Tag: Health

CBO, Health, and the Budget

As I’ve discussed in a series of posts (e.g., here and here), the Congressional Budget Office (CBO) has a pivotal role in the health debate. By telling Congress how potential policy changes would affect the budget, CBO analyses can make or break proposed legislation.

As a result, I think it’s important that participants in the health debate – policymakers, analysts, journalists, and ordinary citizens – understand how CBO approaches health issues. That can sometimes be a challenge, however. As I note in a new paper:

CBO analyses often rely on sophisticated economic modeling and are usually framed in ways that match the specific, sometimes arcane, requirements of the congressional budget process. As a result, the cost estimates and related analyses may sometimes be challenging to understand. The unfortunate result can be confusion about what the scores mean and, equally important, what they do not mean.

That’s not a knock on CBO, which I think does a great job; it’s just the nature of the work.

To help reduce potential confusion, my paper (“Understanding CBO Health Cost Estimates”) discusses how CBO approaches cost estimates and some of the particular issues that arise in health policy. Many of the insights come directly from recent CBO reports (CBO takes transparency seriously), while others are based on my own experiences at CBO.

Continue reading “CBO, Health, and the Budget”

Raising the Curve, Not Bending It

Doug Elmendorf, the director of the Congressional Budget Office, has one of the most difficult and important jobs in Washington: delivering tough budget news to Congress.

Americans are fortunate that he is so good at it.

Today, Doug’s message was particularly stark — and, in many circles, unwelcome — as he reported that the health reform proposals now under consideration by Congress would worsen our already-daunting fiscal outlook.

As noted by the Associated Press:

From the beginning of the health care debate, Obama has insisted that any overhaul must “bend the curve” of rapidly rising costs that threaten to swamp the budgets of government, businesses and families.

Asked by Senate Budget Committee Chairman Kent Conrad, D-N.D., if the evolving legislation would bend the cost curve, the budget director responded that — as things stand now — “the curve is being raised.”

Explained Elmendorf: “In the legislation that has been reported, we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for health care costs.”

Even if the legislation doesn’t add to the federal deficit over the next years, Elmendorf said costs over the long run would keep rising at an unsustainable pace.

CBO on the House Health Bill

On Tuesday, the Congressional Budget Office (CBO) released a preliminary analysis of the House health bill, aka the Tri-Committee bill. Among the key findings:

1. The bill uses five levers to increase health insurance coverage:

  • Expanding Medicaid
  • Subsidies for purchasing insurance through new exchanges
  • An individual mandate (enforced by a penalty if you lack coverage)
  • Play or pay (requiring employers to offer qualifying insurance or pay a tax)
  • A public plan (whose rates would be lower than those of many private plans)

2. These provisions would sharply reduce the number of uninsured. In 2019, for example, CBO estimates that the number of uninsured would fall from 54 million to 17 million, a decline of 37 million. Many of those who would remain uninsured are particularly difficult to reach (e.g., individuals who qualify for Medicaid but don’t enroll) or are unauthorized immigrants (who aren’t a focus of the legislation). Put another way, the bill would result in 97% of the non-elderly (excluding unauthorized immigrants) having health insurance by 2015.

3. The bill would increase spending by almost $1.3 trillion over the next 10 years. The penalties and fees would raise a bit less than $240 billion over the same period, so the 10-year net budget cost would be slightly more than $1 trillion. The bulk of the penalties and fees — $208 billion — would be paid by employers (who would then pass on some or all of the costs to workers). The remaining fees — $29 billion — would be paid by uninsured individuals. As Keith Hennessey notes, the prospect of levying such fees on the uninsured raises some difficult political and policy questions.

4. Enrollment in the public plan would be substantial, perhaps 11 to 12 million people by 2019. The plan, operated by the Secretary of Health and Human Services, would pay providers at levels very similar to those in Medicare. As a result, CBO expects that the public plan would offer lower premiums than many private plans.

5. The analysis is preliminary in two key ways:

  • It does not include any of the potential offsets — e.g., tax increases and Medicare spending reductions — that lawmakers would need to pay for the bill.
  • The CBO estimate is based on “specifications” that the committees asked CBO to evaluate. CBO has not yet had time to analyze the actual language of the proposed bill. It’s always possible that the language would have different impacts than the less-detailed specifications.

UPDATE: The Committee for a Responsible Federal Budget takes a stab at toting up the likely offsets for this bill. A surtax on high earners would be the single largest item, at $544 billion over ten years.

Health Insurance and Labor Markets

Health insurance is not just a health issue. It’s also a jobs issue. Why? Because about 60% of non-elderly Americans get their health insurance through an employer or a labor union. As a result, health insurance and employment are closely related.

As lawmakers consider changes to our system of health insurance, they should therefore keep an eye on the potential implications for jobs and wages. To help them do so, the Congressional Budget Office yesterday released a very helpful brief (see also the accompanying blog entry) that discusses many of the linkages between health insurance and the labor market.

Among other things, CBO reiterates a point I’ve made previously: that the costs of health insurance are ultimately born by workers through lower wages and salaries:

Although employers directly pay most of the costs of their workers’ health insurance, the available evidence indicates that active workers—as a group—ultimately bear those costs. Employers’ payments for health insurance are one form of compensation, along with wages, pension contributions, and other benefits. Firms decide how much labor to employ on the basis of the total cost of compensation and choose the composition of that compensation on the basis of what their workers generally prefer. Employers who offer to pay for health insurance thus pay less in wages and other forms of compensation than they otherwise would, keeping total compensation about the same.

CBO then goes on to discuss a range of potential policies, including ones that would impose new costs on employers. Such policies might require employers to provide health insurance to their workers (an employer mandate), for example, or might levy a fee on employers who don’t provide health insurance (play or pay). CBO concludes that, consistent with the argument above, employers would generally pass the costs of such measures on to their employees through lower wages and salaries. Such adjustments won’t happen instantly, so there may be some short-term effect on employment, but over time the cost will primarily be born by workers through lower compensation.

One exception, however, would be workers who currently earn low wages. As noted on the blog:

Continue reading “Health Insurance and Labor Markets”

CLASS Act Fails the Offset Test

If you take budgeting seriously, people sometimes think you are a curmudgeon. When I was at the Congressional Budget Office, for example, we were once denounced as anti-housing because we concluded that increasing subsidies for low-income housing wasn’t free. CBO reached that conclusion using an advanced tool known as “arithmetic”, but some advocates tried to portray it as an anti-housing policy statement.

At the risk of again appearing curmudgeonly, I would like to draw your attention to a provision in the health care reform bill being considered by the Senate HELP Committee. That provision, the Community Living Assistance Services and Supports Act, would create a new program to insure participants against some of the financial costs of disability and long-term care.

I have nothing to say about the merits of this provision, except to note that it has one of the best acronyms in legislative history: the CLASS Act.

I have a great deal to say, however, about the arithmetic of the CLASS Act, because it illustrates just how hard it will be for our legislative process to really pay for health care reform.

Continue reading “CLASS Act Fails the Offset Test”

CBO on the New HELP Bill

On Thursday evening, the Congressional Budget Office (CBO) released a preliminary analysis of the latest version of Title I of the Affordable Health Choices Act, commonly known as the HELP bill or the Kennedy bill (since it’s the product of the Senate Committee on Health, Education, Labor, and Pensions which Senator Kennedy chairs).

Based on a quick review, here are the top six things I think you should know about the cost estimate:

1.  The analysis is preliminary. CBO and the Joint Committee on Taxation have not yet had time to analyze every provision in the bill, some provisions remain in flux, and new provisions may be added. Health policy continues to be a moving target.

2. The headline cost of the bill — about $600 billion over ten years — is significantly lower than the $1 trillion net cost of the previous version of the bill. The net costs declined because (i) the subsidies for coverage through health insurance exchanges are now smaller, (ii) employers would have to pay a penalty if they do not offer insurance to their workers, and (iii) it would be much harder for employees to get subsidies in the exchange if their employer offers health insurance.

Note: The new CBO tables cover Title I of the bill, which has a net budget cost of $597 billion.  CBO had earlier scored other portions of the bill as costing $14 billion. As a result, you will hear some commentators using the $597 billion figure and others using $611 billion.

3. As usual, it’s important to unpack the headline cost into its constituent parts: the 10-year cost of expanding health insurance coverage in Title I is about $743 billion and a separate provision adds an additional $10 billion. That $753 billion cost is then partially offset by penalties on employers who don’t offer coverage to their workers ($52 billion), penalties on uninsured individuals ($36 billion), higher income and payroll taxes ($10 billion), and the net premiums generated by a program (CLASS) to provide long-term care insurance ($58 billion). The income and payroll tax offset is much smaller than in the previous version of the bill because the current draft would have a much smaller impact on employer-provided health insurance.

4. The bill includes provisions for a public plan, but CBO concludes that these provisions would “not have a substantial effect on the cost or enrollment projections.” CBO reaches that conclusion because “the public plan would pay providers of health care at rates comparable to privately negotiated rates–and thus was not projected to have premiums lower than those charged by private insurance plans in the exchanges.” In short, the reduced cost of the bill is due to the factors outlined in the previous paragraph, not to the public plan.

Continue reading “CBO on the New HELP Bill”

Paying for Health Reform III

Last week I published two posts expressing concern about how Congress might pay for proposed health reforms. The first post argued that policymakers should focus on the trajectory of new spending and offsets, not just the cumulative 10-year budget scores. The second post expressed concern that the offsets used to pay for health reform may include policies that otherwise would have been used to reduce our out-of-control deficits; as a result health reform that appears to be “paid for” could nonetheless worsen our long-run budget trajectory.

Needless to say, these issues are receiving lots of attention around the budgeting parts of the Web. Some important contributions include:

  • Over at the eponymous KeithHennessey.com, Keith Hennessey points out something I missed. In a Financial Times piece on June 22, OMB Director Peter Orszag suggested that paying for health reform over a 10-year budget window isn’t enough for budget neutrality. That’s exactly the point I made in my first post. Peter then sets out a second requirement: that health care reform must be “deficit neutral in the 10th year alone.” This is a good step, since it would rule out some trajectories of spending that would obviously worsen the long-run deficit. As Keith points out, this requirement isn’t sufficient by itself: you need to worry about the entire trajectory of spending and offsets, not just a single year. Nonetheless, it is a very good sign that the Administration is pointing out the limitations of 10-year budget scores.

Stimulus Lifts Government Transfers

A few weeks ago, I posted some charts showing that Americans are increasingly reliant on government transfers as a source of income. Friday’s data on personal income for May confirmed that the trend is continuing.  Government transfers made up a record 18% of personal income in May:

Transfers thru May 2009 In interpreting this increase, it’s important to keep several points in mind:

  • May’s increase was driven entirely by the recent stimulus act. The act provided for one-time payments of $250 to a range of Americans who are beneficiaries of various other programs, including Social Security, SSI, and veterans’ benefits. Those payments more than account for the increase in transfers from 16.9% of personal income in April to 18.0% in May. Continue reading “Stimulus Lifts Government Transfers”

Health is an R&D Problem

Our health care system is notoriously inefficient.  Spending is too high, while quality is too low. Some patients undergo expensive treatments that provide little or no benefit. At the same time, other patients don’t receive some inexpensive treatments that could materially improve their health.

When I was CFO of a medical software start-up back in 2000, we diagnosed this problem quite simply: actual medical practice falls far short of best practices. Good treatment regimes are often well-known, yet are overlooked by a large fraction of practicing physicians. (The classic example at the time was that doctors were substantially under-prescribing beta blockers, which can help many patients after a heart attack; I would welcome comments about whether that’s still true.)

The implied treatment for our health care system is also simple: find ways to get patients, physicians, and other providers to adopt best practices. We were focused on information technology as one potential way to do this, but many others have also gotten attention, including:

Continue reading “Health is an R&D Problem”

Paying for Health Reform II

Yesterday, I suggested that policymakers should take care in how they pay for any health reform. Paying for reform over the next ten years, which appears to be the consensus budgetary goal, is laudable but not enough.  Policymakers should also make sure that reform doesn’t worsen the longer-run trajectory of our over-stretched federal budget.

As I noted, the Congressional Budget Office made a similar point in an important letter last week. Today, I’d like to emphasis another crucial point that CBO made in that letter — one that I think deserves much greater attention than it has received thus far.

Regarding the offsets that might be used to finance new health-related spending, CBO wrote:

Moreover, any savings in existing federal programs that were used to finance a significant expansion of health insurance would not be available to reduce future budget deficits. In light of the unsustainable path of the federal budget under current law, using savings to finance new programs instead of reducing the deficit would necessitate even stronger policy actions in other areas of the budget.

In other words, it’s likely that policymakers will pick the low-hanging fruit — the least-painful tax increases and spending reductions — to offset the costs of new health spending. That certainly makes sense politically, but unfortunately it may also make it that much harder to address our long-run budget problems.