Tag: Budget

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?“

Yes, the House Health Bill Costs More than $1.2 Trillion

In a series of posts last week, I noted that the coverage provisions in the House health bill would cost more than $1 trillion over the next ten years, notably higher than the $894 billion figure that was circulated when the bill was first released. In addition, I pointed out that the bill includes other spending increases that aren’t involved in expanding coverage; when you factor those in, I estimated that the real cost of the bill would be almost $1.3 trillion.

I am not alone in this conclusion. According to David Espo of the Associated Press:

The health care bill headed for a vote in the House this week costs $1.2 trillion or more over a decade, according to numerous Democratic officials and figures contained in an analysis by congressional budget experts, far higher than the $900 billion cited by President Barack Obama as a price tag for his reform plan.

While the Congressional Budget Office has put the cost of expanding coverage in the legislation at roughly $1 trillion, Democrats added billions more on higher spending for public health, a reinsurance program to hold down retiree health costs, payments for preventive services and more.

Many of the additions are designed to improve benefits or ease access to coverage in government programs. The officials who provided overall cost estimates did so on condition of anonymity, saying they were not authorized to discuss them.

My own calculation came in at $1.27 trillion, which strikes me as “almost $1.3 trillion” rather than “$1.2 trillion or more”, but that’s nit-picking.

The key point is that there’s a consensus, at least behind the scenes, that the bill would cost more than $1.2 trillion over the next ten years.

 

The Costs of the Health Bills: Another Look

The Congressional Budget Office released a very helpful letter today that clarifies some of its thinking about the budget impacts of the health bills now pending in Congress. Most importantly, CBO offers a new metric for evaluating the health bills: how they affect the federal government’s budgetary commitment to health care. That’s a very useful metric because it reflects not only government spending on health care, but also the various tax subsidies (most notably for employer-sponsored health insurance) that the government provides.

CBO concludes that the House bill would increase the federal commitment to health care by seven times as much as would the Senate Finance Committee bill ($598 billion vs. $85 billion over ten years):

CBO Cost Measures

The top line in the table reflects the gross costs of the coverage expansions in each bill. As I noted yesterday, the correct figure for the House bill is $1.055 trillion. There was some confusion about this at first, but most commentators now appear to be referencing this figure (see this nice NYT piece discussing the confusion).

There are two additions I would make to this table:

  • First, as I discussed yesterday and a few weeks ago, I think policy makers should unpack the second line item, changes in net spending for Medicare, Medicaid, and other programs. That line includes not only spending reductions but also important spending increases. Based on the individual line items in the two cost estimates, I estimate that those spending expansions are about $75 billion in the Senate Finance bill and about $217 billion in the House bill. As a result, I think the gross costs of the two bills are around $904 billion and $1.272 trillion, respectively. (But see the caveat below.)
  • Second, the House bill includes the CLASS Act, whose budget accounting is misleading. As I discussed several months ago, the CLASS Act would create an insurance program for long-term care. It’s intended to be budget-neutral in the long-run, but premiums start faster and more robustly than do benefit payments. As a result, this budget-neutral proposal narrows the deficit by $72 billion over the next ten years, but then increases the deficit by a comparable amount in subsequent years. A better accounting would net this out, leaving the House bill with a deficit reduction of $32 billion over the next ten years, rather than $104 billion. (Speaker Pelosi and her team deserve credit for being very transparent on this point; the side-by-side they distributed comparing the bill to an earlier one highlights this issue in the very first entry, and some proponents of the bill have indeed referred to it as saving about $30 billion over ten years.)

Caveat: As I’ve previously noted, it’s difficult to get a precise estimate of the additional gross health spending in the bills because the plethora of provisions interact with one another. As a result, CBO reports some major cost impacts–including both deficit reducers and deficit increasers–as interactions that aren’t attributed to individual line items. In principle, those interactions could cause my $75 billion and $217 billion figures to be higher or lower. CBO briefly addresses this issue in today’s letter, noting: “The reductions in net spending for those programs could themselves be divided into provisions that would increase spending (and thus the federal budgetary commitment to health care) and provisions that would decrease spending (and thus that commitment). However, even some individual provisions of the proposal have elements that raise costs and elements that lower costs. Tabulating all of the aspects of the proposal that would, in isolation, increase federal outlays would be complicated and would require somewhat arbitrary judgments about how to allocate interactions among different elements of individual provisions and interactions among provisions.” I certainly agree. However, I also believe that it is important for everyone involved in this debate to remember that these other provisions are in there. And so, in the absence of more precise figures, I think the $75 billion and $217 billion figures are the best we can do.


The House Health Bill Costs Almost $1.3 Trillion

As I’ve noted in a series of posts, there is often great confusion about the cost of the health bill being considered by Congress.

Yesterday, for example, many commentators were saying that the coverage expansions in the new House health bill would cost $894 billion over ten years, even though the actual cost is $1.055 trillion (according, as always, to the estimates of the Congressional Budget Office).

A second problem is confusion between (a) the cost of expanding coverage and (b) the overall cost of the bills. Expanding coverage is the key focus of each of the major health bills, but we should always keep in mind that the bills make other changes as well. In the case of the Baucus bill, for example, I estimated that other spending initiatives added about $75 billion, bringing its total cost to slightly more than $900 billion.

I’ve made the same calculations for the House health bill, and the additional spending is even larger: about $217 billion. Among many other things, that spending would increase payment rates for primary care physicians in Medicaid and create two new funds to finance public health investments and prevention and wellness efforts. The bill would also extend a provision in the recent stimulus bill (ARRA) that increased the federal share (the FMAP) of Medicaid spending, and thus provided assistance to the states:

Slide2

As noted, the House bill does not include any funding to prevent the upcoming 20%+ cut in payment rates for doctors in Medicare. The Baucus bill included a one-year fix at a cost of $11 billion, while the Senate’s efforts to pass a permanent fix without paying for it recently failed (thankfully).

P.S. Kudos to David Espo of the Associated Press for covering the cost of the House bill correctly. He wrote: “The Congressional Budget Office said the cost of additional coverage alone was slightly more [than] $1 trillion over a decade. But that omitted other items, including billions for disease prevention programs.”

Note on the numbers: The increases in other health spending programs are sprinkled throughout CBO’s analysis of the bill. I calculated the $217 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 was one policy that led to both spending increases and spending decreases; since the decreases were larger, I didn’t include any of the increases in my figure. I am certainly open to other suggestions about how to add up the other spending in the bill.

Doesn’t the House Bill Fail the President’s $900 Billion Test?

This morning Speaker of the House Nancy Pelosi released the latest version of the House health bill. And this afternoon, the Congressional Budget Office (CBO) released its preliminary analysis of the budget impacts of the bill.

One of the key findings of that analysis is that the coverage expansions in the bill would cost $1.055 trillion over the next ten years. And that would seem to imply that the bill fails one of President Obama’s key litmus tests, namely that the total cost be less than $900 billion.

As best I can tell, however, you won’t find that figure or interpretation in any of the initial media coverage. Instead, everyone is reporting that CBO concluded that the bill cost $894 billion and, therefore, that it appears to meet the $900 billion test. For example:

  • The Wall Street Journal: “House legislation to overhaul the health-care system, unveiled Thursday, includes a compromise version of a public insurance option and carries an overall cost of $894 billion over 10 years, House aides said.”
  • The New York Times: “House Democrats on Thursday unveiled an $894 billion package to remake the health care system.”
  • The Washington Post:”The House legislation aims to provide health insurance of one form or another to 96 percent of all Americans at an expected cost of just below $900 billion over 10 years.”

Why does my interpretation differ so much from the media’s? I can see only two possibilities. Either (a) the media have been snookered by proponents of the bill or (b) I missed the memo about how the policy community decided to change how costs are measured. (If it’s (b), please let me know so I can catch up.)

The issue here is the difference between the gross and net costs of expanding coverage. As CBO summarizes it (with my emphasis added):

The estimate includes a projected net cost of $894 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $1,055 billion in subsidies provided through the exchanges (and related spending), increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $167 billion in collections of penalties paid by individuals and employers. On balance, other effects on revenues and outlays associated with the coverage provisions add $6 billion to their total cost.

I had been under the impression that everyone was using the gross cost measure when discussing the cost of expanding coverage. And I wasn’t alone. When the Baucus bill was released earlier this month, everyone (including each of the newspapers I linked to above) referred to it by its gross price tag ($829 billion), not its net ($518 billion), and said things like the Baucus bill “would cost $829 billion over the next 10 years — well under the $900 billion President Obama had suggested.”

Slide1

If the right coverage figure for the Baucus bill was $829 billion, then we ought to be focusing on the $1.055 trillion coverage cost in the House bill.

And if $829 billion is not, in fact, the right measure, when did the goalposts move?

P.S. I will follow up shortly with a second concern about the cost discussion: that there are non-coverage items in the bill that cost substantial sums. That’s why I previously argued that the Baucus bill actually cost a smidgen more than $900 billion.

Update: Both Roll Call and the AP are using the more than $1 trillion figure.

Your Mileage May Vary

In the category of better late than never, I should highlight Lori Montgomery’s article in Monday’s Washington Post about how the Congressional Budget Office (CBO) is evaluating the health bills now working their way through the Congress.

The article focuses on Phil Ellis, a senior analyst who is helping lead CBO’s estimation efforts. Phil is an essential part of the CBO health team (indeed, one piece of advice I gave Doug Elmendorf when he took the reins at CBO was “keep Phil happy”). But I should emphasize that there are literally dozens of other folks at CBO who have been working furiously for months to help Congress understand the implications of the myriad health ideas that are under consideration. They all deserve our thanks for their efforts.

Not surprisingly, I think those efforts are essential. As the article reminds us, however, we should also keep in mind how much uncertainty there is about the ultimate impact of the health proposals. As Phil says:

“We’re always putting out these estimates: This is going to cost $1.042 trillion exactly,” he said. “But you sort of want to add, you know, ‘Your mileage may vary.’ “

That’s exactly right. The Congressional budget process demands specific estimates of how much proposed legislation will cost, so that’s what CBO produces. But reality is much more complex, and the actual costs will undoubtedly be more or less.

That uncertainty can be frustrating, but it’s unavoidable. As Nobel Laureate Nils Bohr once said, “Prediction is difficult, particularly if it’s about the future.”

Over at Capital Gains and Games, Pete Davis points out that some commentators (who may have their own agendas) use that uncertainty as a reason to criticize CBO estimates. Pete is thus concerned that the article’s sub-title (“CBO’s price tags are educated guesses, but guesses nonetheless”) may leave the wrong impression. His alternative:

“CBO’s Price Tags Are A Lot Better Than Anyone Else’s, And, Without Them, We’d Never Keep Control Over Congress’ Largess.”

More on the Medicare Doctor “Fix”

 On Sunday, I expressed concern about Congress enacting a permanent Medicare doctor “fix” without paying for it. Yesterday, the Washington Post chimed in with similar concerns.

I have now written a longer version of my argument, which has been published by e21, a new think thank based in New York and Washington. My bottom line remains the same:

Thus, even as Congress struggles to enact one roughly $900 billion health bill, it also wants to hustle through a second $245 billion one. Moreover, Congressional leaders want to pass the permanent doctor fix without paying for it. All $245 billion would thus flow straight into our deficits.

For a nation running trillion-dollar deficits, such profligacy should no longer be acceptable.

When I say that e21 is new, I mean really new. e21 (short for Economic Policies for the 21st Century) opened its doors (well, its web site) yesterday. It’s mission statement is:

 We aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.  Drawing on the expertise of practitioners, policymakers, and academics, we will encourage a spirited debate about the way forward for democratic capitalism.  And we will do so in a manner that is accessible and engaging, in a way that appeals to both experts and non-experts.

I hope to contribute additional pieces to e21 in the future.

Why You Should Oppose the Medicare Doctor “Fix”

The Senate is preparing to take up a bill to implement a permanent “fix” to the rates that Medicare pays for physicians. That bill is a budget-buster, costing almost $250 billion over the next ten years. But Congress doesn’t want to pay for it. Everyone concerned about our budget situation should oppose this latest example of Washington profligacy.

The Senate is preparing to take up a bill to implement a permanent “fix” to the rates that Medicare pays for physicians. That bill is expensive, costing almost $250 billion over the next ten years. But Congress doesn’t want to pay for it. Everyone concerned about our budget situation should oppose this latest example of Washington profligacy.

The underlying mechanics of the issue are arcane, but the fundamental political and budget issues are simple:

  • Under current law, the rates that Medicare pays physicians are scheduled to decline by more than 20% at the end of the year. No one, least of all the doctors, wants this to happen. So Congress is looking for a “fix”.
  • This problem is not new. It began in 1997, when Congress decided to limit the amount spent on physician services in Medicare. The idea was that spending above the target would be offset by reductions in physician payment rates in the future. However, Congress has repeatedly flinched from implementing those reductions. Moreover, Congress often decided to avoid near-term reductions by promising to cut payment rates even more in the future. That’s why there’s an accumulated “debt” requiring a 20+% cut in rates now.
  • With encouragement from the President, many Congressional leaders want to eliminate this issue once and for all by enacting a bill that would provide payment increases to doctors, rather than dramatic cuts, at a cost of $245 billion over the next ten years (and unmeasured amounts in the years beyond).
  • And here’s the kicker: they want to spend that money without paying for it. So all $245 billion would flow straight into our deficits. For a nation running trillion-dollar deficits, that’s unconscionable.

Proponents of this profligacy will argue that (a) it’s essential to fix physician payments once and for all and (b) doing so now is no different from the doctor fixes Congress has enacted in previous years.

Both of those arguments are wrong.

Continue reading “Why You Should Oppose the Medicare Doctor “Fix””

The Social Security Windfall

As you have probably heard, Social Security recipients won’t be getting a cost-of-living adjustment (COLA) in 2010. Well, at least under current law.

The reason is simple: The annual COLA is based on a measure of consumer inflation from the third quarter of one year to the next. Last year, that measure was boosted by the run-up in energy prices, and Social Security recipients received a 5.8% increase in their monthly payments. That price shock has receded and, as a result, inflation from the third quarter of 2008 to the third quarter of 2009 was actually negative. According to today’s release of September consumer price data, the CPI-W (the inflation measure used to set the COLA) fell by 2.1% since the third quarter of last year.

If Social Security payments were exactly indexed to inflation, that would imply a negative COLA—a reduction in monthly benefits—of 2.1%. But the law doesn’t allow benefits to fall. So monthly benefits in 2010 will be the same as in 2009.

Some observers are portraying this as a hardship for seniors and are suggesting that they should get a special COLA this year. If you put on your green eyeshade for a moment, however, you will realize that the reverse is true. The fact that Social Security benefits will be flat means that seniors are receiving a windfall. Under the logic of cost of living adjustments, those benefits should have fallen by 2.1%. Instead they will be flat. Seniors will thus receive a 2.1% increase in their real Social Security benefits.

That’s why thoughtful budget analysts from across the political spectrum believe that a special COLA is not warranted. See, for example, this piece by Andrew Biggs at the American Enterprise Institute and this piece by Kathy Ruffing at the Center on Budget and Policy Priorities. (In case you aren’t familiar with them, Andrew and Kathy are two of the most knowledgeable people about Social Security on the planet.)

Kathy’s piece includes a nice discussion of alternative measures of cost-of-living (addressing the question of whether the cost of living for seniors may be rising faster than the CPI-W suggests). She also concludes, rightly in my view, that if policymakers fell compelled to act, it should in the form of lump-sum payments rather than any messing around with the COLA structure. President Obama endorsed that idea yesterday.

In a separate piece, Andrew notes that one group of seniors are getting a bum deal from the absence of a COLA: new retirees. They never received the benefit of the too-large 2009 COLA, but will have to bear the burden of no COLAs during the year or two that it will take for inflation to catch up to its 2008 peak.

Finally, another Andrew who’s an expert on Social Security–Andrew Samwick at Capital Gains and Games–suggests that any lump sum payments to Social Security beneficiaries in 2010 be paid for by reducing their COLAs the next time they are positive. The payments would thus provide some stimulus in 2010, but wouldn’t add to the long-term federal debt.

Taxes Are Not Created Equal

I’ve been working on a paper about America’s looming fiscal crisis. Earlier today I drafted a short (and as-yet-unfinished) section about tax policy that goes as follows:

Three decades ago, supply-side economists first argued that high marginal tax rates would discourage work, saving, and investment, and that well-crafted reductions in those tax rates could help boost long-run economic growth. Those observations have since become part of the fabric of mainstream economics. Meanwhile supply-side economics transformed into a doctrine that endorsed any tax cut at any time and that peddled the idea that tax cuts would inevitably pay for themselves.

Both of those notions are nonsense. Tax cuts rarely, if ever, pay for themselves, and they can do more damage than good.

As policymakers begin to confront our budget challenges and the conversation shifts from tax cuts to tax increases, it is essential that they understand the now-mainstream insight that taxes are not created equal. Taxes on income, for example, are usually worse for the economy than taxes on consumption. That’s why there’s a rising chorus of economists recommending the introduction of a value-added tax, rather than higher income taxes, if our nation decides it wants to support substantially higher government spending. High tax rates similarly tend to be worse for the economy than low rates. That’s why economists usually favor broad tax bases and low rates, rather than narrow tax bases and high rates. Finally, it’s preferable to levy taxes on bads rather than goods. Where appropriate, taxes on pollution (e.g., emissions of greenhouse gases) should thus be preferred over taxes on working, saving, or investing.

Little did I know that I have a subconscious ESP link with Bruce Bartlett over at Capital Gains and Games. In a long post setting out some of the themes in his new book, Bruce writes:

Everything that was true about [supply-side economics has] been fully incorporated into mainstream economic thinking and all that was left was a caricature.

…

All economists now accept the importance of marginal tax rates to economic decisionmaking, and organizations like the National Bureau of Economic Research publish vast numbers of papers on this topic.

During the George W. Bush years, however, I think [supply-side economics] became distorted into something that is, frankly, nuts–the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.