28 July 2009 
In a letter to four key Republican Congressmen (Camp, Barton, Kline, and Ryan), the Congressional Budget Office destroys the House Democrats’ implementation of the President’s goal of long-term fiscal responsibility through health care reform. With this analysis the fight about the House bill is over by a technical knockout (TKO). The proposed income tax increases were the key vulnerability. I will walk you through the analysis and why I reach the following conclusion.
Conclusion: CBO says that because the proposed new health spending would grow faster than the proposed new income tax increases, the House health bill would increase the long-term deficit. Since the President has said he would not sign a bill that increases the long-term deficit, the bill is dead in its current form. Any tax increase that would grow more slowly than the proposed new spending faces the same irreconcilable problem. The only way to solve this problem and meet the President’s long-term goal is to cut health spending or tax employer-provided health insurance.
We can start by looking at the short-term budget effects of the House Tri-Committee health bill over the next ten years:
|
10-year deficit effect |
|
| New coverage provisions |
+ $1,042 billion |
| Medicare savings |
- $219 billion |
| Other provisions (primarily income tax increases) |
- $583 billion |
| Net deficit increases |
+ $239 billion |
The new CBO information is about the long run deficit. Here is the key paragraph from the 18 page CBO letter:
Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time. The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.
In the long run, it’s all about growth rates. Let’s go to the chalkboard. All numbers are from CBO’s July 14th estimate of the House bill, Joint Tax Committee’s July 16th estimate, and CBO’s July 26th letter to Mr. Camp.
We start with the short run, and look just at the new coverage provisions in green, and the net spending increase in blue. Proposed Medicare savings bring the gross new coverage spending of the green line down to the net spending increase of the blue line. As always, you can click on any graph to see a larger version.
Spending would start in 2013 and ramp up to its long-term path by 2015. In 2019 the bill spends $202 B on the new coverage provisions and saves $51 B from Medicare, for a net spending increase of $151 B.
A small caveat: both the new coverage section of the CBO estimate and the Medicare savings include some indirect revenue effects, such as the higher taxes that would be collected from individuals and employers who don’t comply with the mandates. So technically these lines show the net deficit effects of the “New coverage” and Medicare sections of the bill. The revenue components are relatively small, and this oversimplification does not affect the analysis, so I’m labeling the blue line “net spending increase.” In addition, this is how CBO packages things, so I am confident it’s a safe oversimplification.
Now let’s add to the graph the tax increases in the House bill as a new yellow line. Everything else is the same as on the first graph.
The House bill raises $87 B of taxes in 2019, compared to the $151 B net spending increase in that year. The area between the light blue and yellow lines is the deficit impact. Up to 2013, the bill collects more in taxes than it spends, so the bill actually reduces budget deficits in the early years. After 2013, the light blue net spending line is above the yellow tax line, so the bill adds to the deficit. In 2019, the bill increases the deficit by $151 B – $87 B = $64 B. The net of the deficit-reducing and deficit-increasing areas is the $239 B deficit increase over 10 years from the first table above. Again, all of these are CBO and Joint Tax Committee numbers.
Now we turn to the long run, relying on that key CBO paragraph. Here are the key numbers:
The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. … Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade.
CBO phrases this a little bit carefully, so I want to be clear that this last graph represents my interpretation of the above language, rather than explicit calculations provided by CBO. I’m going to extend the blue and yellow lines from the graph above through the second decade.
Here are some details for the technicians:
- All figures through 2019 are from CBO’s July 14th estimate and Joint Tax’s July 16th estimate.
- The average annual growth rate of the yellow line from 2017 to 2019 is 5.1%, derived from the JCT July 16th estimate.
- Beyond 2019, the yellow line is the 2019 figure of $87 B from Joint Tax, grown at a 5.1% annual rate.
- The average annual growth rate of the blue line from 2017 to 2019 is 8.7%, derived from the CBO July 14th estimate.
- Beyond 2019, the blue line is the 2019 figure of $151 B, grown at an 8.7% annual rate.
- The $205 B deficit increase in 2029 is simply the delta between the two calculated points for that date.
I am being a little more precise than CBO’s language. They were careful not to explicitly say that the growth rates would be precisely 8.7% and 5.1% over the next decade, but it’s the most reasonable conclusion from their language if you have to pick numbers. It’s not fair to say that the $205 B figure is a CBO number — it’s not. It is fair to say that the ever-widening red area, representing large and increasing long-term deficit increases, represents CBO’s conclusion.
What does this mean?
This is the most important analysis CBO has done of the House health bill.
Remember the President’s three part test:
- A bill should not increase the budget deficit in the short run (the first ten years).
- A bill should not increase the budget deficit in the tenth year.
- A bill should “bend the health cost curve down” in the long run. (More recently, a weaker test that a bill must not increase long-term deficits.)
I would prefer stronger tests, which I proposed six weeks ago.
The second graph demonstrates that the House bill would fail the first two tests. CBO and Joint Tax said that in their July 14th and July 16th estimates. The House bill increases deficits by $239 B over the next decade, and by $64 B in the tenth year.
The new information is CBO’s conclusion that the House bill would increase long-term budget deficits, because the new spending will grow faster than the income tax increases. This is logical: if the net spending increases start the second decade $64 B higher than the tax increases, and if the spending will grow 8.7% per year while the taxes will grow only 5.1% per year, then the gap between the two, the budget deficit, will only grow over time. CBO has concluded that the House bill would make America’s long-term deficit problem dramatically worse than it is under current law. This clearly fails the third Presidential test.
There’s another conclusion that is implicit in CBO’s analysis. Because of the different growth rates, there is no way to solve this problem by raising income taxes like the House bill does. If you want to include tax increases in your bill, they have to match the net spending increase in the tenth year, and they have to grow at least as fast as the 8.7% growth rate of long-term net spending. The only thing that has a chance of doing that is the taxation of health benefits.
I think this is fatal to the House bill. The income tax increases were already in serious trouble because of opposition from Blue Dog Democrats who do not want to raise taxes on small business owners, and who do not want to be BTU’d (again) by Senate Democrats who have said they won’t raise income taxes. But House Democratic Leaders were relying on these tax increases to avoid having to make deeper entitlement spending cuts, tax employer-provided health insurance, or dramatically scale back their proposed new spending. CBO has called the fight over by a technical knockout.
Where have I heard this before?
If you are patient enough to have read this blog over the past few months, some of this may look familiar to you. Here’s what I wrote on June 12:
It is therefore odd and self-contradictory that they have proposed raising taxes to offset the higher spending of a new health care entitlement for the uninsured. While you can technically meet my short-term Test 1 by doing so (in a Blue Dog / centrist way that I would oppose, but you’d meet it), it is mathematically impossible in the long run to offset a new health care entitlement with higher taxes, unless your bill also slows the growth of health care spending in other ways.
Great post, Keith.
And let’s not forget the other way even a 10-year “deficit-neutral” bill will make it harder to solve the problem of our long-term fiscal imbalance, and make the eventually necessary sacrifices even greater than they otherwise would be: The offsets used to “pay for” this increase in spending will no longer be available to reduce the fiscal imbalance we already have, which means we’ll have to impose even greater sacrifices (further tax increases and/or further cuts in other projected spending).
And as for “bending the curve” of federal spending on healthcare, Obama and his staff and supporters on this issue are engage in misleading bait-and-switch, “rock soup”* rhetoric that packages, under the rationale of our need to bend that cost curve of future federal spending on healthcare, two distinct elements: (1) (supposed) cost-control mechanisms (e.g., medical IT, comparative effectiveness research) that will supposedly more than pay for themselves, and (2) expansion of coverage. Given the unsustainable projected fiscal imbalance we already have, #1 above should be a given (something we should do anyway), and unless someone can make the case that somehow the savings generated by these cost-control mechanisms would be much greater with expansion of coverage than without it — so much so that federal spending would actually be less with both #1 and #2 than with #1 alone, Obama’s urging us to adopt both in order to bend the cost curve resembles the following dialogue:
Obama: We arent getting any Vitamin C in our diet. On our current course, well get scurvy. We need to start eating a breakfast every day of bacon, sausages and orange juice.
Citizen X: But eating bacon and sausages every day will be bad for our health (were already obese and have dangerously high cholesterol). Why do we need to eat the bacon and sausages every day?
Obama: Did you not hear me?? We arent getting any Vitamin C and were going to get scurvy on our current course! The status quo is unacceptable! We need to have this bacon, sausages and orange juice breakfast every day.
And yes, Im aware of cost-shifting from the uninsured to the insured (including to those insured by the government), and aware of the fact that in some cases preventive care saves money (although apparently not in the aggregate**). But if someone wants to make the case that those or other dynamics mean that federal spending on healthcare would be lower with expansion of coverage than without it, please go ahead (with sources of analyses, hopefully not partisan hacks). Unless that case can be convincingly made, then Obama and others should stop selling the expansion of coverage as part of a package that we need to “bend the curve”, and instead honestly represent, separately, the cost-control mechanisms as supposedly good investments, and expansion of coverage as a matter of compassion and wealth redistribution. Such a representation would be more conducive to a correct conceptual understanding of the merits of each, and to an honest discussion/debate thereof.
* The “rock soup” story http://en.wikipedia.org/wiki/Rock_soup or my bare bones version: A story I was told a long time ago of a traveler who arrives in a village with nothing but a pot. He sets himself down in the center of the village, gathers some rocks, fills his pot with water, and builds a small fire. As the water boils, villagers approach him and ask what he is cooking. He tells them Rock soup, the most delicious soup in the world. Ill be glad to share some with you. Its made with these rocks Ive gathered, although for it to be really good, I should add some high quality beef, fresh vegetables and the finest spices. The villagers readily offer to provide these other ingredients, anticipating the delicious rock soup.
** See http://content.nejm.org/cgi/content/full/358/7/661 regarding the net cost impact of preventive care, and also, if we broad our scope from impact on healthcare spending to impact on overall spending, we should not that longer lives means higher spending on Social Security, Medicare, etc.
As follow-up to the first paragraph of my earlier comment, each iteration of going to the well of tax increases or spending cuts requires more sacrifice, gets politically harder (and thus less likely to happen soon), and involves greater economic trade-offs. If we use tax increases and spending cuts to pay for incremental spending rather than to reduce the already unsustainable projected long-term fiscal imbalance, we will be left with the necessity of even less desirable tax increases and spending cuts to get on a sustainable fiscal course. These eventual sacrifices will be greater, and even more politically difficult, and thus will arrive later while the imbalance grows and compounds the ultimately necessary sacrifices, and they will also likely require greater economic trade-offs, since, particularly on the tax side, as rates rise there is diminishing returns of revenue and more negative impact on GDP (making it harder to address both numerator and denominator of debt-to-GDP with each increment of tax increases).
Its like someone who has been gaining weight and is now obese and on track for severe health problems and premature death in the foreseeable future. He is clearly consuming many more calories than he is burning, and needs to lose weight, maintain weight, or at least reduce the imbalance to significantly slow his weight gain. He finds it very difficult to eat less or to exercise more, and thus hasnt done either even though he knows he must. Specifically, he needs to get to the gym 2 times per week and go from 4 meals per day to 2 in order to have a reasonably healthy future. He then starts considering adding some cake as a late night snack to his daily consumption, and reasons that its ok to do so because he will make it weight-neutral by offsetting it by going to the gym once a week and cutting out 1 meal a day. Well, its not ok, because even if he actually does that (a considerable “if”, by the way), he needed to do that much and more to solve the problem he already had. If he adds the cake, he will then need to go the the gym 3 times per week and cut back to only 2 meals per day, something that is far beyond what hes been able to do so far (and that he is even less likely to do any time soon, meaning hell continue gaining weight at his current pace), and which will entail greater sacrifice in exercise and meal-loss, and which may involve diminishing returns (e.g., if his body cant handle a third vigorous workout each week,20or if skipping a meal deprives him of energy for vigorous workouts).
Unless someone can demonstrate convincingly that expansion of coverage itself (not including the offsets) is somehow highly likely to generate savings in federal healthcare spending sufficient to truly “pay for” itself, it should be considered as a policy change that exacerbates the already huge, unsustainable problem of our long-term fiscal imbalance even if (hypothetically) it were “offset” by tax increases and spending cuts that would provide deficit neutrality indefinitely (i.e., even beyond the ten-year period), exacerbating it not numerically in that hypothetical case (which is much better than the reality of the bills, which don’t even achieve long-term deficit-neutrality, as Keith explains so well), but by using up the least painful and/or politically easiest sacrifices to offset this additional spending rather than for reducing the fiscal imbalance, leaving us to make even more painful and more politically difficult (and hence further delayed and more costly) sacrifices.
The AP has a quote from Rep. Camp “When you find yourself in a hole, the first rule is to stop digging,” Representative David Camp, the top Republican on the House Ways and Means Committee, said in a statement. “If they can’t stop digging, for the good of the nation they should at least get a smaller shovel.” Unfortunately this quote is buried at the bottom of the article that seems to use the CBO as proof the insurance industry wouldn’t be devastated by a public option. Of course most would continue to choose to get their insurance through the employer but there is no guarantee the employer wouldn’t opt for the government plan. This is a point that Keith has made here several times in reference to the President’s repeated overpromising that no one would force you to change your plans.
The same CBO report seems to refute the claim that employers would stop offering insurance to their employees as a result of the exchanges but chief among them is this:
But, as Keith points out here, the two options to solve the deficit problem with the proposed House legislation is to cut health spending or tax employer benefits. The option to tax employer benefits eliminates the chief reason most would not opt for the public plan over employer provided. That really leaves the only option available to Congress here is to actually cut health care spending if they want to maintain the claim the public plan wouldn’t destroy competition in the private insurance industry. The fall brings greater peril for those who would even be inclined to do the difficult work of actual spending cuts as the threat of midterm elections draws ever closer. I find it hard to believe the same group that produced this proposed legislation is going to go back to the drawing board and take on the difficult work of actually bending down the costs.
Only one problem with your analysis, Keith. You are predicating all on Obama keeping his word + refuisng to sign a bill that increases the long term deficit. IMO, he will rationalize and sign it. That is why Republicans like Snowe and Grassley are doing us all a disservice by tring to work with the Democrats on revising and “fixing” 1000+ page bills. You know if it has that much text to it, it must be bad. We need fewer (far fewer, imo) mandates, and to do away with the 3rd party payments. That will bend the curve by providing an a la carte approach to insurance and more individual self-rationing which is what we do with computers, shoes, toasters, etc.
Evinx,
I think you’re right. No matter what, the numbers will never work out, but our government has never constrained itself to its scarce resources in the modern era. It doesn’t matter that this policy is fundamentally unsustainable. The progressive blowhards will push it regardless.
No matter what the projections are. The costs will balloon like all US Gov programs. Name ONE that cost less than projected.
IOW, if this passes, we are even more sunk than our “elite lawmakers” are willing to own up to.
Once again we allow it to happen. These creeps should be forced to take the same healthcare plans they are trying to stick us with. Some for retirements and social security. Maybe the Leftists would sing a different tune if the Messiah was talking about THEIR taxes, THEIR healthcare and THEIR retirement. We should be jamming the switchboards of all the lawmakers !
Reasoner,
I think Medicare Part D (which never should have passed) is coming in significantly less than forecast – about 20-25 billion less, if memory serves. But, it is a very market oriented program with plenty of consumer choice. Obamacare is just the opposite. To validate your overall point though, I think Medicare which started in 1966-67, was projected to cost $9 billion in 1990 – and came in at $90 billion. What we really need now is for people in Iowa to jam Grassley’s phone lines with complaints + people in Maine to do likewise with Snowe’s office. NO DEALS – coop exchange or public option – it all stinks.
When I originally left a comment I clicked that -”Notify me when new comments are added”- Check box now each time any comment is put in I end up getting 3 e-mail that has the same comment. Could there be any way you can get rid of me from that program? Thanks!