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Some Easier (and Perhaps Smarter) Ways to Pay for Health Care Reform

July 17th, 2009 . by economistmom

Doug Elmendorf, director of the Congressional Budget Office, today testified before the Senate Budget Committee on the long-term budget outlook, which is bleak because both demographics (a growing elderly population) and trends in per-capita health costs (rising way faster than the economy is growing) are working against us.  Over the past couple years former CBO director (now Obama budget director) Peter Orszag had convinced Congress that the not-so-simple secret to achieving a more sustainable long-term outlook was to “bend the health cost curve”–i.e., flatten out its growth so that health costs would not rise so much faster than the economy grows.  Today Doug delivered some bad news about the potential cost-curve bending that could be achieved through the current crop of congressional proposals for health reform.

As CNN’s Jeanne Sahadi reported:

NEW YORK ( — The health reform bills released so far would increase government spending on health care without sufficiently reining in health care costs.

And at least initially they aren’t likely to significantly lower premiums for the majority of Americans with employer-sponsored health insurance.

That’s the sobering takeaway from testimony Thursday by Congressional Budget Office Director Douglas Elmendorf.

Elmendorf’s preliminary conclusions were based on a bill jointly released by three committees in the House this week and another bill passed by the Senate health committee on Wednesday.

“The creation of a new subsidy for health insurance … would by itself raise federal spending on health care. … [T]o offset that there have to be substantial reductions (on the tax or spending sides of the ledger],” Elmendorf told the Senate Budget Committee. “The changes we’ve looked at so far don’t represent the fundamental change on the order of magnitude that would be necessary.”

And Roll Call’s David Drucker highlighted a variety of reactions coming from key senators (emphasis added):

Senate Budget Chairman Kent Conrad (D-N.D.) suggested Thursday evening that Congress should steer clear of the health care reform bill being marked up in the House as well as the legislation approved by the Senate Health, Education, Labor and Pensions Committee on Wednesday…

“Everybody has said you’ve got to bend the cost curve in the right way,” Conrad told reporters on his way into Finance Chairman Max Baucus’ (D-Mont.) office to resume negotiations.

“The director of CBO said in very clear testimony, in response to my questions … [that] the other proposals bend the cost curve the wrong way — will increase costs.”…

Senate Majority Leader Harry Reid (D-Nev.) said mockingly earlier Thursday that Elmendorf should run for Congress. And Sen. Chris Dodd (D-Conn.), who managed the markup of the HELP bill, had a few choice words of his own.

“They don’t score the outcome,” Dodd said, arguing that CBO does not score cost savings from Congressional proposals to improve prevention and quality of care. “The only thing CBO does is tell you how much taxpayer money it will take to get these results. So with all due respect — and we all respect the CBO — it’s a game we have to play with them. We believe we’ve crafted legislation that does bend that [cost] curve.”

In CBO’s preliminary analysis of “Division B” of the House Tri-Committee health reform discussion draft, dated July 8, CBO (unofficially) estimated health cost savings of just $160 billion over ten years.  That obviously falls far short of covering the over $1 trillion cost of expanded health coverage under the proposal.  It also falls substantially shy of the $309 billion in “health savings” the Obama Administration proposed in their budget as part of health reform.  Of course, the Administration’s health reform reserve fund contained a total of just $635 billion as its “initial deposit,” and more than half of the funding was to come from higher taxes (specifically, the limit on itemized deductions for high-income households was to raise $267 billion, and other tax enforcement measures would add $59 billion more).

But with a disappointing amount of health cost control achieved, with little enthusiasm for the President’s proposal to limit itemized deductions, and with continued reluctance on both ends of Pennsylvania Ave. to opt for the most sensible tax increase most consistent with health reform–limiting the exclusion for employer-provided health care–the House has turned to a high-income surtax to cover most of the cost of expanded coverage:  $544 billion of the $583 billion in total revenue offsets in the tri-committee proposal comes from the surtax.  The CNN article explains that this makes finding offsets for expanded health coverage difficult:

[W]hile taxing a portion of health benefits was a leading “pay-for” idea — at least in the Senate Finance Committee — the political pushback has muted its prospects for being a serious contender at this writing.

“Basically, the president is not helping us,” Senate Finance Committee Chairman Max Baucus, D-Mont., told reporters Thursday. “He does not want the exclusion and that’s making it difficult.”

In response, White House spokesman Bill Burton told reporters that Obama has consulted lawmakers of both parties about how to “save money and find revenue to pay for our health care reform. If that’s disagreeing with Baucus, somebody else will have to make that determination.”

The tricommittee House bill proposes to pay for half the cost of reform by taxing the richest households — imposing a surtax as high as 5.4% for income over $1 million, and imposing lower rates on households making at least $350,000.

Asked if cost containment becomes more difficult by relying primarily on Medicare cost savings without taxing employer-provided health benefits, Elmendorf said, “Tying one of the two hands behind one’s back makes the job that much harder.”

And Nancy Pelosi doesn’t even seem very thrilled about the high-income surtax, suggesting today that she’d prefer a smaller version (from a CQ story):

Pelosi said Thursday that if more cost savings can be produced in the House legislation, a proposed $544 billion tax surcharge on the wealthiest Americans could be scaled back. But it would not be eliminated, she said.“We have to have a revenue stream to pay for” the bill, she said. “If we don’t need it, we can use it to reduce the deficit.”…

“If we can get more [health cost] savings, perhaps we can cut [the surtax] at the high end,” Pelosi said.

It seems that finding these “CBO-scorable offsets” for the $1 trillion price on expanded health coverage is really hard and unpleasant–because the health cost savings are quite elusive without truly hard choices (i.e., “rationing”), and squeezing additional revenue via higher rates from a tax system that’s already full of inefficient holes only tends to magnify the inefficiencies.  I’ve said before that I’m surprised the high-income surtax is a serious proposal.  A better (more economically efficient and fairer) option would be a broader-based, but still progressive tax increase which would get everyone contributing to a health care system that benefits everyone.  And a really easy way to go for such an option would be to follow a “just don’t do it” strategy with the Bush tax cuts when they expire at the end of 2010.

The Joint Committee on Taxation provides CBO with the revenue estimates for proposed tax legislation, and by estimating the revenue provisions in the President’s budget, has already “scored” these “just don’t do it” tax options.  Here are just some examples (all figures are ten-year revenue gains):

  • Don’t permanently extend capital gains and dividends tax cuts:  +$224 billion;
  • Don’t retain the 10% tax bracket:  +$579 billion;
  • Don’t retain the 25% and 28% tax brackets:  +$449 billion;
  • Don’t extend marriage penalty relief:  +$306 billion;
  • Don’t extend the child tax credit:  +$243 billion;
  • Don’t make permanent 2009 estate tax law:  +$234 billion.

The President’s budget already allows the top-bracket Bush tax cuts to expire, raising around $600 billion over ten years compared with a policy-extended baseline.  But if all of the rest of the Bush tax cuts (including those listed above) were allowed to expire as well, this would raise an additional $2.1 trillion over ten years–double what is needed to cover the costs of expanded health coverage within the ten-year budget window, which is maybe a bit closer to what we would need to cover the costs more reliably over the longer term.  And the beauty of this is that Congress wouldn’t have to pass this, and the President wouldn’t have to sign this.  It seems a lot easier than everything else we’re trying to find as a “scorable offset” for health care reform.  And if we really cannot afford to extend the Bush tax cuts even before considering a major health reform, how could it possibly be affordable when we are trying to do a health reform that on net costs (rather than saves) a substantial amount of money?

4 Responses to “Some Easier (and Perhaps Smarter) Ways to Pay for Health Care Reform”

  1. comment number 1 by: Jim Glass

    With major “cost savings” so critical to this plan — to the point where Obama’s people have been selling it as “heath reform is fiscal reform”, the fiscal reform needed to avert calamity! — isn’t it odd that they didn’t score the plan for savings like this, to find out they don’t have them, before they scheduled votes on it this week? (Although those vote dates do seem to be slipping.)

    Wouldn’t you think that the first step would be for somebody to design a plan that is independently scored to actually produce the desired savings, and that then, when they had one, they’d take it to Congress to consider?

    Not that Congress would be excluded from the design process, of course Congressional players would have input.

    But still, they’d actually have a plan before they started voting on it.

    Does the way they are going about it instead — e.g. figure out how much to raise to pay for it and how, then start figuring out how much you have to raise, and why — instill great confidence in the quality of the final result we can expect?

  2. comment number 2 by: rich

    I agree with the “Dont’s”. Also :

    1. Eliminate the cap on social security tax
    2. double the personal exemption
    3. Add a new income tax bracket 45 (or 50) % for single incomes > 500k, married 600k
    4. Fix alternative income tax by setting reasonable limits and then indexing

    Obama should unveil a tax plan on prime time TV.
    With Powerpoint (or similar) graphics (a la Perot) that make the benefits VERY obvious to the sheeple. 98% will benefit. Visual aids are essential.
    Approx 10 bullet points. (the “don’ts and a few others).

    Frankly he should do the same thing with Single Payer. Explain that Doctors & Hospitals are still private. Great for Small Business. Helps save legacy businesses of the sort that keep failing (Steel, Airlines, Autos) by making them more competitive.

  3. comment number 3 by: 4xmom, non-economist variety

    First time visit to your site–intriguing, but is it frequently mostly by socialists? Why do people trust the government to run ANYTHING, especially something as important as health care? Is there a reason we can’t slow down and debate free-market solutions? No one wants to touch tort reform, which would contribute greatly to allowing MDs to practice common-sense medicine and reduce crazy-huge rewards to lawyers and their opportunistic clients. Socialism will reduce innovation/research and will create a system in which only the influential and well-connected will get top-notch care/tests/surgeries. I am frustrated by the short-sighted nature of this debate; does no one look at history or the dark side of other nations’ health care systems? The question of ‘how to pay for it’ is way down the list or reasons why this is such a bad idea.

  4. comment number 4 by: Jason Seligman

    I want to resond to the 4xMom, and also to the topic, and finally to my thinking, the kernel behind Doug Elemendoff and company’s thinking. If this makes me “socialist,” I promise it is only after a glaring and chronic market failure.

    Let’s start with a saying (sayings often come from economic circumstances that grab us and this one is particularly special), have you ever heard the saying, “Your money or your life?” Have you ever heard it from a doctor?

    Most would likely answer “yes,” and “no” respectively, that is my experience.

    You see while the Obama administration has a stat out right now that docs spend 4 hours a week on administrative activities, they do not really negotiate costs with patients. This is puzzling at first, until you realize that doctors focus on the care aspects of a very complicated job. In fact, in informal polls of doctors I’ve had in the past few years in Georgia and Now in Ohio, I can honestly tell you that doctors I’ve talked to do not know how much they charge for their services.

    Now, in captialism, arguably one of the hardest thing for a business man to do is to pick a price, doctors by and large do not pick prices, becasue they are not (by and large) businessmen.

    They do have prices, it is just that the prices depend on whther you are with insurer group x, y, or other. Okay, so how many groups are we talking about? Two employess from the same firm can find differnt prices for some of the same services depending on which plan they picked upon employment, an “open enrollment period” or after “a meaningful life event”–usually marriage, divorce or the birth of a child. Multiply the average number of plans per employer times the numbeer of employers in your area and you will appreciate that the number of different prices for the same basic services can be large. Multiply that by the number of services, and you can see why your doctor does not know what they charge you for a visit, a flu shot, or most other things–they can’t.

    The reason the doctor does not know what he or she charges is becasue if they bothered to focus on that, the 4 hour figure the Obam administration is quoting for administrative tasks would skyrocket. So doctors depend on a staff that pushes through claims. Insurers, patients and doctors alike depend on these folks to bill and controll access to treatment based on a bewildering number of different clauses and conditions. As patients many of us take them bills to better understand what they “really mean.”

    It is no wonder healtrh care is the numner one avenue to bankrupcy– whether or not they knew it many have faced the decision of Money or Life.

    Okay lets talk truth, three things “market” based reformers must admit:

    first acute healthcare is non-discretionary, so your ability to negotiate or “shop” is limited.

    Second under most insurance programs chroinc care is limited by lifetime award caps, and preexisting conditions clauses.

    Third neither your doctor nor your doctors resident expert on payment know anything about your status vis-a-vis the second, so they they can submit bills that bounce and land on your desk long after the care is given.

    And well shucks but that 1-3 is hard to plan for.

    Now, I ask, patiently and kindly, what can one say about the free market in the current system? Not much good I suppose, but I am willing to be enlightened.

    Most of what the administration and congress are handing us is in fact a “market based” soulution (hard to recognize as such becasue of the market–ironic?), in which the Nation simly picks up the tab for those who fall short, charge what you want for once the patients pockets are empty you can hit up their tax paying neighbors (and no-so neighbors)!

    According to the latest this may imporve conditions for up to 37 million uninsured, but fails to bend back the cost curve — no kidding… really?

    Here is why, you still have all of that difference in coverage and pricing flying around limited only by the creativity of insurers lawyers to come up with new variations on deductables and co-pays, preventitive care maxes, lifetime care maxes, out of state care maxes, payor-of-last-resort clauses, etc, etc, for different plan-events. Insurers are business men and excuses have become a profitable growth industry in the realm of medical care.

    So yeah, perhaps CBO could score this or that more holistically but by and large the administration and congress are getting exactly what they are asking for from CBO–the truth. Are you kidding, agreeing to tax the rich to pick up 37 million people is not really a sustainable long term reform. It is not a game changer, it does not keep us from being the nation with twice the expeditures of other nations and no better outcomes. There is some redistribution to be sure, but the gross ineficiency from the taxes compete with the gains, and we still have a Balkinized market befreft with JobLock, and a host of other miserable productivity robbing conditions.

    Three words, it took me 40 years to believe in them. Single Payer Healthcare. One pool. Well designed regulation. Now that is a market that mets the economies of scale for this problem. This is one GM had right back in 2004, it would be good for them and the rest of us in the US as well.

    Tort reform should start at the source, if people do not understand their current coverage, if they will allow themselves to be treated poorly by a plan administrator after paying 6-700 dollars a month for becasue they are too ignorant or fearful then the market is broken–let’s start there.