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It’s a Good Plan. In 10 Years. Maybe.

March 19th, 2010 . by economistmom

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The good ideas are all still there in some size or shape, but it’s fascinating how some of the most promising features in the health reform bill have been diluted and/or postponed so much that they barely show up in the official ten-year window of the official CBO cost estimate.

Take the excise tax on high-end employer-provided health insurance plans, which is already a bit of a second-best solution compared with directly reducing or eliminating the exclusion of employer-provided health insurance under the personal (individual) income tax (because were it accomplished via a tax on households, it would be easier to adjust for households’ ability to pay).  In order to get the labor unions on board, the tax now doesn’t take effect until 2018.  Partly to make up for that newly lost time with the excise tax, and partly to cover the additional cost of now-higher subsidies offered through the new insurance exchanges, the excise tax was modified with less generous indexing starting in 2020–indexing the threshold to general inflation rather than inflation plus one percentage point.  That change in indexing helps the trajectory of revenue offsets in the second ten years, but of course, 2020 is beyond the first ten years and so outside the official ten-year budget window–so the change shows up in the official cost estimate as shrinking the positive contribution of the excise tax (the best part of the bill, in my opinion) to the overall package.

The revenue estimate shows that the excise tax now only raises $32.0 billion in the ten-year budget window, because it barely gets started within the ten-year window.  In contrast, $210 billion–more than half of the total $409 billion in revenue raised–comes from the increased Medicare tax on high-income households, which would start in 2013.

However fair one thinks it is to increase taxes on the rich, this Medicare tax is not a tax on health spending (it’s another income-based tax), and so it’s not a tax that can keep up with rising health costs as a reliable offset for expanded health coverage.

Ironically, the (fiscally-wise) excise tax now scores as providing less than half the amount of deficit reduction within the ten-year budget window as the (somewhat-budget-gimmicky) Community Living Assistance Services Support (CLASS) program, which is shown as raising $70.2 billion, even though we know that over the longer-run CLASS is a new entitlement which is expected to be a net drain on the federal budget.

The Independent Payment Advisory Board (”IPAB” or what’s commonly known as “the commission”) is still in the bill, too, but remember those recommendations wouldn’t be made until the second half of the decade, and hospitals are exempt until 2020.

So in the overall assessment the health reform/reconciliation bill isn’t full of gimmickry (it’s only tinged with it), does still contain some good health policy in it, was scored fairly and as accurately as possible by CBO.  And it does officially show a net $138 billion in deficit reduction in the ten-year budget window.  If all goes as planned (as written in this bill), in ten years there will be a decently-large excise tax on employer-provided health insurance in place, and the IPAB (commission) will be recommending wise ways to reduce Medicare and overall health costs.  In ten years we will have learned something from the demonstration projects about how to save money, and we’ll implement those ideas more broadly throughout our entire health care system.  And thus we will start “bending the health cost curve.”

That is, unless we don’t. Unless we get to 2018 when the excise tax is supposed to kick in and say “wait, we don’t want to pay that tax.”  And unless we get to 2020 and say, “no, hospitals aren’t going to accept those recommended payment reductions.”…

So it might be a good plan if you look at where the bill says we should be in 2020, if we actually follow through when we get there.

And by the way, even if we follow through, we still won’t have solved the problem of unsustainable health costs and federal entitlement benefits and not enough ways to pay for them.  That’s my boss Bob Bixby’s point in the NBC Nightly News piece above.  Even $138 billion of deficit reduction over the first ten years or even $1 trillion over the second ten years doesn’t amount to much against a policy-extended baseline that shows $15 trillion in deficits just over the first ten years.

Earlier today (Thursday) the President called this “the most significant effort to reduce deficits since the Balanced Budget Act in the 1990s.”  But let’s face it: this was not a “deficit reduction effort”–as if deficit reduction were its primary goal.  It was an effort to expand health insurance coverage that happens to reduce the deficit.  If we follow through on those good things we’re supposed to do much later, after President Obama is no longer President and after many members of Congress will be gone as well, that is.

6 Responses to “It’s a Good Plan. In 10 Years. Maybe.”

  1. comment number 1 by: Brooks

    From the Dictionary of Political B.S. (and I don’t mean Bachelor of Science)

    chutz·pa [khoo t-spuh]
    –noun Slang

    Part 1: Presenting a plan that (1) adds a hugely costly, soon-to-be-entrenched new entitlement to our already unsustainable long-term fiscal imbalance, (2) includes the politically easiest, least painful budgetary sacrifices as “offsets” even though (A) those sacrifices are unlikely to actually be made for the most part and (B) even insofar as they actually are implemented, they are already necessary and inevitable as the easiest parts of any solution to the fiscal imbalance, and using them up to “fund” a new entitlement rather than for deficit-reduction will necessitate politically more difficult, more painful, and later-arriving budgetary sacrifices.

    Part 2: Constantly, emphatically presenting an argument in support of this plan that combines (1)“Rock Soup” (packaging together – as if one were somehow dependent on the other — the costly new entitlement with relatively minor and apparently mostly independent pilot programs and other measures that, optimistically speaking, may lead to some reforms that may lead to other reforms that one day could reduce costs) and (2) the “South Park Underpants Gnomes’ business model” as follows:
    Premise #1: The current course of projected federal spending on healthcare is unsustainable
    Premise #2: ? [this is where one would expect, but not find, some explanation of how adding this entitlement would reduce total projected federal spending on healthcare]
    Conclusion: We need this plan!

    Part 3: Constantly referring to “bending the cost curve” without ever presenting an analysis that shows lower spending (the height of the curve; where on the Y axis of spending at any given point) at some point and showing lower spending in NPV terms. (Oh, and including among those elements that will supposedly “bend the cost curve” a broad expansion of preventive care that will supposedly reduce healthcare spending, even though the experts say it won’t, and presenting a moronic, intelligence-insulting argument to explain why this conclusion of savings is just common sense — “Hey folks, it’s obviously less expensive to treat a problem earlier than later, right?”).

    Part 4: Proclaiming your plan “the most significant effort to reduce deficits since the Balanced Budget Act in the 1990s.” or This bill is the biggest deficit reduction bill that any member of Congress is ever going to have the opportunity to vote on.

  2. comment number 2 by: Brooks

    As I’ve said before, although I have mixed feelings about it (since I do want to see some coverage subsidized for a significant number of the currently uninsured), I come down hoping (very uncomfortably) that this legislation fails so that consideration of any such large entitlement will (hopefully) occur in the more rational context of a plan for our long-term fiscal imbalance, or at least in the context of greater awareness and cognizance of that challenge and the difficult trade-offs we face. If creating a new, expensive entitlement is considered worth doing, it should be considered worth doing within that rational framework, and if it wouldn’t be considered worth doing in that rational framework, it’s not worth doing.

    Hopefully the president’s fiscal commission, outside private fiscal commissions, and the work of groups like Concord, CRFB and the Peterson Foundation will help shift emphasis to the long-term fiscal imbalance issue and will help provide this rational framework in which tough choices are faced.

  3. comment number 3 by: AMTbuff

    Expanding government obligations to pay for health care can only make a dire fiscal situation worse. It’s odd for an employee of Concord not to see fiscal consequences as her top priority over policy preferences, even those as deeply and widely held as the desire for universal health care at near-zero marginal cost.

    Second, third party payment is the root cause of health care spending explosion. The role of insurance, private or governmental, needs to be reduced rather than increased. This will be distasteful, but so is rationing by a National Health Service, and that is where the road leads once you drive private insurers out of business with regulations.

    Third, besides being political suicide tactically (in the short run), this plan is strategically wrong. The government already faces an inevitable loss of faith in the social safety net when Social Security and Medicare promises are broken. Adding more promises to the list merely increases the disillusionment with with the progressive agenda that voters will experience when the bond market refuses to lend more money to the government.

    We are on the Titanic, sailing due north into the ice with insufficient lifeboats, and the Democrats want to take on more passengers to join in the fun. I really don’t think that’s a favor to anyone, least of all the Democrat’s political fortunes.

    Following the collapse of the social safety net, I foresee a sharp turn to the right in the political outlook of the voters. After this, it will be decades before the public will again trust any government promises of long-term benefits.

    It’s ironic that the fiscal train wreck will head off this health care policy train wreck.

  4. comment number 4 by: SteveinCH

    More good news.

    http://keithhennessey.com/2010/03/19/medicaid-cliff/

  5. comment number 5 by: Brooks

    I think we need a new term more precise than “straw man” to label the pervasive mischaracterization by those seeking the new healthcare entitlement (as well as seeking greater stimulus and wishing to portray the Obama Administration and Congressional Democrats as fiscally responsible) of those of us concerned about the medium and long-term fiscal imbalance as opposed to large deficits today (and “hysterically” so)*. Just one example I see today at http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/03/21/INVQ1CF78N.DTL

    Therefore, I hereby coin the term “straw hawk”, as in “straw man of a deficit hawk”.

    * Perhaps the best example of this nonsense was Stan Collender’s post at http://www.capitalgainsandgames.com/blog/stan-collender/1332/breaking-deficit-hawks-very-personal-story which was promptly and correctly smacked down by CRFB at http://crfb.org/blogs/thanks-stan as well as by EconomistMom (Diane).

  6. comment number 6 by: Jim Glass

    Yet more, from Holtz-Eakin.