What’s the Real Cost of the Senate Health Bill?

Senate Majority Leader Harry Reid unveiled his health bill yesterday. As everyone knows by now, the Congressional Budget Office (CBO) estimates that the bill would spend $848 billion to expand coverage over the next ten years, reducing the number of uninsured in 2019 by about 31 million. (The House bill would spend $1.05 trillion over the next ten years, and would reduce the number of uninsured in 2019 by about 36 million.)

As regular readers know, CBO reports two estimates of the cost of expanding coverage: the gross cost, which reflects all new spending and tax incentives to increase insurance coverage, and the net cost, which subtracts any tax revenue increases associated with coverage policies. Leader Reid, Finance Chair Baucus, and their Senate colleagues deserve credit for emphasizing the higher figure in explaining the cost of their bill. In contrast, House leaders tried to focus attention on the lower, net cost of their bill, which led to unnecessary confusion (nb: the net coverage cost of the Senate bill is $599 billion versus $891 billion for the House bill.)

Everyone following this debate should keep in mind, however, that even the gross coverage figures do not capture all the costs of these bills. As I’ve pointed out several times (e.g., here and here), the health bills include many important provisions in addition to those expanding coverage. Many of those non-coverage provisions are intended to save money and thus pay for the coverage expansions. But some of the provisions expand spending on other health programs.

To get a fair read on the total cost of the health bills, we should therefore add together the gross cost of coverage expansions and the cost of the other provisions that increase spending (or decrease revenues). I estimate, for example, the real gross cost of the Senate health bill is $940 billion over ten years:

As noted in the table, the biggest non-coverage items are new discounts for drug purchases in the Medicare Part D program, a new fund to finance efforts in prevention and public health, and a one-year doctor “fix”. Together with other provisions, they add up to a bit more than $90 billion in additional spending, Along with about $1 billion in tax reductions, that means the bill costs $940 billion over ten years, about $92 billion more than for coverage alone. (In contrast, the House bill has a total cost that’s up near $1.3 trillion.)

Caveats: CBO does not calculate a total cost figure for the health bills. The bills include dozens of policy changes, and it would be difficult (perhaps impossible) to allocate all their impacts to specific provisions. Thus, my figures should be considered approximate. I calculated the $90 billion figure for additional spending by adding up all the individual line items in Table 4 of the cost estimate that increased direct spending, with a couple of exceptions. First, I did not include the interaction effects that CBO lists as the end of the estimate because I was not sure how to allocate them; the interactions are large and could have a material effect on my estimate, potentially up or down. Second, there was one policy that led to both spending increases and spending decreases; I included the net spending increase in my figure. I am certainly open to other suggestions about how to add up the other spending in the bill. It’s also worth noting that I have taken as given CBO’s estimate of the gross cost of expanding coverage. There are some nuances in the calculation of that figure (e.g., the treatment of payments in a reinsurance program) that I need to understand better.

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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