Good and Bad News for the House Health Bill

In my recent paper about how the Congressional Budget Office analyzes health proposals, I noted that one of the most important things that CBO does is to provide additional information about its cost estimates. Cost estimates often can’t speak for themselves, so it’s important that members of Congress and other interested observers ask for additional clarification about key issues.

Well, four leading House Republicans recently took this step, and CBO’s response is a doozy. It contains too much to summarize here, so let me focus on the two most important points:

• CBO reiterated its conclusion that the introduction of a public plan (as specified in the bill) would not undermine private health insurance markets. Most Americans would continue to get their health insurance through employers.

• CBO confirmed that the bill would worsen future deficits.

Supporters of the bill will emphasize the first finding as evidence that the public plan won’t gut private insurance markets. Opponents of the bill will emphasize the second finding as evidence that the bill is fiscally reckless.

Neither of these conclusions should be a surprise to anyone, since the basic facts were reported in CBO’s original cost estimate. However, the new letter does provide useful context.

The Public Plan

In its original cost estimate for the House bill, CBO projected that 11 to 12 million people would enroll in the public plan by 2019, while 160 million would get traditional employer-sponsored insurance. In other words, the public plan would not crowd out private insurance.

Some analysts have argued that the potential crowding out would be much larger. The Lewin Group, for example, estimates that more than 100 million people would enroll in the public plan.

In the new letter, CBO reaffirms its original estimate and explains its rationale. The details get a bit mind-numbing, but can be boiled down to two basic observations:

• First, CBO assumes “that only firms with 50 or fewer employees would be permitted to buy coverage through the exchanges.” Lewin, in contrast, assumes that all employers would have access to the exchange. The differing assumptions about employer eligibility reflect a key challenge in preparing cost estimates: the House bill would give a new government official (a commissioner overseeing the insurance exchanges) the discretion to decide which employers would be eligible to use the exchanges beginning in 2014. To forecast enrollment in the public plan, you therefore need to predict how this official will behave five years from now. CBO expects the official to permit a moderate expansion in enrollment (from employers will up to 20 workers to employers with up to 50 workers), while Lewin expects the limit to be entirely lifted.

• Second, CBO sees many reasons why employers would provide insurance (e.g., the favorable tax treatment) even if their workers would have access to the exchanges. Lewin places less weight on these factors.

Future Deficits

From the President on down, lawmakers have declared that changes to the health care system should not worsen our future budget situation. As I’ve pointed out in a series of posts (here and here), however, it’s very difficult to design a bill in which offsets (some combination of spending reductions and revenue increases) are able to keep up with the new spending.

In my analysis of the House bill, for example, I used the following graph to illustrate how the proposed offsets weren’t keeping up with the new spending:

That chart suggested that the House bill would worsen the long-run budget situation. The new CBO letter confirms that conclusion:

Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time. The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.

In short, the gap between spending and the offsets will likely rise in years beyond 2019.