Category: Health

Key Budget Changes in the Senate Health Bill

Majority Leader Harry Reid released his revised health care bill today; the Congressional Budget Office followed shortly thereafter with its cost estimate.

Leader Reid has made many changes to his original bill. The one you will hear the most about, just because it is amusing, is that the tax on cosmetic surgery (the “bo-tax”) has been replaced with a tax on indoor tanning services. (I’m not sure of the politics here, but I presume this tax will be justified by pointing out that indoor tanning is the equivalent of cigarette smoking for your skin.)

From a budget perspective, CBO identifies the following as among the most important changes:

• The tax credit for small businesses would be made available to firms paying somewhat higher average wages, and it would first take effect in 2010 rather than 2011.

• The penalty for not having insurance would be the greater of a flat dollar amount per person or a percentage of the individual’s income, which would increase the amount of penalties collected.

• The provision establishing a public plan that would be run by HHS was replaced with a provision for multi-state plans that would be offered under contract with OPM.

• Certain workers would have the option of obtaining tax-free vouchers from their employers equal in value to the contributions their employers would make to their health insurance plans. The value of vouchers would be adjusted for age, and the vouchers would be used in the exchanges to purchase coverage that would otherwise be unsubsidized. (CBO and JCT estimate that about 100,000 workers would take advantage of that option.)

• Several provisions regulating insurers were added, including a requirement for an insurer to provide rebates if its share of premiums going to administrative costs exceeds specified levels and a general prohibition on imposing annual limits on the amount of benefits that would be covered.

• Additional federal funding for CHIP would be provided to states in 2014 and 2015.

• A provision that would increase Medicare’s payment rates for physicians’ services by 0.5 percent for 2010 was eliminated. Instead, the 21 percent reduction in those payment rates that is scheduled to occur in 2010 under current law would take effect. [In other words, the previous bill had a one-year doctor fix; the new bill has none.]

• The measure of Medicare spending that would be used to set savings targets for the Independent Payment Advisory Board was modified. [As I will discuss in a later post, this is a big deal.]

• The increment to the Hospital Insurance portion of the payroll tax rate for individuals with income above $200,000 and for families with income above $250,000 was raised from 0.5 percent to 0.9 percent.

• The 5 percent excise tax on cosmetic surgery was eliminated, and a 10 percent excise tax on indoor tanning services was added.

• Community health centers and the National Health Service Corps would receive an additional $10 billion in mandatory funding.

• Revisions to and extensions of the Indian Health Care Improvement Act were added.

When Do Regulations Turn Private Insurance into Government Insurance?

Summary: A new Senate health proposal might turn private insurance into government insurance, at least from CBO’s perspective.

In the 1990s, the Congressional Budget Office dealt a key blow to President Clinton’s health legislation when it decided that the reforms would move large portions of the health care system into the government and thus onto the budget. In that case, CBO concluded that regulations on private insurance would be so intrusive that it would effectively become a governmental activity. That finding strengthened the hand of opponents who portrayed the proposal as a big government expansion.

Policymakers have taken great pains to avoid the same fate in their current efforts at health insurance reform. Early in the process, Congressional leaders asked CBO to detail how it would decide which proposed policies should be treated as part of the government — and thus be recorded on the budget for Congressional purposes — and which not. To provide some answers, CBO released a brief back in May that describes how it would draw the line between government and non-government in evaluating health insurance proposals.  In his blog, Director Doug Elmendorf summarized the key distinction as follows:

In CBO’s view, the key consideration is whether a proposal would be making health insurance an essentially governmental program, tightly controlled by the federal government with little choice available to those who offer and buy health insurance—or whether the system would provide significant flexibility in terms of the types, prices, and number of private-sector sellers of insurance available to people. The former—a governmental program—belongs in the federal budget (including all premiums paid by individuals and firms to private insurers), but the latter—a largely private-sector system—does not.

The health legislation being considered in Congress includes many new regulations on private insurance (e.g., to forbid screening based on pre-existing conditions and to require coverage for certain activities), but CBO has consistently found that they aren’t enough to bring private insurance into the federal budget. The regulations would certainly change insurance markets, but in CBO’s view would leave enough flexibility and choice for those markets to still be considered private.

Until last week, that is, when a new proposal emerged that might cross CBO’s line and bring significant portions of the private insurance market onto the federal budget. That proposal would require health insurers to achieve a “medical loss ratio” of at least 90%. [A medical loss ratio (MLR) is the amount that the insurer spends on health care divided by the premiums that it collects. The difference between premiums and health spending covers the insurer’s overhead and administrative costs and provides profits for its shareholders (if any; many insurers are non-profits).]

Some insurance companies have MLRs that are 85%, 80%, or lower. Critics believe those lower ratios reflect either wasteful administrative costs or unwarranted profits. Defenders, on the other hand, point to the high administrative costs of providing careful care and cost management, as well as the higher costs of serving some parts of the insurance market.

Whatever the relative merits of those arguments, the key question for CBO is whether limiting MLRs would fundamentally transform the private insurance market. Based on what I’ve heard from several reporters this afternoon, it appears that the answer is yes. CBO has apparently concluded that when combined with other regulations in the proposed health legislation, strict limits on MLRs (e.g., establishing a minimum of 90%) would cross the line and bring any affected insurance into the federal government and onto the federal budget. On the other hand, much less stringent requirements on MLRs (e.g., establishing a minimum of 80%) would not cross that line.

Given the painful memories of the Clinton effort, you can be sure that Senate leaders are working hard to make sure their new proposal won’t cross the line. But it might come really, really close.

CBO Comments on the Budget Impacts of the Health Bills

CBO Director Doug Elmendorf posted a particularly interesting piece on his Director’s Blog today. Summarizing a presentation he gave to the Group of 30, Doug responds to some of the more common concerns one hears about the budget effects of the health bills:

First, some analysts argue that CBO is underestimating the ultimate costs of the new subsidies to buy health insurance. My response was that the budgetary impact of broad changes in the nation’s health care and health insurance systems was very uncertain, but that CBO staff, in consultation with outside experts, has devoted a great deal of care and effort to this analysis, and the agency strives to have its estimates reflect the middle of the distribution of possible outcomes. CBO’s estimates of subsidy costs may turn out to be too low, but they could also turn out to be too high.

Second, some observers argue that CBO’s estimates are unrealistic because Congress will not allow the Medicare spending cuts in the proposals to take effect. My response was that CBO estimates the effects of proposals as written and does not forecast future legislation, but that the agency does try to provide information about the consequences of implementing proposals. Our cost estimate for the Senate proposal and our cost estimate for the House bill said that inflation-adjusted Medicare spending per beneficiary would slow sharply under those proposals. For example, growth in such spending under the Senate proposal would drop from about 4 percent per year for the past two decades to roughly 2 percent per year for the next two decades; whether such a reduction could be achieved through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care is unclear. In addition, relaxing previously enacted constraints on Medicare spending can add significantly to long-run budget deficits, as we wrote in answer to a question about the effects of combining the House bill with a change in the so-called Sustainable Growth Rate mechanism for Medicare physician payments.

Third, some analysts argue that the pending proposals will hamper future efforts at deficit reduction by using spending cuts and new revenues to pay for a new entitlement rather than to cover the costs of existing entitlements. My response was, again, that CBO does not and should not forecast future legislation; its cost estimates address the specific legislation at hand and do not speculate about the possible impact of a bill on future legislative actions. However, our June analysis of health reform and the federal budget noted that using savings in certain programs to finance new programs instead of reducing the deficit would ultimately necessitate even stronger policy actions in other areas of the budget.

Fourth, some experts argue that the proposals are missing opportunities to reform health care delivery and reduce spending more significantly. My response was that it is not CBO’s role to make such judgments, but that our December volume on Budget Options included a wide range of alternatives for changing the nation’s health care and health insurance systems. Those options covered many different types of reforms and included reforms with different degrees of aggressiveness in altering existing systems and pursuing cost-saving goals.

(I don’t usually post such long excerpts, but this one struck me as worth quoting in its entirety. Doug also shared some thoughts on stimulus and the state of the economy; click on over to his post for those.)

Good Budget Reads

1. Jeff Frankel tops my National Journal post with nine more ways to trim the deficit.

2. EconomistMom Diane Lim Rogers scores the budget quote of the week: “‘Loosey-goosey’ out, loosey-goosey’ back at ya.”

3. Bruce Bartlett makes the case for a war tax: “wars financed heavily by higher taxes, such as the Korean War and the first Gulf War, end quickly, while those financed largely by deficits, such as the Vietnam War and current Middle East conflicts, tend to drag on indefinitely.”

How Would Health Reform Affect Insurance Premiums?

Yesterday, the Congressional Budget Office released its much-anticipated analysis of how the Senate health bill might affect insurance premiums. As a political matter, the analysis appears to be a clear win for proponents of the bill. Most importantly, CBO found that average premiums in the large group market—which provides about 70% of private health insurance—would decline slightly in 2016. That provides comfort to Senate moderates who were concerned by claims that the bill would increase premiums significantly.

On the other hand, the report also found that average premiums in the nongroup market would increase by 10 to 13%. That substantial boost is providing some ammunition to opponents of the bill.

To put these impacts in context, it’s useful to dig a bit deeper to understand the various channels by which health reform may affect insurance premiums. CBO identifies three such channels: changes in the amount of health insurance coverage that each beneficiary purchases, changes in the types of people with coverage, and changes in the price of a given amount of insurance for a given group of enrollees:

For me, the most interesting of CBO’s findings is that the Senate bill would make the nongroup and small group markets more efficient. The price of nongroup coverage would be reduced by 7 to 10% (holding constant the amount of coverage and the type of people covered), while the price of small group coverage would be reduced by 1 to 4%. Where do these savings come from? From reduced administrative costs and competition in the exchanges (not, CBO notes, from any material reduction in cost-shifting from the uninsured to the insured).

The second key finding is the enormous increase in the amount of coverage that consumers would purchase in the nongroup market. CBO finds that the bill would induce people in the in the nongroup market to purchase insurance that covers a larger share of their costs; the bill would also require insurers to cover a broader range of services. Both of these changes would boost nongroup premiums.

The third major finding is that the changing mix of enrollees would lower average premiums in the nongroup market. Premiums in the large group market would decline slightly.

A fourth major implication, overlooked in most discussions thus far, is that we shouldn’t assume that average premiums going up is always bad (or, for that matter, that average premiums going down is always good). Consider, for example, the increase in average nongroup premiums, which occurs because nongroup insurance would expand to cover more services and a larger fraction of beneficiary costs. To what extent is that increase harming people in the nongroup market? It depends on how much the beneficiaries value their new coverage. When consumers move up from a Honda Civic to a Honda Accord, it’s usually safe to assume that they are benefitting, even though the Accord is more expensive. On the other hand, we would look askance (I hope) at a government program that forced potential Civic buyers to purchase Accords instead.

So it is with nongroup insurance. If people are trading up willingly to more expensive coverage, we shouldn’t view that as a bad thing (there is an issue about how broader coverage affects their consumption of health services, but let’s leave that aside for now). On the other hand, if the government is forcing them to buy coverage they don’t fully value, we might be concerned (with the obvious caveat that with health insurance, unlike car purchases, there are some legitimate reasons why the government might mandate some level of coverage). But even then, the most important concern is the net burden (how much consumers value the coverage less what they have to pay for it), not simply the gross burden of paying for it. CBO doesn’t get into these particulars in detail, but it does provide the following breakdown of the amount of coverage effect: two-thirds is due to greater actuarial value of the plans and one-third is due to coverage of more services (including those induced by the greater actuarial value). The increase in actuarial value means that, on average, about two-thirds of the increase in nongroup premiums will be offset by reductions in out-of-pocket spending. As a result, I think the increase in average premiums significantly overstates the burden that beneficiaries in the nongroup market might bear (and, indeed, some may well be better off).

Of course all of these conclusions come with numerous caveats. Most importantly: (a) YMMV; individuals may experience much larger premium increases or decreases than the averages, (b) CBO didn’t model some impacts that could raise premiums — most notably the possibility that increased demand for health services would drive up prices, (c) CBO didn’t model some impacts that may eventually reduce premiums — most notably provisions that might reduce health costs somewhat after 2016, and (d) these findings don’t include the effects of any subsidies or the tax on Cadillac plans; see the CBO report for analysis of those.

Reducing National Health Care Spending

Four researchers from RAND Health have an interesting article in the latest New England Journal of Medicine (ht Bruce Bartlett). Based on some detailed research in Massachusetts, they identified eight strategies that might help to reduce national health care spending:

They conclude that the most promising option is to bundle payments: providers would receive a “single payment for all services related to a given treatment or condition, causing providers to assume risk for preventable costs.” Bundled payments would thus reduce one of the key inefficiencies in our current system: the tendency of fee-for-service payments to “encourage higher volume rather than better value.”

Another important finding is that several options could actually increase spending. Disease management, for example, “typically requires up-front payments for services for a broad population, and there is little evidence of substantial cost offsets.” (A few months ago, I made a similar point about prevention efforts. In both cases, it is important to keep in mind that spending reductions should not be the only goal. Disease management and prevention efforts that increase costs can still be justified if they improve health sufficiently.)

For Health Bills, A Year Makes a Big Difference

The coverage provisions in the Senate health bill have a much lower ten-year cost that do the coverage provisions in the House bill. According to the Congressional Budget Office (CBO), the coverage provisions in the Senate bill will cost $848 billion from 2010 through 2019, while the corresponding costs for the House bill are $1.052 trillion, more than $200 billion higher. (Please keep in mind, though, that the total cost of both bills is higher because of other provisions.)

When I was reading newspapers this morning (yes, I still get ink on dead trees), I noticed several claims that this difference in gross costs could be traced to a timing difference. The main coverage provisions in the House bill start in 2013, while the corresponding provisions in the Senate bill start in 2014.

This seems like a potentially important point, so I took another look at the cost estimates to get a sense of how big this effect is. The answer? It’s big. As illustrated in the following chart, a year makes a big difference in the gross coverage costs within the ten-year window:

The coverage costs in the House bill (denoted in gray) do indeed ramp up a year earlier than the costs in the Senate bill (denoted in orange). As a result, the ten-year cost estimates include seven years of coverage efforts under the House bill, but only six years under the Senate bill.

That timing difference accounts for almost all of the gap between the $848 billion gross coverage cost of the Senate bill and the $1.052 trillion of the House bill. (One way to see this is to note that the seventh year of the House bill costs about $200 billion, almost exactly equal to the difference in the ten-year cost estimates).

Bottom line: Over the ten-year window, the gross coverage costs of the two bills appear quite different, with the Senate bill coming in about 20% lower than the House bill. But much of that difference is timing. Over longer time periods, the gross coverage costs are much closer together.

How Much Does the Senate Health Bill Cost?

Senate Majority Leader Harry Reid unveiled his health bill yesterday. As everyone knows by now, the Congressional Budget Office (CBO) estimates that the bill would spend $848 billion to expand coverage over the next ten years, reducing the number of uninsured in 2019 by about 31 million. (The House bill would spend $1.05 trillion over the next ten years, and would reduce the number of uninsured in 2019 by about 36 million.)

As regular readers know, CBO reports two estimates of the cost of expanding coverage: the gross cost, which reflects all new spending and tax incentives to increase insurance coverage, and the net cost, which subtracts any tax revenue increases associated with coverage policies. Leader Reid, Finance Chair Baucus, and their Senate colleagues deserve credit for emphasizing the higher figure in explaining the cost of their bill. In contrast, House leaders tried to focus attention on the lower, net cost of their bill, which led to unnecessary confusion (nb: the net coverage cost of the Senate bill is $599 billion versus $891 billion for the House bill.)

Everyone following this debate should keep in mind, however, that even the gross coverage figures do not capture all the costs of these bills. As I’ve pointed out several times (e.g., here and here), the health bills include many important provisions in addition to those expanding coverage. Many of those non-coverage provisions are intended to save money and thus pay for the coverage expansions. But some of the provisions expand spending on other health programs.

To get a fair read on the total cost of the health bills, we should therefore add together the gross cost of coverage expansions and the cost of the other provisions that increase spending (or decrease revenues). I estimate, for example, the real gross cost of the Senate health bill is $940 billion over ten years:
As noted in the table, the biggest non-coverage items are new discounts for drug purchases in the Medicare Part D program, a new fund to finance efforts in prevention and public health, and a one-year doctor “fix”. Together with other provisions, they add up to a bit more than $90 billion in additional spending, Along with about $1 billion in tax reductions, that means the bill costs $940 billion over ten years, about $92 billion more than for coverage alone. (In contrast, the House bill has a total cost that’s up near $1.3 trillion.)

Caveats: CBO does not calculate a total cost figure for the health bills. The bills include dozens of policy changes, and it would be difficult (perhaps impossible) to allocate all their impacts to specific provisions. Thus, my figures should be considered approximate. I calculated the $90 billion figure for additional spending by adding up all the individual line items in Table 4 of the cost estimate 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; I included the net spending increase in my figure. I am certainly open to other suggestions about how to add up the other spending in the bill. It’s also worth noting that I have taken as given CBO’s estimate of the gross cost of expanding coverage. There are some nuances in the calculation of that figure (e.g., the treatment of payments in a reinsurance program) that I need to understand better.

Talking about Health Care (and Trillions)

Last night I did my first ever interview on local television, appearing on the Federal News Report on News Channel 8 in Virginia.

Going in, I had my usual talking points in mind on the various health bills pending in Congress, how much they cost, how they are paid for, whether the pay fors will actually work, etc.

But I wasn’t prepared for the best question Beverly Kirk asked me, even though I really should be. That question was very simple: How on earth do you make figures like a trillion dollars tangible to a normal human being? I didn’t have a particularly good answer and would welcome suggestions.

Last week, I was talking with a Senate candidate who asked a very similar question about the size of the deficit, which reached $1.4 trillion in 2009. I had a better answer for that one, noting that the imbalance between federal revenues and spending last year was equivalent to a family earning $40,000 per year but spending more than $65,000.

Health Care Potpourri

1. The Medicare doctor fix has gotten cheaper. Yesterday the Congressional Budget Office (CBO) released a cost estimate for the House proposal to make a permanent “fix” to the rates that Medicare pays doctors (as you may recall, those rates are scheduled to be cut by more than 20% at the end of the year). The ten-year price tag? $210 billion. That’s down from the earlier $245 billion cost because of an arcane change in Medicare regulations (in addition, it’s now being scored separate from other parts of health reform).

2. The House Republican alternative to the House bill would cost much less, but cover many fewer people. According to another cost estimate released yesterday, CBO estimates that the Republican alternative would spend $61 billion over ten years on expanding coverage versus $1.055 trillion in the House bill. In return, their proposal would reduce the number of uninsured by 3 million in 2019 versus 36 million under the House bill.

3. Over at EconomistMom, Diane Lim Rogers has a nice piece about some of the tax increases that the House bill would use to pay for health care reform. Her concern? That they look a lot like the tax increases currently scheduled under the alternative minimum tax. Congress always steps in to prevent the AMT from biting more deeply. Why would things be different with a new AMT-like tax?

4. Confused by all the different cost measures being thrown around in the health debate? Over at e21 (the new think tank), I’ve tried to provide some clarity about the leading measures and how they stack up for the House bill and the Senate Finance bill: “How much do the health bills really cost?“