The health care bill that Congress is currently trying to pass (or that may have passed by the time this is read) is designed to reduce the number of uninsured. While this is certainly a noble goal, these benefits come with corresponding costs. Advocates of the bill have argued that while the bill comes with a hefty cost, the bill actually reduces the government’s budget deficit over the Congressional Budget Office’s (CBO) 10-year forecasting horizon. This certainly makes the bill sound appealing as it implies that we can expand coverage while reducing the deficit. Unfortunately, this is somewhat misleading in the sense that it takes for granted some sketchy assumptions built in to the funding structure of the bill.
Politicians often point to the fact that the CBO is a non-partisan entity that evaluates the cost of particular legislation. The lack of partisanship is certainly important. This appeal to non-partisanship, however, obfuscates other issues surrounding CBO forecasts. Most notably, cost and revenue estimates of the bill are dependent upon the assumptions included in the bill. This feature is very important to the health care legislation.
Particularly important to the health care legislation are provisions about the funding of the bill. The following are three such important provisions: (1) an excise tax on so-called “Cadillac” health care plans that would begin in 2013; (2) a reduction in physician payment rates for Medicare and other rate cuts for Medicare providers; (3) the implementation of an advisory board that would implement cost-saving measures to reduce Medicare spending, unless rejected by subsequent legislation.
These assumptions are particularly important. First, consider the effects of the excise tax as a potential revenue source. The tax is not implemented until 2013. This suggests that, in the near-term, firms that offer top-of-the-line insurance have an incentive to reduce the coverage extended to their employees to avoid the tax. This shift could potentially reduce health care spending as these individuals would then have to spend more in out-of-pocket costs – effectively raising the price and reducing the quantity demanded. Such a shift, however, would also imply lower tax revenue as these plans are eliminated.
Of course, even the analysis of the excise tax above makes important assumptions. For example, it was assumed that the tax was actually implemented and not repealed by subsequent legislation. In addition, the most vehement detractors of this provision have been labor unions as they tend to offer their members better benefits that could potentially be subject to the new tax. As a result, there has been discussion about creating an exemption to the excise tax for members of labor unions. Such an exemption, however, would result in lower tax revenue and a lesser reduction in health care spending.
The second assumption baked into the analysis is a reduction in physician payment rates for Medicare. This reduction was actually passed during the 1990s, but each year has been postponed by subsequent legislation. There is no reason to believe that, after the passage of the health care legislation, this reduction will not be postponed once again. Such a postponement would be enough to cause the health care bill to result in a $59 billion addition to the budge deficit over ten years.
The final major funding source comes from the creation of an advisory panel that would recommend cost-savings measures for Medicare that would be enacted unless revoked by subsequent legislation. The bill assumes that this panel would be able to identify significant areas for cost reduction. This cost reduction could be in the form of greater efficiency or by reducing the quantity or quality of service.
Overall, the bill assumes that reductions in payment rates to Medicare providers and those identified by the advisory panel would that Medicare spending per beneficiary would grow at a rate of 2 percent per year (adjusted for inflation). As a method of comparison, this growth rate has been roughly 4 percent per year over the last 20 years.
The cuts to Medicare are an extremely important source of “revenue” for the health care bill. In fact, in the latest CBO projections (March 11, 2010), cuts to Medicare make up $430 billion of the funding over the next decade. This figure represents roughly 50 percent of the estimated total cost of $875 billion.
Overall, the health care bill makes a great deal of assumptions about revenue sources that potentially obfuscate the true costs of the bill. The reader should note that I have not taken a position on the health care bill. Rather the purpose of this column was to highlight the potential costs of the legislation if the assumptions included in the CBO’s analysis are not met. It is left to the reader to decide whether the benefits exceed the actual costs.