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.

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Big Money in Cap-and-Trade

On Friday, the House of Representatives passed its climate change bill by a slim margin. The bill’s key feature is a cap-and-trade system for greenhouse gases. That system would set national emission limits and would require affected emitters to own permits (called allowances) to cover their emissions.

The number one thing you should know about this bill is that the allowances are worth big money: almost $1 trillion over the next decade, according to the Congressional Budget Office, and more in subsequent decades.

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.

As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster.

The following table illustrates how much revenue the bill would raise and compares it to the alternative of auctioning all the allowances:

Cap-and-trade revenues

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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.

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.

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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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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