CBO Director Elmendorf destroys a core Presidential health care argument

CBO Director Elmendorf destroys a core Presidential health care argument

CBO Director Dr. Douglas Elmendorf has posted the slides he used in a presentation Wednesday to the Institute of Medicine, titled Health Costs and the Federal Budget. The presentation obliterates the claims of the President and his allies about the effects of the new laws on federal health spending and the budget.

For months the President and his Budget Director correctly argued that the goal of health care reform was to “bend the cost curve down.” The projected path of per capita health spending is unsustainable and will result in three bad outcomes:

  1. those with health insurance will have less money available for other needs;
  2. it will be harder for the uninsured to buy insurance; and
  3. government spending on Medicare and Medicaid will break federal and state budgets.

Here is the President at the Blair House:

The third thing it seems — I assume we can all agree on is that over the last decade costs have doubled for health care in America — costs have doubled for government-provided health care, but everybody’s health care. And that that meant that right now everybody knows that that wrecks budgets, it wrecks state budget, it wrecks family budgets, it wrecks federal budgets. Every 35 cents of every dollar spent on health care is spent by the federal government or the state governments for Medicare and Medicaid — 35 cents on the dollar. That doesn’t count veterans and other things, just those two. And so — and what’s happened is — on the dollar, on every health care dollar.

And so we’re facing, all of us around this table, Democrat and Republicans, are facing the fact that there’s $919 billion now we’re spending on Medicare and the federal portion of Medicaid, and that if things — I don’t see any firewall is going to keep costs from doubling again, we’re going to be talking about in the year 2019 we’re going to be spending $1.7 trillion if we don’t do something to bend that curve.

A common refrain from the President and his Budget Director was “health care reform is entitlement reform.” And through two budget cycles, when senior Administration officials were pressed on their plans for deficit reduction, they always returned to the argument that health care reform would substantially improve the federal budget outlook.

CBO Director Dr. Douglas Elmendorf has shown this argument to be incorrect.

This is the best and most direct presentation I have seen on the subject. I commend Dr. Elmendorf for his honesty, clarity and bluntness. I wish he had been this blunt and this clear in February and March before these bills became law.

Here is Dr. Elmendorf’s first slide. Emphasis is mine.

The Challenge

Rising health costs will put tremendous pressure on the federal budget during the next few decades and beyond. In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure.

Here he shows the effects on Medicare spending of the two new health care laws, as well as the effect if Congress permanently extends a Medicare “doctors’ fix” like the “temporary” one being considered in the House today. The light blue line represents Medicare spending before the new laws, the dark blue line after the new laws, and the dotted line is the new laws plus a permanent doc fix. You can see that there is net Medicare savings even with a permanent doc fix, but the unsustainable spending growth still exists. And this is the part of the federal government where they “cut” (slowed the growth of) spending to pay for part of the new health care subsidies.

Now Dr. Elmendorf shows us the effects of the new laws on spending for Medicaid, CHIP, and the new health insurance subsidies’ You can see how the new spending line (in light blue) is an enormous increase over the baseline spending in dark blue.

OK, now let’s examine the net effects of the two laws.

Since the dark blue bars are roughly the same height as the combination of the light blue bars, the net deficit effect shown by the line is right about zero. Congressional Democratic leaders optimized to maximize coverage and minimize political pain from spending cuts and tax increases without increasing the deficit. Had they instead focused on the the President’s stated priority of “bending the cost curve down,” this graph would have looked quite different. The deficit reduction boasted about by the Administration and its allies is trivially small.

Dr. Elmendorf is direct:

The legislation will increase [the federal budgetary commitment to health care] by nearly $400 B during the 2010-2019 period but reduce it in the following decade.

The legislation will reduce budget deficits by about $140 billion during the 2010-2019 period and by an amount in a broad range around one-half percent of GDP during the following decade.

Q: How can both these statements be true? Over the next decade, how can the new laws increase the federal budgetary commitment to health care while reducing the deficit?

A: By redirecting non-health dollars to health. The increased Medicare payroll taxes on “the rich” are the best example. These laws devote more federal resources to health care. We were supposed to move the other way and devote less.

On February 23, 2009, the President said:

In the coming years, we’ll be forced to make more tough choices and do much more to address our long-term challenges, from the rising cost of health care that Peter described, which is the single most pressing fiscal challenge we face by far, to the long-term solvency of Social Security.

Once again Dr. Elmendorf debunks this claim that “it’s all about health cost growth.” This graph shows that, at least for the next decade, most of the growth in federal entitlement spending is the result of aging. Excess cost growth of health spending is a critically important but secondary factor.

Finally, here is Dr. Elmendorf’s concluding slide. Emphasis again is mine.

Putting the federal budget on a sustainable path would almost certainly require a significant reduction in the growth of federal health spending relative to current law (including this year’s health legislation).

Never before have I seen a CBO Director so bluntly refute the policy claims of a President and his Budget Director.

16 responses

  1. Pingback: Tweets that mention CBO Director Elmendorf destroys a core Presidential health care argument | KeithHennessey.com -- Topsy.com

  2. It also looks like Dr. Elmendorf admitted there would be rationing:

    Slide 11
    "Efforts to reduce costs increase the risk that people would not get some health care they need or would like to receive."

  3. The ACA does eventually reduce the deficit. Just not by very much in the 10 year budget cycle. It does not reduce Federal spending on health care, but I don't see this presentation as that different from what the Administration's line on Health Care reform was. It will drastically increase coverage while reducing the deficit.

    As Ezra Klein repeatedly wrote through the health care debate, the benefit of the ACA is it gives a platform, not only for further entitlement growth (yes I'm a socially liberal) but also as a way to increase the tax on corporate health care plans and allow the government to force learnings from one part of the health care sector onto another one. I see these as benefits and if we can get all that without a negative effect on the long term deficit that's not a bad trade off.

    • If ACA does eventually reduce the deficit (a claim I doubt given a politician's desire to give "goodies"), it only does so, as Keith points out, by increasing taxes. We hardly need ACA to do that, unless you believe "stealth" tax increases are some kind are a good thing. Second, ACA hardly "drastically increase coverage". For that to be true, you would have to identify some large population that gets no health coverage now. You cannot find such a population and you know it. Just saying 30 million (or whatever your favorite number is) lack health insurance is not the same thing as saying that population lacks health care coverage.

      You seriously weaken your argument even further by referencing Ezra Klein. Klein is a child and thinks like a child. Your mind has been fogged by his claiming on the one hand we have some deficit reduction, but at the same time want a platform for further entitlement growth. Have you even thought about the sovereign debt, the deficit, and the examples of Greece, Spain, and Portugal. Do you even realize that if we have a debt of $20 trillion, then at 5% the interest would be $1 trillion annually? That is close to 1/3 of the current budget. Where ever would you get the money for further entitlement growth. You might have noticed Greece just demanded a 25% decrease in pharma costs. Nova for example, has said "no" because it would mean operating at a loss.. Pity the diabetics in Greece. They are now on the hook to import needed drugs on their own nickel.

      The idea that we can tax corporate health plans is silly. Corporations would simply stop providing those benefits as Waxman quickly discovered. That would put those benefits back on the federal government and your already false hope of providing benefits without increasing the deficit would be overwhelmed by massive increases in the deficits or such a significant decrease in health care that only armed revolution would ensue. So ends the folly of taking seriously the child Ezra Klein.

      • Okay Rick – I'll bite
        Is your definition of health care coverage ERs and free clinics? That's pretty poor "coverage" it's also an incredibly expensive way to treat problems that could be treated through family doctors, if those that aren't insured were to have insurance.

        The bond markets don't seem particularly concerned about America's debt (see the latest offering securing a 3.3% interest rate – that grades it as fairly low risk) and while I agree that as the debt grows the interest burden will continue to eat up the federal outlay, blaming a $185billion/year bill with being overwhelmingly responsible in increasing the debt burden is a stretch. Compared to Bush's tax cuts, the wars in Iraq and Afghanistan and Medicare Part D it's actually very cheap.

        Also it will be impossible for the debt relief to happen without some kind of tax increases as well as structural change in government outlays (including changes to Social Security, defense spending and Health spending) but as you saw during the Health Care debate there is only one party who actually cares about governing at the moment so no major change will be possible while one party continually stonewalls.

        If corporate health care plans were taxed, corporations could either pay the tax, or stop offering health care. But, unless you believe that markets don't work, corporations would have to somehow make up for that lost compensation most likely through increased income (otherwise competition would lead employees to other better compensated roles). Now if markets don't work and corporations can just give a 20% reduction in pay/benefits to American workers without any consequence, the government would have to step in.

      • First, the question is if there is health care coverage. Now, whether you like the means or not is immaterial, the answer is that there is coverage and you have admitted it. Now, cost is a germane issue. But, d we really address cost by setting up another complete system with mandated levels of coverage? That is a horrible idea and it shows in the monstrosity of a health care bill. Where is the option of catastrophic coverage. Where are the options of letting individuals and markets address the costs. If anyone, anywhere thinks a government solution is both efficient and complete, they have been mislead. Government always, always overspends and under performs.

        I am glad you referenced family doctors. Let me know where you are going to get all these new primary care doctors. Will the speak English? Or, will we be reduced to sign language.

        The bond market is stirring. Greece is up, what, 700 bips. Spain has been dropped to AA. The US is only able to keep its lower rates by QE, the carrying of a fed rate of ,25%, a flight to relative safety. But, if you look at PIMCO, that will not remain. The whole idea we can take our debt to $20 trillion and the bond market will not react is just plain silly.

        Afghanistan and Iraq will end. In fact, Iraq has essentially ended. Revenue increased after the Bush tax cuts. It is doubtful the expiration of the cuts will increased revenue. But, if it does, the history of tax increases is always to produce significantly less revenue than projected. That is always true and is why the CBO is restricted to static, rather than dynamic, scoring. On the other hand, a new medical entitlement, like all entitlements will cost significantly more than estimated, will continue to grow, and will never go away. Please don't even try to compare two relatively small wars to a health care entitlement. It is foolish.

        No, one party is not interested in governing. It is interested in grandstanding and giving other people's money away. In fact, I wish the Democrats would have thought about governing before they started the Ponzi schemes of Medicare and Social Security. You do remember, don;t you, that both programs came from Democrats interested in "governing". And worse, both programs were promises based on taking money now from the taxpayers in exchange from the promise of payment later. So, now, I guess, it is your intent to go back on those promises.

        You may remember McCain offered a plan to tax corporate health plan. You may also remember the Democrats in general and Obama in particular poo-pooed that plan. My claim is that you cannot tax the corporations for health care and expect them to continue offering that plan. Even a Democrat should be able to figure that out. Waxman finally did. I doubt, and you would too if you thought about it, that corporations will eliminate health care insurance and put the full amount into paychecks. They certainly would not put any increases they avoid into the paychecks. But, again, labor is a market and the corporation will pay what it needs to pay ot get good labor. Business is not a charity as much as Democrats would like it to be. I am appalled at the way you toss off, as if it were obvious that government, would have any idea of how to set pay rates after health care coverage were dropped. You cannot be serious, can you?

  4. I like how one of the slides is attributed to Goldman Sachs. Why bother having a CBO at all when we can just rely on Goldman Sachs's projections?

  5. These estimates are still far rosier than reality will prove to be. The reasons?
    First, the "savings" ignored the bureaucratic costs of supporting this huge new program. Recent CBO reports have concluded that the $140B of savings will vanish when these costs are taken into account. Second, as we saw in the leaked material from AT&T, large corporations will quickly determine that the penalties for dropping insurance will be far less than the costs of providing it. Employer provided insurance benefits will go the way of the defined benefit pension plans – extinction. Unfortunately this will markedly increase the costs to the federal government as millions of people are dumped into the new exchanges and require subsidy of their premium costs. Just as medicare was 9x the predicted cost in 1990, so too will this new entitlement suffer exponential cost over-runs. Of course, the more cynical among us might be tempted to conclude this WAS THE PLAN from the start, but either way the promise that "you can keep your current insurance if you like it" will prove hollow.
    Finally, many of the promised cuts and revenue sources will never materialize. The tax on Cadillac plans for instance hit a favored and protected constituency, large unions. The Dems will never let this occur, and if they try to exempt unions (again) there will be open rebellion. So in the end it will be adjusted out of existence. The revenue will never be collected. Another example is the "doc-fix" issue. As a physician I can assure you, if they attempt to impose a 26% cut on the already abysmal Medicare reimbursement levels, we will quit the program en masse. Then the promise of "insurance" coverage will ring hollow as there are no physicians willing to accept it.
    These are just a few ideas off the top of my head, others will list many more. The promises made have been deceptive and false, all with the intention of "doing something historic", namely asserting government control over our health care system. Check back in 6 years after the exchanges have opened for business and see what CBO ssays then!!

    • BNK,

      If employer provided plans go the way of pensions, this would theoretically result in a huge increase in income tax revenue to the government as compensation is moved from health care benefits (untaxed) to income (taxed). I would find it hard to believe that corporations could end a fairly generous benefit and not offer any increase (even if it is not equal to the cost of providing health care). This would offer two things, the possible creation of a consumer choice model of health care and greater revenue for the federal government to fund the safety net that currently isn't funded. Seems reasonably balanced to me.

      I actually think corporations will keep benefits though because they are a very ambiguous offering that makes it harder for employees to "shop" between prospective employers (the perceived value of "good benefits" is likely greater than the actual outlay that companies make), it also keeps high performing entrepreneurial employees tied to corporate America solely for the benefit of good corporate health care plans

      And by the way the AT&T charge (along with others) wasn't related to a change in health care it was a removal of a corporate welfare benefit tied to the medicare part D enactment, where large corporations that offered prescription drug coverage to their retirees where given not only a deduction for the cost of covering those employees but a credit as well on their tax returns. With ACA the credit was removed, causing the companies to only get the deduction not a handout/credit also.

  6. @wj you are from chicago? what a surprise……

    I love when "social liberals" start talking about the intricacies of the bond market and credit quality (let alone economics). It acts as a leading indicator for me to move on to the next comment….saves me precious time to read about the latest redistributive, corrupt, inept/incompetent, immoral new bill being sponsored by the President from the 8th hole of some DC golf course.

    • You're skating extremely close to the edge of my comments policy. Your substantive comments are quite welcome, but please keep it civil. In particular, I'd appreciate it if you debate the merits of other commenters' arguments, rather than comment on your view of their intent.


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