The True Cost of the House Health Care Bill

The New York Times health care blog has a post about the games that politicians are playing with the cost of their health care bill--in this case, the new House bill that was initially reported as costing less than $900 billion.  A more accurate assessment would have been $1.05 trillion:

Throughout Thursday, news accounts, including our own, focused on $894 billion, the total cost given out by aides to the House speaker, Nancy Pelosi, before the official cost analysis was released by the Congressional Budget Office.

But a closer look at the budget office report suggests that the number everyone should have reported was $1.055 trillion, which is the gross cost of the insurance coverage provisions in the bill before taking account of certain new revenues, including penalties by individuals and employers who fail to meet new insurance requirements in the bill.

Because Obama set a $900 billion target--probably sensibly, since the politics of a $1 trillion health care bill are tricky--the House wanted to get their proposal under that line.  The problem is, they also want to subsidize lots and lots of people, which is expensive.

I expect that the reaction of many people, maybe even most, is "Who cares whether we use gross or net cost, as long as it's deficit neutral?"  I'm sympathetic, but there really are very good reasons to care:

1.  This bill will not actually deficit neutral; it's just scored deficit neutral.  This is not the fault of the CBO, which is doing its job.  But the bills are loaded down with a bunch of "automatic spending cuts" and similar gimmicks which are very unlikely to happen.  We did the same thing with Medicare in the Balanced Budget Act of 1997, and by 2003--i.e., the first year that the cuts really started to cut--Congress had mostly undone them. 

Doug Elmendorf, the source of that "deficit neutral" score, has made it pretty clear that he does not think the cuts will take place; he's just scoring them because that's what the CBO process requires him to do.  After all, the reason that we need these automatic spending cut mechanisms is that Congress can't make a credible committment to cut costs now.  And the reason they can't be relied upon to cut costs in the future is that doing so is politically costly.

The larger the gross cost, the larger the hole it will rip in the budget if these gimmicks fail.

2.  We have a gigantic existing budget deficit, which will require hundreds of billions of dollars worth of spending cuts or tax increases.  I call your attention to the chart I posted the other week, showing what the budget deficit would look like with and without the Baucus Bill:

Deficits.pngIn other words, even if everything in this "deficit neutral" bill happens the way that the CBO expects it too, we still end up with a $600 billion deficit.  We need to pay for that, somehow.

But of course, keeping the bill "deficit neutral" also requires some combination of tax increases and spending cuts.  These are very politically difficult, and as is generally true, the current bills use the ones that are politically easiest to cover their costs:  things like tax increases on the rich, cuts to unpopular provider reimbursements, and rejiggering Medicare Advantage.  Yes, these things are not easy--some of them are so hard that they may not happen.  But whatever comes after them must, almost definitionally, politically even more difficult to pass.  In the case of tax increases on the rich, there is simply an economic limit--the Laffer Curve does not apply at current levels of US taxation, but that doesn't mean it doesn't apply at any level of taxation, and we're already headed to marginal income tax rates of more than 50% in some jurisdictions.

So the larger the gross cost, the more of the political "low hanging fruit" it eats up.  That means that closing our existing budget deficit becomes more politically costly, and therefore less likely to happen--or, rather, more likely to happen too late, when the crisis is almost upon us.

3.  Even if you are not particularly worried about shrinking the existing budget deficit, gross costs are, well, costs.  Tax increases reduce the consumption people are able to do, of either goods or leisure.  Benefit cuts mean fewer benefits.  This has to be considered against the benefits.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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