Month: October 2009

The Congressional Budget Office released a very helpful letter today that clarifies some of its thinking about the budget impacts of the health bills now pending in Congress. Most importantly, CBO offers a new metric for evaluating the health bills: how they affect the federal government’s budgetary commitment to health care. That’s a very useful metric because it reflects not only government spending on health care, but also the various tax subsidies (most notably for employer-sponsored health insurance) that the government provides.

CBO concludes that the House bill would increase the federal commitment to health care by seven times as much as would the Senate Finance Committee bill ($598 billion vs. $85 billion over ten years):

The top line in the table reflects the gross costs of the coverage expansions in each bill. As I noted yesterday, the correct figure for the House bill is $1.055 trillion. There was some confusion about this at first, but most commentators now appear to be referencing this figure (see this nice NYT piece discussing the confusion).

There are two additions I would make to this table:

• First, as I discussed yesterday and a few weeks ago, I think policy makers should unpack the second line item, changes in net spending for Medicare, Medicaid, and other programs. That line includes not only spending reductions but also important spending increases. Based on the individual line items in the two cost estimates, I estimate that those spending expansions are about $75 billion in the Senate Finance bill and about $217 billion in the House bill. As a result, I think the gross costs of the two bills are around $904 billion and $1.272 trillion, respectively. (But see the caveat below.)

• Second, the House bill includes the CLASS Act, whose budget accounting is misleading. As I discussed several months ago, the CLASS Act would create an insurance program for long-term care. It’s intended to be budget-neutral in the long-run, but premiums start faster and more robustly than do benefit payments. As a result, this budget-neutral proposal narrows the deficit by $72 billion over the next ten years, but then increases the deficit by a comparable amount in subsequent years. A better accounting would net this out, leaving the House bill with a deficit reduction of $32 billion over the next ten years, rather than $104 billion. (Speaker Pelosi and her team deserve credit for being very transparent on this point; the side-by-side they distributed comparing the bill to an earlier one highlights this issue in the very first entry, and some proponents of the bill have indeed referred to it as saving about $30 billion over ten years.)

Caveat: As I’ve previously noted, it’s difficult to get a precise estimate of the additional gross health spending in the bills because the plethora of provisions interact with one another. As a result, CBO reports some major cost impacts–including both deficit reducers and deficit increasers–as interactions that aren’t attributed to individual line items. In principle, those interactions could cause my $75 billion and $217 billion figures to be higher or lower. CBO briefly addresses this issue in today’s letter, noting: “The reductions in net spending for those programs could themselves be divided into provisions that would increase spending (and thus the federal budgetary commitment to health care) and provisions that would decrease spending (and thus that commitment). However, even some individual provisions of the proposal have elements that raise costs and elements that lower costs. Tabulating all of the aspects of the proposal that would, in isolation, increase federal outlays would be complicated and would require somewhat arbitrary judgments about how to allocate interactions among different elements of individual provisions and interactions among provisions.” I certainly agree. However, I also believe that it is important for everyone involved in this debate to remember that these other provisions are in there. And so, in the absence of more precise figures, I think the $75 billion and $217 billion figures are the best we can do.

As I’ve noted in a series of posts, there is often great confusion about the cost of the health bill being considered by Congress.

Yesterday, for example, many commentators were saying that the coverage expansions in the new House health bill would cost $894 billion over ten years, even though the actual cost is $1.055 trillion (according, as always, to the estimates of the Congressional Budget Office).

A second problem is confusion between (a) the cost of expanding coverage and (b) the overall cost of the bills. Expanding coverage is the key focus of each of the major health bills, but we should always keep in mind that the bills make other changes as well. In the case of the Baucus bill, for example, I estimated that other spending initiatives added about $75 billion, bringing its total cost to slightly more than $900 billion.

I’ve made the same calculations for the House health bill, and the additional spending is even larger: about $217 billion. Among many other things, that spending would increase payment rates for primary care physicians in Medicaid and create two new funds to finance public health investments and prevention and wellness efforts. The bill would also extend a provision in the recent stimulus bill (ARRA) that increased the federal share (the FMAP) of Medicaid spending, and thus provided assistance to the states:

As noted, the House bill does not include any funding to prevent the upcoming 20%+ cut in payment rates for doctors in Medicare. The Baucus bill included a one-year fix at a cost of $11 billion, while the Senate’s efforts to pass a permanent fix without paying for it recently failed (thankfully).

P.S. Kudos to David Espo of the Associated Press for covering the cost of the House bill correctly. He wrote: “The Congressional Budget Office said the cost of additional coverage alone was slightly more [than] $1 trillion over a decade. But that omitted other items, including billions for disease prevention programs.”

Note on the numbers: The increases in other health spending programs are sprinkled throughout CBO’s analysis of the bill. I calculated the $217 billion figure by adding up all the individual line items 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; since the decreases were larger, I didn’t include any of the increases in my figure. I am certainly open to other suggestions about how to add up the other spending in the bill.

This morning Speaker of the House Nancy Pelosi released the latest version of the House health bill. And this afternoon, the Congressional Budget Office (CBO) released its preliminary analysis of the budget impacts of the bill.

One of the key findings of that analysis is that the coverage expansions in the bill would cost $1.055 trillion over the next ten years. And that would seem to imply that the bill fails one of President Obama’s key litmus tests, namely that the total cost be less than $900 billion.

As best I can tell, however, you won’t find that figure or interpretation in any of the initial media coverage. Instead, everyone is reporting that CBO concluded that the bill cost $894 billion and, therefore, that it appears to meet the $900 billion test. For example:

• The Wall Street Journal: “House legislation to overhaul the health-care system, unveiled Thursday, includes a compromise version of a public insurance option and carries an overall cost of $894 billion over 10 years, House aides said.”

• The New York Times: “House Democrats on Thursday unveiled an $894 billion package to remake the health care system.”

• The Washington Post:”The House legislation aims to provide health insurance of one form or another to 96 percent of all Americans at an expected cost of just below $900 billion over 10 years.”

Why does my interpretation differ so much from the media’s? I can see only two possibilities. Either (a) the media have been snookered by proponents of the bill or (b) I missed the memo about how the policy community decided to change how costs are measured. (If it’s (b), please let me know so I can catch up.)

The issue here is the difference between the gross and net costs of expanding coverage. As CBO summarizes it (with my emphasis added):

The estimate includes a projected net cost of $894 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $1,055 billion in subsidies provided through the exchanges (and related spending), increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $167 billion in collections of penalties paid by individuals and employers. On balance, other effects on revenues and outlays associated with the coverage provisions add $6 billion to their total cost.

I had been under the impression that everyone was using the gross cost measure when discussing the cost of expanding coverage. And I wasn’t alone. When the Baucus bill was released earlier this month, everyone (including each of the newspapers I linked to above) referred to it by its gross price tag ($829 billion), not its net ($518 billion), and said things like the Baucus bill “would cost $829 billion over the next 10 years — well under the $900 billion President Obama had suggested.”

If the right coverage figure for the Baucus bill was $829 billion, then we ought to be focusing on the $1.055 trillion coverage cost in the House bill.

And if $829 billion is not, in fact, the right measure, when did the goalposts move?

P.S. I will follow up shortly with a second concern about the cost discussion: that there are non-coverage items in the bill that cost substantial sums. That’s why I previously argued that the Baucus bill actually cost a smidgen more than $900 billion.

Update: Both Roll Call and the AP are using the more than $1 trillion figure.