Does House Bill Deal With Costs? Yes. No. Maybe.

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THE TREATMENT JULY 22, 2009

Does House Bill Deal With Costs? Yes. No. Maybe.

There's a lot of confusion over whether the House health reform bill, which two committees have passed and a third is considering, will deal with the issue of costs. And a big reason is that there are really three separate questions here.

  1. Does the House reform plan, on net, pay for itself within the ten-year budget window?
  2. Does the House reform plan, on net, pay for itself beyond the ten-year window?
  3. Does the House reform plan actually reduce the cost of health care over the long run, thereby easing pressures on both the federal budget and society as a whole?

The answer to (1) is "Yes, but..."  It is "yes" because the cost of expanding coverage--that is, strengthening Medicaid and giving people subsidies with which they can purchase insurance--comes to a little over $1 trillion over ten years.  The House bill raises a roughly equal amount of money through a combination of savings within the health system (changes to Medicare reimbursement, etc.) and an income tax surtax on very wealthy people.  So it's deficit neutral in that sense. 

The "but" is because of what's called the "sustainable growth rate" or SGR. Every year, there is supposed to be an automatic reduction in Medicare payments to physicians. Every year, Congress at the last second postpones the cut, because it would have a drastic effect on physician incomes and perhaps (as a result) the availability of physician services. Obama and the Democrats said they it's time to 'fess up and admit that nobody is going to allow those cuts to take place. But doing that means we're on the hook for another $200 billion in spending over the next ten years.Some would say you have to include that in the cost of a reform plan, particularly since that promise was a key reason the American Medical Association now says it supports reform. And if you do that, the House plan does not pay for itself.  It's in the red for about $200 billion over ten years. (I'm rounding figures to keep it simple.)Others would say it's essentially a separate expenditure--an obligation we were already forced to meet and that shouldn't be added to the price tag of reform. The wonks say "it's baked in the cake already."

The answer to (2) is "Probably not, although it's not clear how big a gap or how much it matters."  Everybody is obsessed with keeping the tab for reform at or under a trillion dollars. One way to do that is to gut the bill--slash benefits and subsidies to people who need help. That seems to be where the Senate Finance Committee is headed. The other way is to stay under $1 trillion is to offer more generous benefits and subsidies, but delay implementation until three or four years into the program. That's what the House did.  And it works, at least on the balance sheet. Six or seven years of reform is less expensive than ten. And you can pay for it by starting the offsets--the new revenue and the savings from elsewhere--a bit earlier.  But that also means that, by the time the ten year window is done, reform is sending out more money than it's taking in. The difference might not be much: Remember, the CBO, who's coming up with all these numbers, has a very conservative view of how much money efficiency moves will yield. Just a bit more optimism and the program is pretty close to balance, even beyond the ten years. But look at the program in its final year of implementation and you'll see a gap.

Of course, the real issue is not what happens in year eleven but year twenty and thirty and forty, and not just to the federal budget but to health care expenditures as a whole. Which brings us to...

The answer to (3) is "it depends entirely on which experts you believe."  The CBO, again, makes projections based on fairly conservative assumptions about the impact of efficiency changes to health care. In effect, it assumes the worst. As far it's concerned, there are really only a handful of ways to substantially reduce costs--that is, to bend the cost curve down--over the long run. You can cap or eliminate the tax exclusion, which CBO believes will drastically alter incentives and put downward pressure on costs You can create sort of automatic budget mechanism that reduces spending levels if savings don't materialize over time. (The 1993-94 Clinton health care plan had something like this.) You can also take payment policy out of the hands of Congress and put it in the hands of an independent authority.

(Actually, CBO has only hinted that the last suggestion will work. We'll learn more soon, if indeed Congress adopts a proposal along those lines that the administration and Senator Rockefeller are circulating.)The House bill has none of these things.  Ergo, CBO Director Doug Elmendorf on Thursday said it would *not* contain costs. His testimony was widely seen as an effort to put the tax exclusion back on the table, since it's a CBO favorite. I think that reading was accurate--and I think that's why he was so definitive.

Other experts, however, think the CBO is way too pessimistic on this. The most famous is David Cutler, who argues you don't need those three tools to get big savings. He says that a combination of other changes--including better information technology, comparative effectiveness research, bundling of hospital payments, and moving towards integrated care--can do the trick. If Cutler is right, then something like the House bill--with maybe a few more bells and whistles--will indeed reduce costs significantly over the long term.

One thing to keep in mind: There's a vast middle ground between doing nothing about long-term costs and bringing long-term costs "under control." It's entirely possible the House bill, or something like it, will make progress on bending the cost curve--just not as much as some of us would like. If it did that while simultaneously making insurance coverage available to all and making the system more efficient, that'd still be a pretty big accomplishment.

--Jonathan Cohn

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