How Much Do The Health Bills Cost?

Everyone involved in the health care debate is waiting expectantly to see the Congressional Budget Office’s analysis of the newly-revised Baucus health bill. That estimate may arrive on Wednesday, which could allow a vote in the Senate Finance Committee as early as Thursday (but quite possibly later).

In preparation for that release, I have one simple request: Could everyone please take more care in characterizing the cost of the revised bill? And the cost of the other health bills?

To date, there has been much unnecessary confusion about the cost of the health bills now being discussed in Congress. Using the same budget estimates, observers often report very different figures for the same bill. When Senator Baucus unveiled the initial draft of his bill, for example, he described it as costing $856 billion over ten years, but many observers looked at the official cost estimate and concluded that the bill would actually cost $774 billion. The House Tri-Committee bill has generated an even larger range of claims. Some observers have characterized the bill as costing about $1 trillion over ten years, while others have pegged the cost at almost $1.3 trillion or more than $1.5 trillion.

Why do these figures vary so much? Because the health bills are trying to do many things:

  1. Increase coverage through higher Medicaid spending and “carrots” such as subsidies for purchasing insurance through an exchange or tax incentives to get coverage.
  2. Increase coverage through “sticks” such as penalties for individuals who don’t have coverage.
  3. Prevent Medicare payment rates for doctors from being cut by more than 20% at the end of the year, as would happen under existing law.
  4. Increase spending on other federal health programs (e.g., prescription drugs in Medicare)
  5. Increase revenues by raising taxes in ways related to health insurance coverage (e.g., on insurers).
  6. Increase revenues by raising other taxes (e.g., new taxes on health providers, taxes on high earners, or reduced income tax deductions).
  7. Reduce spending on federal health programs to pay for the other expansions (e.g., reduce provider payment rates and roll back Medicare Advantage).

When observers characterize the overall cost of the health bills, they must choose (whether they know it or not) which of these items to include.

That decision is easy for the last two items on the list since they are offsets that are otherwise unrelated to health insurance coverage. The confusion thus arises with the first five items on the list.

If observers want to characterize the total cost of the bills, they should include not only the cost of expanding coverage (category 1), but also any provisions that would increase other spending. In other words, the total cost of a bill includes items that address the Medicare doctor “fix” (category 3) or raise other federal health spending (category 4). Those are often overlooked, however, because the official cost estimates group those provisions together with items from category 7, the provisions that reduce health spending. To get to the right figures, observers need to dig into the details of the cost estimates.

If observers want to characterize the total cost of expanding coverage, they should focus solely on category 1, the new spending and subsidies that would expand the number of people who have health insurance.

If observers want to characterize the net cost of expanding coverage, they should combine categories 1, 2, and 5. The “stick” measures in category 2 should be included because they encourage individuals to purchase health insurance or encourage employers to provide insurance to their workers. However, they do so in a way that reduces the net cost to the government. The tax increases in category 5 should be included because they reduce coverage.

Participants in the health care debate should take much greater care in distinguishing those three measures of cost. In principle, cost estimates from the Congressional Budget Office include enough information to calculate each of them. In practice, however, exact figures may sometimes be difficult to calculate. To determine increases in other health spending, for example, one can identify each provision that increases spending and add those together to get a gross amount of new spending. But it may not be possible to determine how interactions among policies (which CBO often scores separately) should be betted against those provisions. Thus, there will be uncertainty about estimates of the total bill cost (as Senator Baucus discovered).

The following table illustrates these calculations for the Baucus bill and the House Tri-Committee bill:

Continue reading “How Much Do The Health Bills Cost?”

8 Million Jobs Lost

Kudos to Floyd Norris over at the New York Times for characterizing total job losses to date as 8 million jobs, not “just” 7.2 million. As I discussed on Friday, the Bureau of Labor Statistics estimates that the number of jobs in March 2009 was 824,000 lower than it previously thought. But BLS won’t include this adjustment in its official data until early February.

The official, as-yet-unadjusted data indicate that 7.2 million jobs have been lost since the recession started in December 2007. The future revision to March figures, however, implies that a better estimate would be 8 million.

We can now expect several months in which commentators use different figures for total job losses. Those steeped in the details, like Norris, will use the 8 million figure. Those less-attuned to the details, like the authors of the NYT’s lead editorial (just four pages after Norris’s article), will use the 7.2 million figure.

Norris also addresses the obvious question: Why did BLS miss the March level of jobs by such a large amount? The answer is that BLS has to estimate jobs gained and lost at certain employers, and their model is not doing as well as we (or it) would hope:

The official job numbers are based on a monthly survey of employers, augmented by something called the “birth-death model,” which factors in jobs assumed to have been created by employers who are too new to have been included in the survey, and subtracts jobs from employers assumed to have failed and therefore not responded to the latest survey.

Victoria Battista, an economist at the Bureau of Labor Statistics, said the bureau was looking at whether that model needed to be changed, as well as at other possible issues, such as changing response rates to the questionnaire sent out to employers each month.

The newest revision is called a “benchmark revision.” Such revisions are disclosed each October, and led to reductions in job totals in both 2007 and 2008. But the changes those years were tiny when compared with the changes this year.

For the 12 months through last March, the birth-death model added 717,000 jobs to what the bureau would have reported had it relied solely on its survey.

While the government uses the survey of employers to estimate the number of jobs, the benchmark revisions are based on reports from states on the number of employees for whom unemployment insurance premiums are paid. Those numbers take longer to be available, but are considered to be more reliable.

The Changing Distribution of Worker Earnings

On Friday, the Congressional Budget Office released a new study examining how worker earnings changed from 1979 through 2007. The report is full of important facts about the evolution of earnings throughout the earnings distribution and, in particular, among the highest earners.

For example, the following chart illustrates how the earnings of men and women (age 25-54) have changed at different points in the earnings distribution:

Earnings of Men and Women

The chart confirms two well-known findings: men, on average, earn more than women, and high-earners have seen the largest earnings gains in recent decades. Other takeaways include:

  • In real terms (i.e., adjusting for inflation), men at the 10th and 50th percentiles (of the male earnings distribution) in 2007 earned about the same as similarly situated men back in 1979.
  • Women’s earnings have been growing faster than men’s. Women at the 10th and 50th percentile (of the female earnings distribution), for example, had higher earnings in 2007 than their counterparts in 1979.
  • Women at the 90th percentile in 1979 earned a bit less than the median man. In 2007, however, a woman at the 90th percentile earned 66% more than the median man.

The following chart illustrates how earnings have evolved among the top 10% of men and the top 10% of women from 1989 to 2007:

Continue reading “The Changing Distribution of Worker Earnings”

1.1 Million More Jobs Lost

Today’s jobs report was weak across the board: September payrolls fell by 263,000, the unemployment rate rose to 9.8%, the underemployment rate (U-6) rose to 17.0%, and average weekly hours fell to 33.0, tying the record low set in June.

The Bureau of Labor Statistics also reported that payrolls declined by 13,000 more in July and August than it had previously estimated.

And if that weren’t enough, BLS also estimates the number of jobs back in March was actually 824,000 lower than previously reported (this is an estimate of the “benchmark revision” that BLS will make to the data early next year).

Putting these figures together, we find that the number of jobs has now declined by 1.1 million (263,000 + 13,000 + 824,000) more than we previously knew.

I have always found it frustrating that the BLS reports an estimate of the benchmark revision each October, but doesn’t incorporate that revision until the following February. That means that many analysts will be using incorrect data over the next few months.

If you want to know the number of jobs lost during the recession, for example, you might think you could get that number by clicking over to the BLS and comparing the number of jobs in September 2009 to the number of jobs in December 2007. That comparison would show total job losses of 7.2 million. Based on today’s estimate of the benchmark revision, however, it’s likely that the actual figure is more than 8.0 million.

Update: The original post had a typo for the average weekly hours; as noted above, the correct figure is 33.0, not 30.0.

Andrew Samwick’s Good Point About Health Insurance

In a recent post over at Capital Gains and Games, Andrew Samwick makes an important point about the debate over health insurance reform. As Andrew notes, many proponents of a public plan (aka public option aka government-run plan) blame the quest for profits for the ills they see in the private health insurance market.

This is one of those claims that is both true and false. What’s true, again echoing Andrew, is that the search for profits can lead to bad outcomes (e.g., efforts to cover the healthy while avoiding the sick) in our current system. That’s because we haven’t adequately addressed some key problems — most notably adverse selection — that arise in health insurance markets.

But that fact does not, of itself, demonstrate that the profit motive is itself the problem. If we can establish rules of the road that limit adverse selection (e.g., by prohibiting exclusions for pre-existing conditions), we may be able to direct the profit motive in the direction we want: finding ways to deliver greater value (i.e., better service and lower costs) to Americans with health insurance.

In Andrew’s words:

The solution to the problems in our health care sector is to make it look more like the retail sector or any other sector in which being voracious and profit-driven drives down costs.  The problems of adverse selection and moral hazard in insurance markets are well known — they are what stands in the way of extending the benefits of competition to health care.  Addressing them should be the central features of the reform, with a risk-adjustment mechanism to address the former and high-deductible plans to address the latter.  All of this discussion of Medicare-for-all in a public option is at best premature, since we have not seen whether a competitive, private system can function under the right form of regulation.

To drive this point home, let me offer the following (admittedly imperfect) analogy: it turns out that the profit motive causes thousands of companies to emit millions upon millions of tons of carbon dioxide and other pollutants. That’s a bad thing. But it doesn’t imply that the solution is a “public option” for electricity production and gasoline refining. The right response is to establish rules that address the market failure — in this case the pollution — and then let the firms do their thing.

That’s what we should do with health insurance.

Happy New Year … and Good Riddance to the Old One

Today marks the beginning of the new fiscal year, so budgeteers are all greeting each other with a cheery “happy new year.”

I think I speak for everyone when I say good riddance to fiscal 2009. Let’s hope that we never again see deficits of more than 10% of GDP.

I am still guessing that the 2009 deficit came in around $1.4 trillion. As for fiscal 2010, the only thing we can safely say is that the deficit, thus far, is less than $1 billion. But the day is young.