Is What I Hear True?

I heard that...

...healthcare reform will cost $1.6 trillion. Is that true?

A more recent answer to this question, based on H.R. 3962, the bill moving through the House of Representatives, was posted on Nov. 6, 2009. To get it, click here.

The simple answer is that no one knows yet.  However, the often-quoted estimate of $1.6 trillion is not accurate. This and other quoted estimates for the various proposals do not take into account all parts of the proposals, any savings or revenues associated with the proposals, nor all the proposed amendments. We won't know how much reform will cost until a final, complete bill is scored.

Right now, the talk about “costs” is based on estimates from draft bills as they were first introduced, not on the final bills. Some parts of the bills were not analyzed, including  many of the amendments. Some estimates did not include savings or new revenues generated by the bills. Also, the numbers are mind-boggling.  This is a big country with a big economy.  To put the numbers in context, please see "The Numbers in Perspective."

In talking about the cost of the bills, some people refer to the gross cost. This is the total spending on the new bill before reducing it for any savings or new revenue generated by the bill (although the methods vary slightly among the bills).  Combining the spending, savings, and revenue gives the net cost of the bill. All the proposed bills have savings, which come from changes to the system that will save money, as well as new revenue, such as premiums, fees, and taxes.  The net cost of the proposed bills is lower than the gross cost, but most people use the gross cost when talking about the bills.

As of September 30, 2009, there are two main proposed bills and one Chairman’s Mark in Congress:

• The House of Representatives bill, H.R. 3200, America’s Affordable Health Choices Act (also called the Tri-Committee Bill)
• The Senate's Affordable Health Choices Act (also called the Kennedy Bill or the HELP Committee Bill)
• The Senate Finance Committee Chairman's Mark (also called the Baucus Bill, although it is not officially a bill as of yet). 

Although the Congressional Budget Office (CBO) has “scored” each of these proposals, this scoring is  a preliminary review only. (Note: The CBO’s process of calculating the income and expenses of a bill is called “scoring.”) 

Estimated Cost of the House of Representatives Bill

The CBO scored H.R. 3200 and reported the results on July 17, 2009.  The CBO scored H.R. 3200 based on the description of the bill from the Ways and Means Committee’s staff, and not on the written bill.  Also, the CBO only scored some, not all, of the bill in the preliminary review, and did not include the 41 amendments House committees have made to the bill.    

This CBO’s initial scoring of H.R. 3200 also corrected a problem that the bill’s sponsors say is not part of healthcare reform.  In 1998, Congress adopted the Sustainable Growth Rate (SGR) formula to determine how much Medicare will pay physicians.  Since 2002, this complicated formula has called for reductions in payments to physicians.  Nearly every year, at the last minute, Congress decides not to make the cut in the next year’s budget, and the President has not vetoed it.  Each time this happened, Congress “borrowed” from physician payments budgeted for future years in order to balance the current year’s budget. This has resulted in a large and rapidly growing budget problem in Medicare. 

To fix it, the CBO (July 17, 2009) has stated that physicians’ payments will have to be cut by 21% starting January 2010.  The alternative is a one-time fix in 2009 that will cost a total of $245 billion over 10 years . This fix would "pay back" the money "borrowed" money from future years' budgets.  When CBO scored H.R. 3200, it included the $245 billion in the cost of the bill. 

According to CBO, H.R. 3200’s scoring is not “a complete cost estimate” for the bill.  The document is available at:  http://www.cbo.gov/ftpdocs/104xx/doc10464/hr3200.pdf.

The CBO's preliminary scoring (July 17, 2009) for 2010 - 2019 of H.R. 3200 shows:

$1,042 billion	cost of insurance coverage provisions minus certain payments
-245 billion	cost of fixing the 2002-2008 Medicare SGR physician payment problem (removed because some feel it should not be counted as part of healthcare reform)
-219 billion	savings (“offsetting spending reductions”) from the bill
-583 billion	increase in federal revenues from the bill
-6 billion	net 10-year cost (rounded); shows overall savings, which could mean a decrease in the federal debt if the bill is enacted

In other words, if the estimates are accurate, the original CBO scoring indicates the bill could make money and reduce the federal debt. However, because the entire bill and its approved amendments have not been scored by the CBO, it is not clear what the bill would cost if enacted. 

If the bill passes as originally written, there will be 17,000,000 million Americans—or 3% of the population—who would be uninsured in 2019.

When people say reform will cost $1.6 trillion, they are referring to news reports of the July 17, 2009, CBO scoring of the H.R. 3200 healthcare reform bill. Soon after the CBO released its scoring, the media claimed the bill would cost $1.6 trillion. However, as can be seen in the numbers above, this claimed cost does not withstand scrutiny (or a calculator).  The bill's spending due to healthcare reform, according to the CBO scoring, is $797 billion ($1,047 billion minus the $245 billion to fix the Medicare physician SGR payment problem).

Estimated Cost of the Senate HELP Committee (Kennedy) Bill

The CBO scored Title I only of the Senate's Affordable Health Choices Bill, also called the HELP Committee bill or the Kennedy bill, on July 2, 2009.  The CBO had previously scored Titles III and IV of the bill.

The CBO has not scored the entire bill or its amendments.  According to the CBO, the preliminary scoring is not “a formal or complete cost estimate of the draft legislation.”  The document is available at: http://www.cbo.gov/ftpdocs/104xx/doc10431/07-02-HELPltr.pdf. 

The CBO's preliminary scoring (July 2, 2009) for 2010 - 2019 of the HELP Committee Bill shows:

$645 billion	cost of insurance coverage provisions minus certain payments in Title 1
-48 billion	savings (“offsetting spending reductions”) from Title 1 of the bill
0 billion	increase in federal revenue from Title 1 of the bill*
$597 billion	net 10-year increase in spending for Title 1
14 billion	cost of Title III and IV (previously scored)
$611 billion	net 10-year cost (shows overall increase in spending but does not include revenue provisions)

*The HELP Committee does not normally write the parts of bills that generate revenue. This is normally done by the Senate Finance Committee, which is also reviewing the bill. This is why no federal revenues are shown in the preliminary scoring.

If the bill passes as originally written, there will be 34,000,000 Americans—or 10% of the population—who would be uninsured in 2019.

The bill assumes an expansion of Medicaid to 150% of the federal poverty guidelines (FPG).  The cost of the Medicaid expansion was not included in the preliminary scoring.

The HELP Committee bill is less complete than H.R. 3200, and various Senate committees have added approximately 190 amendments to the original Help Committee bill.  Because the cost of these amendments has not been scored by CBO, it is not clear what the bill would cost if enacted with all or some of these amendments.

Estimated Cost of the Senate Finance Committee Chairman's Mark (the “Baucus Bill”)

The CBO released its second scoring of the Senate Finance Committee Chairman’s Mark (also called the “Baucus Bill,” even though it has not yet been written up in bill form and is not officially a bill) on October 7, 2009. The CBO based its scoring on the text of the Chairman’s Mark as amended by the Senate Finance Committee.  The CBO states that its estimates are "subject to substantial uncertainty."   The CBO's scoring document is available at:  http://www.cbo.gov/ftpdocs/106xx/doc10642/10-7-Baucus_letter.pdf

The CBO's preliminary scoring October 7, 2009) for 2010 - 2019 of the Senate Finance Committee's Chairman's Mark shows:

$829 billion	cost of insurance coverage and subsidy provisions
-201 billion	revenue from excise tax on high premium insurance plans and other revenue
-110 billion	savings from other sources
$597 billion	net cost of insurance provisions
-404 billion	savings (“offsetting spending changes”) from the Mark
-196 billion	increase in federal revenues
$-81billion	net 10-year cost (rounded); shows overall savings, which could mean a decrease in the federal debt if the mark becomes a bill and is enacted

In other words, if the estimates are correct and if the Chairman’s Mark is passed as a bill with  its present content, the bill could make money and reduce the federal debt.

If the Mark passes as written, there would be 25,000,000 Americans—or 6% of the population—who would be uninsured in 2019.

Some Savings Are not Counted
Most of the healthcare reform bills would generate significant savings for many families and individuals, as well as for small businesses.  These savings, however, are not part of the federal budget and therefore are not reflected in the estimated savings. 

Also, there has been no attempt to calculate the economic value that may result from the prevention of death and disability because of healthcare reform.  For example, the Institute of Medicine (IOM) estimates that the 18,000 Americans die every year unnecessarily because they are uninsured and can’t get or delay treatment (Institute of Medicine, 2003). No one has studied how the economy would benefit from reducing the number of unnecessary deaths that result from a lack of insurance.

Some people also believe that better coverage of preventive services will ultimately lead to reduced costs of care.  The CBO does not estimate any savings, even in later years, for preventive health services.  The CBO’s explanation for why it does not do this is at:  http://www.cbo.gov/ftpdocs/104xx/doc10492/08-07-Prevention.pdf

CBO Scoring of Healthcare Bills Is Not as Reliable as for Other Types of Bills
There is an issue with the reliability of CBO scoring of healthcare bills.   The CBO is widely respected for its integrity, competence, independence, and non-partisan approach.  However, many believe that its scoring of healthcare bills is less reliable than for other types of bills.

The CBO seems to consistently underestimate savings and overestimate costs for major healthcare bills. For example, in the 1980s, the CBO significantly underestimated how much the change to hospital prospective payment would save for Medicare.  In 1997, it significantly underestimated how much money would be saved by payment changes to skilled nursing facilities and home care services.  In 2003, it significantly overestimated the cost of Medicare Part D (The Commonwealth Fund, 2009).

This may be because the CBO is too cautious in its estimates, which is understandable given the complexity of our healthcare system. Within the U.S., we have a mix of private and public insurance, nonprofit and for profit providers, as well as privately provided and government-provided care for certain groups of people, like active-duty military personnel and veterans. Health insurance and healthcare services cost more in some parts of the country than in others. And, the various insurance plans cover and pay for services at very different rates. These make it harder to estimate how much reform will cost or save the country as a whole.

Bloomberg.com (2009, September 15) announced that the Institute of Medicine (IOM) is nearly  ready to release a report expected to criticize the CBO for being too “stingy” in scoring H.R. 3200.  In this report, the IOM will identify many measures that could save $250 billion a year within a decade, about five times what CBO counted in their scoring, including:

• Saving $2.6 billion a year by encouraging healthcare providers to buy equipment through an auction
• Saving $109 billion over 10 years by moving the healthcare system toward electronic payments
• Saving $14 billion over 10 years by encouraging insurance companies to mail explanation of benefits forms once a month instead of for each claim

In addition, the IOM believes that wide use of electronic medical records will save $77.8 billion per year, rather than the $5.4 billion scored by the CBO. 

The Difficulty of Making a 10-Year Budget
Ten year budgeting, which the CBO has done for all of the healthcare bills it has scored is very difficult.  In any 10-year period, there is likely to be at least one recession. Other events also occur that change the world in profound ways.   Budget estimates for the near future are much more dependable than those that guess what may happen 8, 9, or 10 years from now. While looking at the cost of bills over the long term is important for budget integrity, it may be as much art as science in the later years.  The costs of healthcare reform all refer to such 10-year estimates made by the CBO. 

 

Sources

Board on Health Care Services (2003). Hidden Costs, Values Lost: Uninsurance in America.  Institute of Medicine.

Elmendorf, D.  (2009, July 2).  Letter to Edward M. Kennedy.  Congressional Budget Office.  Available at:  http://www.cbo.gov/ftpdocs/104xx/doc10431/07-02-HELPltr.pdf

Elmendorf, D. (2009, July 17). Letter to Charles B. Rangel.  Congressional Budget Office.  Available at: http://www.cbo.gov/ftpdocs/104xx/doc10464/hr3200.pdf

Elmendorf, D. (2009, August 7).  Letter to Nathan Deal.  Congressional Budget Office.  Available at: http://www.cbo.gov/ftpdocs/104xx/doc10492/08-07-Prevention.pdf

Elmendorf, D. (2009, October 7).  Letter to Max Baucus.  Congressional Budget Office.  Available at:
http://www.cbo.gov/ftpdocs/106xx/doc10642/10-7-Baucus_letter.pdf

The Commonwealth Fund (August 26, 2009).  New Research Finds Congressional Budget Office Has Underestimated Savings and Overestimated Costs from Health Policy Changes.  Available at:  http://www.commonwealthfund.org/Content/News/In-The-Media/2009/Aug/Congressional-Budget-Office-Has-Underestimated-Savings-and-Overestimated-Costs.aspx

Congressional Budget Office Issue Brief (2006, September 6).  The Sustainable Growth Rate Formula for Setting Medicare’s Physician Payment Rates.  Available at:   http://www.cbo.gov/ftpdocs/75xx/doc7542/09-07-SGR-brief.pdf

Mullaney, T (September 15, 2009). U.S. Health-Costs Panel to Rebut “Stingy” Budget Office Savings.  Accessed September 22, 2009 at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a09dX4NiJ714

For Additional Reading

Elmendorf, D. (2009, March 27). Letter to John Spratt.  Congressional Budget Office.  Available at: http://www.cbo.gov/ftpdocs/100xx/doc10052/03-27-SGR.pdf

Gabel, J.  (2009, August 26).  Congress’s Health Care Numbers Don’t Add Up.  New York Times.  Available at: http://www.nytimes.com/2009/08/26/opinion/26gabel.html?_r=1&scp=1&sq=
gabel,%20Jon&st=cse

 

CONTACT US