Key Issues in Analyzing Major Health Insurance Proposals

December 2008



Numbers in the text and tables may not add up to totals because of rounding.

This document references a number of the Congressional Budget Office’s (CBO’s) cost estimates and other publications, which are available at CBO’s Web site.



Concerns about the number of people who lack health insurance and about the high and rising costs of health insurance and health care have led to proposals that would substan­tially modify the health insurance system in this country. Because the Medicare program already provides nearly universal coverage to the elderly, those proposals generally focus on options for providing coverage to and reducing costs for the nonelderly population. Because most nonelderly people obtain their insurance coverage through an employer, proposals could affect that coverage in some way. They could, for example, provide new federal subsidies to pay some portion of health insurance premiums; impose mandates for individuals to purchase coverage or for employers to offer it; encourage alternatives to employment-based insurance or provide strong incentives to purchase coverage individually; or create new federally adminis­tered options for obtaining health insurance (including a single-payer system in which all citi­zens or residents would be offered coverage under Medicare).

This report describes some of the key assumptions that the Congressional Budget Office (CBO) would use in estimating the effects of key elements of such proposals on federal costs, insurance coverage, and other outcomes; the evidence on which those assumptions are based; and—if the evidence points to a range of possible effects rather than a precise prediction—the factors that would influence where a proposal falls within those ranges. In doing so, it also reviews many of the major issues that arise in designing such proposals. This document does not provide a comprehensive analysis of any specific proposal; rather, it identifies and dis­cusses many of the critical factors that would affect estimates of various proposals. In accor­dance with CBO’s mandate to provide objective and impartial analysis, the report makes no recommendations.

This report is the product of an intense effort on the part of a large number of CBO analysts. Philip Ellis and Janet Holtzblatt of CBO’s Health and Human Resources Division organized and revised the final drafts of each chapter, under the supervision of James Baumgardner. David Auerbach, Lyle Nelson, Ben Page, Lara Robillard, Rob Stewart, and Chapin White contributed major sections of the report and drafted several of its chapters. Other significant contributions came from Colin Baker, Paul Cullinan, Noelia Duchovny, Renee Fox, Tim Gronniger (formerly of CBO), Stuart Hagen, Keisuke Nakagawa, Jean Hearne, Melissa Merrell, Allison Percy, Lisa Ramirez-Branum, Bill Randolph, and David Weiner. In addition, Tom Bradley, Pete Fontaine, Keith Fontenot, Holly Harvey, Kate Massey, and Bruce Vavrichek provided important guidance on the report throughout its development. The analysis also benefited greatly from comments by Joseph Newhouse of Harvard University and Mark Pauly of the University of Pennsylvania. (The assistance of external reviewers implies no responsibility for the final product, which rests solely with CBO.)

Christine Bogusz and Sherry Snyder edited the report. Maureen Costantino designed the cover and prepared the report for publication. Lenny Skutnik printed the initial copies, Linda Schimmel coordinated the print distribution, and Simone Thomas prepared the electronic version for CBO’s Web site.

Finally, special thanks are due to CBO’s former Director, Dr. Peter R. Orszag, who conceived the idea for this report and was instrumental in its development.

Robert A. Sunshine

December 2008




Introduction and Background

Scope and Focus of This Report

Health Insurance Coverage

Health Care Spending


Approaches for Reducing the Number of Uninsured People

Methods of Subsidizing Premiums

Subsidizing Premiums Through the Tax System

Subsidizing Premiums Through Spending Programs

Effects of Premium Subsidies on Rates and Sources of Insurance Coverage

Individual and Employer Mandates

Automatic Enrollment Provisions


Factors Affecting Insurance Premiums

Design of Benefits and Cost Sharing

Management of Benefits

Administrative Costs of Health Plans

Effects of Gaining Insurance Coverage on Health Care Use and Spending


Proposals Affecting the Choice of an Insurance Plan

Regulating Insurance Premiums and Sales

Revealing the Relative Costs of Health Plans

Expanding Access to Federally Administered Plans


Factors Affecting the Supply and Prices of Health Care Services

Background on the Supply of Health Care Providers

Payment Methods and Providers’ Incentives

Payment Rates

Responses to Changes in Payment Rates or Demand for Services

Uncompensated Care and Cost Shifting


Administrative Issues and Effects on Other Programs

Implementation Issues and Timelines

Maintenance-of-Effort Requirements

Effects on Other Federal Programs

Coverage of Certain Populations



Changes in Health Habits and Medical Practices

Modifying Health Habits

Expanding the Use of Clinical Preventive Services

Establishing a "Medical Home"

Adopting Disease Management Programs

Comparing the Effectiveness of Medical Treatments

Adopting Health Information Technology

Modifying Laws About Medical Malpractice



Effects on Total Health Care Spending, the Scope of the Federal Budget, and the Economy

Effects on National Health Expenditures

Global Budgets for Health Care

Impact of Proposals on the Composition of Compensation and Tax Revenues

Flow of Payments and Budgetary Treatment

Macroeconomic Effects



S-1. Sources of Insurance Coverage and Insurance Status of the Nonelderly Population, 2009

1-1. Sources of Insurance Coverage and Insurance Status of the Nonelderly Population, 2009

1-2. Share of Employees Offered Health Insurance, by Size of Firm, 2009

1-3. Health Care Expenditures in 2008, by Insurance Status

1-4. National Health Expenditures, by Source of Payment and Type of Service, 2009

1-5. Persistence of Health Care Spending

2-1. Distribution of the Nonelderly Population, by Insurance Status, Family Income, and Family Structure, 2009

2-2. Illustrative Tax Subsidy for Employment-Based Health Insurance for a Single Worker Who Receives $40,000 in Total Compensation, 2009

2-3. Effects on a Single Worker of Repealing the Tax Exclusion and Replacing It with an Above-the-Line Deduction, 2009

2-4. Effects of a Premium Subsidy on Offer Rates for Employment-Based Coverage, by Size of Firm, 2009

2-5. U.S. Experience with Enforcing Mandates

2-6. Impact of Third-Party Data and Enforcement Methods on Income Tax Compliance, 2001

3-1. Administrative Costs for Private Health Plans, by Category, 2006

6-1. Current Allocation of Major Administrative Responsibilities for Financing and Regulating Health Care

7-1. Medical Injuries, Negligence, and the Filing of Malpractice Claims, 2003



1-1. Patterns of Health Insurance Coverage for Nonelderly People, by Family Income Relative to the Federal Poverty Level, 2009

1-2. Uninsurance Rates of Full-Time Workers, by Size of Firm and Family Income Relative to the Poverty Level, 2009

1-3. Projected Distribution of the Uninsured Nonelderly Population, by Selected Characteristics, 2009

1-4. The Relationship Between Quality of Care and Medicare Spending, by State, 2004

2-1. Distribution of Marginal Tax Rates on Income for the Nonelderly Uninsured Population, 2009

2-2. Probability of Enrolling in an Individually Purchased Insurance Plan with a Subsidy

3-1. Average Annual Premiums for Covered Workers for Single and Family Coverage, by Plan Type, 2008

7-1. Trends in Smoking and Obesity



1-1. Regulation of Health Insurance and the Employee Retirement Income Security Act

2-1. Tax Exclusions, Tax Deductions, and Tax Credits

2-2. Issues with Refundable Tax Credits

2-3. Health Insurance Mandates in Hawaii and Massachusetts

3-1. What Is Actuarial Value?

7-1. Types of Tort Reforms