projected costs

Health Spending Projections from the CMS

Yesterday, Health Affairs released the annual projections of national health expenditures (NHE) from the Office of the Actuary at the Center for Medicare and Medicaid Services (CMS). In conjunction with the release of the new projections, Health Affairs asked the lead CMS author, Gigi Cuckler, to provide an overview of the new forecast in a “Health Affairs Conversations” podcast. The journal also asked Princeton University economist Uwe Reinhardt and I to provide some commentary about the CMS projections following Ms. Cuckler’s remarks.

An important takeaway from these new projections is that the CMS Office of the Actuary finds no evidence to link the 2010 health care law to the recent slowdown in health care cost escalation. Indeed, the authors of the projections make it clear that the slowdown is not out of line with the historical link between health spending growth and economic conditions.

Furthermore, to the extent anything fundamental has changed in health care over the last decade, the most likely source of the shift is the steady movement toward higher deductible and consumer-driven health insurance. The authors of the projections note this trend as an important development in employer-sponsored health care.

The entire podcast (about fifty minutes) is available here.

posted by James C. Capretta | 11:35 am
Tags: CMS, projected costs

The House Bill: A $10 Trillion Unfunded Liability

Amid all the flurry of news in the hectic last days before the House recessed for the August break, something important went largely unnoticed — a development that should be the knockout blow to the kind of sweeping health-care bill the Obama administration is pushing, at least as it has been cobbled together in the House.

In a July 26 letter to the Ranking Republicans on four key committees (Ways and Means, Energy and Commerce, Education and Labor, and Budget), the Director of the Congressional Budget Office (CBO), Doug Elmendorf, made it clearer than he ever had before that the bill, in its original July 14 form, would dramatically widen the already large gap between long-term government revenue and spending. Here’s the key paragraph:

Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time. The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.

In other words, CBO expects the spending in the bill would grow at a rate of least 8 percent annually into the indefinite future, while the revenue to pay for it will only grow at about 5 per cent per year. Hence the “substantial increases” in federal budget deficits beyond 2019.

Although CBO declined to specify any actual deficit numbers beyond 2019, they can be easily calculated, in rough terms, from the information provided in Elmendorf’s letter.

By 2030, if the spending associated with the coverage provisions rises 8 percent per year after 2019 and the revenue rises by 5 percent, the bill would add more than $200 billion per year to currently projected budget deficits. By 2048, the annual deficit increase would top $1 trillion — and only go up from there.

Of course, the federal government is already in a deep hole due to the projected rapid cost increases in Social Security and Medicare. The trustees for those programs reported earlier this year (see here and here) that Social Security’s seventy-five year unfunded liability stands at $5 trillion, while Medicare’s has reached at an astounding $36 trillion.

It is possible to do a similar “unfunded liability” calculation for the new entitlement spending in the House bill. Assuming a discount rate of 5.7 percent per year, the bill would add more than $10 trillion over seventy-five years in new unfunded government obligations.

Of course, some amendments were adopted to assuage the Blue Dogs in the Energy and Commerce Committee. The fate of those amendments is uncertain at best, however, as Speaker Pelosi has indicated the contents of the yet-to-be-written merged bill from the three committees will be decided later (to attract votes of course). But even if the Blue Dog amendments survive, they would do very little to change the basic direction of the bill’s long-term costs.

CBO recently projected that the federal budget deficit is already on track to reach nearly 15 percent of GDP in 2035, well above the historical average of about 2 to 2.5 percent. The last thing Congress should be doing is making the problem worse with new runaway costs. Indeed, the president himself has said he won’t accept a bill that makes our long-term budget problem worse. How he squares that with full support for the emerging House bill is anybody’s guess.

posted by James C. Capretta | 5:44 pm
Tags: House bill, projected costs, Doug Elmendorf, CBO, spending, deficit, Medicare, social security, Blue Dogs, Nancy Pelosi
File As: Health Care

The Prognosis for ObamaCare

The House bill would add $239 billion to the federal budget deficit over the coming decade, according to Congressional Budget Office (CBO) projections. That’s bad enough, coming as it would on top of the $11 trillion in deficits that are already expected to occur over the period 2009 to 2019 under the Obama budget plan.

But that’s really just the beginning of it.

Yesterday, CBO confirmed that the House bill would do even more fiscal damage in its second ten years. Here’s the crucial paragraph, from a letter sent by CBO director Doug Elmendorf to the four Ranking Republicans on the key House committees:

The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year-budget window.

That really should do it. The Blue Dogs are in this fight, in part, because of their stated concerns over growing budget deficits and unaffordable entitlements. The president reiterated again last week that he is determined to sign a bill that slows the pace of rising costs and improves our long-term fiscal outlook.

Well, here’s a bill that would go in exactly the opposite direction from what the authors say is their objective, according to CBO. It would add a third runaway health care entitlement program to the two already on the books (Medicare and Medicaid) with no prospect in sight that spending on any of them will ever come in line with the government’s revenue base. A back-of-the-envelope estimate indicates the House bill would run up a cumulative federal budget deficit of at least $700 billion in its second ten years, and possibly much more. That’s on top of budget deficits that are already unsustainable and that will put the American economy at considerable risk of crippling interest rates or hyper-inflation.

This is not a close call. The Democrats have no choice. For the sake of the country, they have to go back to the drawing board and work with Republicans on something much more sensible.

[To read the NRO symposium on ObamaCare in which this post originally appeared, with Newt Gingrich, David Gratzer, and Amy Menefee, click here.]

posted by James C. Capretta | 12:50 pm
Tags: CBO, deficit, ObamaCare, House Bill, Doug Elmendorf, Blue Dogs, projected costs
File As: Health Care

The House Bill Costs Far More than $1 Trillion

The health care bill under consideration in the House will cost at least $1.5 trillion over a decade, not $1 trillion as advertised, and raise taxes by $800 billion over the same period. Moreover, the bill is likely to cost even more than that because of built-in pressure for further legislative expansion. These are some of the points I make in this new piece, up at Kaiser Health News today.

posted by James C. Capretta | 12:21 pm
Tags: House bill, projected costs
File As: Health Care

The Presidentís Reckless and False Health Care Claim

It’s now a clear pattern. When the president senses his position is vulnerable to a factual criticism, he asserts emphatically that the opposite is true — without ever providing evidence to back up his claim.

Here’s the latest example. According to Politico, President Obama told skeptical Blue Dog Democrats last evening that they should support the health care bill emerging in the House because it would produce savings beyond the ten-year budget window.

Oh really. Says who?

The context here is crucial. It’s already abundantly clear that the federal government cannot afford its existing health care commitments. The Congressional Budget Office (CBO) recently projected that Medicare and Medicaid costs will nearly double in twenty-five years, from 5.3 percent of GDP today to 10.0 percent in 2035 (this assumes continuation of current policy with regard to physician fee updates). The Medicare Trustees projected in May that the program’s 75-year unfunded liability has reached $36 trillion.

Moreover, the federal government is projected to run massive budget deficits for the foreseeable future. In 2009, the government has already run up a deficit of $1 trillion through June, and it could reach $2 trillion before it’s over at the end of September. CBO expects the Obama budget plan would increase the government’s debt by $11 trillion from the end of 2008 to the end of 2019. Running up government debt at that kind of pace would put the nation’s economy at considerable risk, to put it mildly. At some point, lenders would demand higher returns for their lending, pushing interest rates up and choking off growth, or the Fed would partially monetize the debt with even easier money and rapid inflation.

It is in this context that Democratic leaders in the House and Senate are trying to rush health care bills to their respective floors for consideration before the August congressional break.

The centerpieces of the bills are the creation of a new, massive entitlement to health insurance subsidization and a large expansion in Medicaid eligibility. The House bill, unveiled today and available here, would add $1.2 trillion in federal costs over a decade with just these two expansions, according to CBO. And the trend is even more alarming. Between 2018 and 2019, federal costs for the new entitlement and the enlargement of Medicaid would increase by a combined 8.9 percent.

That shouldn’t be surprising though, because that’s basically the rate at which Medicare and Medicaid have been growing for more than four decades. And there’s nothing in the House or Senate health care bills which would lead one to assume a new health entitlement program will grow at a more moderate pace in the future than the ones already on the books have done in the past. CBO has said repeatedly that slowing the pace of rising costs will require a fundamental restructuring of financial incentives, for consumers and suppliers of medical services. Nothing currently on the table in Congress comes close to meeting that test.

That was essentially the message CBO delivered to members of the Senate Health, Education, Labor, and Pension committee last week. In response to a question from Sen. Judd Gregg, CBO Director Doug Elmendorf said a bill which simply expanded coverage without fundamental reform “puts an additional long-term burden on top of an already unsustainable path” (Elmendorf’s testimony can be seen here, with his response to Senator Gregg at the 1 hour, 38 minute mark).

Moreover, it seems that President Obama’s own budget director agrees with CBO. Last week, Peter Orszag delivered a letter to House leaders saying their bill doesn’t go nearly far enough to slow the pace of rising costs. But even that didn’t stop the president from saying otherwise in his desperate attempt to round up votes.

The federal government’s budget is already knee-deep in debt, largely because politicians have promised that better days ahead will make all budgetary problems go away. They haven’t, and the current president is making the situation much worse. The last thing any member of Congress should do is simply take the president’s word for it that the health care bills under consideration will ultimately “bend the cost-curve.” If he really believes that — because no one else really does — he should provide some hard evidence to back up his claim. And that’s not a theoretical possibility. He could ask his independent projection experts — not his political appointees — to provide directly to Congress and the public, without review by anyone else, their best estimates of what these bills would do to the long-term (25- or 50-year) budget outlook. Those estimates would be taken much more seriously than unsubstantiated assertions which run against commonsense and all evidence.

posted by James C. Capretta | 9:11 am
Tags: ObamaCare, Blue Dogs, House bill, CBO, projected costs, deficit, HELP, Doug Elmendorf, Peter Orszag, cost-curve
File As: Health Care

Senate Democrats Opt for Regressive Mandates

President Obama and his congressional allies greeted the Congressional Budget Office’s latest estimates of the Kennedy-Dodd legislation with great enthusiasm. The cost had come down, we were told, even as more people would get covered.

But, as others have already noted, there was an awful lot of spin in the media coverage of what CBO actually said. For starters, it’s clear the Kennedy-Dodd bill, even as amended, would still cost a fortune. CBO’s new estimate shows a ten-year cost of about $600 billion for the bill, but that estimate excludes the cost of covering Americans with incomes below 150 percent of the poverty line under Medicaid, which is not yet part of the Kennedy-Dodd draft but is central to the overall Democratic reform framework. That addition alone would add at least $500 billion to $600 billion to the tab, and perhaps much more, putting the total cost of Kennedy-Dodd, even as revised, at well over $1 trillion for the decade.

Still, CBO did say Kennedy-Dodd 2.0 would cost less than the original version. In mid-June, CBO projected that the health-insurance subsidies provided in the original bill would cost $1.279 trillion over a decade. But, in the new version of the legislation, those subsidies would cost $723 billion over ten years — or $556 billion less.

So how does the new, apparently leaner Kennedy-Dodd bill cut the subsidy costs?

Part of the answer is a scaling-back from an outlandishly expansive starting point. The original version of Kennedy-Dodd contemplated subsidizing households with incomes all the way up to 500 percent of the poverty line. Even House Democrats found that to be too much. So Kennedy-Dodd 2.0 now sets the income limit at 400 percent of poverty.

But, beyond the lower income threshold, Senate Democrats, including Finance Committee Chairman Max Baucus, have also discovered the budgetary virtues of heavy-handed government decrees. If you want to expand insurance coverage, you can simply make people sign up for a plan — whether they want to or not. And to keep costs down for the government, you subsidize only those who get insurance outside of the workplace — and then write rules that make it nearly impossible for anyone to fall into that category. Presto! Government-run health-care paid for with the hidden taxes of government mandates.

According to the Census Bureau, there are about 102 million Americans under age 65 living in households with incomes between 150 and 400 percent of the poverty line — the presumed target population for subsidized insurance in the Kennedy-Dodd bill. But CBO said only about 20 million people in 2014 would get the subsidies under the revised version of the legislation. That’s because the authors sought to create a so-called “firewall” to prevent most workers from getting insurance outside the workplace if their employer offered a plan. And, of course, the bill would also impose severe, per-worker penalties on any employer that didn’t offer approved coverage. Only workers who would have to pay more than 12.5 percent of their income for a job-based plan could opt to get their insurance through the subsidized insurance arrangements, which CBO apparently assumes will be a relatively small number of people.

What’s ironic is that mandating enrollment in job-based insurance is about the most regressive way possible to expand coverage. Despite the perceptions, employment-based health insurance is financed by workers, not firms. The premiums for coverage implicitly reduce the cash compensation workers take home. In most companies, workers pay the same implicit premium for health insurance regardless of their age or health status or salary. That means the cost of enrolling in job-based coverage falls more heavily on low-wage workers than higher-salaried employees, which is why such a large percentage of the uninsured are in households that have access to a plan but choose not to enroll.

Democrats used to be sympathetic to the financial strain these workers are under. But that was before CBO said their sympathy would be expensive. So now the emerging plan is to make tens of millions of Americans pay more than they do today for government-approved insurance organized by their employer. That’s really their only choice. If they don’t take it, they will face a large financial penalty. Great deal, huh?

Congressional Democrats are between a rock and a hard place. They desperately want to pass a bill they can label “universal coverage,” but they have no coherent plan for making health-care provision more efficient and less costly. Thus, expanding coverage with new federal subsidies for a large segment of the population in the current cost environment is prohibitively expensive. Presented with these facts, the lead Democratic Senators could have chosen to write a more sensible reform plan focused first on building a functioning marketplace in which cost-conscious consumers would drive out unnecessary costs. But, instead, they have decided to plow ahead with their “universal coverage” plan, only now they want to impose the high cost of it on struggling workers. Their only hope is that the bill will pass before the public discovers what they are up to.

posted by James C. Capretta | 5:13 pm
Tags: ObamaCare, CBO, HELP, Medicaid, projected costs, Max Baucus, mandate, universal coverage
File As: Health Care

Rushing Headlong Toward a Crisis

President Obama has made passage of an expensive new entitlement to health insurance his top legislative priority this year even as it has become abundantly clear that his fiscal policy is driving the country headlong toward a crisis.

In June, the Congressional Budget Office (CBO) took another, more complete look at President Obama’s budget plan and found the following: a $2.7 trillion spending increase over ten years, not counting the full costs of a health-care plan; annual deficits exceeding $600 billion every year — and rising as the years pass; a cumulative ten-year budget deficit of $9.1 trillion; and $17 trillion in government debt at the end of 2019.

And that might be the rosy scenario.

For starters, there are the budgetary risks associated with Obamacare. It’s all but certain to have additional deficit spending in its early years, which is why the president wants to change the traditional budget rules and require a deficit-neutral bill only over a full decade. That means all of the “financing” can be back-loaded, and later pushed back again. Sort of the “glad to pay you Tuesday for a hamburger today” version of budget discipline. Moreover, CBO has already estimated that the cost of the new health-insurance entitlement program in the Kennedy-Dodd legislation would rise very rapidly — 6.7 percent per year — when fully implemented. So even if the bill is “financed” over ten years, over the longer run, it will add to the massive unfunded liabilities associated with Medicare and Medicaid.

Then there’s the interest rate assumptions used to make the ten-year projections. Many forecasters, including CBO, use rather benign assumptions of where real interest rates are headed because the economy is expected to remain soft for some time. But what if the flood of government debt leads some important lenders to demand higher returns?

Yesterday, CBO provided some illuminating projections of what would happen under just such scenarios. For instance, if interest rates on government debt in the coming decade roughly tracked the experience of the 1980’s, the Obama budget plan would run entirely off the rails in very short order. By 2014, the annual deficit would exceed $1.1 trillion, and it would cross $2 trillion in 2019. Over ten years, the higher interest rates alone would force the government to borrow an additional $5 trillion, with the nation’s debt topping $22 trillion at the end of the decade — or more than 100 percent of GDP.

But even if interest rates followed a path closer to what the latest Blue Chip forecasts indicate, the nation’s debt will still rise more rapidly than CBO’s base assumption would indicate. Instead of $17.1 trillion of debt at the end of 2019, it would be $18.3 trillion. And the deficit in 2019 alone would exceed $1.3 trillion.

The Obama administration is pursuing a reverse of the “starve-the-beast” strategy. Pile on spending and new programs in the current recession, and then, after the fact, push for the mother of all tax increases as the only way to defuse the ticking time bomb of runaway government debt. Fortunately, the public is beginning to stir. They have seen spend-and-tax before, and it’s not what they thought they were voting for in November.

posted by James C. Capretta | 10:08 pm
Tags: ObamaCare, CBO, deficit, HELP, projected costs
File As: Health Care

The Baucus Planís Penalties on Work

Late last week, Senator Max Baucus, chairman of the Senate Finance Committee, tried to jump-start the push for a sweeping health care bill by letting it be known that he has made progress toward a “bipartisan” deal in his committee on a health care plan.

Of course, no one knows for sure what’s in the Baucus plan except for a handful of people. There have been two Congressional Budget Office (CBO) tables provided to the committee indicating how much alternative versions of plan would cost over the coming decade, but neither estimate been released to the public by the committee. The insistence on complete secrecy just days before a planned markup of the bill would seem to contradict pronouncements of total confidence in its popularity and inevitability.

Still, despite the secrecy, some of the details are now clear enough to make some analytical judgments — thanks, in part, to a post by Ezra Klein of some slides which apparently reflect where the emerging plan now stands. And it is clear from the details provided in those slides that the draft Baucus plan would impose severe financial penalties on the earned income of low-wage workers.

The centerpiece of the Baucus plan is a new entitlement to health insurance premium subsidies. The very lowest income households (perhaps below 133 percent of the federal poverty line, or about $29,300 for a family of four in 2009) would get full subsidization of their premiums, likely worth about $12,000 per year. That subsidy would then get phased down as household income rises. In the original Baucus plan, the cut-off point was 400 percent of poverty, or $88,200 per year. But CBO said that plan would cost $1.6 trillion over a decade, a figure that stunned and appalled Democrats. Senator Baucus and his staff subsequently vowed to cut back the total governmental cost of the plan to under $1 trillion over ten years — without abandoning their goal of “universal coverage.” How to do that? Continue to make people buy the insurance — the so-called “individual mandate” — but give them less by way of subsidization when they do so. The new Baucus plan would cut subsidies off at 300 percent of poverty, or $66,150 for a family of four.

But phasing out subsidization of expensive health insurance plans in this manner imposes very high implicit tax rates. If the total premium for an average health insurance plan for a family costs $12,000 per year, under the updated Baucus plan a worker would lose $.33 in health premium subsidization for every $1 earned in the phase-out range. That implicit 33 percent tax rate would be come on top of existing federal payroll and income taxes, as well as the implicit taxes associated with phasing-out the earned income tax credit, food stamps, and housing vouchers. Quite literally, if the Baucus plan were to pass, it would not pay for millions of lower income Americans to take higher paying jobs because much of the wage gain would be lost to the government.

The problem would be compounded by Senator Baucus’s elaborate “pay or play” scheme. Several options are presented in the slide deck, but it’s clear that the most likely scenario is a penalty on employers if they don’t provide government-approved insurance for lower wage workers and their families who would be eligible for premium subsidization if they weren’t enrolled in a job-based plan. This is a transparent effort to push more costs onto employers in order to keep the overall federal costs of the Baucus plan to “just” $1 trillion.

But what will employers do if faced with such a requirement? For starters, they will avoid hiring low wage workers, as the “pay or play” mandate wouldn’t apply to workers with higher incomes. Is that what the Democrats really intend? Moreover, to avoid paying the penalty, firms would re-organize themselves so that they contract with other firms for low-wage labor instead of hiring the workers directly themselves.

After the success of welfare reform in 1996, you’d think Congress would have learned that the last thing they want to do is to penalize work among low-wage households. It’s completely counterproductive to make such households ever more dependent on government assistance. But that’s exactly what the emerging Baucus plan would do.

posted by James C. Capretta | 10:57 am
Tags: Max Baucus, CBO, entitlement, universal coverage, projected costs, mandate, pay or play
File As: Health Care