Congressional Budget Office
Director’s Blog

We have received several questions about CBO’s analysis of the draft health care reform legislation released by the Committee on Health, Education, Labor, and Pensions (HELP)—in particular, about the legislation’s effects on employer-sponsored coverage. Looking at one year—2017—as an example, CBO estimates that, under the HELP proposal, about 147 million people would have employer-sponsored insurance in that year, 15 million fewer than would have such insurance under current law. What changes would produce that result? 

·        Some individuals would have insurance coverage available from their employer, but would also have an option to obtain subsidized insurance from an exchange.  That opportunity would exist for people whose incomes were sufficiently low—and the cost of employer-sponsored insurance sufficiently high—so that the insurance would be categorized as “unaffordable” under rules that would be set by the Secretary of Health and Human Services.  (Although the draft legislation does not specify a standard for affordability, CBO and the staff of the Joint Committee on Taxation assumed that coverage would be deemed unaffordable if workers had to pay a larger share of their income for their employer’s plan than they would have to pay in the exchanges.) By CBO’s estimate, about 10 million people with this choice would opt to obtain insurance from exchanges rather than from their employer.

·       The availability of subsidized coverage in the new insurance exchanges would be an attractive option for many lower-income workers. As a result, some employers would decide not to offer their employees health insurance coverage, opting instead to provide other forms of compensation.  CBO estimates that about 10 million individuals who would be covered through an employer’s plan under current law would not have access to that coverage under the draft legislation because some employers would choose not to offer it. 

·       Finally, approximately 5 million more individuals would obtain employer-based coverage under the proposal (compared with the number under current law) either because they worked for a firm that newly began to offer coverage as a result of the legislation or because they decided to enroll in an insurance plan that the employer would offer under current law but which they would not select in the absence of the legislation. (Some workers would value an employer’s offer of insurance and be more willing to sign up for it because of the legislation’s requirement for individuals to have insurance; some employers would begin to offer insurance to accommodate employees’ desires and to take advantage of the subsidies that would be provided for some small businesses.)

Today CBO delivered letters to Senators Kent Conrad and Judd Gregg that respond to their request for information about the features of health care reform proposals that would affect federal spending on health care over the long term. In the absence of significant changes in policy, rising costs for health care will cause federal spending to grow much faster than the economy, putting the federal budget on an unsustainable path. To elucidate the possible effects of major legislation affecting health care and health insurance on the federal budget, CBO’s analysis examines the budget outlook under current law; the likely budgetary effect of efforts to expand the scope of insurance coverage; the potential for reducing health care spending; the likely impact of specific changes in the health system; and mechanisms for engendering efficiency gains in health care over time.

The federal government’s budgetary commitments to health care (including both spending programs and tax preferences) total more than $1 trillion in 2009.  Many proposals to significantly expand health insurance coverage would add to federal costs by providing large subsidies to help lower-income individuals and families purchase insurance.  Such proposals could permanently boost the government’s budgetary commitments to health care by something in the vicinity of 10 percent.  Improving the long-term budget outlook would require addressing that added cost in addition to the budgetary strains anticipated under current law.  Health care legislation might include provisions that would make it budget neutral over the first 10 years, but such legislation might nevertheless add to budget deficits in later years.

Many experts believe that a substantial share of spending on health care contributes little if anything to the overall health of the nation. Therefore, changes in government policy have the potential to yield large reductions in both national health expenditures and federal health care spending without harming health. Moreover, many experts agree on some general directions in which the government’s health policies should move—typically involving changes in the information and incentives that doctors and patients have when making decisions about health care.

However, large reductions in spending will not actually be achieved without fundamental changes in the financing and delivery of health care. The government could spur those changes by transforming payment policies in federal health care programs and by significantly limiting the current tax subsidy for health insurance. Those approaches could directly lower federal spending on health care and indirectly lower private spending on it as well. Yet, many of the specific changes that might ultimately prove most important cannot be foreseen today and could be developed only over time through experimentation and learning. Modest versions of such efforts—which would have the desirable effect of allowing policymakers to gauge their impact—would probably yield only modest results in the short term.

CBO has analyzed a number of reform options in its recent publications, including creating so-called accountable care organizations, bundling payments to hospitals and other providers, providing additional information about effective medical treatments, expanding the use of preventive and wellness services and primary care, increasing cost sharing by patients, and modifying the tax treatment of employment-based health insurance (Key Issues in Analyzing Major Health Insurance Proposals & Budget Options, Volume I).  When CBO evaluates policies, the agency aims to reflect the middle of the range of expert opinion about likely outcomes. For any particular policy option, CBO carefully reviews the relevant empirical evidence and examines the incentives that would be created to control costs and the factors that might limit the success of those incentives.  At this point, experts do not know exactly how to structure such reforms so as to reduce federal spending on health care significantly in the long run without harming people’s health.

Therefore, one broad long-range approach for reform that has drawn interest recently would combine specific policy actions—to generate near-term savings and provide experience that would lay the groundwork for future savings—with a mechanism or framework to impose ongoing pressure on the health care system to achieve efficiencies in the delivery of health care. That path would require tough choices to be made, and its effectiveness would depend ultimately on the willingness of federal policymakers to maintain significant and systemic pressure over time. Without meaningful reforms, the significant costs of many current proposals to expand federal subsidies for health insurance would be much more likely to worsen the long-run budget outlook than to improve it.

CBO was asked to review the documents, accompanying a letter to the President, in which a group of health care industry stakeholders describe their commitments to reduce health care costs, strengthen quality, and improve access, with a particular focus on their potential effects on the federal budget and on the cost or savings that might be attributed to legislation.

Today, CBO released a letter in response to these inquiries. The industry documents describe a number of initiatives that may affect the quality and the cost of health care in ways that might be very beneficial but sometimes would not involve the federal government at all. A CBO cost estimate for a legislative proposal must report the savings that would occur as a result of that particular legislation. To the extent that certain practices would be adopted anyway, without legislation, they would not affect the budgetary scoring of a proposal, although they might affect CBO’s baseline projections of the costs of federal programs. Therefore, only a subset of the initiatives identified in the letter to the President could result in savings (or costs) that would be relevant for CBO’s cost estimates for legislative proposals, but more specific legislative details would be required in order to prepare such estimates.

Private or governmental initiatives that would affect the amount of spending that occurs in the private sector can have a muted effect on the federal budget by bringing about a change in the composition of compensation between tax-excluded health benefits and taxable wages. But often, steps that would improve the efficiency of the health care system would not translate automatically into savings in federal health programs;  in many cases, such savings would require specific legislation to reduce or restructure federal payment rates for medical services.

CBO has updated its analysis of the policy proposals contained in the President’s budget to incorporate details on some of the proposals that were made available with the release of the President’s full budget proposal on May 7th.

The results of CBO’s updated analysis are similar to those released in March. CBO now estimates a 10-year deficit of $9.1 trillion under the President’s policies—about $130 billion lower than it estimated three months ago (a difference of about 1.4 percent of the cumulative deficit over the period). That difference reflects the details of the proposals and some technical changes in CBO’s estimates of the proposals. As with the March report, this analysis incorporates revenue estimates from the Joint Committee on Taxation (JCT). CBO has not updated its baseline budget projections or its economic forecast since the preliminary analysis of the President’s budget was released in March.

CBO’s and the Administration’s estimates of the President’s policies are very similar for 2009, but CBO’s estimate of the deficit over the next 10 years is $2 trillion higher. Most of that gap results from underlying differences in the two baselines.

Under the president’s policies, the deficit in 2009 would total $1.8 trillion and equal 13.0 percent of gross domestic product (GDP), CBO estimates. In 2010, the deficit would measure 9.9 percent of GDP, or $1.4 trillion, CBO estimates. The cumulative deficit over the 2010–2019 period would equal $9.1 trillion (5.2 percent of GDP), more than double the cumulative deficit projected under the current-law assumptions embodied in CBO’s March baseline. As a result, debt held by the public would rise from 57 percent of GDP in 2009 to 82 percent of GDP by 2019.

Under current law, revenues would grow from 15.5 percent of GDP in 2009 to 19.9 percent of GDP in 2013. Much of the projected increase in revenues occurs because of the expiration of certain provisions of the 2001 and 2003 tax cuts. Under the President’s proposals, revenues would grow somewhat less quickly and would remain near 19.0 percent beyond 2013, slightly above the average over the past 40 years of 18.3 percent. However, they would be about $2.0 trillion lower than the revenues projected under current law over the 2010–2019 period. Of that amount, modifying and extending provisions of the 2001 and 2003 tax cuts would have the largest effect.

Outlays under the President’s policies would fall as a percentage of GDP over the next few years, from 28.5 percent in 2009 to 22.6 percent in 2012, after which they would begin rising largely because of climbing health care spending and increasing debt-service costs, reaching 24.5 percent in 2019—well above the average of 20.7 percent over the past 40 years. Those figures are virtually unchanged from what CBO estimated under the President’s initial budget request in March.

CBO has also analyzed how the President’s proposals would affect the economy (and then, indirectly, the budget). Estimates of economic effects depend on many specific assumptions, so CBO’s analysis used a number of different models of economic behavior and the structure of the economy.

The President’s proposals would raise the level of output by between 0.8 percent and 1.0 percent, on average over the 2010 to 2014 period, CBO estimates. Those estimates incorporate both supply-side effects (influences on the economy’s potential output) and demand-side effects (temporary movements of output relative to its potential level). The models that CBO used to estimate those overall economic effects are not well-suited to projecting the effects of changes in demand beyond five years. However, CBO also estimated the supply- side effects alone, employing a wider variety of models for which projections can be extended over a longer period. For a range of plausible assumptions, the supply-side effects of the President’s proposals would imply output from 2015 to 2019 that is, on average, 0.3 percent to 1.9 percent below the baseline level.

CBO and the Joint Committee on Taxation staff worked together to produce a preliminary  analysis of the major provisions related to health insurance coverage contained in the “Affordable Health Choices Act,” drafted by the Senate Committee on Health, Education, Labor, and Pensions (HELP).  The estimates are based on provisions from title 1 of the draft legislation released by HELP on June 9th. Among other things, the draft legislation would establish insurance exchanges (called “gateways”) through which individuals and families could purchase health insurance coverage. The proposed bill also would provide federal subsidies to substantially lower the cost of that coverage for some enrollees.

According to our preliminary assessment, enacting the proposal would result in a net increase in federal budget deficits of about $1.0 trillion over the 2010-2019 period. When fully implemented, about 39 million individuals would obtain coverage through the new insurance exchanges. At the same time, the number of people who had coverage through an employer would decline by about 15 million (or roughly 10 percent), and coverage from other sources would fall by about 8 million, so the net decrease in the number of people uninsured would be about 16 million or 17 million.

These new figures do not represent a formal or complete cost estimate for the draft legislation, for several reasons. The estimates provided do not address the entire bill—only the major provisions related to health insurance coverage. Some details have not been estimated yet, and the draft legislation has not been fully reviewed. Also, because expanded eligibility for the Medicaid program may be added at a later date, those figures are not likely to represent the impact that more comprehensive proposals—which might include a significant expansion of Medicaid or other options for subsidizing coverage for those with income below 150 percent of the federal poverty level—would have both on the federal budget and on the extent of insurance coverage.

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

In preparing its economic forecast published in September 2008, CBO estimated that 40 percent of the tax rebates issued in the spring and summer under the Economic Stimulus Act of 2008 would be spent within six months––raising the growth of consumption in the second and third quarters of 2008 by 2.3 percent and 0.2 percent, respectively, and reducing it by 1.0 percent in the fourth quarter, when the distribution of the rebates was expected to end. However, analysts disagree about the economic impact of tax rebates. One study of the 2001 rebates suggests that as much as two-thirds of those rebates was spent within six months. For the 2008 rebates, some analysts have put the figure as low as 10 percent to 20 percent––in contrast to CBO’s estimate of 40 percent. There is, however, disagreement among analysts about the economic impact of tax rebates. Today CBO released a brief that examines the issue in light of the evidence currently available.

Studies of tax rebates fall into three groups depending on the type of data employed: those based on detailed data about spending by individual households; those based on qualitative answers to surveys in which people were asked what they intended to do or had already done with their rebate check; and those based on national data on income and spending for the country as a whole. By itself, simple observation of aggregate  consumption over time may not detect the effect of rebates; no spike in spending corresponds to the spike in income. For that reason, CBO places more confidence in studies of the first two types, which rely on differences in spending by people who benefit from the tax rebates and those who do not.

The figure below illustrates why careful studies, not casual observation, are necessary.  It shows a counterfactual path for monthly consumption spending, constructed by subtracting from actual spending CBO’s estimate of the effect of the rebates. That estimate (based on an assumption that 40 percent of the rebates was spent) implies that the rebates raised the growth of consumption in the second and third quarters by 2.3 percent and 0.2 percent, respectively, but reduced it by 1.0 percent in the fourth quarter, when the distribution of the rebates ended. However, someone comparing the monthly course of consumption with that of income would be unlikely to detect any effect.

Note: The cumulative area between lines showing consumption with and without the effects of rebates is 40 percent of the area between the lines showing income with and without the rebates. In the figure, it is assumed that the 40 percent of rebates is spent over six months according to this pattern: 15 percentage points in the first month and 5 percentage points in each subsequent month. On the basis of those assumptions, CBO estimates that the rebates added 2.3 percent (at an annual rate) to the growth of consumption in the second quarter of 2008 and 0.2 percent in the third quarter but––because of those effects––reduced the growth of consumption by 1.0 percent in the fourth quarter.

Yesterday, I explained how CBO’s cost estimates take into account behavioral responses to proposed new federal laws, including the effects of such responses on spending for federal health care programs such as Medicare and Medicaid. In that discussion, I noted that exceptions to this practice occasionally occur because budget “scorekeeping” rules specify that only certain types of spending effects can be considered for Congressional budget enforcement purposes. These rules are potentially relevant for estimates of health reform proposals that aim to achieve budget savings by funding new prevention and wellness activities or by reducing waste, fraud, and abuse in Medicare or Medicaid.

Scorekeeping rules were set forth by the Congress in the conference report for the Balanced Budget Act of 1997 and are updated occasionally upon agreement by the full group of “scorekeepers,” a group that consists of the House and Senate Committees on the Budget, the Congressional Budget Office, and the Office of Management and Budget. The purpose of these rules is to ensure consistent treatment of spending authority, appropriations, and outlays across programs and over time.

When an agency is given significant new legal authority to identify and eliminate program waste, any estimated budget savings is counted, or “scored,” in assessing the budgetary impact of the legislation that provides that new authority. For example, CBO would estimate savings for a provision that required Medicare to suspend payments to a provider being investigated for fraudulent activity. In other examples, the Congress has occasionally given agencies new authority to use employment data to identify and stop federal payments for individuals who are not eligible for certain benefits.

However, potential cost savings in Medicare from an increase in funding for administrative activities aimed at reducing wasteful spending (rather than new investigative or enforcement authority with the same aim) would not be included in the official score of legislation. In particular, two of the scorekeeping rules prohibit counting any changes in mandatory spending as a result of changes in the amount of mandatory funding for administration or program management, or in the amount of discretionary appropriations for any activity. (A mandatory spending program is one that does not require annual appropriations; discretionary programs are funded each year in an appropriation bill.) The guidelines were adopted in part to avoid situations where hoped-for, but quite uncertain, savings are used to offset near-term, certain spending increases or revenue decreases in the same legislation.

Thus, new prevention and wellness activities funded from discretionary appropriations may generate eventual savings in Medicare or Medicaid, but those potential savings are not credited to the appropriation action as part of the budget scorekeeping process. Similarly, if a bill would increase either discretionary or mandatory funding for activities aimed at reducing fraud or waste, those added funds are included as a cost of the bill, but any potential savings in mandatory spending are not reflected for Congressional scorekeeping purposes. For either of these examples, if the bill becomes law, then the estimated savings in mandatory spending are factored into future CBO baseline projections; and of course, any realized savings in such cases will in fact reduce budget deficits unless they are used for other purposes.

CBO’s long-standing practice in formulating cost estimates is to look for evidence that proposed policies would affect people’s behavior in ways that would generate budget savings or costs and then to include such behavioral responses in our analysis. (One exception to this practice is when budgetary scorekeeping rules specify that only certain types of effects be considered—the topic of a blog entry tomorrow.) Examples of behavioral responses incorporated in CBO cost estimates include the changes in the production of various crops that would result from adopting new agriculture price or income support policies, changes in individuals’ driving behavior that would result from increases in gasoline taxes, and the likelihood that veterans will take up certain education or health benefits when policies pertaining to those benefits are changed.

In the health area, CBO’s cost estimates regularly incorporate many types of behavioral responses on the part of patients, providers, employers, workers, insurers, and even state governments. CBO’s cost estimate for the Children’s Health Insurance Program Reauthorization Act of 2009 provides a recent example. That legislation raised the federal excise tax on tobacco, which will lead to higher cigarette prices. Economists have studied how smokers respond to price changes, and reliable evidence shows that people smoke less when cigarette prices rise. One channel through which that change in behavior would affect the budget is by reducing Medicaid spending, because a decline in smoking among pregnant women in the program would reduce the number of low-birthweight babies; CBO’s estimate reflected that effect. Similarly, the Joint Committee on Taxation’s (JCT’s) estimate of the revenue impact of the bill also reflected a projected decline in smoking.

Most current proposals for broad reform of the health care system would affect the price of health insurance for some individuals, and CBO’s cost estimates will take account of how consumers would probably respond. For example, some proposals would create subsidies that effectively lower the price of insurance for eligible persons, and CBO’s analysis will project how many more individuals would take up coverage. Indeed, for any proposal that would affect insurance prices—mandating certain types of coverage, changing the tax treatment of employer-based health benefits, or providing tax credits for health coverage—CBO and JCT will develop estimates that incorporate expected responses by consumers and employers.

Consumers and employers are not the only ones who respond to incentives. One recent CBO analysis found that physicians generally respond to reductions in Medicare payment rates by increasing the reported volume and intensity of the services they deliver to Medicare beneficiaries, offsetting about a quarter of the reduction in federal spending that would otherwise have occurred. Our cost estimates routinely incorporate the most recent available evidence on how providers respond to payment changes.

Certain policies could result in some budget savings and also impose some costs. CBO tries to assess both. For example, many health reform proposals include expanded support for preventive care and wellness services, as well as greater emphasis on primary care. Such policies have the potential to improve health outcomes and enhance the quality of patients’ lives. To the extent that policies avert diseases or lead to more effective medical care, they also might reduce health spending on balance. However, some policies of this sort might actually raise health spending, because additional preventive or primary care generally costs money, not every aspect of preventive or primary care is effective at averting disease, and people who avoid certain diseases may fall victim to other diseases instead. For a detailed discussion of how CBO estimates the effects of proposals aimed at improving health or increasing the use of clinical preventive services, see Chapter 7 of our December 2008 volume on Key Issues in Analyzing Major Health Insurance Proposals.

Although CBO’s estimates reflect how certain individuals and firms would respond to enactment of a legislative proposal, those estimates generally do not reflect how gross domestic product (GDP) might change. That long-standing convention of not incorporating macroeconomic effects in cost estimates is consistent with the practice of  the House and Senate Budget Committees to adopt an annual budget resolution with a specific underlying set of baseline economic assumptions, so that all legislation throughout a Congressional session can be evaluated against those assumptions.

CBO just released a cost estimate for the American Clean Energy and Security Act of 2009 (H.R. 2454), which was recently approved by the House Committee on Energy and Commerce. This legislation would make a number of changes in energy and environmental policies largely aimed at reducing emissions of gases that contribute to global warming. The bill would limit (or cap) the quantity of certain greenhouse gases emitted from facilities that generate electricity and from other industrial activities over the 2012-2050 period.

Under the provisions of the bill, the Environmental Protection Agency (EPA) would establish two separate regulatory initiatives known as cap-and-trade programs—one covering emissions of most types of greenhouse gases and one covering hydrofluorocarbons. Both cap-and-trade programs would set a limit on total emissions for each year and would require regulated entities to hold rights, or allowances, to the emissions permitted under that cap. Some of those allowances would be auctioned by the federal government, and the remainder would be distributed at no charge.

Other major provisions of the legislation would:

• Provide energy tax credits or energy rebates to certain low-income families to offset the impact of higher energy-related prices from the cap-and-trade programs;
• Require certain retail electricity suppliers to provide a minimum percentage of their electricity sales with electricity generated by facilities that use qualifying renewable fuels or energy sources;
• Establish a Carbon Storage Research Corporation to support research and development of technologies related to carbon capture and sequestration;
• Increase, by $25 billion, the aggregate amount of loans Department of Energy is authorized to make to automobile manufacturers and component suppliers under the existing Advanced Technology Vehicle Manufacturing Loan Program;
• Establish a Clean Energy Deployment Administration within the Department of Energy, which would be authorized to provide direct loans, loan guarantees, and letters of credit for clean energy projects;
• Authorize the Department of Transportation to provide individuals with vouchers to acquire new vehicles that achieve greater fuel efficiency than the existing qualifying vehicles owned by the individuals; and
• Authorize appropriations for various programs.

CBO and the Joint Committee on Taxation (JCT) estimate that over the 2010-2019 period enacting this legislation would:

• Increase federal revenues by about $846 billion; and
• Increase direct spending by about $821 billion.

In total, those changes would reduce budget deficits (or increase future surpluses) by about $24 billion over the 2010-2019 period.

In addition, assuming appropriation of the necessary amounts, CBO estimates that implementing H.R. 2454 would increase discretionary spending by about $50 billion over the 2010-2019 period. Most of that funding would stem from spending auction proceeds from various funds established under this legislation. CBO has done extensive work on issues surrounding climate change as I have mentioned in earlier blogs.

The TRICARE program provides health care for members of the uninformed services, for military retirees, and for their families—the more than 9 million people eligible to use its integrated system of military health care facilities and providers and regional networks of contracted civilian providers. User fees for TRICARE beneficiaries have remained the same (or even been reduced) since the mid-1990s, when the current program was first set up. At the same time, taxpayers’ costs for the program have risen dramatically. The Department of Defense (DoD) has not requested any TRICARE fee increases for the upcoming fiscal year 2010. In light of previous proposals, however, a CBO report released today looks at the impact of possible cost-sharing changes in TRICARE on the federal budget.

In 2008, DoD’s spending on health care was $42 billion, or about 6 percent of DoD’s total funding; under current policy, CBO projects that the share of defense spending devoted to health care will rise sharply further in coming years. In its budget submissions for 2007, 2008, and 2009, DoD proposed that enrollment fees, deductibles, and copayments of some TRICARE beneficiaries (generally retirees between the ages of 38 and 65) be increased to encourage more-efficient use of the system and reduce medical spending.

In its analysis, CBO compared the proposed increase in fees for military retirees with the growth seen in several measures of nonmilitary health care spending. It found that the proposed enrollment fees accurately adjusted for trends in spending growth observed in the civilian sector since 1995. For example, if the Prime plan’s enrollment fee of $460 for family coverage had grown at the same pace as the average premium in civilian health plans, the amount today would be close to the new fees proposed in DoD’s 2009 budget submission. Nevertheless, the level of DoD’s proposed fees would still be below premiums commonly seen in civilian plans. The average annual health insurance premium for family coverage in a health maintenance organization in 2008, for example, was about $13,100, of which the average worker’s contribution was about $3,400. Under the proposal, most DoD retirees who were not yet eligible for Medicare would have paid $1,100 per year to enroll their family in TRICARE Prime in 2011.

CBO also determined, on the basis of currently available research, that DoD used reasonable assumptions about TRICARE beneficiaries’ responses to some of the changes in the 2009 proposal and that the actual reductions in spending could be larger than DoD has foreseen. CBO also found, however, that DoD did not include in its estimates the effects that increased cost sharing for TRICARE might have on other federal programs—such as Medicaid and the Federal Employees Health Benefits (FEHB) program—and on revenues. Those effects would decrease, though to a relatively small degree, the reductions in spending that might be realized from increasing TRICARE beneficiaries’ costs.

This paper was written by Carla Tighe Murray of CBO’s National Security Division. Carla has been at CBO for seven years and holds a Ph.D. from the University of Illinois (Urbana-Champaign).  She enjoys yoga and gourmet cooking.