Health Care's Fuzzy Math

The name of the game in Washington Thursday was spinning the latest budget numbers from the Congressional Budget Office. As a CBO alum, I’m pleased that the agency’s hard work is getting such deserved attention. However, I’m also frustrated that policymakers and the media so often mischaracterize CBO’s findings.

For example, everyone is reporting that health-care reform will cost $940 billion over the next ten years. Unfortunately, that’s not true. The $940 billion price tag applies to the parts of the legislation that would expand health insurance coverage. As important as those provisions are, they are not the whole story of health reform. For example, the legislation would also fill in the infamous “doughnut hole” in Medicare’s prescription drug program at a ten-year cost of $38 billion. A new fund for prevention and public health efforts would cost $13 billion. Another fund for community health centers would tack on another $12 billion. And so on through dozens of smaller programs.

The CBO is clear that the legislative package, as a whole, would reduce the deficit not only over the next ten years, but even more substantially in the second decade if the legislation executes as written. Of course, that’s an enormous “if.”

The CBO is clear that the legislative package, as a whole, would reduce the deficit not only over the next ten years, but even more substantially in the second decade if the legislation executes as written. Of course, that’s an enormous “if.”

These provisions may well be worthy, but they aren’t free. Indeed, if you add them all up, their price tag comes to $132 billion in new spending and $2 billion in new tax cuts. The total cost of health reform is thus $1,072 billion, about one-seventh higher than the $940 billion figure grabbing all the headlines.

Similar problems afflict the other prominent claim: that health reform will reduce the federal budget deficit by $138 billion over the next ten years. That’s not true either. The entire legislative package—combining both the Senate bill and the reconciliation adjustment—now reforms the government’s student loan program in addition to the changes to health care. The student loan reforms account for $19 billion of the deficit reduction in the legislation. Thus at best health-care reform will reduce the deficit by $119 billion over the next decade.

But that’s not the only problem. The health-care reform also includes a budget gimmick that exaggerates the potential budget savings. The ingeniously-named CLASS Act would create a new federal insurance program for financing long-term care. Because premiums would start flowing faster than benefit payments, the program scores as reducing the deficit by $70 billion over the next decade. But those savings are temporary. In future years, benefit payments will accelerate and eventually consume the initial surpluses in the program. For that reason, most budget experts believe that the CLASS Act should not be counted as real deficit reduction. After netting that out, health-care reform reduces federal deficits by only $49 billion over the next decade, almost two-thirds less than the headline figure.

• Benjamin Sarlin: Do the CBO’s Numbers Add Up?Even that figure overstates what the reform part of health reform actually accomplishes. Over the next decade, health reform will expand the government’s commitment to health care, not reduce it. The only reason the health reform scores as reducing the deficit is that it is packaged with significant tax increases, most notably a $210 billion expansion in Medicare taxes. Those taxes have traditionally been considered payroll taxes, but the legislation would change that: for the first time ever, the Medicare tax would also apply to the investment income of upper-income taxpayers.

Of course, proponents are not the only ones taking liberties with the numbers. Opponents of the legislation have also employed some spin of their own. For example, a common allegation is that the legislation reduces the deficit only because it combines six years of new benefits with ten years of new taxes. That’s not true either.

It is true that the main health benefits in the reform don’t begin until 2014, which helps keep down the apparent cost of the program. But those costs are paid for over the last six years of the budget window through a combination of tax increases and spending cuts (even after stripping out the CLASS Act gimmick). Moreover, CBO is clear that the legislative package, as a whole, would reduce the deficit not only over the next ten years, but even more substantially in the second decade if the legislation executes as written.

Of course, that’s an enormous “if.” In order to make the long-term budget impacts look better while limiting political opposition in the near term, the original Senate bill adopted a strategy in which many of the most promising savings measures—e.g., reductions in Medicare payment rates and an excise tax on “Cadillac” health insurance plans—would ramp up substantially in later years. The reconciliation adjustment takes that strategy even further. The Cadillac tax, for example, has been essentially gutted over the next ten years, but is designed to grow rapidly in the decade after that. That helps the second decade look good, budget-wise. But it raises an obvious question: Will future presidents and Congresses try to back out of these budget savings, just as President Obama and the current Congress want to back out of paying for more than $300 billion in Medicare spending for physicians? Only time will tell.

In the meanwhile, let’s hope that the media and policymakers take more care in characterizing CBO budget estimates. And keep an eye out in the days ahead: yesterday’s analysis was preliminary, since CBO had not been given enough time to read the new legislative language in full. If the numbers change in CBO’s final analysis, we can look forward to another round of numbers spin.

Donald B. Marron is a visiting professor at the Georgetown Public Policy Institute and writes about economics, finance, and life at dmarron.com. In 2006, he served as acting director of the Congressional Budget Office.