Bending the Federal Health Cost Curve (Maybe)

Buried deep in CBO’s cost estimate of the new Senate health bill is a striking conclusion: CBO believes that the health bill would eventually reduce the federal commitment to health care. In short, the bill would eventually bend (or, at least, lower) the federal health cost curve (including both spending and tax subsidies).

That conclusion comes with two crucial caveats: CBO’s estimates into future decades are subject to great uncertainty and assume that the legislation executes exactly as written. As CBO itself points out, that latter assumption is shaky — Congress will undoubtedly revisit health care repeatedly in coming years and may well decide to soften the spending reductions and tax increases specified in the bill.

Still it is striking that the bill, as written, might reduce the federal commitment to health beyond the first decade. That certainly distinguishes it from the previous version of the Senate bill.

CBO writes:

In subsequent years [i.e., after 2019], the effects of the proposal that would tend to decrease the federal budgetary commitment to health care would grow faster than those that would increase it. As a result, CBO expects that the proposal would generate a reduction in the federal budgetary commitment to health care during the decade following the 10-year budget window. By comparison, CBO expected that the legislation as originally proposed would have no significant effect on that commitment during the 2020-2029 period; most of the difference in CBO’s assessment arises because the manager’s amendment would lower the threshold for Medicare spending growth that would trigger recommendations for spending reductions by the Independent Payment Advisory Board. The range of uncertainty surrounding these assessments is quite wide. (emphasis added)

The change in the IPAB is a bit arcane, but potentially a big deal if future Presidents and Congresses let it do its thing. Under the original Senate bill, the IPAB recommendations would be relevant only to the extent that Medicare spending per beneficiary was projected to grow faster than overall per capita health spending. In the new bill, the threshold is set much lower, reflecting inflation in overall consumer prices and consumer medical inflation. That change gives the IPAB more teeth and, in later years, more bite.

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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