Bending the Federal Health Cost Curve (Maybe)

UPDATE: The Congressional Budget Office discovered an error in its original cost estimate for the revised Senate health bill. CBO originally projected that the Independent Payment Advisory Board (IPAB) created by the bill would lead to substantial reductions in Medicare spending beyond 2019. CBO’s revised estimate shows significantly smaller IPAB savings in future decades. CBO’s new letter does not specifically address the federal commitment to health care (the specific cost measure discussed in this blog post), but it appears that the potential reductions are much smaller than originally reported.

Buried deep in CBO’s cost estimate of the new Senate health bill is a striking conclusion: CBO believes that the health bill would eventually reduce the federal commitment to health care. In short, the bill would eventually bend (or, at least, lower) the federal health cost curve (including both spending and tax subsidies).

That conclusion comes with two crucial caveats: CBO’s estimates into future decades are subject to great uncertainty and assume that the legislation executes exactly as written. As CBO itself points out, that latter assumption is shaky — Congress will undoubtedly revisit health care repeatedly in coming years and may well decide to soften the spending reductions and tax increases specified in the bill.

Still it is striking that the bill, as written, might reduce the federal commitment to health beyond the first decade. That certainly distinguishes it from the previous version of the Senate bill.

CBO writes (my emphasis added):

In subsequent years [i.e., after 2019], the effects of the proposal that would tend to decrease the federal budgetary commitment to health care would grow faster than those that would increase itAs a result, CBO expects that the proposal would generate a reduction in the federal budgetary commitment to health care during the decade following the 10-year budget window. By comparison, CBO expected that the legislation as originally proposed would have no significant effect on that commitment during the 2020-2029 period; most of the difference in CBO’s assessment arises because the manager’s amendment would lower the threshold for Medicare spending growth that would trigger recommendations for spending reductions by the Independent Payment Advisory Board. The range of uncertainty surrounding these assessments is quite wide.

The change in the IPAB is a bit arcane, but potentially a big deal if future Presidents and Congresses let it do its thing. Under the original Senate bill, the IPAB recommendations would be relevant only to the extent that Medicare spending per beneficiary was projected to grow faster than overall per capita health spending. In the new bill, the threshold is set much lower, reflecting inflation in overall consumer prices and consumer medical inflation. That change gives the IPAB more teeth and, in later years, more bite.

5 thoughts on “Bending the Federal Health Cost Curve (Maybe)”

  1. I’m surfing around the web, trying to figure out exactly how the CMS estimates the Reid bill will not “bend down” health care costs. Something about the CMS saying national health expenditures will rise $234 billion. My understanding is this assertion is in contradiction to the part of the CBO’s estimates, which you summarize above, that the cost curve of health care WILL bend down.

    I’ve got the CMS study and the latest CBO letter to Harry Reid, but I don’t completely understand where it is in the two documents that they are contradicting one another.

    I’m just surfing around looking for hints as to this contradiction. But, it would be really nice if I could find an article, with quotes from the documents, showing where they contradict?

    1. Hi Levander — I believe that the main difference is that CMS includes an estimate for national health expenditures, including state and private, but CBO addresses only the federal share. In principle, increases in private and state spending may offset any reductions in federal.

      Furthermore, CBO uses a concept of the federal commitment to health care which includes the value of the tax subsidy to health insurance. That gets substantially reduced by the reduced tax exclusion on insurance plans. But that doesn’t reduce national health spending directly (but it likely would indirectly).

      –Donald

  2. Thank Donald.

    I’ve finally had time to review some of this stuff. This is what I was looking for in the CMS report:

    In aggregate, we estimate that for calendar years 2010 through 2019, NHE would increase by $234 billion, or 0.7 percent, over the updated baseline projection that was released on June 29, 2009. Year by year, the relative increases are largest in 2016, when the coverage expansions would be fully phased in (1.6 percent), and gradually decline thereafter, as the effects of the Medicare market basket reductions compound and as the excise tax on high-cost employer health plans affects more policies, reaching 0.5 percent in 2019. The NHE share of GDP is projected to be 20.9 percent in 2019, compared to 20.8 percent under current law.

    I see what you’re saying about how this could affect overall expenditures, and that could too. But, as indicated by the CMS report, there’s really very little done to bring them down. Hence, the oft-cried accusation that this bill is just a giant corporate give-away.

    Just relying on how things may work to our advantage better than we expected really isn’t good enough in my mind. It seem pretty clear that the main problem with our system is that it’s just too expensive. And, according to CMS estimates, this bill only makes it more expensive.

    I’d be all for this bill if we weren’t already spending too much on health care. I’d be fine with costs rising in order to achieve universal coverage in that case. But, that’s not the case. We’re already paying well more than other nations who have universal coverage, and they have at least the same health statistics we have.

    Plus, if you read the CMS report about what happens with Medicare under the Reid bill. Yeah, right. Surrrre they’re gonna cut half a trillion off Medicare. It’s just more hocus pocusery trying to make it look to the masses like their bill is more fiscally responsible than it actually is.

    Corrections in my logic appreciated.

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