The Real Cost of the Baucus Bill

Earlier today the Congressional Budget Office released its much-anticipated preliminary analysis of the new Baucus health bill.

I will have more to say about the cost estimate later, but for now I want to make one simple point: The media are systematically misreporting the cost of the bill. For example:

  • The New York Times: “The budget office analyzed the bill … its newly projected cost — $829 billion over 10 years.”

If you read CBO’s analysis carefully, you will see that it says no such thing. Instead, it says that the provisions in the bill that expand health insurance coverage will cost $829 billion over the next ten years.

Why is that an important distinction? Because, as I noted the other day, the bill increases federal health spending in other ways. For example, it spends about $11 billion to avoid a sharp reduction in payment rates for doctors in Medicare at the end of the year. And it spends almost $21 billion to make the Medicare drug benefit more generous.

If you go through the CBO cost estimate and add up all the new health spending programs, you will discover that the actual cost of the bill is more than $900 billion:

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Perhaps I am nuts, but I think that policy debates should be informed by actual facts, including about budget impacts. And despite the ease with which I have learned to throw around the word “trillions”, I still think $75 billion is a lot of money.

So let me once again implore everyone commenting on the health debate: There is a difference between the cost of the Baucus bill ($904 billion) and the cost of its provisions to expand coverage ($829 billion). It is understandable that most commentary focuses on the health insurance provisions. But we should not forget the other $75 billion in spending on other initiatives. Dollar-for-dollar they deserve as much scrutiny as the coverage expansions.

Note on the numbers: The spending on the doctor fix is easy to find in the CBO report; it’s the first item on page 5 of the detailed estimates of direct spending impacts. The increases in other health spending programs are sprinkled through the nine pages of the direct spending analysis. I calculated the $64 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 were a couple of programs in which it seemed appropriate to net a spending increase against a cost reduction before including it in my total (those cases were small). I am certainly open to other suggestions about how to add up the other spending in the bill.

28 thoughts on “The Real Cost of the Baucus Bill”

  1. “Perhaps I am nuts, but I think that policy debates should be informed by actual facts, including about budget impacts. And despite the ease with which I have learned to throw around the word “trillions”, I still think $75 billion is a lot of money.”

    As policy debates in question are public policy debates, do we get to consider externalities as actual facts?

    Not all $75 billion in public spending is created equal. If you consider externalities, $75 billion spent on quality of care comes out rather differently than, say, $75 billion on occupying Iraq.

    A billion-dollar-a-year bribe to doctors to get the AMA on side so that any health care reform passes at all perhaps should be offset against the risk-adjusted social externalities of another decade without healthcare reform.

    1. Yes, absolutely, to your broader point: the right public policy debate is to ask whether the additional $75 billion is worthwhile, not to pretend that it doesn’t exist.

      To be precise, though, I don’t think externalities is the concept you are looking for. There certainly may be some externalities kicking around, but you should also value the direct effects of the policy (e.g., expanding part D coverage makes prescription drugs more affordable for affected seniors — that’s a benefit to include even if there are no externalities).

      I’ve been wondering about the AMA stance on the bill. The House bill has a ten-year doctor fix with a $200+ billion price tag that really did look a bribe for AMA support. Maybe I missed it, but I haven’t seen anything about how the AMA feels about the Baucus bill, with its much smaller one-year fix at $11 billion. Is the AMA less supportive?

      1. “There certainly may be some externalities kicking around”

        Maybe one or two, here or there.

        60% of personal bankruptcies, systematic disincentives to enterpreneurialism and small business formation, excessive friction and stickiness in labor markets, etc.

        No doubt these things have trivial social and economic impact, but we should at least acknowledge they exist.

        Duke has it right. The numbers are what the numbers are to satisfy rather arbitrary procedural and political constraints imposed upon the health care reform process.

        Regrettably, we don’t have a system which allows us to soberly consider and adopt on the merits reform options from an ala carte menu. So, while you may be right that “the right public policy debate is to ask whether the additional $75 billion is worthwhile,” in the empirical sausage-making world, the policy debate we actually have is “is reform of the U.S. healthcare system worthwhile”.

        So, if a difference of $75 billion, in your estimation, tips the policy balance in favor of retaining the status quo indefinitely, then say so. Or, if you believe that public awareness of the extra $75 billion will tip the balance of public support in favor of retaining the status quo indefinitely, then say so.

        But we’re well past the point of deliberating over whether the Medicare drug benefit ought to be $21 billion more or less generous.

      2. Hi Michael — I appreciate you being one of the best comment contributors here on my blog, but I do wish you would pay attention to what I actually say. So, just to spell it out, you raised the concept of externalities in the context of the $75 billion of spending. And I said that I don’t think externalities from that spending are going to get you where you want, but the direct effects are likely where the action is. And that’s certainly true of the part D spending, which would have essentially no effect on the externalities you mention in your follow-up. I certainly agree there are larger externalities from broader coverage changes, but that was not the issue you raised.

        Your view of the legislative process is simply wrong. The debate is about much more than whether something passes. In the Senate, the SFC bill will somehow be combined with the HELP bill and then taken to the floor, where it presumably will be amended before being passed. Meanwhile the House is working on its bill, which a conference committee will one day try to meld with whatever the Senate passes. None of those steps are Yes / No decisions. Legislators will be adjusting the individual elements throughout. My position is that they should do so with their eyes open about the bills actually do. And that the public should be well-informed along the way.

        Denounce me as an accountant if you will (old joke: economists are people who didn’t have the personality to become accountants), but I think as a matter of principle that people ought to use the right numbers, regardless of how they feel about an issue. See also my pieces on the jobs numbers (8.0 million lost, not 7.2 million as reported) and the size of the stimulus ($100 billion at the end of June, not $60 billion as some critics alleged).

  2. Seems like the CBO score was a “fix”

    Lowers deficit impact enough to make it thru the Byrd amendment (if it goes to reconciliation)

    Generates % covered (despite weakened individual mandate) high enough to preserve deal with hospitals.

    Assumes Medicare cuts that Congress has never had the balls to make before (dox fix)

    Huge impact from ‘Cadillac Tax’ that the left will never let live.

    It may be the best bill yet (for taxpayers) but it’s still flawed!

  3. Hi, Donald,

    “And that’s certainly true of the part D spending, which would have essentially no effect on the externalities you mention in your follow-up. I certainly agree there are larger externalities from broader coverage changes, but that was not the issue you raised.”

    The issue I was trying to raise, to quote myself, was, “the risk-adjusted social externalities of another decade without healthcare reform”. Let me try to break it down into accounting.

    Let’s assign the net value of externalities incurred by the status quo over the next ten years as Xs, and the net value of externalities with a reform package as Xr. The ten-year externality value of the reform package is then Xv=Xs-Xr.

    Passage of health care reform is by no means assured at this point. The entrenched interests arrayed against it are many and powerful. Any change in the composition of the package will change the delicate political balance, and increase or decrease the likelihood of failure to pass health care reform.

    Let’s assign the net change in probability that a health care reform package will become law due to the inclusion of a given package component as Cp.

    If we multiply Cp x Xv, we get a number. Should we ignore this number when we consider any given component of the package, or should we include it, however roughly.

    A case in point…

    You write, “I haven’t seen anything about how the AMA feels about the Baucus bill, with its much smaller one-year fix at $11 billion. Is the AMA less supportive?”

    And today I read in the Washington Post that, “The American Medical Association is concerned because the 10-year $829 billion cost of the Senate bill does not include $200 billion in promised higher Medicare payments.”

    So, on the one hand, the Baucus bill saves $200B by cutting doctor reimbursements. Yeah!

    But on the other hand, now the AMA is getting cold feet about supporting the reform bill. Which increases the chance we’re stuck with the status quo indefinitely. So what is the risk-adjusted social cost of the increased chance of failure incurred by saving $200B? Doesn’t the accountant in you want to know?

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