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There continues to be much confusion about the budget impacts of the health bills now being discussed in Congress. When House leaders unveiled their new bill last week, they described it as costing $894 billion over ten years. After looking at the official analysis from the Congressional Budget Office, however, most observers concluded that the coverage expansions would actually cost more than $1 trillion.
And if you look further into the details of the bill, its complete cost – reflecting all provisions, not just the coverage expansions – appears to be several hundred billion dollars higher still.
The situation became even more complex on Friday, when CBO introduced another cost metric into the debate: the net change in the government’s budgetary commitment to health care. Using that measure, CBO concluded that the new House bill would increase the federal cost of health care by almost $600 billion over the next ten years.
These different measures give widely divergent figures for the “cost” of the House health bill. Although each of those figures provides important information, their number also creates the risk of unnecessary confusion. To avoid such confusion, it is important that policymakers and commentators understand the key differences among them.
The Cost of Expanding Coverage
Most of last week’s confusion stemmed from the difference between the gross and net cost of expanding coverage. House leaders quoted the net cost in their bill even though commentators had focused on the gross cost when discussing previous bills.
What’s the difference between these two cost measures? Well, when CBO tallies up the gross cost of expanding coverage it includes every new spending program or tax cut that increases the number of people with health insurance. Provisions that fall in this category include Medicaid expansions, subsidies to help individuals purchase insurance, and tax credits to small businesses for providing insurance to their workers.
To calculate the net cost of expanding coverage, CBO starts with the gross cost and then subtracts any revenue increases that result from coverage policies. If an insurance mandate is enforced with penalties on individuals or employers, for example, the resulting revenues reduce the net cost of expanding coverage. Taxes on health insurance also reduce the net cost of expanding coverage, but tend to lower, rather than raise, the number of people with insurance.
Using these metrics, CBO concluded that the coverage provisions in the House bill would have a gross cost of $1.055 trillion and a net cost of $894 billion. In contrast, the bill passed by the Senate Finance Committee had a gross coverage cost of $829 billion and a net cost of $518 billion.
These two bills are not exactly comparable. The Finance bill is the work of only one of the two Senate committees with health jurisdiction, while the House bill reflects input from all the relevant House committees. Nonetheless, the cost differences between the bills do provide important information. The House bill has higher gross costs because it includes a larger Medicaid expansion and larger subsidies to help individuals purchase insurance. The difference between the two bills is even more pronounced for net costs, because the House bill raises significantly less revenue from coverage policies (the House bill raises more from penalties, but the Senate bill also includes a tax on “Cadillac” health insurance plans).
The Cost of All Health Provisions
Although useful, the two measures of coverage costs suffer from a major limitation: they reflect only those policies that are related to health insurance coverage. Increasing coverage is a key focus of the bills, but policymakers and commentators should not lose sight of the fact that both bills would make many changes unrelated to coverage.
For example, the House bill would, among many other things, increase payment rates for primary care physicians in Medicaid, create two new funds to finance efforts in public health, prevention, and wellness, and extend a provision in the stimulus bill that shifted more of the costs of Medicaid onto the federal government. The Senate bill, on the other hand, would provide a one-year “fix” to physician payment rates in Medicare and expand coverage in the Medicare drug benefit, among many other things.
If commentators and policymakers are interested in the overall costs of the health bills, rather than just the cost of the coverage provisions, they need to take these other provisions into account. Unfortunately, CBO does not calculate the gross cost of the health bills. The bills include so many interacting provisions that it can be difficult to isolate the budget effects of every provision that increases health spending from every provision that reduces spending. CBO does report estimates for many individual provisions, but then lumps together many of their interactions into a few categories (e.g., interactions with Medicare Advantage) that cannot be specifically allocated to particular provisions.
As a result, it isn’t possible to calculate an exact measure of the gross cost of the health bills. To get a sense of the magnitudes, however, it is possible to go through CBO’s cost estimates and identify those individual provisions that increase federal health spending. By adding those to the gross cost of expanding coverage, we can get an estimate of the gross cost of all the provisions in the bills.
In the House bill, for example, the other spending increases add up to $217 billion, with the largest items being higher payment rates in Medicaid ($57 billion) and funding for the public health, prevention, and wellness funds ($34 billion). Adding these to the coverage costs suggests that the total gross cost of the bill is close to $1.3 trillion. (Similar calculations for the Senate Finance bill suggest a gross cost of about $900 billion.)
The Government’s Budgetary Commitment to Health Care
Although CBO does not estimate the gross cost of the bills, its new metric provides a valuable look at their net cost. This new metric, the net change in the government’s budgetary commitment to health care, combines three key cost elements:
- The gross cost of all health provisions;
- The savings from any offsetting reductions in federal health spending; and
- The savings from any net reductions in the tax subsidies that the government currently provides for health insurance.
CBO includes that third item because the government’s budgetary commitment to health care includes not only spending programs but also the various tax subsidies that the government provides for health coverage. From that perspective, some tax increases – for example, a tax on “Cadillac” insurance plans – should be viewed as reducing the net budget commitment to health. Revenues from enforcing mandates would not be viewed as reducing this cost measure, however, nor would non-health offsets such as raising taxes on high earners.
This measure provides the most striking difference between the two bills. CBO estimates that the House bill would increase the government’s budgetary commitment to health care by almost $600 billion over the next ten years. The Senate Finance bill, in contrast, would increase the commitment by $85 billion over the same period. The House bill would thus increase the federal commitment to health care by seven times as much as the Senate Finance bill.
Donald B. Marron is a visiting professor at the Georgetown Public Policy Institute and writes about economics and finance at dmarron.com. He previously served as a member of the Council of Economic Advisers and as acting director of the Congressional Budget Office.
**CBO source materials:
“Different Measures for Analyzing Current Proposals to Reform Health Care,” October 30, 2009.
“Preliminary Analysis of the Affordable Health Care for America Act,” October 29, 2009.
“Preliminary Analysis of the Chairman’s Mark for the America’s Healthy Future Act, as Amended,” October 7, 2009.