Baucus Bill: How Much Does It Cost?

Yesterday, Senate Finance Committee Chairman Max Baucus released his much-awaited health care proposal. In his announcement, he described it as a costing $856 billion over the next ten years, costs that would be more than paid for by other spending reductions and tax increases.

Later in the day, the Congressional Budget Office released its preliminary estimate of the budget impacts of the bill. That estimate shows a $774 billion cost for the bill’s provisions that expand coverage. As a result, come commentators have suggested that Baucus somehow misspoke and over-stated how much his bill would cost by more than $80 billion.

That is not correct.

Why? Because the bill does more than expand coverage. It also increases spending on various health programs.

For example, it provides a one year “doctor fix”, delaying by a year dramatic cuts in Medicare payment rates. CBO estimates that provision has a ten-year cost of about $11 billion.

The bill also expands the prescription drug benefit in Medicare. That provision would cost more than $17 billion over ten years.

Those two provisions alone imply that the bill costs a bit more than $800 billion. And there are numerous other spending increases that would cost at least a few tens of billions more. I must admit that I couldn’t find my way all the way up to $856 billion when I quickly reviewed them, but it’s clear that the true cost of the bill is notably higher than $774 billion for the coverage expansions alone.

The larger point is that we should be careful to identify all the important provisions in these competing bills, and keep track of gross budget impacts, not just net impacts. I raised this issue in my discussion of the House health bill. That bill was often touted as costing around $1 trillion over ten years, but the actual cost of expanding coverage was closer to $1.3 trillion. And a permanent fix to the Medicare doctor issues would have added more than $200 billion to that.

I haven’t gone back to look at all the details, but on apples-to-apples basis, the House bill would cost at least $1.5 trillion compared to the $800 billion plus of the Baucus bill.

I think Chairman Baucus should be commended for trying to inject some gross (in the good sense) figures, rather than net ones into this debate. That can only improve the quality of the discussion. (But it would be great to get some more guidance on how to get to exactly the $856 billion figure).

Note for budget geeks: The biggest net-vs-gross question is how to think about the $30 billion budget impact of premium interactions. If those interactions are happening because of efforts to reduce costs, then they shouldn’t be included in the gross cost figure. If they are happening because of efforts to increase costs, then they should.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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