What is Health Care Reform?

Health care reform increases the federal deficit over the next ten years. The health care reform legislation, however, reduces the deficit.

Greg Mankiw set off a vigorous discussion in the blogosphere (see, e.g., Ezra Klein, Clive Crook, and the Austin Frakt) with a provocative analogy about health care reform:

I have a plan to reduce the budget deficit.  The essence of the plan is the federal government writing me a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit.  Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit.  But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

I read Greg as raising an important rhetorical / pedagogic question which, judging by some responses, may have been overshadowed by his satire.

That simple question is “what is health care reform?”

The policy community and commentariat often equate health care reform with the legislation (actually two pieces of legislation) that President Obama signed into law last year. As everyone knows, the Congressional Budget Office estimated that those two laws would, if fully implemented, reduce the federal budget deficit by $143 billion from 2010-2019. That’s the basis for the claim that “health care reform would reduce the deficit over the next ten years.” (CBO also discussed what would happen in later years, where the law, if allowed to execute fully, would have a bigger effect, but let’s leave that to the side right now.)

The complication, which Greg’s post partly addresses, is that the health care reform legislation included many provisions. Greg notes, for example, that some expanded health insurance, while others raised taxes. In his view, only the first part constitutes health care reform — an effort that by itself would widen the deficit — while the tax increases are what made the legislation deficit-reducing.

In fact, it’s more complicated than that. By my count, the two pieces of health care reform legislation combined seven different sets of provisions:

1. Expanding health insurance coverage (e.g., by creating exchanges and subsidies and expanding Medicaid)

2. Expanding federal payments for and provision of health care services (e.g., reducing the “doughnut hole” in the Medicare drug benefit)

3. Cuts to federal payments for and provision of health care services (e.g., cuts to Medicare Advantage and some Medicare payment rates)

4. Tax increases related to insurance coverage (e.g., the excise tax on “Cadillac” health plans)

5. Tax increases not related to insurance coverage (e.g., the new tax on investment income)

6. The CLASS Act, which created an insurance program for long-term care

7. Reform of federal subsidies for student loans

(The House Republicans’ effort to repeal health care reform would overturn 1-6, but leave the student loan changes in place.)

To capture these complexities, I occasionally refer to the legislation as the health care / tax / student loan / long-term care legislation. But whenever I write that for publication, my editors take it out. Although my lengthy description is accurate, it doesn’t work for friendly conversation. So the law (which again, was really two laws) gets called the health care reform law.

Greg’s point, I think, is that this rhetorical convention creates confusion when talking about the law’s budget impacts. To say “the health care reform law reduces the deficit over the next ten years according to CBO” is absolutely true. But it often gets elided to “health care reform reduces the deficit over the next ten years” which isn’t true if, like Greg, you think the revenue raisers, student loan changes, and CLASS Act aren’t really health care reform.

I think Greg is right to worry about this distinction. Because of the information loss as the details of CBO scores get transmitted through various layers of speakers and media (including this blog), some people are indeed under the mistaken impression that health care reform, by itself, reduces the budget deficit over the next ten years. It doesn’t.

However, Greg’s analogy has a flaw: it presumes that none of the tax increases count as health reform. I disagree.

Our current tax system provides enormous ($200 billion per year) subsidies for employer-provided health insurance. They should be viewed as part of the government’s existing intervention in the health marketplace. And rolling back those subsidies strikes me as essential to future health care reform. I would count any revenues raised from doing so as part of health care reform.

That didn’t happen, but the legislation did include a tax on “Cadillac” health plans as a partial substitute. That will clearly affect health insurance markets, and it offset a portion of existing tax subsidies. For both those reasons, it should be viewed as part of health care reform.

The key thing is not the difference between spending and revenues, but between provisions that fundamentally change the health care system and those that do not.

Happily, I am not alone in this view. Indeed, it has been endorsed by none other than the Congressional Budget Office. CBO grappled with this issue during the health care debate. And after much thought, it came up with a useful measure of the health care reform part of the legislation: the “Federal Government’s Budgetary Commitment to Health Care“. This measure combines the spending and tax subsidies that the government provides for health care.

Taking all the health care provisions into account, CBO concluded that the health care reform legislation would increase the federal government’s budgetary commitment to health care. But not as much as many critics suggest. Adding together items (1) through (4) on my list, CBO concluded that the health care reform parts of the legislation would increase the deficit by about $400 billion over ten years. That would then be more than offset by the other provisions — primarily taxes but also the student loan provisions and the CLASS Act. (In later years, by the way, CBO projects that the legislation would actually reduce the federal commitment to health care.)

Bottom line: Health care reform increases the federal deficit over the next ten years, but the health care reform legislation reduces the deficit. What could be simpler?

P.S. I hope it goes without saying–but will say it anyway–that one should not evaluate the health care reform legislation on its fiscal impacts alone … or even predominantly. The legislation has a wide range of benefits (e.g., 32 million more people with health insurance) and costs. The key question is how they net out.

9 thoughts on “What is Health Care Reform?”

  1. I think to complete your argument about having a connection to health care to distinguish health care net revenues from the legislative reform net revenues, there needs to be a measurement of legislative opportunity costs, especially if one wants to motivate Congress to act or at least consider the economic effects of legislation on the deficit.

    The most important reform for health care, as you rightly mention, is to eliminate the employer tax deduction. The deduction is a ‘connected item to health reform’ (and we will leave this concept undefined and sort of, I know it when I see it). Allowing the deduction to continue is a lost opportunity to reform health care and a lost opportunity to raise tax revenues $200 billion per year ($ 2 trillion over 10 year budget window). It depends on whether or not you view the marginal costs to include the opportunity costs of not eliminating the deduction.

    If the deduction effect were included in the CBO cost analysis, and I believe it should have been, the deficit effect of the passed health reform legislation would start at the point of a deficit of $200 billion per year. Added to the $200 billion would be the additional deficit costs of the items in the legislation less any connected revenue producers, such as the Cadillac tax.

    A CBO analysis that included the $200 billion per year foregone revenue would show a truer cost picture of ignoring the elimination of the employer tax deduction in the passed health reform legislation.

  2. Uhm…what exactly is the point of differentiating the “reform” from the “legislation,” when they’re forever linked? Should this distinction be made for all laws that pay for themselves?

    It’s simply undeniable that if the law somehow was repealed by Republicans, they wouldn’t leave the tax increases in place. And if it weren’t for the tax hikes, we wouldn’t have gotten the bill; and vice versa. So really, the suggestion that we can separate the reform from the taxes is nothing but a silly game of semantics. For all practical purposes, these are the same things. Period.

    For anyone interested, I ripped apart Mankiw for his absurdist argument on my blog:
    Does Harvard Offer Refunds?

  3. It’s a rhetorical tactic as old as “rock soup”.

    An abbreviated version of the “rock soup” story: A traveler arrives in a village with nothing but a pot. He sets himself down in the center of the village, gathers some rocks, fills his pot with water, and builds a small fire. As the water boils, villagers approach him and ask what he is cooking. He tells them “Rock soup, the most delicious soup in the world. I’ll be glad to share some with you. It’s made with these rocks I’ve gathered, although for it to be really good, I should add some spices”. A villager eagerly provides spices. The traveler then says “and some fresh vegetables would make it even better”. Villagers promptly provide vegetables. Lastly the traveler says “and adding some beef would really make it perfect”. Beef is then provided by the villagers, who all feel so fortunate for the arrival of this traveler who will share some of this delicious “rock soup”.

    And it’s not the first time the “rock soup” rhetorical approach was used by Obama and advocates of healthcare “reform”. The other was in lumping coverage expansion measures together with cost-containment measures intended to “bend the curve” and then claiming that the whole package will bend the curve, implying that it must be a package deal or we can’t bend the curve (and even then, also leaving aside the whole minor matter of if level of spending, particularly on present value basis, rather than just the eventual slope of the curve at some point) http://economistmom.com/2009/07/the-cant-we-do-better-blue-dogs/#comment-3110

    And below the comment at that link I added another analogy I cooked up (pardon the pun), which I’ll paste here:

    Unless the savings from those cost-control measures (medical IT; comparative effectiveness; etc.) are highly dependent on expansion of coverage, Obama’s rhetoric resembles the following:

    Obama: We aren’t getting any Vitamin C in our diet. On our current course, we’ll get scurvy. We need to start eating a breakfast every day of bacon, sausages and orange juice.

    Citizen X: But eating bacon and sausages every day will be bad for our health (we’re already obese and have dangerously high cholesterol). Why do we need to eat the bacon and sausages every day?

    Obama: Did you not hear me?? We aren’t getting any Vitamin C and we’re going to get scurvy on our current course! The status quo is unacceptable! We need to have this bacon, sausages and orange juice breakfast every day.

    As a note, yes I’m aware of some cost shifting from the uninsured to government.

  4. It is amazing to me how simple health care and “reform” has become in this country. Health care is such a complex issue that to even define it in the space of one article or posting is ludicrous, but both sides do it all the time. I practiced family medicine in rural Arizona for 17 years. I dropped out of the Medicare program when they decided to criminalize billing mistakes even when they (MC or CMS) give the wrong information. My friend and a number of other didn’t and they are all paying half million dollar fines 2 years after submitting bills for services for which CMS initially had no problems paying.

    It is often said we (the US) have the greatest health care in the world (usually be politicians and since they know everything, then by regular people). By any measure other than per capita spending, no one can justify that statement. We aren’t the fattest on earth but we are close to or in the top 10. Longevity (how long we live), nope-not in the top 10. Infant mortality, fat chance not even in the top 20. Yet we spent 13.6 of our GDP on health care, the next highest country was Germany at 10.6 and everyone in that country has insurance.

    We don’t have health care in this country, we have disease care. I could never submit a bill to MC or BXBS for a visit for a 35 year old male that was completely healthy for which my visit consisted of ways for him to eat right, exercise and which supplements to take to avoid disease. There are codes for “well exams”, try to get paid for it, doesn’t happen anymore than the other codes for counseling, coordination of care, family counseling or others. So to get paid, we have to find a disease and then it becomes a pre-existing condition if the patient ever gets another job and new insurance he/she is screwed.

    We don’t reward patients for taking care of themselves and penalize others for the overweight, smoking, don’t eat exercise, I would rather take a pill than change my lifestyle idiots. Through employer plans, a 300 pound diabetic who takes 9 medication (yeah, many do), gets the same benefits as the 30 year old guy who has a normal weight, exercises and eats correctly (and we can’t even agree what this means). For those doing the math, this translates into $3000 for every GM vehicle for the last year I could find stats. Just because the government isn’t sending you a note to pay a tax, this is a tax you pay for those who refuse to take part in their own care.

    As Medicare slashes (or tries to slash) pay for doc’s (most lose money every time a MC pt. is seen at least in family practice) doc’s have to make up for this by seeing more pt’s. This means less time per patient and so technology is used to replace good exams (and the complicated way BXBS et al allows you to calculate how much to charge rewards this), more expensive tests are ordered and less time actually spent providing health care.

    Many of my patients used to carry high deductible catastrophic plans which made them much better consumers of health care options. (Although there may be arguments against this, one has to be supremely ignorant to not think if you have to pay the $1200 for your MRI of your knee, you are far more comfortable waiting six weeks to see if things heal on their own). Unless people have to feel some pain for their medical choices, they aren’t really good consumers and they demand the best and fastest. Now the government (which can’t decide if fat, salt,carbs, medications, eggs, etc is good or bad for you) wants to force them to buy a plan they don’t need to help pay for the health care costs of the fat ass above. So what’s next, tax a new Cadillac so everyone can have one? Charge double for a fillet mignon so the guy who didn’t go to college or med school can also have it? Penalizing health people who are good consumers of their health care dollars is so ludicrous it is hard to believe.

    1. Obesity, infant mortality, and longevity are not good comparative measures of our health care system.

      Food in the US is cheaper as a percent of a workers salary (number of hours needed to work to purchase) than other countries. Since it cost less we consume more food and become obese. As personal income grows in other parts of the world, the other countries are becoming obese like the US.

      The US infant mortality statistics include all babies born alive. Other countries do not include babies that die a short time after birth. Our poor infant mortality ranking in based in large part on difference in statistical methods..

      For many varied reason, the US has the highest teenage pregnancy rates in the world and teenagers have a higher rate of pre-term babies, poor pre-natal nutrition, etc. and all that goes with that. This also increases our infant mortality, but within any age sub-category, the US does better than or as well as any other country.

      The US has a higher accident fatality rate (open roads, high speeds, fast cars, etc) and a higher homicide rate than many other countries. When international comparisons are made that standardize for these non-disease related deaths, and the differences in infant mortality measures, the US has the best longevity. When deaths related to healthiness are the comparative basis for longevity in any category, eg, heart disease, specific cancer types, etc, the US does the best.

      On healthcare intervention outcomes, when there are diseases or medical conditions, the US healthcare comparative measurements show that it is one of the best, if not the best, in the world.

      Our overall numbers look worse for reasons that have nothing to do with the health care system or the availability of health care.

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