CBO scores the Kennedy-Dodd bill

CBO scores the Kennedy-Dodd bill

The Congressional Budget Office has released a preliminary estimate (“score”) of the draft Kennedy-Dodd health care bill.Some in the press are reporting that this is a “$1 trillion bill.” This poorly explains the true budgetary impact of the bill for several reasons. The bill would increase spending by more than $1.3 trillion (that’s “thirteen hundred billion dollars”) over ten years, and even that understates the impact because the bill phases in over the first five years.

I explained last week that the bill is incomplete. I expect a later version of this text will be marked up by the Senate Health, Education, Labor, and Pensions (HELP) committee, and then combined on the Senate floor with a companion bill marked up by the Senate Finance Committee. Even in its final form the HELP Committee text will be only half a bill. I further expect the HELP Committee bill will end up increasing the budget deficit, while the “pay-fors” (offsets) will come from the Finance Committee bill, which it appears will raise taxes and cut Medicare and Medicaid spending.

New health care entitlement spending

CBO has estimated the effect on the federal budget of the new subsidy component, which I described last week:

People from 150% of poverty up to 500% (!!) would get their health insurance subsidized (on a sliding scale). If this were in effect in 2009, a family of four with income of $110,000 would get a small subsidy. The bill does not indicate the source of funds to finance these subsidies.

There are at least six other major components of the bill that have not yet been scored by CBO. Part of this is due to the time crunch, but most of it is because the Kennedy-Dodd staff have not yet given CBO specific enough legislative language for CBO to do their thing.

  1. The budgetary effects of neither the individual mandate nor the employer mandate are included in this score. I think CBO will find these provisions would raise revenues for the government and reduce the deficit. While the leaked draft of Kennedy-Dodd was specific about the employer mandate, the official version has just the placeholder language, “Policy under discussion.” Both mandates leave wide discretion for the Secretaries of Treasury and HHS to create a level and structure of taxation “to accomplish the goal of enhancing participation in qualifying coverage.” It is extremely difficult for CBO and their tax counterparts, the Joint Committee on Taxation (JCT) staff, to estimate something like this.
  2. The estimate does not include the budgetary cost of expanding Medicaid to childless adults with income below 150% of the poverty line. I expect that this will add hundreds of billions of dollars to the cost over the next decade.
  3. It does not include the requirement that health plans define “children” as dependents up to age 27. I expect this will raise costs.
  4. It does not include the effects of the Medical Advisory Council’s ability to define benefits, or the requirements that plans rebate premiums to the insured. I think this too will raise costs.
  5. It does not include the budget effect of having a “public plan option.”
  6. There are a bunch of other programs in the bill, including a new disability program and lots of new public health programs.

What we have is a score of two provisions — the new subsidies for people between 150% and 500% of poverty to buy health insurance, and subsidies to small businesses with low-wage employees. We can learn a lot from the table on page 10 of CBO’s estimate. Press coverage is focusing on the “one trillion” number for the net deficit impact, making the common mistake of losing important information by ignoring the gross components of that net number. I am more concerned with the size of the new health care entitlement spending, which is $1.3 trillion over the next ten years.

2010-2019 total
Exchange subsidies 1,279
Small business subsidies 60
Payments by uninsured individuals -2
Medicaid/SCHIP outlays -38
Tax effects on deficit -257
Net deficit impact 1,042

95% of the spending, $1,279 billion over the next ten years, comes from the new subsidies for individuals. This spending does not begin until year 3 (2012), and it’s not fully effective until year 6 (2015). This is a normal effect of implementing such a huge and complex policy — it takes several years to phase in. While the $1,279 billion represents the actual effect on the federal budget of this bill, we can see that the phase-in reduces the cost quite significantly. The green area is 71% of the area under the blue line, which is my estimate of the hypothetical cost of a bill that were it fully effective on day 1. I am not arguing that the “real” cost is the area under the blue line, but instead that focusing only on the 10-year total disguises the true long-term cost of this new entitlement spending. The Kennedy-Dodd draft creates new health spending entitlements that would grow 6.7% per year, faster than our economy, which CBO projects to grow about 4% per year (nominal) in the long run. This means the new health entitlement spending would eat up a larger share of the economy over time.

K-D-phase-in

Effect on private sector spending

CBO has not estimated the effect of this bill on private sector health care spending. That’s not their core mission, but I hope they do so when they have a more fully specified bill. It is a critical metric identified by the President as one of his key tests for an acceptable bill, and it’s a core element of my four-part test for measuring health care cost control.

Effect on health insurance coverage

I will let the pictures tell the story. Here is a before and after of the effects of implementing the Kennedy-Dodd bill. I have chosen 2015, the first year in which the subsidies would have their full effect. Pictures for succeeding years would look similar. I have written before that I think the 51 million figure (now 46 million) overstates the problem to be solved.

Kennedy-Dodd-before

And here is the effect of the Kennedy-Dodd bill:

Kennedy-Dodd-after

You can see that Kennedy-Dodd would mean that 16 million otherwise uninsured people would get health insurance through the new exchanges, as a result of the subsidies.

In addition, another 22 million people who will otherwise have health insurance will take those subsidies. Three million are a shift from one taxpayer-financed program (Medicaid or SCHIP) to another (the new exchanges). But CBO estimates that 19 million people who are now using their own resources will take advantage of the new subsidies and get health insurance through the exchanges.

This is the problem with creating a new subsidy for something that people are already doing. Analysts say that the new taxpayer subsidies “crowd out” private spending. These people are better off, in that they now have funds available to spend on other things. But if the goal is to reduce the number of uninsured, it is inefficient because half the people benefiting from the new spending are substituting public dollars for private ones.

This makes the cost per newly insured numbers look bad. If you look at just the effects on spending, it’s more than $11,400 per newly insured person. Even if you take into account the higher tax revenues that result from the movement out of employer-based health insurance, the net cost to the taxpayer is still more than $9,100 per newly insured person.

I will soon apply my four-part test to this preliminary Kennedy-Dodd draft, and will update these estimates as the policy develops.

(photo credit: Referees in the Tunnel by Scott Abelman)

43 responses

  1. Pingback: Club for Growth

  2. Looking at the chart where you also provide the cost if it was fully phased in on day 1 suggest a 10 year compound annual rate of growth in subsidies is a little over 6% (and that’s excluding all the items yet to be calculated). If that rate continued to be generated by the private sector, it would be more ammo for Obama. I assume that like most gov’t programs the LT cost will be dramatically understated.

  3. Great rundown of the extensive marginal costs that are apparent from this bill. Now we can only hope that other Americans notice the true costs and not what is sold to us by Congress and the Administration. I too believe that the costs will much higher than $1.3 trillion over the next decade. If you take into account those who are not insured currently and will be insured under this program, in addition the number of people who do not see their true costs of attaining medical service, there will be an extensive number of people flooding doctors and hospitals as care will be perfectly elastic. Many people will find diseases, sicknesses, and other symptoms that had not been found before that will drive up the cost of care even more! Health care cost is a very serious issue in America, but nationalizing health care and putting more layers of government in the mix is not optimal nor marginally beneficial to solve the problem.

  4. Pingback: When The CBO Scores, The Whole World Stops Turning « Around The Sphere

  5. Marginally Beneficial,

    “Health care cost is a very serious issue in America, but nationalizing health care and putting more layers of government in the mix is not optimal nor marginally beneficial to solve the problem.”

    You are being dishonest. No one is proposing nationalizing health care and you know it.

    And as I have asked many times. What is your solution to the most expensive health care system in the world by double?

  6. Just wondering Marginally Beneficial, what do suggest we do about situations such as below?

    An $80 tooth extraction would have saved the taxpayers $250,000 and saved a young boy’s life.

    http://www.washingtonpost.com/wp-dyn/content/article/2007/02/27/AR2007022702116.html

    Twelve-year-old Deamonte Driver died of a toothache Sunday.

    A routine, $80 tooth extraction might have saved him.

    If his mother had been insured.

    If his family had not lost its Medicaid.

    If Medicaid dentists weren’t so hard to find.

    If his mother hadn’t been focused on getting a dentist for his brother, who had six rotted teeth.

    By the time Deamonte’s own aching tooth got any attention, the bacteria from the abscess had spread to his brain, doctors said. After two operations and more than six weeks of hospital care, the Prince George’s County boy died.

    Deamonte’s death and the ultimate cost of his care, which could total more than $250,000, underscore an often-overlooked concern in the debate over universal health coverage

  7. jharp,

    You keep asking what we would do about Deamonte. If I were aware of him, if I understood that his tooth was abscessed, if I understood that his mom was distracted by his brother’s rotten teeth, and if I had a way to get $80 to him for this express purpose, I would pay for the poor child’s tooth extraction. Would you do the same or would you just force all of us to ante up to the cause?

    Even if Deamonte had had insurance, there is no guarantee that the outcome would have been different. His mom could have still been distracted, his mom could have been unaware that the tooth was abscessed. If his mom had asked for help at their church–or perhaps any church, I guarantee that the family would have gotten free regular preventive dental care. I know this because that is what my church would do. If your church would not do that, then you should work to change that. Dental schools regularly offer free clinics for families like Deamonte’s; his mother could have searched out a program like that. In our town, schools in poor areas of town offer free dental checkups for the students. That’s a program that probably receives federal dollars, and even those programs and federal dollars are not enough to make sure that all poor families brush and floss.

    I cannot explain his awful death. Why are you so certain that insurance magically makes parents stop letting their children drink juice and pop instead of milk and water? Will insurance educate families on the dangers of an abscess? Will insurance make his mother take the kids for regular checkups? I know people who do have dental insurance, and they don’t “believe in” seeing the dentist regularly. Crazy? Yes. Hold me responsible? No.

  8. Yes, Jeanie, I would have gladly helped Deamonte.

    And this is why I support a single payer health care system. For all of the future Deamontes.

    And Deamonte could have been struck by lighting on his way to the dentist too. What is your point?

    My point is there are many many Deamonte’s out there who could lead much more productive lives with access to health care before they became deathly ill. And it is rather obvious that this is no guarantee that Mom will take him to the doctor.

    My other point is the taxpayers got a bill for $250,000 when $80 would have sufficed. And the deal breaker for Deamonte was his Mom couldn’t afford the $80. An absolute national disgrace for the greatest country the world has ever known.

  9. My point was that your solution–a single payer system–is no guaranteed solution of Deamonte’s problem, the problem you asked us to consider. There will always be horrifying stories out there.

    If we didn’t have to pour so much of our money into taxes, we could all lead more productive lives and have more money for charity.

  10. “My point was that your solution–a single payer system–is no guaranteed solution of Deamonte’s problem, the problem you asked us to consider.”

    Geez. Of course it’s no guarantee. Like I said, Deamonte could get hit by lightning on his way to the dentist too. If Deamonte’s mother didn’t have to come up with the $80 we would have removed a huge barrier to getting deamonte to the doctor. Multiply that times many many Deamontes and it saves lives. And more importantly for republican’s, it saves tax dollars. Lot’s of tax dollars.

    We are one of the least taxes countries (industrialized) in the world. And no one is proposing increasing taxes anyways.

    We also have the most expensive health care system in the world (industrialized) by 50%. And we are the only one without some form of a single payer. And our system delivers the same level of care as the others.

    Why do you suppose no other country copies our system?

  11. I think the CBO score renders Kennedy-Dodd DOA, judging from the WH reaction to questioning by Jake Tapper. Personally, I think in light of AMA’s and American Hospital Association’s opposition to these reforms, the WH is realizing this is going to be a very hard sell.

    President Obama has sent out a mass email to his supporters asking for donations to fight opposition to health care reform. Perhaps this is SOP for an administration that hopes to pass a massive piece of legislation but it seems hardly necessary where President Obama is concerned. ABC news plans to broadcast from the Blue Room on June 24 offering quite a platform for presenting some unidentified plan to the viewing audience. They are of course not offering the Republicans an opportunity to present their plan but plan to include hard hitting questions from the likes of Diane Sawyer and Charlie Gibson. I am sure NBC or CBS would be equally thrilled to give this administration such a venue as well. Despite the extraordinary advantage this administration enjoys from an adoring Press Corps, the President’s policies have been proven to be far less popular than he is personally. This does not bode well for an administration hoping to sell a massive new entitlement to an increasingly skeptical audience.

    The bloom is off the rose, so to speak, with this administration and spending. VP Biden admitted this past Sunday on Meet the Press the stimulus was passed prior to the administration having a clear understanding of the extent of the economic crisis. The administration is hoping the same urgency stressed to pass the “stimulus” will somehow convince a skeptical audience a second time. The old adage “fool me once..” seems to apply here. My guess is the AMA, AHA and other huge health care organizations have far too much at stake to allow the administration to reform the entire health care industry in haste.

  12. Mary M
    Commented on June 16, 2009 at 5:12 pm |

    “I think the CBO score renders Kennedy-Dodd DOA”

    You’d be wrong.

    The CBO’s findings are for an incomplete piece of legislation, making the cost-per-coverage estimates much worse than they will ultimately be.

  13. jharp

    With all due respect, why did the WH distance themselves from the plan? The plan only insures an additional 16 million people and using the figure the WH uses that leaves an additional 30 million uninsured. Read the analysis on Tapper’s blog I linked above:

    “The CBO director wrote in his blog that according to CBO’s “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.”

    Even if a public plan would somehow magically cover all those not covered by the incomplete aspects of Kennedy Dodd, that public plan must not only be paid for but it would have to allow for the additional $1 trillion in increased deficits by the other portion of the plan analyzed by CBO. My question would also be, if this other portion of the bill magically did all this why did they leave it out?

  14. “My question would also be, if this other portion of the bill magically did all this why did they leave it out?”

    http://www.huffingtonpost.com/2009/06/16/gop-pushed-for-incomplete_n_216206.html

    “The CBO’s findings, however, are for an incomplete piece of legislation, making the cost-per-coverage estimates much worse than they will ultimately be. Republicans on the committee knew this, according to Democrats. But they pushed for the bill to be studied by the CBO now. And when poor results came back, they ran with them.

    “The reality is there are still some outstanding issues, including employer responsibility and a public insurance option,” said a Democratic aide to a committee member. “Those are two outstanding issues. So what we did in a good faith effort to find bipartisan consensus, we did not include those elements because we are trying to find common ground. But Republicans wanted there to be a score even though, the reality is, if there is an incomplete bill you will have an incomplete statement.”

    Another Democratic aide to the HELP Committee member concurred, adding that Sen. Ted Kennedy’s office, in an effort to “find bipartisan consensus with Republicans colleagues” filed the bill and allowed it to be scored by the CBO — not expecting it to be used as partisan fodder.”

    And I was not aware of the White House distancing itself from the plan.

    And I have no doubt that the best thing to do is wait for ALL of the numbers. Then make a judgment.

  15. jharp,
    The sources for the piece you linked are a Democratic aide for a committee member (unnamed mind you) and the author of the piece editorializes that the cost -per-coverage estimates appeared worse than they will ultimately be. There is no direct quote or substantial analysis provided for the author’s conclusion that the CBO analysis is a worst case situation for ultimate costs of the program. Nevertheless, I agree we can wait for ALL the numbers to make a final judgement. I do doubt though that the WH would have distanced themselves from Kennedy Dodd had the author from Huffington Post’s analysis had been correct.

  16. “Nevertheless, I agree we can wait for ALL the numbers to make a final judgement. I do doubt though that the WH would have distanced themselves from Kennedy Dodd had the author from Huffington Post’s analysis had been correct.”

    Thank you. I agree. And only time will tell.

    And where did you see that the White House distanced itself from the Kennedy/Dodd? I did not see that.

  17. Who is going to provide all this treatment at a reducede cost with no cap on malpractice. I think you should talk to people who mare in the trenches,like me

  18. JHarp

    “Read Jake Tapper’s report “After CBO Analysis, White House Distances Self From Kennedy Bill.””

    Thank you Mary. I don’t read Jake Tapper but out of respect for you I did.

    And it reminded me of why I have avoided him in the past.

    It seemed quite clear to me that the headline’s only purpose was to mislead. Gibbs simply made it clear that wasn’t the final bill and the was still work to be done.

    “”This is not the Administration’s bill,” White House press secretary Robert Gibbs said in a statement following the Congressional Budget Office’s analysis of Sen. Ted Kennedy’s health care reform legislation, “and it’s not even the final Senate Committee bill.””

    Though clearly not an endorsement it is misleading to say “White House distances self”.

    I think Jake Tapper is a right wing hack and not a serious journalist.

  19. Massachusetts reform (the Government funded portion) is costing the Commonwealth about $6,000 per covered life per year. Applying that cost to the approximately 46 million who need insurance (according to Congress) and trending cost at 6% annually, we get $3.6 trillion over 10 years. Since the CBO costs the initiative at $1.3 or so, that seems to imply that they think each individual will cost $2,000 (unlikely) or that only 15 million will get coverage. That doesnt seem like Universal Health insurance to me (although the cost certainly is out of this world).

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