Some health-related budget options from CBO

12/09/2016 12:37:00 PM

Yesterday at 2pm the CBO released a big report with estimates for lots of different budget options. I reviewed the health-related ones.

But first, a disclaimer: there's less health policy in the CBO releases than you might expect. You won't, for example, find much analysis on how federal health programs affect mortality, or estimates of the cost-effectiveness of public health insurance, nor even ideas for reducing the cost of delivering care to medicaid enrollees. So, don't think of this CBO document as being about policy. More realistically, you should think of it as a list of possible "pay fors" that the next congress can fish to offset the cost of new deficit-increasing policies republicans would like to enact.

Relatedly, there's very little in the CBO estimates that represents genuine "savings" to the government—most of the deficit reduction comes from proposed tax hikes. Sometimes this is explicit: one of the largest budget items in there is the proposal to tax 50 percent of the value of employer-sponsored health insurance plans, which would raise $430 billion over the first decade. Other times, this is implicit, such as the proposals to raise deductibles for medicare, VHA, and trihealth beneficiaries—after all there's little practical difference, for example, in raising the Medicare part A premium versus levying a tax on social security income. Other proposals include a mix of policy design, spending cuts, and tax hikes, such as the proposals to hike copays and coinsurance to medicare, which in addition to producing revenue, should also reduce hospital stays and other healthcare utilization by beneficiaries. So, there are some actual policy ideas in there, and a couple of them are pretty decent.

Federal Employees

Here's a pretty typical proposal in the genra: a plan to replace the Federal Employee Health Benefit with a voucher tied to inflation. There's very little policy here, as federal employees already shop for private insurance plans in the FEHB system. Rather, this is just a reduction in pay to federal employees: by tying the value of the health benefit to inflation (there's no good reason to suppose health costs won't grow faster than inflation), this proposal reduces federal payrolls by about $58 billion over ten years. This could be equivalently phrased as a revenue enhancement: a tax on federal employees. This is why I say we should think of these CBO options as a pond where Congress can go fish for money, not serious policy analysis.

CBO estimates that applying the same medigap restrictions (see below) to the military health benefit, Tricare, would save $27 billion. Most of this, about three fifths, savings comes from reduced benefits to beneficiaries (cost shifted from government to beneficiaries), while the remaining two fifths comes from reduced healthcare utilization. Also like the Medicare reform, this would cap out-of-pocket expenses at $4,125, making it a decent policy trade. Still though, "soldiers are overpaid" is not complaint I hear often—why not refund that $27 billion to them in the form of lower premiums?

You can save $29 billion by repealing VA health benefits for 2 million veterans. Half of those veterans will end up on other forms of public insurance such as medicaid or else receiving federal subsidies for Obamacare, while the other half will ¯\_(ツ)_/¯. These aren't veterans with disabilities, so ideally they'd be able to get health insurance through their post-military employment in private businesses.

Here's $18 billion if you raise premiums, deductibles, co-payments for veterans. There's no breakdown of how much is revenue/out-of-pocket versus how much is reduction in healthcare utilization, though we can safely assume most of it is the former. Hiking premiums makes Tricare less attractive relative to private insurance options, which I guess is desirable if you prefer they seek private insurance instead of a federal retirement benefit. On the other hand, this undermines the goal of keeping Tricare as a safety net for veterans who cannot afford private insurance.


Here's a proposal to modernize Medicare by capping out-of-pocket payments at $7,500 while raising the part A coinsurance to match part B's 20 percent, and adding a $250/day copayment for the first 5 days of hospital stays. That contrasts sharply with the current weak design of Medicare that not only doesn't cap out of pocket costs, but actually increases them for the sickest patients. The strengths of this policy design, however, are undermined by the need to raise revenue—rather than using the savings from decreased moral hazard and the revenue from co-pays and coinsurance to reduce premiums, the plan hikes premiums, imposing a $19 billion tax on seniors. But why?

Additional Medigap option: There's also an alternative in the above proposal to produce even more savings by restricting medigap policies so that can't pay for all of a senior's medicare copays and coinsurance. Under the restrictions, medigap could not cover the first $750 of patients' out-of-pocket medicare expenses, and no more than 50 percent of expenses over $750 but under $6,750, and this saves $45 billion over six years. Overall this is a dumb plan because it does not include other types of supplemental insurance such as employer benefits, but the estimates they have are noteworthy: in the first year, 2020, there will be 40 million fee-for-service enrollees and 20 percent of them will have medigap, and the CBO estimates restricting those medigap plans will save $4.9 billion, for a total of $6,125 in savings per beneficiary. Note that average Medicare spending is only $10,000 per beneficiary. CBO says they used similar behavioral estimates as RAND but a 60 percent reduction in healthcare utilization is quite a ways away above RAND estimates. It also doesn't seem consistent with estimates they used for the out-of-pocket cap above.

Here's a $330 billion tax hike on seniors, in the form of increases in premiums for Medicare part B and part D.

Medicare compensates healthcare providers for 65 percent of certain medical debts that patients can't pay. Reducing that to 45 percent saves $15 billion, and reducing it further saves $31 billion. To an extent, this is just a plan to tax healthcare providers, though I suppose they'll make up a portion of the loss by not treating poor patients, and squeezing those who struggle to pay even harder.

Here's medicare part D rebate program that looks to me a lot like a $145 billion tax on drug companies.


It turns out there's a loophole in federal medicaid funding to states that allows states to rope in more than the law intends. To simplify a bit, the federal government pays a percentage of medicaid expenses, and states levy special taxes on medicaid providers to artificially drive up measured medicaid spending, giving them more federal funding despite the fact that their actual medicaid expenses did not go up. This proposal narrows, but does not eliminate, this loophole, saving up to $40 billion over ten years.

But if that's not enough, it turns out that cutting medicaid by $374 billion saves almost $374 billion. Who knew? There's even less to this policy proposal than it sounds. There's no policy ideas about ways to reduce the cost of providing medicaid, but rather just a plan to reduce the pot of medicaid funds available to states. It does this specifically by imposing a per-beneficiary cap with annual increases pegged to CPI-U inflation rate, plus one percentage point, but the details hardly matter. The key point is that funding won't keep pace with healthcare costs, and this saves the federal government boatloads of money.

Graduate Medical Education

Now here's a plan to cut federal subsidies for Graduate Medical Education by $32 billion. Which, I guess I'm ok with? I've not found a convincing argument for why the government subsidizes this in the first place.

Medical Research

Here's a plan to reduce medical research by $9 billion. The premise of the plan is baloney—there's no analysis of the cost-effectiveness of the research, just a bogus argument that it doesn't belong in the Department of Defense. Ok, fine, let's move the money to NIH. Next?

Cigarette Tax

Ok, here's some real policy wonkery: a $0.50 per pack tax hike on cigarettes would raise $34 billion in revenue, and over the first decade save an additional billion in reduced public health expenses. After 10 years, as those healthier people live longer that $1 billion savings is likely to turn slightly negative. But besides, the reason to do this is the benefit to public health, not the revenue or savings.

Capping Malpractice Damages

I'm a little confused on how this proposal works, but it looks like capping medical malpractice suits at $750,000 (up to $500,000 punitive plus $250,00 pain and suffering) plus an unlimited amount of economic damages (lost wages, etc) saves about $62 billion due to reduced cost of medicare, medicaid, FEHB, and Obamacare subsidies. This strikes me as a large estimate when you consider that it only happens if the decreased malpractice liability causes both doctors to reduce prices and insurers to pass that savings to enrollees, for a net reduction in total national health spending by 0.5 percent.


If you repeal Obamacare's expenses but not it's funding sources, you have a pot of $1.2 trillion to play with.

On the other hand if you just want to end the individual mandate, that's $416 billion in savings on Obamacare subsidies as people become uninsured. To be honest, that's more than I would estimate, as my view is that the subsidies themselves are a larger incentive to stay in the market than the mandate.