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259 IRET Congressional Advisory 1 (2009)

handle is hein.taxfoundation/iretcgadv0256 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. October 12, 2009 Advisory No. 259 CBO UNDERESTIMATES COST OF THE SENATE FINANCE HEALTH BILL The health care reform bills before Congress would raise demand for health care and raise the price of health care. Such a large industry cannot expand without experiencing rising costs as it bids scarce resources away from other uses. The price jump will be high in the short run until the supply of health care can be increased. (John Cogan, R. Glenn Hubbard, and Daniel Kessler estimate a 10% jump in premiums for family insurance plans in an op ed in the Wall Street Journal on September 25.) There will still be a lower but permanent long run price effect even after supply increases. Have the price increase been counted in cost estimates of the reform plans? CBO published a report on its estimation methods in December, 2008, entitled Key Issues in Analyzing Major Health Insurance Proposals. It asked if the supply of health services could accommodate the new demand, especially in the short run before new doctors, nurses, and technicians could be trained, and new equipment installed. The Report discussed controlling costs through reimbursement rates negotiated or set by government agencies. It wondered, if compensation rates were reined in, would doctors and hospitals see more patients to offset lost revenue per patient, or be discouraged from working? (In our view, the latter makes economic sense; the former is wishful thinking.) CBO calls squeezing more patients into a doctor's work day increased productivity. (We call it having less time with your doctor which could make the quality-adjusted productivity gain zero.) The ambiguity about price effects raises a question about the CBO spending estimates for the health reform bills. The CBO scores the Senate Finance bill as reducing the federal deficit by $81 billion over ten years (letter from CBO Director Douglas Elmendorf to Senate Finance Committee Chairman Max Baucus, October, 7, 2009). The bill has a gross cost of $829 billion over the last six years of the ten year budget window, starting about 4 years out. (Taxes rise for ten years, spending does not jump until 2014.) The bill would tax high value insurance plans, which reduces the net subsidy to $628 billion. There would be other taxes on providers of medical devices and drugs, which would raise prices for consumers (including the government). The bill would impose fines on people who are deemed able to afford health insurance but who choose not to buy it. The itemized deduction for medical costs for persons under age 65 would be reduced by limiting the deduction to amounts in excess of 10% of adjusted gross income, versus 7.5% under current law. CBO calculates that the taxes and other cost reductions from curbing Medicare Advantage payments and limiting federal payments to doctors would result in the forecast saving of $81 billion. The projected saving include $162 billion over ten years from holding payments to Medicare fee-for- service providers (other than physicians) below the growth of health cost inflation. Further savings are assumed pursuant to the recommendations of a to-be- A3. A * * ~ i ~ee

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