Analysis of a Wyden/Bennett Health Insurance Proposal

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May 1, 2008

CBO and the Joint Committee on Taxation have been working closely together to analyze a modified version of S. 334, the Healthy Americans Act. This morning Edward Kleinbard (the staff director of the JCT) and I sent the letter below to Senators Wyden and Bennett about the modified proposal. (Many comprehensive health reform proposals involve complicated interactions between the spending and revenue sides of the budget, and the close working relationship that has developed between the staffs at JCT and CBO on health care is particularly important and valuable as we analyze these types of proposals. )

May 1, 2008

Dear Senators:

At your request, the staffs of our two organizations have collaborated on a preliminary analysis of a modified proposal for comprehensive health insurance based on S. 334, the "Healthy Americans Act," which you introduced last year. That modified proposal includes various clarifications and changes that you have indicated you would like to examine as part of the consideration of that bill. Attachment A summarizes our understanding of your modified proposal.

The staffs of the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) have worked closely together for the past several months to analyze your modified proposal; this collaboration reflects both the novelty of the undertaking and the intimate connection between the revenue and expenditure components of this proposal. We have summarized our conclusions in this joint letter; its purpose is to give you preliminary guidance regarding an approximate range of revenue and cost results that might be expected from your modified proposal. This joint letter does not constitute and should not be interpreted as a formal estimate of your proposals budgetary impact, whichfor the purposes of scoring under the Congressional Budget Actwould ultimately be provided by CBO and would incorporate revenue estimates prepared by the JCT staff.

The basic thrust of your modified proposal is to require individuals to purchase private health insurance and to establish state-run purchasing pools and a system of federal premium collections and subsidies to facilitate those purchases. The systems premium collection and subsidy mechanisms would be based largely on income tax filings, and the required benefits would initially be based on the Blue Cross/Blue Shield standard plan offered to federal workers in 2011 and then allowed to grow at the rate of growth of the economy. Although employers would have the option of continuing to offer coverage to their workers, nearly all individuals who were not enrolled in Medicare would obtain their basic health insurance coverage through this new system. Most enrollees in Medicaid and all enrollees in the State Childrens Health Insurance Program (SCHIP) would have their primary insurance coverage shifted to the new system.

Your proposal also would replace the current tax exclusion for employer-based health insurance premiums with a fixed income tax deduction for health insurance. (In addition, employers that had provided health insurance would be expected to "cash out" their workersthat is, to increase workers wages by the average contribution that the employers would have made for their health plan.) The proposal also would require new tax payments from employers to the federal government and further would seek to recapture the savings to state governments from reduced expenditures on Medicaid and SCHIP.

There are several important distinctions between the proposal we analyzed and S. 334 as it was introduced. For example, our analysis was limited to the operation of the new health insurance purchasing system and did not take into account most of S. 334s provisions regarding the Medicare program or other provisions that would not directly affect the new system. More fundamentally, the modified proposal would tie the premiums collected through the tax systemas well as the premium subsidies for lower-income householdsto the cost of the least expensive health plan available in an area that provided required benefits, not to the average premium amount, as under S. 334. Furthermore, the value of the new tax deduction would not vary with the premium of the insurance policy that was actually purchased, and the schedule of employers payment rates would range from 3 percent to 26 percent (rather than 2 percent to 25 percent) of the average premium. Attachment B describes in more detail the main differences between your modified proposal and S. 334.

The preliminary analysis reflected in this letter is subject to three important limitations. First, the staffs of both JCT and CBO are in the process of enhancing our capabilities to estimate the effects of comprehensive health care proposals. Improvements in our methodologies or more careful analysis of your modified proposals provisionsparticularly as you translate those concepts into formal legislative languagecould change our assessment of its consequences.

Second, any formal budget estimate will reflect the macroeconomic assumptions and the baseline projections of current-law tax and spending policies in effect at the time it is issued. That baseline could differ materially from todays baseline.

Third, we focused our analysis on a single future year in which the proposed system would be fully implemented. For that purpose, we settled on 2014, the sixth year of the current 20092018 budget window. Under an assumption that the proposal is enacted in 2008, that timeline for full implementation seems to us to be achievable but could be optimistic, as we expect that it would probably take until 2012 for the new system to begin operation, and several years after that for various phase-ins and behavioral adjustments to take place. The new system would involve temporary net budgetary costs in its initial years; we have not analyzed the magnitude of those early-year transition costs.

Overall, our preliminary analysis indicates that the proposal would be roughly budget-neutral in 2014. That is, our analysis suggests that your proposal would be essentially self-financing in the first year that it was fully implemented. That net result reflects large gross changes in federal revenues and outlays that would roughly offset each other.

More specifically, under your proposal, most health insurance premiums that are now paid privately would flow through the federal budget. As a result, total federal outlays for health insurance premiums in 2014 would be on the order of $1.3 trillion to $1.4 trillion. Those costs would be approximately offset by revenues and savings from several sources: premium payments collected from individuals through their tax returns; revenue raised by replacing the current tax exclusion for health insurance with an income tax deduction; new tax payments by employers to the federal government; federal savings on Medicaid and SCHIP; and state maintenance-of-effort payments of their savings from Medicaid and SCHIP. Attachment C provides more information about the approximate magnitudes of those components.

For the years after 2014, we anticipate that the fiscal impact would improve gradually, so that the proposal would tend to become more than self-financing and thereby would reduce future budget deficits or increase future surpluses. That improvement would reflect two features of the proposal. First, the amount of the new health insurance deduction would grow at the rate of general price inflation and thus would increase more slowly than the value of the current tax exclusion. Second, the minimum value of covered benefits that all participating health plans had to provide would initially be set at the level of the Blue Cross/Blue Shield standard option offered to federal workers in 2011 (we assume that the systems inaugural year would be 2012); but under your proposal that average value would from that point forward be indexed to growth in gross domestic product per capita rather than growth in health care costs. Because federal premium subsidies would be based on the cost of providing that level of coverage, the cost of those subsidies would grow more slowly over time.

We hope this analysis is useful to you. Not surprisingly, a number of uncertainties arise in attempting to predict the effects of such large-scale changes to the current health insurance system. Although we have provided a range of results that reflect our current expectations about likely outcomes, actual experienceand the results of a formal cost estimatecould differ substantially in either direction.