Baucus Bill: Four Steps in the Right Direction

From a budget perspective, the Baucus bill is a major step forward from the earlier HELP and House bills. There remains lots of room for improvement, and I am certainly not endorsing the bill at this point. But I do believe that Chairman Baucus and his team deserve credit for improvements on at least four important fronts: overall budget impact, doctor payment rates in Medicare, tax increases, and communications.

1. On paper, at least, the bill satisfies three key budget tests. It doesn’t add to the deficit over the ten-year budget window, it doesn’t add to the deficit in the tenth year of the window, and it doesn’t add to the deficit in years beyond the window. Indeed, it appears to reduce the deficit over each of those periods.

As CBO hinted in its cost estimate and Greg Mankiw discusses on his blog, there are reasons to doubt whether some proposed spending reductions and tax increases would actually materialize. Thus, the actual budget effects may not be as rosy. That’s a huge issue. But even with that caveat, the Baucus bill is a major improvement over proposals that didn’t even try to hit these budget targets.

2. The bill increases physician payment rates in Medicare for only one year – and it pays for the resulting spending increases. Congress has repeatedly avoided cuts to physician payment rates in Medicare by raising rates for a year or two and then ”paying for” the increased spending by scheduling even larger payment cuts in the future. After a decade of this game, the scheduled fee cuts have become ridiculous. If Congress doesn’t act, payment rates will fall more than 20% at the end of the year.

In his budget, President Obama suggested that we address this problem by saying “just kidding”. Physician payment rates wouldn’t be cut, and instead would grow at a moderate pace in coming years. The House took a similar approach in its health bill, and the result was $245 billion in additional spending on the doctors without any offsets. In short, pure deficit spending.

Baucus is right to shun that approach. As a tactical matter, it’s impossible for him to do otherwise. He doesn’t have the offsets necessary to pay the $245 billion ten-year cost of a permanent fix, but he does have room to cover the $11 billion cost of a one-year fix. And offering a permanent fix without paying for it would have removed any plausibility about the future spending reductions and tax increases that he wants to use as pay-fors in his bill.

Doing a one-year fix also puts Baucus on the moral high ground in another way. Under the President’s proposal and the earlier House bill, the $245 billion ten-year cost of a permanent fix looked uncomfortably like a bribe to get doctors to support the larger health bill. Under Baucus’ approach, in contrast, the long-term fight over physician payments will be deferred for at least another year. With physicians getting “only” $11 billion out of the bill, it will be interesting to see their reactions to it.

3. The primary tax increase is much better than the tax increases proposed by the President or the House. The Baucus bill includes a tax on insurance companies that offer expensive health insurance plans. Over the next ten years, that tax would raise $215 billion and rapidly-growing amounts thereafter.

I have many concerns with this tax, mostly because a related, but better option is available: reducing the tax exclusion for employer-sponsored health insurance. That approach would be more efficient, more equitable, more transparent, and, well, pretty much “more” of everything beneficial you would want a tax increase to accomplish.

Nonetheless, it’s also true that the proposed tax on insurers (which would , of course, get passed through to consumers) is much better than the other tax proposals that have been floated. The President, for example, proposed paying for a portion of the health care expansion by limiting the value of itemized deductions, boosting ten-year revenues by $263 billion. The House bill, in turn, proposed a “surtax” on high income earners that would raise $544 billion over ten years.

In my opinion, neither of those two proposals belongs in the debate about how to pay for expanded health coverage. The federal government already has such a large stake in health care – through spending programs like Medicare and Medicaid and through tax subsidies such as the tax exclusion for employer-sponsored health insurance – that it ought to be able to find offsets within the parts of the health system that it already touches. Moreover, a tax on health insurance could improve incentives in the health insurance market and, thereby, help bend the long-run curve of health spending. Finally, a tax on health insurance is just the kind of offset that seems plausible in a health debate, but would be much harder to consider in other budget contexts. As I’ve argued before, a health bill could appear to be fully paid for yet still worsen our long-run fiscal situation it the pay-fors were policies that we would otherwise have used to help narrow the deficit. The Obama and House proposals strike me as falling in that category – ideas that might be considered in a larger deficit discussion—while the tax on insurers / insurance is much more dependent on the health discussion.

4. Chairman Baucus has rightly highlighted gross costs, not just net. As I noted in my earlier post, Baucus characterized his bill as costing $856 billion over ten years, which includes the cost of expanding insurance coverage plus the cost of other provisions (e.g., the one-year doctor fix and an expansion of Medicare Part D). Other commentators have emphasized a smaller figure, $774 billion, which includes only the gross costs of the coverage expansion. I think Baucus is right to emphasize the larger number (although I am not yet sure exactly what the right figure is). Congress and the American people should know the full cost of all the expansions that are being proposed and the full amount of all the offsets that will be required to pay for them.

4 thoughts on “Baucus Bill: Four Steps in the Right Direction”

  1. With all the negativity commentary Baucus’ proposal has received, it’s nice to see someone say something nice for a change. Without endorsing the bill at all, it is a big improvement over previous efforts. But it has a long way to go to get this right.

    I have three small bones to pick with your analysis that should give us even more pause when viewing the Baucus proposal. First, don’t be drawn into the trap of accepting deficit neutrality over any time horizon as the primary fiscal policy consideration. The primary consideration should be increasing the size of government, not its deficit. On this score, the Baucus proposal is unacceptable.

    Second, turning to the deficit effects we have to be careful not to consider as legitimate offsets any cuts to Medicare or Medicaid. Such cuts in general are welcome, because these programs are unsustainable. But until the reforms to Medicare/aid make the programs sustainable, we must not treat such cuts as offsets to other spending increases. Reducing unaffordable spending to increase spending is phony.

    Third, we don’t know what the effect of the Baucus proposal would be in the long run. According to CBO’s preliminary analysis, the proposal reduces the deficit in the first 10 years and the 10th year. CBO suggests it reduces the deficit over the next 10 years, but doesn’t provide a year-by-year score. If you recall, the Lewin score of the House bill ramps up spending significantly in these latter years. It’s possible, even likely, that the deficit is significantly increased in the 20th year under the Baucus proposal, and every year thereafter, failing the President’s “in the future” test.

    1. Translating into behavioral-economics-speak, I think you are saying: If you need a $25 toaster, don’t get tricked into buying a $75 toaster, just because the salesman first showed you a $150 toaster.

  2. “In order to save our children from a future of debt, we will also end the tax breaks for the wealthiest 2% of Americans. But let me perfectly clear, because I know you’ll hear the same old claims that rolling back these tax breaks means a massive tax increase on the American people: if your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not one single dime.” State of The Union Speech.

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