Blogger – I won’t go on too much. This entry by the Director does not instill confidence. He says that the legislation will decrease the incentive to work or work more hours because of the huge increase in Medicaid. Then he says it won’t matter TOO much, even though he said it will be the biggest effect outside the healthcare industry itself. HUH?

I am going to deal with your objections in smaller increments as I think the details matter and I do not want to put too much into one post (if possible). The speech by the director that you cite,

http://cboblog.cbo.gov/?p=1478

 referred to an update on the economic outlook …the update is here…

The Budget and Economic Outlook: An Update

http://www.cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf

Here is the actual quote in the report that the director referred to:

Policy changes incorporated in current law are also expected to slow the expansion of the labor supply during the next 10 years. Those changes—including the expiration of EGTRRA, JGTRRA, and provisions limiting the impact of the alternative minimum tax—will raise marginal personal tax rates during the next decade relative to what they were in the past decade and will thereby modestly reduce people’s incentive to work.  Page 65 in pdf

EGTRRA – Economic Growth and Tax Relief Reconciliation Act of 2001 by George Bush

JGTRRA – Jobs and Growth Tax Relief Reconciliation Act of 2003 by George Bush

This has nothing to do with health care but with George Bush.

In addition, CBO expects that the major health care legislation enacted in 2010 will reduce the supply of labor slightly (see Box 2-1).  Page 65 in pdf, shown below in entirety

This states that, “That net effect reflects changes in incentives in the labor market that operate in both directions” so the net effect is “roughly half a percent”. 

In the speech you referred to he is saying that labor outside the health care industry which is much larger will have the biggest impact from the half a percent.

If you read the particulars below you will see their justifications for this claim.  One thing you should remember is the big picture, 95% of the US population will have health insurance and the Federal debt will be reduced by 1.3 trillion dollars over 20 years (as opposed to what happens if these bills did not exist).  I think in each of the specific cases below I would be hard pressed to state that it would be better if we did not do it at all…what do you think?

The reason for this has to do with “expansion of Medicaid and the provision of subsidies that will reduce the cost of insurance obtained through the newly created exchanges, beginning in 2014.” for single people making between $14,945/year and $43,320/year and married people making between $30,429/year and $88,200/year.  So if these folks are not offered health insurance through their employer they can still get health insurance through the new health insurance exchanges and extra help with subsidies.  The subsidies decline in value as their income reaches the upper limit (at which the subsidies are zero).  They speculate that some people might work fewer hours or leave the labor market but this “will apply only to a small segment of the population”.  

They also state, “Other provisions in the legislation are also likely to diminish people’s incentives to work. Changes to the insurance market, including provisions that prohibit insurers from denying coverage to people because of preexisting conditions and that restrict how much prices can vary with an individual’s age or health status, will increase the appeal of health insurance plans offered outside the workplace for older workers. As a result, some older workers will choose to retire earlier than they otherwise would.

Additionally, the state, “People currently lose eligibility for Medicaid if their income rises above a certain level; for working parents, the median income threshold for eligibility among states was 64 percent of the FPL in 2009. The health care legislation will allow parents to work and still qualify for Medicaid until their income exceeds 138 percent of the FPL. Moreover, parents whose income exceeds the new, higher threshold may be able to work and receive the tax credits and cost-sharing reductions for insurance purchased through the exchanges. Some other provisions of the legislation may also affect decisions regarding work, but their net effect on the total labor supply will probably be small.”

The new law imposes an excise tax on “Cadillac”, high end health insurance plans.  It also add 0.9% increase for singles making over $200,000/year and married over $250,000/year.  “The net effect of that increase will probably be a slight decline in labor supply.”

Another effect would be, “Employers’ decisions to hire workers will also be affected in some cases by the health care legislation. Employers with 50 or more employees will be required to pay a penalty if they do not offer insurance or if the insurance they offer does not meet certain criteria and at least one of their workers receives a subsidy from an exchange.”  However, “Alternatively, because firms are penalized only if their full-time employees receive subsidies from exchanges, some firms may instead hire more part-time or seasonal employees.” 

Box 2-1 on page 66 of the pdf states:

The Patient Protection and Affordable Care Act (Public Law 111-148) and the Health Care Education Reconciliation Act of 2010 (P.L. 111-152) will affect some individuals’ decisions about whether and how much to work and employers’ decisions about hiring workers.  The Congressional Budget Office (CBO) estimates that the legislation, on net, will reduce the amount of labor used in the economy by a small amount—roughly half a percent—primarily by reducing the amount of labor that workers choose to supply. That net effect reflects changes in incentives in the labor market that operate in both  directions: Some provisions of the legislation will discourage people from working more hours or entering the workforce, and other provisions will encourage them to work more. Moreover, many people will be unaffected by those provisions and will face the same incentives regarding work as they do under current law.  The net reduction in the supply of labor is largely attributable to the substantial expansion of Medicaid and the provision of subsidies that will reduce the cost of insurance obtained through the newly created exchanges, beginning in 2014. In particular: The legislation  extends Medicaid eligibility to most nonelderly residents whose income is below 138 percent of the federal poverty level (FPL)— including childless adults who are currently ineligible for Medicaid in most states. (The FPL in 2010 is $10,830 for a single person and $22,050 for a family of four.)  People who purchase insurance through the new exchanges will generally be eligible for tax credits to help them pay their health insurance premiums if their income is between 138 percent and 400 percent of the FPL and they are not offered coverage through an employer. (They may also be eligible for reductions in their cost-sharing requirements.) Those subsidies decline in value as income rises and can, under some circumstances, drop sharply to zero when income exceeds 400 percent of the FPL. The expansion of Medicaid and the availability of subsidies through the exchanges will effectively increase beneficiaries’ financial resources. Those additional resources will encourage some people to work fewer hours or to withdraw from the labor market. In addition, the phase out of the subsidies as income rises will effectively increase marginal tax rates, which will also discourage work. But because most workers who are offered insurance through their jobs will be ineligible for the exchanges’ subsidies and because most people will have income that is too high to be eligible for Medicaid, those effects on financial resources and marginal tax rates will apply only to a small segment of the population. Other provisions in the legislation are also likely to diminish people’s incentives to work. Changes to the insurance market, including provisions that prohibit insurers from denying coverage to people because of preexisting conditions and that restrict how much prices can vary with an individual’s age or health status, will increase the appeal of health insurance plans offered outside the workplace for older workers. As a result, some older workers will choose to retire earlier than they otherwise would. In contrast, another feature of the Medicaid expansion removes an existing disincentive to work for many low-income individuals. People currently lose eligibility for Medicaid if their income rises above a certain level; for working parents, the median income threshold for eligibility among states was 64 percent of the FPL in 2009. The health care legislation will allow parents to work and still qualify for Medicaid until their income exceeds 138 percent of the FPL. Moreover, parents whose income exceeds the new, higher threshold may be able to work and receive the tax credits and cost-sharing reductions for insurance purchased through the exchanges. Some other provisions of the legislation may also affect decisions regarding work, but their net effect on the total labor supply will probably be small. For example, the new laws impose an excise tax on high cost health insurance plans beginning in 2018. CBO expects that the burden of the tax will, over time, be borne primarily by workers, reducing their after-tax compensation and thereby encouraging them to work more. That provision, though, will also increase the effective price of health insurance, making other goods relatively less expensive. Those “other goods” include leisure—which people “purchase” in forgone earnings by choosing to work less—so the change in relative prices will encourage people to work less. The legislation also increases Medicare’s Hospital Insurance (HI) tax by 0.9 percentage points on earnings above $200,000 ($250,000 if married and filing a joint return). The net effect of that increase will probably be a slight decline in labor supply. Employers’ decisions to hire workers will also be affected in some cases by the health care legislation. Employers with 50 or more employees will be required to pay a penalty if they do not offer insurance or if the insurance they offer does not meet certain criteria and at least one of their workers receives a subsidy from an exchange. Those penalties, whose amounts are based on the number of full-time workers in the firm, will, over time, generally be passed on to workers through reductions in wages or other forms of compensation. However, firms generally cannot reduce workers’ wages below the minimum wage, which will probably cause some employers to respond by hiring fewer low-wage workers. Alternatively, because firms are penalized only if their full-time employees receive subsidies from exchanges, some firms may instead hire more part-time or seasonal employees. More generally, the health care legislation may shape the labor market or the operations of other segments of the economy in ways that are difficult to anticipate or quantify. For example, the legislation could influence labor markets indirectly by making it easier for some employees to obtain health insurance outside the workplace and thereby enabling workers to take jobs that better match their skills. Some firms, however, might invest less in their workers—by reducing training, for example—if the probability of retaining those workers declines. To the extent that changes in the health insurance system lead to improved health status among workers, the nation’s economic productivity could be enhanced. It is not clear, however, whether such changes would have a substantial impact on overall economic productivity or output. Moreover, many of the effects of the legislation may not be felt for several years because it will take time for workers and employers to recognize and to adapt to the new incentives.

Blogger – Then he goes on to say that they PROJECT that 32 Million more people will be insured by 2019 and that that will increase services met by the healthcare industry. But then he says that the reduced spending on the previously uninsured caused by this will be minimal. HUH? I could be wrong, but doesn’t this mimic the Mass. law, and we see how that has turned out.

Here is what he stated,

Turning to the health sector, one effect of the March legislation will be to increase the amount of health care delivered to people who would have been uninsured in the absence of the law. CBO projected that 32 million fewer people will be uninsured in 2019 because of the legislation. Previous research suggests that, all else equal, gaining insurance coverage will increase an individual’s demand for health services by about 40 percent. By itself, this would represent an expansion of the health sector of the economy equal to an increase in total health services of a few percent.

The health care market segment will expand by a few percent because there are 32 million more people insured and the demand for health care services will go up by 40%.

Another effect of the March legislation will be to reduce unnecessary spending on health care for people who would be insured with or without the legislation—but probably only to a very limited extent

I think this may be what you are referring to with your “reduced spending” comment.  He is not referring to the total cost of the uninsured but to the spending done on the insured regardless of the health care reform legislation.

He cites four reasons for this:

1. He states it will “will reduce administrative costs and increase competition among insurers”.
2. He states that because of the “Cadillac” tax (which you correctly stated goes into effect in 2018) for high end insurance plans, employers will probably offer plans just below the threshold for the excise tax (imposed by the “Cadillac” tax).  This will lower premiums and therefore, spending.  It will also add greater cost sharing (from the excise tax) and more stringent benefit management (due to the lower premiums).
3. “The legislation reduced payments to many Medicare providers relative to what the government would have paid under prior law. Those reductions will impose greater pressure on providers to increase efficiency in the delivery of care. As a result of those cuts in payment rates and the existing “sustainable growth rate” mechanism that governs Medicare’s payments to physicians, CBO projects that Medicare spending will increase significantly more slowly during the next two decades than it has increased during the past two decades (per beneficiary, after adjusting for overall inflation)”  The health care reform bill reduces payments to providers and therefore, slows the ever increasing costs of health care.
4. “The legislation set up a number of experiments in delivery and payment systems to induce providers to offer higher-quality and lower-cost care.”  This is one thing I like very much which I referred to in another post.  These are pilot, test projects to evaluate the effectiveness and cost impact before it is rolled out on a larger scale. If these projects are successful the benefits will be included over and above the debt reduction of 1.3 trillion dollars over 20 years.  The CBO did not factor the test projects impact in because they do not know the outcome yet…

 Blogger – The Excise Tax (Cadillac Tax) doesn’t go into effect until 2018. He expects that many employers will answer this by giving cheaper plans, and that this will somehow make costs go down and care more efficient. How? There are NO restrictions on rate increases in ObamaCare- only a “review” and public flogging. I guess you get to keep your healthcare if you have a good job that provides it- but only some of it. I am no fan of Unions, but I can see why they fought and won to get a 5 year gap in this provision. If they are planning to pay for some of ObamaCare with this, I think they are wrong about how much $ it will garner. The only thing I can think of is that they hope this will create cheaper group provider services. Maybe, but maybe it will just mean fewer insured services.

Because historically folks on the high end do not want to pay excise taxes.  Employers will give them insurance plans whose costs are just below the excise tax threshold.  This means lower cost plans.  Since they are lower cost folks that do want to pay the excise tax and chose the lower cost plans the insurance companies will be more cost conscious about benefits.

The threshold is set at annual premiums of…

“a high-cost health plan is defined as costing more than $10,200 for an individual or $27,500 for a family, including worker and employer contributions to flexible spending or health savings accounts. The cost does not include stand-alone vision or dental benefits. The tax would not be imposed until 2018”

“For retirees and workers in high-risk professions, such as firefighters and longshoremen, the bill would set higher thresholds — $11,850 for an individual plan and $30,950 for a family plan.”

http://www.kaiserhealthnews.org/Stories/2010/March/18/Cadillac-Tax-Explainer-Update.aspx

“On average, the annual premium was $2,985 for a single person and $6,328 for a family.”

http://healthinsurance.about.com/od/healthinsurancebasics/a/cost_of_health_insurance.htm

You do not get fewer insured services.  Folks that fall into the single people making between $14,945/year and $43,320/year and married people making between $30,429/year and $88,200/year can actually get services where they had none before (no health insurance at all offered by their employer).  If you fall into the “Cadillac” folks you can get the same benefits you got before but you will pay an additional excise tax increase of 0.9%.  I really think these folks can afford that and having 95% of Americans covered kind of puts that in perspective IMO.

 Blogger – He also mentions that insurers have been regulated by the legislation and that this will reduce costs. Again, “splain that to me, Lucy? How How How will it reduce costs when costs ar not regulated? He claims it will be through competition in the nongroup market. How again? With insurance companies being exempt from interstate competition laws, how will that do anything but force more people into the local companies at whatever price they choose to provide coverage? Even if their assumption is correct, he admits that it will be minimal.

This is the reference from the remark he made, “The legislation changed the regulation of private health insurance. Those changes will reduce administrative costs and increase”

 New Market Rules Would Reduce Administrative Costs

Compared with plans that would be available in the nongroup market under current law, nongroup policies under the proposal would have lower administrative costs, largely because of the new market rules:

“Nongroup” here means private insurance like the kind self-employed folks use

• The influx of new enrollees in response to the individual mandate and new subsidies—combined with the creation of new insurance exchanges—would create larger purchasing pools that would achieve some economies of scale.

• Administrative costs would be reduced by provisions that require some standardization of benefits—for example, by limiting variation in the types of policies that could be offered and prohibiting “riders” to insurance policies (which are amendments to a policy’s terms, such as coverage exclusions for preexisting conditions); insurers incur administrative costs to implement those exclusions.

• Administrative costs would be reduced slightly by the general prohibition on medical underwriting, which is the practice of varying premiums or coverage terms to reflect the applicant’s health status; nongroup insurers incur some administrative costs to implement underwriting.

• Partly offsetting those reductions in administrative costs would be a surcharge that exchange plans would have to pay under the proposal to cover the operating costs of the exchanges.

http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-Premiums.pdf page 14 pdf

 Blogger – Then he addresses Medicare. I just have to cut & paste this because I think his rhetoric and then his admittance of the frailty of his assumption is kind of staggering.

” The legislation reduced payments to many Medicare providers relative to what the government would have paid under prior law. Those reductions will impose greater pressure on providers to increase efficiency in the delivery of care. As a result of those cuts in payment rates and the existing “sustainable growth rate” mechanism that governs Medicare’s payments to physicians, CBO projects that Medicare spending will increase significantly more slowly during the next two decades than it has increased during the past two decades (per beneficiary, after adjusting for overall inflation). We wrote last spring that it is unclear whether such a reduction in the growth rate of spending could be sustained, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or through reductions in access to care or the quality of care.”

So the cuts will force docs to reduce costs, or maybe not, and the gov’t will be spending less, but it might not be sustainable? And the reductions could very well reduce care for people who have been paying in 5% all their working lives? Not to be repetitive, but HUH?

A lot of the problems here has to do with the language these guys use.  I wish they would write cliff notes for the rest of us…The spending reductions were mentioned in an earlier post but there is nothing in all this that discusses payment reductions to doctors.  However, under the legislation prior to health care reform,

“Under current law, some of Medicare’s payments for physicians’ services are limited by a system known as the sustainable growth rate mechanism. That system is currently projected to reduce payments to physicians by about 20 percent in 2011 and more thereafter. (If legislation was enacted to override those reductions—as has happened every year since 2003—spending on Medicare would be significantly higher than projected in the baseline.) Changes to the Medicare program made by the recently enacted health care legislation will also restrain the growth of spending. Even with those constraining effects, CBO anticipates that spending for Medicare will expand faster than the economy. As a result, by the end of the decade, outlays for Medicare are projected to total $929 billion (4.0 percent of GDP), compared with $519 billion (3.5 percent of GDP) this year.”

http://www.cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf page 38 pdf

The reductions in cost come through the other ways previously mentioned.  So the spending reductions previously mentioned offset the increase payments to physicians that has happened every year since 2003 (thank you AMA).  If pending legislation to increase Medicare payments to physicians goes through (has not yet but I did mention the pending bill in an earlier post) the costs of Medicare could increase more than their baseline projection.  However, they also do worst case projections that would take this into account.

“the proposal includes numerous provisions that would encourage the development and dissemination of less costly ways to deliver appropriate medical services, either directly or indirectly. Examples of those provisions include the excise tax on high-premium insurance plans; the creation of a new Medicare advisory board that might limit the growth rate of Medicare spending; and certain changes in Medicare’s payment methods as well as new pilot and demonstration projects regarding other changes in payment methods (such as penalties for hospital readmissions that are deemed avoidable and incentives to coordinate patients’ care). The changes in Medicare’s payment methods could “spill over” to the private sector and decrease spending for health care relative to currently projected levels. However, the effects of those initiatives on Medicare’s spending are uncertain and would probably be small in 2016 relative to the program’s total spending, so any spillover to private insurance at that point would probably be small as well.”

http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-Premiums.pdf page 28 pdf

The sustainable part has to do with the comment they made in the report that they expect the cost of Medicare to increase slower over the next two decades than the last two decades with Health Care Reform.  Beyond two decades is a toss up and I doubt that any plan can be structured to work into perpetuity.

I do not see a reduction of care but changes must be made or insurance premiums will keep going up and companies will continue to pay less and less.  The idea is to slow the increase of costs and The Health Care Reform Act is the beginning not the end of this process.  Many Republicans and Democrats have tried and failed to begin, President Obama got it done…a start…

Blogger – I would like to quickly reference the last part of your link, markdart, to the CBO response to Sen. Ryan.

http://www.house.gov/budget_republicans/press/2007/pr20100319letter.pdf

In the March 18, 2010, preliminary analysis of the budgetary effects of the reconciliation proposal, CBO and JCT estimated that the direct spending and revenue effects of enacting that proposal together with the Senate-passed health bill (H.R. 3590) would yield a net reduction in federal deficits of $138 billion over the 2010–2019 period. Thus, the legislation’s effects on the rest of the budget—other than the cash flows of the HI trust fund—would amount to a net increase in federal deficits of $260 billion over the same period. For the decade beyond 2019, CBO expects that enacting the reconciliation proposal and the Senate-passed health bill would reduce federal budget deficits relative to those projected under current law—with a total effect during that decade in a broad range around one-half percent of GDP. The legislation would have positive effects on the cash flows of the HI trust fund in that decade that would be larger than its effects on federal budget deficits as a whole. Therefore, leaving aside the cash flows of the HI trust fund, CBO expects that the reconciliation proposal and the Senate-passed health bill would yield a net increase in budget deficits during the decade beyond 2019.  The increase in the balances of the HI trust fund that would result from enacting H.R. 3590 and the reconciliation proposal might suggest that significant additional resources—$398 billion plus additional interest to be credited to the trust fund over time—had been set aside to pay for future Medicare benefits. However, only the additional savings by the government as a whole truly increase the government’s ability to pay for future Medicare benefits or other programs, and those would be much smaller ($138 billion plus interest savings to be achieved over time). In effect, the majority of the HI trust fund savings under H.R. 3590 and the reconciliation proposal would be used to pay for other spending and therefore would not enhance the ability of the government to pay for future Medicare benefits.

I am no Rhodes scholar. I worked to provide the formal educations for my family. This confuses me. Are they saying that the legislation might make less of a deficit than would have happened without it, but that the cost (most probably) comes at the price of Medicare benefits?

My husband and son are the big brains in the family, and I am going to pick my husband’s on this tonight- I may have to backpeddle (or might have better ammo) tomorrow. But to me the  big picture is that the cost of ObamaCare is not only going to be in the wallet for most Americans, but in the ability to get quality care even if you have paid for it. That is an assumption, but no more unreasonable than the assumptions made by the CBO and those who take their projections as gospel. I have a lot of “HUH’s” that I don’t feel any better about after your post debunking the criticisms of the CBO on ObamaCare, markdart. I welcome any illumination!

This is another case of confusing language with these folks.  The name of the section that you quoted from is, “The Budgetary Impact of Enacting the Reconciliation Proposal and H.R. 3590 Excluding Cash Flows of the Hospital Insurance Trust Fund”.  The bill can be found here,

Patient Protection and Affordable Care Act

http://thomas.loc.gov/cgi-bin/bdquery/z?d111:H.R.3590:

The Hospital Insurance (HI) trust fund is the fund from which Medicare Part A benefits are paid.  The letter asked the director what would happen if this trust fund was excluded from the health care reform package.  To make a long story short the answer is not good, don’t do it.  The trust fund needs to stay with the health care reform package to make the numbers work and to keep Medicare Part A alive past 2017.

The CBO letter that responds to the criticism you brought up states,

On the basis of the economic forecast and technical assumptions underlying CBO’s March 2009 baseline, CBO projected that, under current law, the HI trust fund would be exhausted—that is, the balance of the trust fund would decline to zero—during fiscal year 2017.  Enacting the reconciliation proposal and the Senate-passed health bill would reduce net outlays for Part A of Medicare by $286 billion over the 2010–2019 period relative to that baseline, CBO estimates. Enacting that legislation would also increase HI payroll tax receipts by about $112 billion over that period, according to estimates by CBO and JCT. Together, those changes in outlays and revenues would diminish budget deficits and add $398 billion plus interest earnings to the trust fund’s balances over that 10-year period.

http://www.house.gov/budget_republicans/press/2007/pr20100319letter.pdf page 4 pdf

So, the health care reform bill adds $398 billion plus interest to the Medicare Part A trust fund.  Under the previous law that trust fund would equal 0 in 2017.  There is nothing in here about Medicare benefits.

My overall conclusion is that there is nothing in the specific arguments you made that IMO reinforces the criticisms you have.  To the contrary, I think, without the health care reform intervention, your fears are more justified.  However, I am open to and welcome more specific arguments to prove your case.