Paying for Health Reform

Lawmakers want to be sure that health care reform — if it happens — won’t worsen the deficit over the next ten years.  That’s laudable, but it’s not enough. There’s a risk that reform could be paid for over ten years, yet still worsen our long-run budget crisis.  Policymakers should therefore focus on the long-run trajectory of new spending and offsets, not just the 10-year budget scores.

Faced with a frightening budget situation, lawmakers have rightly decided that health care reform — if it happens — should be budget neutral. In practice, that means that any new spending from health reform should be paid for — by other spending reductions or by increases in tax revenues — over a 10-year budget window.

That’s a laudable goal, but it’s not enough.

We also need to ensure that health reform doesn’t worsen our already grim long-run budget situation. Unfortunately, that could easily happen, even if its costs are paid for over the next ten years.  To illustrate, consider the following stylized example. The red line is a hypothetical path for the net costs of health reform, and the blue line is a hypothetical path for the offsets that would be used to pay for that reform. I’ve chosen the numbers so that health reform costs $1 trillion over ten years, and so that the offsets total to $1 trillion over the same period.

Shape Matters

This combination of policies would satisfy the “budget neutrality” test – the value of the offsets would indeed offset the net costs of the health reform. Nevertheless, it would substantially widen the deficit after several years, since the annual amount of new spending would eventually exceed the annual amount of offsets.  If those trends continued, reform would not really be budget neutral; instead, it would exacerbate the long-term budget crisis.

The importance of this concern was highlighted by the Congressional Budget Office last week.

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Competitiveness & Health Reform

This morning, the Wall Street Journal editorial page questioned the oft-alleged link between health care costs and the competitiveness of American business. Echoing Council of Economic Advisers Chair Christina Romer, it referred to that argument as “schlock.” At the same time, everyone interested in health policy is still absorbing the trillion-dollar price tag that the Congressional Budget Office (CBO) put on the Kennedy health bill.

I’d like to point out that these two issues – any link between health care and competitiveness and the estimated cost of health reform – are closely related. The way that CBO estimated the budget impacts of the Kennedy bill implies that health care has little effect on competitiveness. If you take the contrary view, that health care is a big deal for American competitiveness, then you should also believe that CBO has underestimated the difficulty of paying for health reform.

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CBO on the Kennedy Health Bill

On Monday afternoon, the Congressional Budget Office (CBO) released a preliminary analysis of the Affordable Health Choices Act, commonly known as the Kennedy Health Bill.  The draft bill language was distributed last week by the Senate Committee on Health, Education, Labor, and Pensions (HELP) which Senator Kennedy chairs.

Based on work by CBO and the Joint Committee on Taxation (JCT), the analysis provides preliminary estimates of the budget impact of the bill as well as its impacts on health insurance coverage.  Some highlights:

1.  The analysis is preliminary. CBO and JCT have not yet had time to analyze every provision in the bill, some provisions remain in flux, and new provisions may be added.  In short, health policy is a moving target.

2. The bill would have a net budgetary cost of slightly more than $1 trillion over the next ten years (2010 – 2019). To get the bill passed, its proponents will have to find a way to offset most or all of those costs.  That’s why President Obama and others have been talking about various spending reductions (e.g., reduced payment rates for some providers) and revenue increases (e.g., reducing the benefit of itemized deductions) in recent days.  As a political matter, the offsets may turn out to be more difficult than the core policy.

3. The bill would increase Federal spending by $1.3 trillion, which would be partially offset by about $260 billion in higher tax revenues; the net cost is slightly more than $1 trillion. Spending would increase primarily because the Federal government would provide subsidies for individuals and families to purchase health insurance through insurance exchanges (also known as gateways). Revenues would increase because fewer workers would receive employer-sponsored health insurance (which is not subject to income and payroll taxes).  Those workers would still be compensated at market rates, but more of their compensation would be in taxable forms (e.g., wages and salaries).

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Health and the Rule of Three

When policy debates heat up, it’s not enough for policy analysts to run the numbers and for political analysts to count votes and gauge the influence of affected interests. You also need communicators to craft a crisp, clean message. One that resonates with listeners consciously and, if possible, subconsciously.

Every word counts. As a result, one of the key communication battlegrounds is very basic: What do you call the policy?  If you can win the naming battle, you are a long way toward winning the policy war.

Having participated in a number of these debates, I would like to offer the following conjecture, which I will boldly characterize as a rule:

The Rule of Three:  If debate about an economic policy is sufficiently important, that policy will have three different names: one used by proponents, one used by opponents, and one used by non-partisan agencies that don’t want to take sides.

That rule is asserting itself today in the debate over reforming the health care system, much as it did in the debate over Social Security a few years ago.

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Linkfest

Some good items elaborating on topics I’ve discussed in the past week:

Growing Government Transfers

I’ve received several emails today about a story posted last night by USA Today.  The story points out that government transfers now make up more than one-sixth of American incomes, the highest ever.  Naturally, some observers welcome this development, while others denounce it.

I thought it would be useful to side-step that debate and instead provide some historical context.  To begin, the following chart shows the ratio of government transfers to personal income from January 1959 through April 2009 (the most recent data):

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Drawing the Line on Health Insurance

Some of CBO’s most important decisions involve principles, not numbers. For example, CBO has to decide when proposed policies should be treated as part of the government — and thus be recorded on the budget for Congressional purposes — and when not. Many calls are easy. But then there’s health insurance reform.

The fine folks at the Congressional Budget Office have a reputation as the number-crunching, uber-geeks of the Congressional budget process.  And that’s a reputation they wear proudly (and I am proud to wear as an alum).

But some of CBO’s most important decisions involve principles, not numbers.  For example, CBO has to decide when proposed policies should be treated as part of the government — and thus be recorded on the budget for Congressional purposes — and when not.  Many calls are easy: taxes and spending are clearly governmental, hence in the budget.  Many regulations (e.g., minimum wages and environmental rules) are clearly outside; they may create benefits and impose costs just as taxes and spending do, but they still leave most choice and control in private hands.

And then there are the hard cases such as health insurance reform.

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