Congressional Budget Office
Director’s Blog

In this year’s discussion of health reform, many people have put forth the goals of “bending the curve” of the federal budgetary commitment to health care, the federal budget deficit, or overall national health expenditures. Accordingly, Members of Congress are asking CBO to analyze the extent to which different health reform proposals meet these goals. Last month we wrote to Senator Conrad and Senator Gregg:  “CBO does not provide formal cost estimates beyond the 10-year budget window because the uncertainties are simply too great. However, in evaluating proposals to reform health care, the agency will endeavor to offer a qualitative indication of whether they would be more likely to increase or decrease the budget deficit over the long term.”  Let me explain our methodology for doing this and the limits of that methodology, beginning with the federal budget and then concluding with national health spending.

The health reform proposals being discussed this year generally include many specific changes to tax and spending policies. Although we and the staff of the Joint Committee on Taxation base our 10-year estimates of the budgetary effects of reform proposals on detailed examination of these changes, we cannot realistically conduct longer-term analysis at that level of detail. Therefore, we group the changes in a reform proposal into several broad categories and evaluate the rate at which the budgetary impact of each of those broad categories is likely to increase over time. Some elements of reform proposals, such as subsidies for people who purchase insurance through exchanges, tend to grow roughly in line with health care costs, although the allocation of those growing costs between enrollees and the government can push the growth rate somewhat higher or lower. Other elements of some proposals, like tax increases unrelated to health care, would generally grow along with increases in taxable incomes, although we aim to take into account specific aspects of legislation that can raise or lower that rate. Still other parts of proposals, such as changes in Medicare and Medicaid payment rates or practices, can have effects that increase at a range of rates at different points in time depending on the nature and extent of the changes. For all of these parts of reform proposals, we evaluate the impact of the legislation as written and do not assess the likelihood that policies will be changed later through subsequent legislation. 

After we have developed an estimate of the growth rate of the costs or savings in each broad category, we assess how those costs or savings would evolve from the end of the 10-year budget window through the following decade. The result is a very approximate sense of whether a piece of legislation is increasing or decreasing the federal budgetary commitment to health care or the federal budget deficit during the second decade and at the end of that decade.

We are very reluctant to extend these extrapolations further into the future, because the uncertainties surrounding them magnify considerably. Although we publish projections of the federal budget 75 years ahead, those projections are inherently uncertain and are designed to identify broad trends rather than to reflect specific pieces of legislation. Trying to project several decades ahead not just the evolution of the health care system under current law but also the effects on that system of a particular comprehensive and interacting set of reforms is extremely difficult. One particular challenge is that our long-term projections under current law incorporate changes that we expect would be made by state governments and the private sector in response to the growing burden of health care spending (responses which could occur under current federal law). Because that burden will mount over time, the responses will likely increase in intensity as well; as a result, determining whether reforms proposed in current legislation might ultimately have occurred through the actions of these other agents becomes increasingly complicated as the time horizon lengthens. Indeed, our Panel of Health Advisers has encouraged us to focus on estimating the effects of legislation during the next couple of decades and not to attempt to estimate effects further out.

So, how do we evaluate whether certain health reform proposals “bend the curve” in terms of the federal budgetary commitment to health care or the federal budget deficit? And what does “bend the curve” mean? If the projected budget deficit is lower 20 years from now under a reform proposal than it would be without any policy changes, then that curve is clearly being bent downward, on average, during the next twenty years; if the projected deficit is higher, then that curve is being bent upward. Would those downward or upward trajectories continue indefinitely?  That sort of extrapolation might seem natural, but we simply cannot tell whether it is appropriate. Although we think we can provide a rough indication of the level of federal health spending or the budget deficit 20 years ahead, we are not confident that we have an analytic basis for projecting their growth rates at that point, much less for evaluating whether those growth rates will continue in future years. Therefore, we are more confident talking about whether proposals would “lower” or “raise” the curve of the federal budget deficit or budgetary commitment to health care 10 to 20 years from now than we are discussing the shape of the curve in that time period or the level or slope of the curve beyond that period.

CBO does not analyze national health expenditures (NHE) as closely as we analyze the federal budget (although we are working to enhance our capabilities in this area). Accordingly, we cannot provide precise quantitative estimates of the effect of health reform proposals on NHE even within the first 10 years. However, we will try to offer a qualitative indication of whether proposals would be more likely to raise or lower NHE during the next couple of decades.  Expanding insurance coverage would raise NHE, because insured people generally receive more medical care than do uninsured people (see CBO’s Key Issues in Analyzing Major Health Insurance Proposals, December 2008, pages 71-76). Yet, the increase in NHE would be much smaller than the increase in federal spending because some of that additional spending represents a shift in costs from other payers to the government (for example, new subsidies for people who would have purchased insurance anyway). At the same time, changes in Medicare or Medicaid that reduce federal spending and do not merely shift health costs to other payers would generally reduce NHE. For specific pieces of legislation, we will try our best to provide a very approximate sense of balance between these two opposing forces.

In sum, as health reform legislation is considered by the Congress, CBO will endeavor to offer a qualitative indication of whether certain legislation would be more likely to increase or decrease the federal budgetary commitment to health care, the federal budget deficit, and national health expenditures in the decade beyond the 10-year budget window. Whether these effects would persist in more-distant decades is not clear, and that uncertainty is an inherent feature of policy changes that could have substantial effects on such a large and growing share of the U.S. economy.

In the past few days, I’ve received many calls and e-mail messages from people around the country commenting on my participation in a meeting this past Monday at the White House.  Most of these people expressed their concern about CBO’s ability to carry out its responsibilities with its traditional independence and nonpartisanship.  I appreciate the interest in CBO’s work, so let me try to allay those fears.

The President asked me, and other experts in the room, for our insights into possible ways to reduce the nation’s health care spending.  The very capable staff at CBO has thought a lot about this subject, and I shared those thoughts with the President.  Although the audience was unique, my comments were no different from what we have said publicly on numerous other occasions.  The CBO staff and I have offered our thoughts on this subject to the Congress and the public in published reports and letters, and we have discussed them in many meetings with Members of Congress and their staffs of both political parties.  Across the range of topics we study, we deliberately spend a lot of time explaining our thinking to policymakers, because we believe that such openness is a responsibility of our agency and can help policymakers to reach better-informed policy decisions.  But we never adjust our analysis or conclusions to please our audience (as the reaction to various CBO reports amply demonstrates).

CBO will continue to do what it has always done—provide independent, nonpartisan analysis for the Congress, communicate that information as clearly as possible, and provide as much transparency as possible about our methodology and assumptions.  A visit to the White House won’t change that a bit!

This morning President Obama said that he had met with the Congressional Budget Office regarding cost savings in health reform legislation.  A number of people have asked me what happened, so here’s the story:

I was invited to the White House to meet with the President, his key budget and health advisers, and some outside experts.  The President asked me and the outside experts for our views about achieving cost savings in health reform.  I presented CBO’s assessment of the challenges of reducing federal health outlays and improving the long-term budget outlook while simultaneously expanding health insurance coverage–just as we had explained these challenges in a letter to Senator Conrad and Senator Gregg last month.  I also described CBO’s view of the effects of the health legislation we have seen so far, as I did last Thursday in a hearing at the Senate Budget Committee and a mark-up at the House Ways and Means Committee.  In addition, I discussed various policy options that could produce budgetary savings in the long run, drawing on CBO’s Budget Options for Health Care released in December, our letter to Senators Conrad and Gregg last month, and my comments last Thursday.  Other participants in the meeting expressed their own views on these various topics.

People have asked whether it was exciting to meet the President and be in the Oval Office:  Yes, and my kids will be jealous when they get back from summer camp and hear about it.  Of course, the setting of the conversation and the nature of the participants do not affect CBO’s analysis of health reform legislation.  We will continue to work with Members of Congress and their staffs, on both sides of the aisle, to provide cost estimates and other information as health reform legislation is considered.

Yesterday CBO released a preliminary analysis, conducted with the staff of the Joint Committee on Taxation (JCT), of H.R. 3200, the America’s Affordable Health Choices Act of 2009, as introduced by several House committees on July 14. Earlier this week, CBO released a preliminary report on the health insurance coverage provisions of the bill; this latest report added analysis of the other provisions.

According to CBO’s and JCT’s assessment, enacting H.R. 3200 would result in a net increase in the federal budget deficit of $239 billion over the 2010-2019 period. That estimate reflects a projected 10-year cost of the bill’s insurance coverage provisions of $1,042 billion, partly offset by net spending changes that CBO estimates would save $219 billion over the same period, and by revenue provisions that JCT estimates would increase federal revenues by about $583 billion over those 10 years.

By the end of the 10-year period, in 2019, the coverage provisions would add $202 billion to the federal deficit, CBO and JCT estimate. That increase would be partially offset by net cost savings of $50 billion and additional revenues of $86 billion, resulting in a net increase in the deficit of an estimated $65 billion.

The figures released yesterday do not represent a complete cost estimate for the legislation. In particular, the estimated impact of the provisions related to health insurance coverage is based on specifications provided by the committee staff, rather than on a detailed analysis of the legislative language. (The estimates for other spending provisions reflect the specific legislative language. JCT has separately published its estimates of the effects of revenue provisions contained in H.R. 3200.) In addition, the figures do not include certain costs that the government would incur to administer the proposed changes and the impact of the bill’s provisions on other federal programs, and they do not reflect any modifications or amendments made after the bill was introduced. Nevertheless, this analysis reflects the major net budgetary effects of H.R. 3200.

CBO released a study today that examines alternatives to current Navy and Coast Guard long-term procurement strategies for their small surface ships known as small combatants. As articulated in their respective long-term shipbuilding plans, the Navy and the Coast Guard intend to purchase a total of 83 small combatants. CBO estimates these purchases would cost more than $47 billion over the next 20 years.

The Navy is building two versions of its new combat ship designed for operations near coastlines (the littoral zone). Also, the Coast Guard is building replacements for its existing classes of high-endurance cutters and medium-endurance cutters. As the designation “small combatant” implies, the Navy’s two versions of littoral combat ships (LCSs) and the Coast Guard’s national security cutters (NSCs) and offshore patrol cutters (OPCs) are designed to be significantly shorter in length, lighter in weight, and shallower in draft than most Navy surface warships (carriers, amphibious ships, cruisers, and destroyers).

Although all four types of ship are about the same size, they are designed to perform different missions. In general, The Navy’s LCSs are designed to have less range than Coast Guard cutters but to operate at much greater speeds and close to shore during wartime as part of a naval battle network. The Coast Guard ships are meant to operate independently at sea for long periods of time and at some distance from the shore and not to engage in major combat operations.

In the early stages of implementing the ship programs, however, the Navy and the Coast Guard have encountered various challenges—including cost overruns and construction problems. As a result of those delays and cost overruns, some members of the Congress and independent analysts have questioned whether the Navy and the Coast Guard need to buy four different types of small combatant and whether—in spite of the services’ well-documented reservations about using similar hull designs—the same type of hull could be employed for certain missions.

To explore that possibility, CBO examined three alternatives to the Navy’s and the Coast Guard’s current plans for these four ships.

• Option 1 explores the feasibility of having the Coast Guard buy a variant of the Navy’s LCS—to use as its offshore patrol cutter.
• Option 2 examines the effects of reducing the number of LCSs the Navy would buy and substituting instead a naval version of the Coast Guard’s national security cutter.
• Option 3 examines the advantages and disadvantages of having the Coast Guard buy more national security cutters rather than incur the costs of designing and building a new ship to perform the missions of an offshore patrol cutter.

According to CBO’s estimates, all three alternatives and the services’ plans would have similar costs, regardless of whether they are calculated in terms of acquisition costs or total life-cycle costs. CBO’s analysis also indicates that the three alternative plans would not necessarily be more cost-effective or provide more capability than the services’ existing plans. Specifically, even if the options addressed individual problems that the Navy and Coast Guard might confront with their small combatants, the options would also create new challenges.

Eric J. Labs of CBO’s National Security Division wrote this report. Eric has been at CBO for 14 years and holds a Ph.D. from MIT. With three children, two dogs, and two cats, Eric’s hobby is sleeping.

Today I had the opportunity to testify before the Senate Budget Committee about CBO’s most recent analysis of the long-term budget outlook.

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy. The following chart shows our projection of federal debt relative to GDP under the two scenarios we modeled.

Federal Debt Held by the Public Under CBO’s Long-Term Budget Scenarios (Percentage of GDP)

Keeping deficits and debt from reaching these levels would require increasing revenues significantly as a share of GDP, decreasing projected spending sharply, or some combination of the two.

Measured relative to GDP, almost all of the projected growth in federal spending other than interest payments on the debt stems from the three largest entitlement programs—Medicare, Medicaid, and Social Security. For decades, spending on Medicare and Medicaid has been growing faster than the economy. CBO projects that if current laws do not change, federal spending on Medicare and Medicaid combined will grow from roughly 5 percent of GDP today to almost 10 percent by 2035. By 2080, the government would be spending almost as much, as a share of the economy, on just its two major health care programs as it has spent on all of its programs and services in recent years.

In CBO’s estimates, the increase in spending for Medicare and Medicaid will account for 80 percent of spending increases for the three entitlement programs between now and 2035 and 90 percent of spending growth between now and 2080. Thus, reducing overall government spending relative to what would occur under current fiscal policy would require fundamental changes in the trajectory of federal health spending. Slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for fiscal policy.

Under current law, spending on Social Security is also projected to rise over time as a share of GDP, but much less sharply. CBO projects that Social Security spending will increase from less than 5 percent of GDP today to about 6 percent in 2035 and then roughly stabilize at that level. Meanwhile, as depicted below, government spending on all activities other than Medicare, Medicaid, Social Security, and interest on federal debt—a broad category that includes national defense and a wide variety of domestic programs—is projected to decline or stay roughly stable as a share of GDP in future decades.

Spending Other Than That for Medicare, Medicaid, Social Security, and Net Interest, 1962 to 2080 (Percentage of GDP)

Federal spending on Medicare, Medicaid, and Social Security will grow relative to the economy both because health care spending per beneficiary is projected to increase and because the population is aging. As shown in the figure below, between now and 2035, aging is projected to make the larger contribution to the growth of spending for those three programs as a share of GDP. After 2035, continued increases in health care spending per beneficiary are projected to dominate the growth in spending for the three programs.

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (Percentage of GDP)

The current recession and policy responses have little effect on long-term projections of noninterest spending and revenues. But CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt. Federal interest payments already amount to more than 1 percent of GDP; unless current law changes, that share would rise to 2.5 percent by 2020.

Yesterday CBO released a brief that analyzes intergovernmental issues in the context of The Unfunded Mandates Reform Act of 1995 (UMRA). UMRA focuses attention on federal requirements imposed on state, local, and tribal governments and the private sector that are not conditions for receiving federal aid. The law specifies which types of requirements should or should not be considered mandates, establishes procedures that govern Congressional consideration of such mandates, and directs CBO to estimate the costs of mandates. UMRA’s goal is to promote informed decisionmaking by the Congress as it considers questions about the appropriateness of federal mandates and about the desirability of providing financial assistance to cover the costs of those mandates. Because UMRA applies additional procedural hurdles for legislation that imposes requirements on public entities, this brief focuses specifically on intergovernmental mandates.

There are often questions about which bills are covered by UMRA and about how the law defines an intergovernmental mandate. UMRA’s application is limited in three ways:

• It does not apply to the broad policy areas of national security or constitutional rights (including voting rights) or to some segments of the Social Security program.
• In most cases, it does not consider new conditions related to federal grant programs to be mandates.
• It focuses on mandates with costs above a threshold—originally set at $50 million, and adjusted annually for inflation so it is now $69 million.

Most legislation that the Congress has considered since 1996 has contained no intergovernmental mandates as UMRA defines them. Only 13 percent of the more than 7,600 bills and other legislative proposals CBO reviewed between 1996 and 2008 (most as they were reported out of committee) contained such mandates. Less than 9 percent of those mandates would have imposed costs above UMRA’s threshold. Only eleven bills with estimated costs over the threshold have become law since 1996. Those include increases to the minimum wage, preemptions of state taxing authority, requirements on commuter railroads and transit authorities, reductions in funding for some entitlement programs, and new standards for issuing driver’s licenses.

This brief was written by Leo Lex in the Budget Analysis Division. In his spare time Leo enjoys photography, gardening, and recently, glassblowing (but not in the heat of summer).

CBO and the staff of the Joint Committee on Taxation (JCT) worked together to produce a preliminary analysis of the major provisions related to health insurance coverage that are contained in draft legislation called the America’s Affordable Health Choices Act, which was released today by several House committees. Among other things, those provisions would establish a mandate for most legal residents to obtain insurance, significantly expand eligibility for Medicaid, and set up insurance “exchanges” through which certain individuals and families could receive federal subsidies to substantially reduce the cost of purchasing that coverage. The analysis issued today does not take into account other parts of the proposal that would raise taxes or reduce other spending (particularly in Medicare) in an effort to offset the federal costs of the coverage provisions.

The tables included in the report summarize our preliminary assessment of the coverage provisions’ budgetary effects and their likely impact on rates and sources of insurance coverage for the nonelderly population. According to that assessment, enacting those provisions by themselves would result in a net increase in federal budget deficits of $1,042 billion over the 2010–2019 period. By 2019, CBO and the JCT staff estimate, the number of nonelderly people who are uninsured would be reduced by about 37 million, leaving about 17 million nonelderly residents uninsured (nearly half of whom would be unauthorized immigrants).

The figures released today do not represent a formal or complete cost estimate for the draft legislation. First, as noted above, these figures do not address the entire bill. Second, the analysis was based on specifications that were provided by staff of the three committees and that differ in important ways from the “discussion draft” version of legislative language that was released in June. The specifications that we analyzed are supposed to be reflected in the draft language released by the committees today, but we have not yet been able to analyze that language to determine whether it conforms to those specifications. Third, our analysis does not incorporate the administrative costs to the federal government of implementing the specified policies nor all of the proposal’s likely effects on spending for other federal programs; we expect to include those effects in the near future, and we do not expect that they will have a sizable impact on our estimates. Finally, the budgetary information reflects many of the major cash flows that would affect the federal budget as a result of implementing the specified policies, and it provides our preliminary assessment of the proposal’s net effects on the federal budget deficit. Some additional cash flows would appear in the budget—either as outlays and offsetting receipts or outlays and revenues—but would net to zero and thus would not affect the deficit.

CBO will continue to work on an ongoing basis with the House and Senate committees involved in health care reform to provide estimates and analyses as legislation is considered.

Today CBO delivered a letter to Representative Paul Ryan that responded to his request for an analysis of H.R. 2920, the Statutory Pay-As-You-Go Act of 2009. H.R. 2920 is virtually identical to the proposal recently advanced by the Administration. It would establish a new statutory form of pay-as-you-go (PAYGO) budget enforcement—which is generally intended to ensure that laws affecting direct (mandatory) spending or revenues are, in total, budget neutral.

That process, although similar to the statutory PAYGO system that was in place from 1990 through 2002, would differ from the former system in several significant ways. CBO’s analysis reviews the statutory PAYGO system that was enacted in 1990 and that remained in place until fiscal year 2002, and the current pay-as-you-go rules adopted by the House of Representatives and the Senate. It then presents an overview of the key features of H.R. 2920 and assesses the possible effects of the legislation on future budget deficits and control of the budget process.

In CBO’s view, the PAYGO process specified in H.R. 2920 includes some features—specifically, the statutory sequestration mechanism—that could enhance overall budget enforcement. However, the proposed process has other features—a proposed temporary rule to score certain changes in spending and revenues relative to “current policy” rather than current law; a modification of the baseline’s treatment of some expiring mandatory programs; and new procedures for scoring legislation that would convert programs’ spending from discretionary to mandatory—that could lead to greater spending or reduced revenues in the coming decade than would occur under the existing House and Senate rules. In addition, some features of the bill’s proposed sequestration mechanism would limit its usefulness in deterring increases in spending.

H.R. 2920 also would shift some control over the budget process from the Congress to the executive branch in ways that could effectively require lawmakers to vote on legislation without a clear indication of the potential impact of their decisions on the triggering of a future sequestration.

Today CBO released a brief that analyzes the effects of changes in the health insurance system on the U.S. labor market. In 2009, about three out of every five nonelderly American are expected to have health insurance that is provided through an employer or other job-related arrangement, such as a plan offered through a labor union. Changes to the health insurance system could affect labor markets by changing the cost of insurance offered through the workplace and by providing new options for obtaining coverage outside the workplace.

In the current system, employment-based plans are popular largely due to three reasons:

• They are subsidized through the tax code: Nearly all payments for employment-based insurance are excluded from taxable compensation and thus are not subject to income and payroll taxes.
• Employers offering coverage usually pay a large share of the premium – partly to encourage broad participation among their employees, so as to limit the potential for “adverse selection.”
• Larger group purchasers can spread administrative costs over a larger number of people, using these economies of scale to reduce costs imbedded in premiums.

Although employers directly pay most of the costs of their workers’ health insurance, the available evidence indicates that active workers—as a group—ultimately bear those costs.

Congress is currently considering proposals that would expand health insurance coverage. Those proposals would affect the labor market because of the close linkage between health insurance and employment. For example:

• Requiring employers to offer health insurance—or pay a fee if they do not—is likely to reduce employment, although the effect would probably be small. Those who would most likely be affected are currently paid close to or at the minimum wage. They would be more vulnerable to job loss because their wages could not be lowered sufficiently to absorb the cost of health insurance (if their firm decides to offer) or the fee (if their firm does not) without bumping into the minimum wage.
• Proposals that imposed surcharges on employers whose workers received subsidies directly from the government could have a larger impact on employment. (Such provisions are sometimes known as free-rider surcharges.) Many of the affected workers would be paid low wages that could not easily adjust to absorb the full cost.
• Providing new subsidies for health insurance that decline in value as a person’s income rises could discourage some people from working more hours.
• Subsidies could be targeted to small businesses, but employers or their workers might respond by taking action to qualify for the subsidies. For example, some firms might reorganize into smaller subsidiaries, and workers might move to smaller firms to take advantage of the new subsidies.
• Increasing the availability of health insurance that is not related to employment could lead more people to retire before age 65 or choose not to work at younger ages. It might also encourage other workers to take jobs that better match their skills—because they would not have to stay in less desirable jobs solely to maintain their health insurance.

The overall impact on labor markets, however, is difficult to predict. Although economic theory and experience provide some guidance as to the effect of specific provisions, large-scale changes to the health insurance system could have more extensive repercussions than had previously been observed and also may contain numerous pieces that would interact—affecting labor markets in significant but potentially offsetting ways.