Health – Page 5 – Donald Marron

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 Washington Post: “The bill would cost $829 billion over the next decade.”

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

The Wall Street Journal: “The latest Senate health bill will cost $829 billion over a decade.”

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:

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.

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:

Increase coverage through higher Medicaid spending and “carrots” such as subsidies for purchasing insurance through an exchange or tax incentives to get coverage.
Increase coverage through “sticks” such as penalties for individuals who don’t have coverage.
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.
Increase spending on other federal health programs (e.g., prescription drugs in Medicare)
Increase revenues by raising taxes in ways related to health insurance coverage (e.g., on insurers).
Increase revenues by raising other taxes (e.g., new taxes on health providers, taxes on high earners, or reduced income tax deductions).
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?”

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.

Human Organs, Behavioral Economics, and Insurance Mandates

Like the minimum wage and rent control, the market for human organs is a classic topic when teaching the basics of supply and demand. Organ markets are largely outlawed and, as a result, the demand for organs greatly outstrips the supply. For example, according to some estimates, as many as 4,000 people in the United States die each year while waiting for donor kidneys (some of which could, in principle, come from healthy donors).

As Dick Thaler notes in the New York Times today, the usual economist solution to this problem – allowing the buying and selling of human organs – is a political non-starter. Many people find the idea “repugnant,” as economist Alvin Roth has put it.

One solution, which Roth helped pioneer, is to create organ swaps rather than sales. Suppose, for example, that my wife needs a kidney and that I am willing to donate, but am not a match. And at the same time, a woman wants to donate a kidney to her sick brother, but also isn’t a match. That seems like a dead end (so to speak), but if I am a match for her brother, and she is a match for my wife, then we can arrange a swap – my kidney for hers. Two lives get saved, and there’s nothing repugnant about it.

Over time, this basic idea has expanded to include “daisy chains” of donations involving numerous donors and recipients (for a nice description see this recent article in Wall Street Journal).

Thaler considers another way to address the problem of organ supply (from individuals who become brain dead, not those who are healthy) using the insights of behavioral economics:

Continue reading “Human Organs, Behavioral Economics, and Insurance Mandates”

Answer: When It’s a Fine

Readers have provided many thoughtful comments on yesterday’s post about whether we should use the word “taxes” to characterize the financial penalties that would be used to enforce an individual health insurance mandate. Based on those comments, and some further reflection, I have several additional thoughts:

I discovered that some people think the individual mandate itself should be characterized as a tax. I don’t agree. As long as individuals are free to choose among private insurance plans in satisfying the mandate, there is no need for the President (or anyone else) to refer to the mandate as a tax. The distinction between regulation and taxation can sometimes be blurry, but it’s still a useful distinction. And an individual mandate is clearly a form of regulation. (However, I also won’t object if opponents characterize the mandate as a tax; that’s well within the norm of political economic rhetoric on both sides of the aisle. My point is simply that proponents of the mandate don’t need to use the “t” word in characterizing it.)

Note: The situation would be different if individuals were forced to purchase a specific government insurance plan. That would be a tax. (For a related discussion, see this brief from the Congressional Budget Office that discusses how it decides whether regulations are so intrusive that the regulated activities should be reflected in the budget; as I noted in one of my first posts, that was a key issue during the debate over the Clinton health proposals.)

My ruminations were focused on the question of what you should call the financial penalties that would be applied to individuals who didn’t satisfy the mandate. Following the CBO, I am firmly of the belief that the resulting cash inflow to the government should be characterized as revenues.

Most revenues are the result of taxes, but not all. And, on reflection, it seems rhetorically defensible to refer to the penalties as “fines” rather than “taxes” if their purpose is to enforce the individual mandate and not to generate revenue. (This is similar to, but somewhat different from, my earlier thoughts about the penalty acting like a Pigouvian tax, which is what I took the President to be saying on Sunday.)

So, here’s my revised suggestion for rhetoric that the President can use next time he’s interviewed by George Stephanopoulos: “If my plan is enacted, I believe that all responsible Americans should have health insurance. If they don’t they should face a penalty because they are imposing costs on others who may have to pick up the tab for their future health costs. And that penalty is a fine, George, not a tax.”

When is a Tax Not a Tax?

A critique–and, if you read far enough, a partial defense–of the President’s rhetoric about the definition of a tax.

Be sure to read my follow-up post: “Answer: When It’s a Fine“

President Obama has walked into a rhetorical box on taxes. On the one hand, he campaigned on a promise not to raise taxes on Americans who earn less than $250,000 per year. On the other hand, he has endorsed policies that look a lot like taxes on those people. They include:

A $0.62 per pack increase in the federal cigarette tax. President Obama signed this into law to help finance an expansion in health programs for children; the increase went into effect on April 1.

Proposals to tax insurers who offer “Cadillac health insurance plans.” As many commentators have noted – and as I taught my students on Monday – some of that tax (perhaps much of it) would ultimately be passed on to consumers in higher insurance premiums. So insurers may be the ones writing checks to the government, but, in reality, consumers will be paying higher taxes.

Penalties to enforce an individual mandate in the health bills now pending in Congress. For example, the draft Baucus bill (from a few days ago; it may have since changed) would impose a penalty of up to $3,800 per year for families that could afford health insurance but do not purchase it.

The President’s supporters have argued that the first two tax increases are consistent with his pledge. The increased cigarette tax, for example, isn’t an increase in income taxes. And the tax on insurance companies isn’t a direct tax on individuals and, even if it’s partially passed through, it would not increase individual income taxes.

Such hairsplitting has no economic content – some of both tax increases really would fall on families that earn less than $250,000 – but may provide enough political cover to defend what I presume the President actually meant on the campaign trail: “I will not raise income taxes directly on American families who earn less than $250,000.”

Unfortunately for the President, that hairsplitting apparently won’t work with the third proposal which involves a direct tax on individuals who don’t get qualifying health insurance. Those individuals would have to write a check to the government as a penalty for this lack of coverage.

There would seem to be no wiggle room to enable the President to call this anything but a tax (albeit not an income tax). Yet, when asked about this by George Stephanopoulos on Sunday, the President tried to deny that such penalties are taxes. Stephanopoulos and Merriam-Webster, however, were having none of it:

The President’s argument fails, on its face, if you take the view that a tax is any money that the government takes from you through exercise of its sovereign power. Purchasing a souvenir at a National Park? Not a tax since it’s a voluntary, market-like transaction. But paying a penalty because you haven’t purchased government-approved health insurance? That’s a tax. And, indeed, it is treated as such by the Congressional Budget Office in its evaluation of health proposals.

I think CBO is correct: for federal budget purposes, the penalty on the uninsured would indeed be a tax, since it reflects the exercise of the government’s sovereign power.

However, and this may surprise you, I also think the President has an important point which he tried, with only limited success, to articulate. I would describe it as follows: A well-meaning government levies taxes for two different reasons:

Continue reading “When is a Tax Not a Tax?”

Talking Health on CNBC

When I worked for the White House, I discovered that you could learn a lot about your co-workers — or, at least, their portfolios — by their TV habits. Some people watched CNBC, some Fox, and some CNN. And some even managed to get through the work day without turning their TVs on.

I have always been firmly in the CNBC contingent, so I was particularly happy to appear on Squawk Box this morning. Here’s a link to a video of the interview (sorry, I still haven’t mastered the embedding of videos from news sites.)

Going in, my main talking points on the health debate were:

From a budget perspective, the Baucus bill is much better than the House bill. As Chairman Baucus has said, his bill would increase spending by more than $800 billion over the next ten years. On a comparable basis, the House bill would increase spending by more than $1.5 trillion. That’s a huge difference.

My biggest budget concern about the Baucus bill involves the offsets he proposes to pay for those increased costs. Some of those offsets presume that we can make substantial future cuts to payment rates for various Medicare providers. The trillion-dollar question is whether we will actually have the backbone to make those cuts when the time comes. Our recent experiences with doctor payments in Medicare should give us all pause on that front. In addition, there’s the hard question of whether we should be using the “easy” offsets to address our existing fiscal crisis instead.

Baucus Bill: Four Steps in the Right Direction

From a budget perspective, the Baucus bill is a major step forward from the earlier HELP and House bills. There remains lots of room for improvement, and I am certainly not endorsing the bill at this point. But I do believe that Chairman Baucus and his team deserve credit for improvements on at least four important fronts: overall budget impact, doctor payment rates in Medicare, tax increases, and communications.

1. On paper, at least, the bill satisfies three key budget tests. It doesn’t add to the deficit over the ten-year budget window, it doesn’t add to the deficit in the tenth year of the window, and it doesn’t add to the deficit in years beyond the window. Indeed, it appears to reduce the deficit over each of those periods.

As CBO hinted in its cost estimate and Greg Mankiw discusses on his blog, there are reasons to doubt whether some proposed spending reductions and tax increases would actually materialize. Thus, the actual budget effects may not be as rosy. That’s a huge issue. But even with that caveat, the Baucus bill is a major improvement over proposals that didn’t even try to hit these budget targets.

Continue reading “Baucus Bill: Four Steps in the Right Direction”

How Much Does the Baucus Bill Cost?

Yesterday, Senate Finance Committee Chairman Max Baucus released his much-awaited health care proposal. In his announcement, he described it as a costing $856 billion over the next ten years, costs that would be more than paid for by other spending reductions and tax increases.

Later in the day, the Congressional Budget Office released its preliminary estimate of the budget impacts of the bill. That estimate shows a $774 billion cost for the bill’s provisions that expand coverage. As a result, some commentators have suggested that Baucus somehow misspoke and over-stated how much his bill would cost by more than $80 billion.

That is not correct.

Why? Because the bill does more than expand coverage. It also increases spending on various health programs.

For example, it provides a one year “doctor fix”, delaying by a year dramatic cuts in Medicare payment rates. CBO estimates that provision has a ten-year cost of about $11 billion.

The bill also expands the prescription drug benefit in Medicare. That provision would cost more than $17 billion over ten years.

Those two provisions alone imply that the bill costs a bit more than $800 billion. And there are numerous other spending increases that would cost at least a few tens of billions more. I must admit that I couldn’t find my way all the way up to $856 billion when I quickly reviewed them, but it’s clear that the true cost of the bill is notably higher than $774 billion for the coverage expansions alone.

The larger point is that we should be careful to identify all the important provisions in these competing bills, and keep track of gross budget impacts, not just net impacts. I raised this issue in my discussion of the House health bill. That bill was often touted as costing around $1 trillion over ten years, but the actual cost of expanding coverage was closer to $1.3 trillion. And a permanent fix to the Medicare doctor issues would have added more than $200 billion to that.

I haven’t gone back to look at all the details, but on apples-to-apples basis, the House bill would cost at least $1.5 trillion compared to the $800 billion plus of the Baucus bill.

I think Chairman Baucus should be commended for trying to inject some gross (in the good sense) figures, rather than net ones into this debate. That can only improve the quality of the discussion. (But it would be great to get some more guidance on how to get to exactly the $856 billion figure).

Note for budget geeks: The biggest net-vs-gross question is how to think about the $30 billion budget impact of premium interactions. If those interactions are happening because of efforts to reduce costs, then they shouldn’t be included in the gross cost figure. If they are happening because of efforts to increase costs, then they should.

Bending the Curve: Redefining Health Insurance

Over the past few months, a politically-diverse group of health policy experts has been pondering a key question: what are the “specific, feasible steps” that policymakers could use to reduce the growth of health spending? In short, how can we bend the curve?

The fruits of their labor were published by the Brookings Institution on Tuesday as Bending the Curve: Effective Steps to Reduce Long-Term Health Care Spending Growth.

I encourage everyone interested in health policy to give it a close look.

The report’s recommendations for fixing health insurance particularly caught my eye:

Governments should ensure proper incentives for non-group and small-group health insurance markets to focus on competition based on cost and quality rather than selection. Achieving this requires near-universal coverage and insurance exchanges to pool risk outside of employment, augment choice, and align premium differences with differences in plan costs.

…

[Therefore, these insurance markets should be restructured to] focus insurer competition on cost and quality through requirements for guaranteed issue without — or with very limited — pre-existing condition exclusions; limited health rating, such as those related to age and behaviors only; and full risk-adjustment of premiums across insurers based on enrollees’ risk. For market stability, these reforms must be undertaken in the context of an enforced mandate that individuals maintain continuous, creditable basic coverage.

In short, the report recommends a combination of an individual mandate and reforms that eliminate both the ability of and the incentive for insurance companies to try to enroll only the healthy and low-cost.

Continue reading “Bending the Curve: Redefining Health Insurance”