religion, sex, sexual orientation, gender identity, or disability. The rulemaking should take into account the need for hospitals to restrict visitation in medically appropriate circumstances as well as the clinical decisions that medical professionals make about a patient’s care or treatment.

Sounds right to me.

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AT&T, Caterpillar, Deere, and Verizon garnered headlines last week (and an unwelcome summons to Capitol Hill) for announcing that a provision in the recent health care legislation would result in substantial accounting write downs. AT&T, for example, told the SEC that it expects to take a $1 billion charge in the first quarter because the law eliminates a tax subsidy for providing prescription drug coverage to retirees. According to the Wall Street Journal, Credit Suisse estimates that the total accounting hit for corporate America will total $4.5 billion.

Citing these impacts, a Wall Street Journal editorial denounced the provision as “a wholesale destruction of wealth and capital.” White House Press Secretary Robert Gibbs, in contrast, praised it as “closing a loophole.

Who’s right?

To figure that out, I spent a lovely Saturday afternoon tracking through the intersection of health policy, tax policy, and financial accounting and emerged with a clear verdict: Gibbs is right. The provision does indeed close a tax loophole.

But the WSJ isn’t completely wrong. The first law of loopholes is that every loophole benefits someone. If you close a loophole, someone will be hurt. That’s what’s happening here. The extra subsidy for retiree prescription drug coverage provided an extra financial boost for AT&T, Caterpillar, et al. Eliminating the loophole will thus reduce the value of the companies and the wealth of their shareholders, just as the WSJ alleges. But it’s hard to get too teary-eyed since that value and wealth were created by the loophole in the first place.

And now to the details:

(more…)

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Health care understandably dominated the headlines leading up to — and beyond — yesterday’s historic House vote. It’s important to remember, however, that the reconciliation legislation also includes major reforms in the way that the government supports student loans.

Under current law, federally supported loans are made both direct from the government and through private lenders. The government loans are direct loans (i.e., the government lends directly to students). The private loans are guaranteed by the government (i.e., private organizations lend to students and the government guarantees the lenders against the risk of default). The health/revenue/education legislation will eliminate the private lending channel. (The market for non-government private loans will continue to exist.)

Opponents have denounced this change as a government takeover of the student loan market. That makes for a great soundbite, but overlooks one key fact: the federal government took over this part of the student loan business a long time ago.

In a private lending market, you would expect lenders to make decisions about whom to lend to and what interest rates to charge. And in return, you would expect those lenders to bear the risks of borrowers defaulting. None of that happens in the market for guaranteed student loans. Instead, the federal government establishes who can qualify for these loans, what interest rates they will pay, and what interest rates the lenders will receive. And the government guarantees the lenders against almost all default risks.

In short, the government already controls all of the most important aspects of this part of the student loan business. The legislation just takes this a step further and cuts back on the role of private firms in the origination of these loans.

That step raises some interesting questions about the costs of the current system (see this post), possible benefits of the current system (some colleges and universities appear to prefer working with private lenders), and the potential budget savings of cutting out the middle man (which appear to be large but somewhat overstated in official budget analyses).

But it hardly constitutes a government takeover.

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On Saturday, the Congressional Budget Office released its complete cost estimate for the health/revenue/education legislative package that the House is expected to vote on later today.

The good news: The combined package would reduce the deficit by slightly more over the next ten years ($143 billion) than previously estimated ($138 billion). And nothing has changed about the projected increase in insurance coverage. CBO still expects that the legislation would increase the number of people with health coverage by 32 million in 2019.

The interesting news: A few months ago, CBO invented a particularly useful measure of the federal government’s commitment to health care. This measure combines federal spending on health care and federal tax subsidies for health care. If you view many tax subsidies as close equivalents to spending (as I do), this is a very important metric. It would indicate, for example, that if you increase health spending, but decrease tax subsidies by the same amount, that the federal commitment to health care is not increasing, even though both spending and taxes would be rising. I think that’s a useful way to look at things.

So how does the legislative package line up on this measure?

CBO estimated that H.R. 3590, as passed by the Senate, would increase the federal budgetary commitment to health care over the 2010–2019 period; the net increase in that commitment would be about $210 billion over that 10-year period. The combined effect of enacting H.R. 3590 and the reconciliation proposal would be to increase that commitment by about $390 billion over 10 years. Thus, the incremental effect of the reconciliation proposal (if H.R. 3590 had been enacted) would be to increase the federal budgetary commitment to health care by about $180 billion over the 2010–2019 period.

In subsequent years, the effects of the provisions of the two bills combined that would tend to decrease the federal budgetary commitment to health care would grow faster than the effects of the provisions that would increase it. As a result, CBO expects that enacting both proposals would generate a reduction in the federal budgetary commitment to health care during the decade following the 10-year budget window—which is the same conclusion that CBO reached about H.R. 3590, as passed by the Senate.

In short, the reconciliation package increases the federal commitment to health care over the next decade (e.g., by rolling back the excise tax on expensive insurance plans that’s in the Senate bill) but then brings it down in the future (e.g., by ramping up the excise tax beyond the ten year window).

From a budget point of view, the basic structure of the legislative package is thus: Expand the commitment to health care in the next decade, pay for that expansion using other revenue sources, and then reduce the overall health commitment in later years. It’s that structure that leads to disagreement among budget experts about the long-run effects of the legislation. If the legislation executes as written, it will reduce future deficits substantially. If future Congresses flinch on the future budget savings (without flinching on the continued new spending), it will increase future deficits.

The shout-out: Long-term readers of CBO cost estimates know that they traditionally end with a sentence identifying the one or two people most responsible for the analysis. Given the importance of this cost estimate, however, the letter takes a different approach, identifying several dozen dedicated analysts who have been doing their best to provide Congress (and the American people) with as much information as possible about the legislation. They all deserve our thanks:

David Auerbach, Colin Baker, Reagan Baughman, James Baumgardner, Tom Bradley, Stephanie Cameron, Julia Christensen, Mindy Cohen, Anna Cook, Noelia Duchovny, Sean Dunbar, Philip Ellis, Peter Fontaine, April Grady, Stuart Hagen, Holly Harvey, Tamara Hayford, Jean Hearne, Janet Holtzblatt, Lori Housman, Justin Humphrey, Paul Jacobs, Deborah Kalcevic, Daniel Kao, Jamease Kowalczyk, Julie Lee, Kate Massey, Alexandra Minicozzi, Keisuke Nakagawa, Kirstin Nelson, Lyle Nelson, Andrea Noda, Sam Papenfuss, Lisa Ramirez-Branum, Lara Robillard, Robert Stewart, Robert Sunshine, Bruce Vavrichek, Ellen Werble, Chapin White, and Rebecca Yip.

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How Much Does Health Reform Cost?

It figures that CBO would release its much-awaited score just as I was boarding a plane to go to a conference. So apologies for being slow to the party.

The headlines are reporting that CBO scored the health reform effort as costing $940 billion over the next ten years. Readers of this blog know that isn’t correct. The $940 billion figure refers only to the coverage expansions in the legislative package. There are also many other health reform initiatives–e.g., filling the “doughnut hole” in Medicare’s prescription drug benefit and increasing funding for community health centers and prevention efforts–in the legislation. Add it all up and the ten-year cost of health reform is about $1,072 billion.

Bonus question: How much does health reform reduce the budget deficit?

The headline claim is that CBO says the health reform package will reduce the deficit by $138 billion over the next ten years. That’s not right either. First of all, the health reform has now been stapled together with student loan reform in order to deal with some of the specifics of reconciliation. The student loan package accounts for $19 billion of the ten-year savings. So at best health reform should get credit for $119 billion in deficit reduction. But then there’s the CLASS Act gimmick. Lop that off and health reform really should be credited with $49 billion in deficit reduction. And even then it isn’t really health reform that’s creating those reductions. The health policy changes are actually expanding the deficit over the next ten years; other, non-health tax increases offset those increases and provide some deficit reduction.

Lest I be viewed as relentlessly beating on the package, let me offer a second bonus question:

Does the package generate budget savings only because it’s using ten years of taxes to pay for six years of benefits?

This appears to be a common refrain among opponents of the package. But it doesn’t hold up either. It is true that the new health benefits don’t start in earnest until 2014; that helps keep the ten-year sticker price down. But those six years of costs are offset by a combination of spending cuts and tax increases during those years, even if you strip out the CLASS Act gimmick. And in the second decade, CBO tells us that the bill reduces the deficit significantly more if–and this is a huge if–it executes as written.

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Earlier today the Congressional Budget Office released an updated analysis of the Senate health bill. The update reflects all the amendments that were adopted during Senate consideration of the bill, some technical adjustments, and the assumption that the bill would be enacted in the spring of 2010 (rather than December 2009, as previously assumed).

The bottom line is that not much has changed. The near-term costs of the bill have increased somewhat, but the budget story remains essentially the same.

The health care debate seems to have moved on from budget issues. For example, the big news today was that the Senate Parliamentarian announced that the legislative strategy of using reconciliation to pass a second health care bill will work–at least as far as he is concerned–only if the Senate bill is first passed by the House and signed into law by the President.

Nonetheless, as a public service let me offer a quick summary of the budget impacts of the bill over the next ten years:

There are four things you should take away from this table:

1. The Senate bill costs about $971 billion — not $875 billion — over the next ten years. As long-term readers know, one of my pet peeves is that the media (and many policymakers) use the phrase “cost of the health care bill” when they should be saying “cost of the provisions in the health care bill that expand health insurance coverage.” This distinction is important because all the health bills also contain provisions that have nothing to do with expanding insurance coverage. The Senate bill, for example, would help fill in the doughnut hole in Medicare Part D, fund more community health centers, and fund prevention efforts, among other things. These efforts may be worthy, but they aren’t free. Thus while the media reports that the bill costs $875 billion, I estimate that the real cost is about $971 billion. That figures includes the $875 billion being spent to increase health insurance coverage plus $94 billion in new spending on other health initiatives and $2 billion in new tax cuts.

2. The Senate bill will reduce the deficit by $118 billion over the next ten years. The bill contains more than $1 trillion in offsets, including $251 billion in tax increases related to health insurance coverage (e.g., the tax on “Cadillac” health plans, penalties on some employers, and penalties on some uninsured individuals), $266 billion in tax increases unrelated to health insurance coverage (e.g., higher Medicare payroll taxes on wages above $200,000), and $572 billion in spending reductions (e.g., lower Medicare payment rates for some providers).

3. The near-term budget savings are exaggerated by the inclusion of the CLASS Act; adjusting for that, the ten-year deficit reduction is $48 billion. Another item familiar to long-time readers, the CLASS Act would create an insurance program for long-term care. Premium income, which reduces the reported deficit, would start much faster than benefit payouts, so the program generates surpluses in the near-term. But it won’t in the long-run. So most budgeteers view the inclusion of the CLASS Act here as a gimmick. Netting out the $70 billion in budget savings from the CLASS Act, and you have deficit reduction of $48 billion over the next decade.

4. The bill would increase the Federal commitment to health care over the next ten years. CBO created this metric to reflect the fact that the Federal government supports health care both through spending programs and through tax subsidies, most notably that for employer-provided health insurance. CBO finds that the combination of these efforts will expand during the first ten years of the bill.  If the entire bill executes as written, however, CBO expects that the federal commitment to health care will decline in the second decade.

Note: CBO does not calculate a total cost figure for the health bills. The bills include dozens of policy changes, and it would be difficult (perhaps impossible) to allocate all their impacts to specific provisions. Thus, my figures should be considered approximate. I calculated the $94 billion figure for additional spending by adding up all the individual line items in Table 4 of the cost estimate that increased direct spending, with a couple of exceptions. First, I did not include the interaction effects that CBO lists as the end of the estimate because I was not sure how to allocate them; the interactions are large and could have a material effect on my estimate, potentially up or down. Second, there was one policy that led to both spending increases and spending decreases; I included the net spending increase in my figure. I am certainly open to other suggestions about how to add up the other spending in the bill. It’s also worth noting that I have taken as given CBO’s estimate of the gross cost of expanding coverage. There are some nuances in the calculation of that figure (e.g., the treatment of payments in a reinsurance program) that I need to understand better. I made similar calculations for the $2 billion in tax cuts itemized in the JCT analysis of the bill.

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Last week, the Council of Economic Advisers released its 2010 Economic Report of the President (ERP). I haven’t had time to read it yet, but I did take a quick spin through looking at the charts and getting a feel for it.

The first thing I noticed is that the folks at the CEA have made an important innovation: the ERP now includes references to the academic studies, government reports, etc. on which it bases some of its conclusions. That’s a welcome break from a long-standing tradition (which I never really understood) that the ERP didn’t include references.

A second useful innovation is that the ERP is available in eBook formats, including for my beloved Kindle. Not to add to their already enormous workload, but I look forward to the 2011 or 2012 version having dynamic graphics and live links to the references.

Here are some of the charts that I particularly liked:

1. The boom and bust of house prices. By this measure, house prices are still historically high–except for the bubble.

2. The declining role of banks in the financial sector. Note the growth of mutual funds and ABS issuers.

3. How rising health care costs may consume a rising share of employee compensation. (Note, however, that by setting the axis at $30,000 rather $0, the chart visually exaggerates the effect.)

4. How the rate of being uninsured varies with age.

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In order to pay for coverage expansions (and other spending increases), the Senate health bill includes a mix of tax increases and spending reductions. Notable among these are several provisions that would reduce future Medicare spending and increase Medicare revenues.

Some opponents of the bill have argued that the spending reductions would eventually drive providers from the program and thus hurt Medicare beneficiaries. In response, some proponents of the bill have made an interesting argument: that the spending reductions and revenue increases would actually strengthen Medicare by extending the life of its Hospital Insurance (HI) trust fund, which pays for Part A of the program.

That argument is interesting for two reasons. First, it is absolutely correct within the narrow confines of trust fund accounting. The Medicare spending reductions and revenue increases in the Patient Protection and Affordable Care Act (PPACA) would indeed extend the life of the HI trust fund, thereby allowing Part A payments to continue further into the future. Second, that logic implies that many of the budget savings from the Senate health bill will eventually be used to pay for further Medicare benefits. As a result, those savings won’t be available to pay for the coverage expansions and other spending increases in the bill. In short, if you believe that the bill will strengthen Medicare, you shouldn’t believe that the Part A spending reductions and revenue increases are helping to pay for health reform.

The Congressional Budget Office makes exactly this point in a helpful note published today. The note explains the mechanics of trust fund accounting and their relation to usual budget accounting and then delivers the money quote:

The key point is that the savings to the HI trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs.

That conclusion echoes a similar finding by Rick Foster, the Chief Actuary of CMS (the folks who oversee Medicare and Medicaid). Back on December 10, he noted:

In practice, the improved part A financing [resulting from the Senate health bill] cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions under the PPACA) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.

Bottom line: Don’t double count the Medicare spending reductions and revenue increases in the Senate health bill.

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UPDATE: The Congressional Budget Office discovered an error in its original cost estimate for the revised Senate health bill. CBO originally projected that the Independent Payment Advisory Board (IPAB) created by the bill would lead to substantial reductions in Medicare spending beyond 2019. CBO’s revised estimate shows significantly smaller IPAB savings in future decades. CBO’s new letter does not specifically address the federal commitment to health care (the specific cost measure discussed in this blog post), but it appears that the potential reductions are much smaller than originally reported.

Buried deep in CBO’s cost estimate of the new Senate health bill is a striking conclusion: CBO believes that the health bill would eventually reduce the federal commitment to health care. In short, the bill would eventually bend (or, at least, lower) the federal health cost curve (including both spending and tax subsidies).

That conclusion comes with two crucial caveats: CBO’s estimates into future decades are subject to great uncertainty and assume that the legislation executes exactly as written. As CBO itself points out, that latter assumption is shaky — Congress will undoubtedly revisit health care repeatedly in coming years and may well decide to soften the spending reductions and tax increases specified in the bill.

Still it is striking that the bill, as written, might reduce the federal commitment to health beyond the first decade. That certainly distinguishes it from the previous version of the Senate bill.

CBO writes (my emphasis added):

In subsequent years [i.e., after 2019], the effects of the proposal that would tend to decrease the federal budgetary commitment to health care would grow faster than those that would increase itAs a result, CBO expects that the proposal would generate a reduction in the federal budgetary commitment to health care during the decade following the 10-year budget window. By comparison, CBO expected that the legislation as originally proposed would have no significant effect on that commitment during the 2020-2029 period; most of the difference in CBO’s assessment arises because the manager’s amendment would lower the threshold for Medicare spending growth that would trigger recommendations for spending reductions by the Independent Payment Advisory Board. The range of uncertainty surrounding these assessments is quite wide.

The change in the IPAB is a bit arcane, but potentially a big deal if future Presidents and Congresses let it do its thing. Under the original Senate bill, the IPAB recommendations would be relevant only to the extent that Medicare spending per beneficiary was projected to grow faster than overall per capita health spending. In the new bill, the threshold is set much lower, reflecting inflation in overall consumer prices and consumer medical inflation. That change gives the IPAB more teeth and, in later years, more bite.

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