CBO: Light Regulation of Private Market Reduces Budget Impact
Posted by Alan on May 28, 2009
Whether comprehensive health care reform is enacted this year rests to a substantial extent on its impact on the federal budget. To be sure, federal lawmakers can do what they want to the budget. Unlike families, businesses and state governments, the feds can literally print money. But there’s an economic and political cost to this. For example, President Barack Obama’s economic recovery efforts are already hampered by the deficit spending involved. Opponents to his health care reform would seize any negative budgetary impacts stemming from his reform as a heavy club useful for bashing the Administration’s plan.
Even the Administration’s allies are concerned about the impact of health care reform on the government’s finances. In an email I received from Senator Diane Feinstein she writes, “I believe that there is much room for improvement in our nation’s healthcare system. However, I believe that health care reform should not increase the federal deficit.”
Which is why what the Congressional Budget Office considers “in the budget” or “outside” of it is so critical. The Clinton Administration’s health care plan was dealt a serious blow when, in 1994, the CBO determined that the employer mandate and the purchasing pools, both central to the reform package, be considered a form of taxation, expanding the federal government. As the Washington Post notes, the “decision was one of several by the CBO that fueled Republican attacks and helped torpedo [the Clinton] reform efforts.” As a result, lawmakers this time around are “treading carefully around the role of government.”
Which makes a recent issues brief published by the CBO especially important. Entitled The Budgetary Treatment of Proposals to Change the Nation’s Health Insurance System especially important. The brief provide guidance to the careful treading of legislators. At this stage the CBO is reacting to health care reform concepts, not legislation. As with most things, especially things issuing from Washington, D.C., the devil parties in the details. Nonetheless, the CBO laid out very clearly what factors it would consider in making a determination.
For example, it noted that some determinations will be fairly straightforward. These are items involving cash moving in and out of federal coffers or of entities acting on behalf of the government. “Such transactions include the provision of subsidies for some people and businesses; the income and expenditures of a public health insurance plan; the government’s receipts from “play-or-pay” requirements and from penalties imposed on individuals who fail to comply with a health insurance mandate; and “risk adjustment” transactions of the government that shift funds from insurers with lower-risk enrollees to those with higher-risk enrollees.”
Other provisions, for instance those related to requiring individuals to purchase health insurance coverage or the operation of health insurance exchanges through which individuals, small businesses and maybe larger corporations could purchase coverage, are more nuanced. Much will depend on how they are structured.
For example, concerning the individual mandate, the CBO’s determination will hinge on three factors:
- Is the consumer likely to be able to choose among a number of insurance plans with differing degrees of comprehensiveness?
- If there are plans with different levels of coverage, will they cover a broad enough range to offer consumers a meaningful choice?
- Is the consumer likely to be able to choose among several different insurance companies competing on price?
It’s easy to see how complicated this can get. How many choices must consumers have for it to be meaingful choice? What if the minimum benefit package is so rich there’s no meaningful range of benefits? The mere existence of a mandate nor the imposition of federal oversight on the market will not be enough to require resulting premiums and subsidies to be considered part of the federal budget. Instead, it is “a combination of the two—a mandate and tight federal control over how that mandate can be met—[that] is necessary and sufficient to justify recording the affected private-sector transactions in the federal budget.”
How premiums (and expenses) flowing through health insurance exchanges are treated in relation to the federal budget is also far from clear-cut. Factors taken into account will be the nature of the exchange: is it a purchaser of coverage on behalf of its members or simply an information clearinghouse? To what extent are exchanges federal entities under government control? What it comes down to is the degree of federal government control of the exchanges, their powers, and their purpose.
Douglas Elmendorf, the Director of the Congressional Budget Office, in his blog summarizes the CBO’s guidance to Congress:
- “Premium income—for a public plan (or plans) and for insurance purchased through exchanges or in the private market—should be classified as federal revenues if there is an individual mandate and tight government control of the insurance market. The corresponding expenditures should also be recorded as outlays in the budget. Similarly, if there is an individual mandate and a dominant public plan available to some segments of the insurance market, premiums and outlays for those segments of the market should appear in the budget and the premium income should be classified as revenues.
- Premium income should be classified as an offset on the outlay side of the budget—along with the corresponding spending counted as outlays—if:
- Premiums are collected for a public plan but there is no mandate, or
- There is an individual mandate in conjunction with an active, loosely restricted private market, and premiums are collected for a public plan or by governmental exchanges.
- Outlays for premiums and income from the receipt of those premiums should not appear in the federal budget if:
- There is no mandate and no public plan, or
- There is an individual mandate and an active, loosely restricted private market, and if premiums are paid through nongovernmental exchanges or directly to insurers. “
The Obama Administration and Democrats in Congress will try their best to keep revenue and expenses related to health care reform off the budget. They’ll only go so far, however. At some point the calculation as whether the public policy benefit of a provision (in their view) outweighs the political cost comes out on the side of the public policy.
Yet President Obama has made crystal clear his desire for bi-partisan health care reform. For Republicans to sign on to a package they’ll need the political cover keeping as much of the financial impact of the package off the budget as possible. This, in turn, inserts the CBO guidelines squarely into the debate. And the message is clear: the looser government’s hand grips the new health care system the smaller its budgetary impact.
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