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CBO: The Health Reform Slopes Don’t Add Up

July 28th, 2009 . by economistmom

The Congressional Budget Office once again validates some intuition many of us had about health care reform:  when you have health costs rising much faster than the economy is growing, a package that expands coverage but is unwilling to tax health benefits to pay for it is not likely to add up to a deficit-neutral plan over the longer term.  (Or, if this is the diet we’re going on, we’d better not buy the bikini just yet…)

Quoting from pages 12-13 of the report (a letter to Congressman Dave Camp (R-MI) on the House tri-committee proposal), emphasis added:

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.

Under any proposal that provided new federal subsidies for the purchase of health insurance, the rate of growth in federal spending would depend importantly on how the subsidies were indexed over time. As long as overall spending for health care continued to expand as a share of the economy, people’s share of insurance costs would continue to rise faster than their income, or the government’s subsidy costs would continue to rise faster than the tax base, or both. The proposal limits the share of income that eligible people would have to pay when they purchased coverage in the insurance exchanges, and that share of income would not change over time. In addition, insurance plans offered through the exchanges would be required to pay a specified share of costs for covered services (on average), and that share also would not change over time. Combining those provisions, increases in health care spending in excess of the rate of growth in income would be borne entirely by the federal government in the form of higher subsidy payments—because those payments would have to cover the entire difference between the total premium for insurance coverage and the capped amount that enrollees would pay. Those factors help explain why the costs of the coverage provisions would continue to grow rapidly in the decade after 2019.

4 Responses to “CBO: The Health Reform Slopes Don’t Add Up”

  1. comment number 1 by: Anandakos


    I believe that any projection of health care costs beyond 2019 is purest speculation. If there is any discipline that is going to be radically altered by technology, it is health care. Yes, the technology is expensive, but it trades capital expenditure for better targeted treatment with more predictable outcomes. That should help “bend the curve downward”.

    But more than that is the results of the uncontrolled experiment that United States food and drug companies have been running on the US population for the past 60 years. That is, since the coming wave of elders were born.

    Obesity and diabetes are rampant; people consume beta-blockers and SSRI’s like M&M’s; when people take a walk, it’s a waddle.

    Current mortality statistics are being computed based on the lifespan of The Greatest Generation, who grew up through the Depression when food was less varied and for some scarcer, but of vastly higher quality. People were THIN and walked everywhere; that built healthy and resilient bodies. And most important of all, that was before anti-biotics when people had to have a decent immune system to survive.

    The Baby Boom Generation of which we are both members, but at different ends, will not fare so well. No, everyone won’t get sick, and many will live to 100 and beyond because of vitamins and modern technological health care. But a sad number will succumb to early wasting diseases in the next decade, and that will “bend the curve”, too.

  2. comment number 2 by: Anandakos

    Lo siento. I forgot this sentence at the end of the fourth paragraph: “Those who didn’t were removed from the life expectancy computations decades ago.”

  3. comment number 3 by: Sherry Jarrell

    What is the purported goal of the President’s Universal Health Care reform? I’ve been doing a lot of reading and listening on this issue and have summarized the most common claims in the following short list.

    To make sure that all currently uninsured U.S. citizens have medical insurance.
    To make sure that all U.S. citizens receive basic medical care.
    To limit national spending on health care.

    How does the bill propose to accomplish these goals? Let’s take each in turn.

    “To make sure that the uninsured have medical insurance.” The only way to guarantee that everyone who currently doesn’t have insurance gets insurance is to require it. And if the government requires it, they have to have a way of paying for it, which means either increased taxes or a mandate for individuals and businesses to buy insurance that they do not now choose to buy. In addition, in order to meaningfully require that everyone abides by the new law, there has to be a mechanism for monitoring, enforcement, and fines for those who fail to comply. Sure enough — it’s all there in the bill (the bill that neither the President nor Congress has read).

    “To make sure that all U.S. citizens receive basic medical care.” Let’s see. Fundamentally, “receiving medical care” means that a patient sees a doctor. It means that services are provided by the doctor and consumed by the patient. These services are not free: they use resources; they are valuable; they take time. We can place a dollar value on these resources, regardless of the specific currency – private income, public tax revenues, bartering, or waiting — used to pay for them. How would the legislation ensure that everyone received basic medical care? It would first have to define what kinds of treatments are considered basic; then it would have to require some sort of monitoring system to document that those services were received, and some sort of penalty if a person failed to receive them. It would have to require that the right number of doctors provided the right kinds of medical services in the right geographic areas (a nightmarish concept in and of itself) and it would have to compensate the doctor for providing the service. Of course, in order to pay for all this, the plan would have to limit the compensation for the doctor, which leads us to ….

    “To limit national spending on health care.” Or, as President Obama puts it, to “curb rising health care costs.” What does this mean exactly? How is legislation that forces demanders and suppliers of a service to come together in ways they now choose not to do going to make the production of that service more efficient? (efficient means that more outputs of the same quality are produced from the same inputs….this is the ONLY way that the cost of medical service is lowered….) What single piece of evidence do any of us have that the health care plan will lead to improved medical care for either the individual or the nation as a whole? Medicaid? Medicare? No, these are the very programs Obama references when he laments skyrocketing U.S. health care costs, and the primary impetus for the push for reform. Canadian or UK health care? Hawaii’s failed Universal Health Care experiment? No; each of these programs serves as a warning about the sorry state of our future should the Health Care bill pass.

    The fact is that, despite the feel-good sentiment linked with the idea of Universal Health Care, the reality would be a disaster. None of us would benefit; all of us would suffer lower quality, rationed health care services. There is simply no other way around it.

    Finally, as an economist, I have to comment on the analyses I have seen on this issue by other economists. I have been very surprised and disappointed by them, on the whole. I have seen claims by other economists that health care reform will actually save states money, increase the number of high-quality jobs, lower the unemployment rate, and improve the growth rate of the U.S. economy. I hate to be the bearer of bad news, but these claims are just plain false. I could quote excerpts and detail step-by-step where the reasoning fails, and I’m happy to do just that if asked, but I will spare you! Basically, these analyses are bogus for one of two reasons: one, they ignore that tax revenues are foregone private income and; two, that individual choice is always better than decision-by-committee.

  4. comment number 4 by: Anandakos

    Ms. Jarrell,

    If “individual choice (were) always better than decision-by-committee” then dictatorships would outperform democracies. They don’t, except briefly if at all.

    Your points individually are certainly well made, lucid, restrained, and quite possibly true. But they evidence a lack of understanding how the macro level is often — not always, but often — greater than the sum of the micro parts.

    For one glaringly simple instance, you have neglected the 18% of premium payments that go to executive bonuses and stockholder gains in private for-profit health insurance providers. That alone is greater than the 1/6th of the US population that is currently uninsured.

    Now clearly the entire 18% can’t be reclaimed; for one thing many people will continue to be covered by PFP carriers, so their portion of the 18% will continue to be directed to the officers and stockholders. But at least some of the expansion can be paid for by that simple redirection of what is otherwise pretty much wasted resources.

    What in fact DO health insurance companies do for their customers (the insured)? If they make a profit by definition the average — both mean and median — insured paid more for coverage than necessary in a given year. If they voluntarily acted like responsible fiduciaries and did not throw nearly 50% of expensively and seriously ill people from their voluntary plans, then they would be providing a genuine insurance coverage.

    But they DO invoke recission against nearly 50% of the most expensive patients (the top 1% of claims). AND THEY DON’T EVEN GIVE THE PREMIA BACK!!!!! They renege on an agreement that they COULD have vetted lo this many years ago, but don’t renege on taking the payments intended to maintain it.

    A single-payer system run by the government would not do that; taxpayers actually have some leverage on government: they can vote one out of office. Now it might do some other things like limit end of life care that you might not like. But if it did so it would have to weather the anger of those who believe their loved ones were improperly denied intervention. An insurer who denies care that causes their customer to die simply off-loads a liability. The relatives have no recourse except a tort claim, and those are often limited to arbitration by an arbitrator in the pocket of the insurance company.

    The next big well of money is the roughly 50% greater markup pharmaceutical manufacturers charge Americans vis-a-vis the members of national single-payer systems in Europe and developed Asia. Folks in your “free-market uber alles” camp consistently raise a classic FUD factor that “development of new drugs will stop!” Well you know what? Most of those “new drugs” don’t cure people, they’re essentially legalized Junk for people with chronic illnesses. Once started on them the patient must continue “this or something better” for the balance of his or her life. An excellent income annuity for the drug maker.

    You conservatives always talk about “incentives”. If people did not know that there were drugs to control diabetes, they might not drink so much HFCS-laden soda. If they had the fear of cancer that people fifty years ago faced, they might not be so blase about eating nitrited meats.