House Bill Fails Budget Tests

by Donald Marron

Monday, July 20, 2009 at 12:09 AM EDT

Lawmakers face more work if they want to pay for health reform. According to the latest analysis by the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation, the House health bill fails two key budget tests:

• New spending isn’t fully paid for. House committees haven’t identified enough spending reductions or tax increases to offset the spending. As a result, the bill would increase the deficit by $239 billion over the next ten years.

• The bill would widen the structural deficit. CBO estimates, for example, that the program would increase the deficit by $65 billion in 2019, the final year of the budget window.

These budget challenges stem from the fact that the House bill would increase spending in two major ways:

• First, the House bill would increase health insurance coverage. As noted in a previous CBO analysis (and summarized in a recent post), that effort would have a net budget impact of $1.04 trillion over the next ten years; spending would increase by almost $1.3 trillion, while tax revenues would increase by about $240 billion.

• Second, the bill would change the formula that determines how much Medicare pays physicians. Those payment rates are scheduled to be cut 21% next year under an arcane formula (the sustainable growth rate mechanism). The House bill would replace those cuts with increases in coming years, at a cost of $245 billion over the next ten years.

As I’ve noted in previous posts (e.g., here), a key risk is that health reform would put the U.S. on an even worse fiscal trajectory. As shown in the following graph, that’s exactly what would happen under the current House bill:

The various offsets — primarily tax increases on high earners and reductions in other parts of Medicare — do not keep pace with the new spending under the bill.

Over the next ten years, the offsets in the House bill ($1.047 trillion) are almost exactly equal to the net budget impact of expanding coverage ($1.042 trillion). Thus, one could argue that the bill fully pays for the coverage expansion. Of course, that would also imply that the bill completely fails to pay for the increase in physician payments in Medicare. Moreover, the net cost of the coverage expansion in later years is higher than the offsets. For example, in 2019, the net cost of expanding coverage is $202 billion, while the offsets total only $177 billion.

Data Note: CBO provides two pieces of information about the cost of changing physician payment rates: (1) year-by-year estimates of the direct effect of the change, which total $228 billion and (2) a statement that the total costs of the change, including interactions with other programs, is $245 billion. To estimate the total year-by-year impacts in the graphs above, I assumed the $245 billion total had the same annual pattern as the $228 billion of direct impacts.