Congressional Budget Office
Director's Blog

Current proposals to reform the health care and health insurance systems would affect the federal budget and the nation’s spending for health care in many ways, and those effects can be summarized using a variety of different measures. Today CBO released a letter to clarify the measures being used by CBO in its analysis of such proposals—in particular, the effects of proposals on federal budget deficits and on the magnitude of the federal budgetary commitment to health care. As concrete examples, the letter discusses the preliminary analysis recently completed by CBO and the staff of the Joint Committee on Taxation (JCT) of the proposal put forward by the Chairman of the Senate Committee on Finance, as amended by the committee, and of the preliminary analysis by CBO and JCT of H.R. 3962, the Affordable Health Care for America Act, which was introduced yesterday in the House of Representatives.

Effect on Federal Budget Deficits

CBO and JCT’s analysis of a health care reform proposal focuses on its net impact on federal budget deficits during the 10 year budget window from 2010 through 2019. This “bottom line” reflects all of the effects of a proposal on spending and revenues, regardless of whether or how they are related to the provision of health care. CBO and JCT estimated that the proposal approved by the Committee on Finance would result in a net reduction in federal budget deficits of $81 billion over the 2010–2019 period, and that H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion over the same period.

Effect on the Federal Budgetary Commitment to Health Care

CBO’s letters providing preliminary analyses of the proposal approved by the Senate Committee on Finance and H.R. 3962 also addressed the effects of the proposals on “the federal budgetary commitment to health care.” CBO used that phrase in a letter earlier this year to describe the sum of net federal outlays for health programs and tax preferences for health care. CBO has used this measure because some Members have expressed interest in the federal government’s overall role in the financing of health care—both under current law and under alternative reform proposals. (Whether the federal role should be expanded, contracted, or held the same is a policy choice, and CBO, as always, makes no policy recommendations.)

Federal outlays for health programs are not an adequate gauge of that overall role because tax expenditures for health care are substantial under current law and because new tax credits to help purchase health insurance are a significant part of some reform proposals. Similarly, federal tax expenditures for health care do not, by themselves, capture this overall role because federal spending on health care is also substantial under current law and because such spending would increase significantly under some reform proposals. By including both the federal government’s spending for health care and the subsidies for health care that are conveyed through reductions in federal taxes, the “federal budgetary commitment to health care” represents a broad measure of the resources allocated by the federal government in this area—and a measure that is independent of the extent to which outlays or tax provisions are used to channel those resources.

For example, how would the proposal approved by the Senate Finance Committee affect the budgetary commitment to health care? CBO and JCT’s estimates imply that the proposal would increase the federal budgetary commitment to health care by about $85 billion over the 2010-2019 period. (Again, we estimate that the proposal would result in a net reduction in federal budget deficits of $81 billion over the same time period.)

Bending the Cost Curve

Major proposals to reform health care would affect not only the federal budget but also spending for health care by individuals, firms, and other levels of government. A broad measure encompassing those effects would be the impact on total national health expenditures. However, CBO does not analyze national health expenditures as closely as it does the federal budget, and at this point CBO has not assessed the net effect of health care reform proposals on those expenditures, either within the 10-year budget window or for the subsequent decade. That is, CBO has not evaluated whether reform proposals would lower or raise—or bend down or up—the “curve” of national health expenditures.

CBO and the Joint Committee on Taxation (JCT) have just issued a preliminary analysis of H.R. 3962, the Affordable Health Care for America Act, as introduced on October 29, 2009. Among other things, H.R. 3962 would establish a mandate for most legal residents of the United States to obtain health insurance; set up insurance “exchanges” through which certain individuals and families could receive federal subsidies to substantially reduce the cost of purchasing that coverage; significantly expand eligibility for Medicaid; substantially reduce the growth of Medicare’s payment rates for most services (relative to the growth rates projected under current law); impose an income tax surcharge on high-income individuals; and make various other changes to the federal tax code, Medicaid, Medicare, and other programs.

According to CBO and JCT’s assessment, enacting H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion over the 2010–2019 period. In the subsequent decade, the collective effect of its provisions would probably be slight reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty.

The estimate includes a projected net cost of $894 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $1,055 billion in subsidies provided through the exchanges (and related spending), increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $167 billion in collections of penalties paid by individuals and employers. On balance, other effects on revenues and outlays associated with the coverage provisions add $6 billion to their total cost.

Over the 2010–2019 period, the net cost of the coverage expansions would be more than offset by the combination of other spending changes, which CBO estimates would save $426 billion, and receipts resulting from the income tax surcharge on high-income individuals and other provisions, which JCT and CBO estimate would increase federal revenues by $572 billion over that period.

By 2019, CBO and JCT estimate, the number of nonelderly people who are uninsured would be reduced by about 36 million, leaving about 18 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants). Under H.R. 3962, the share of legal nonelderly residents with insurance coverage would rise from about 83 percent currently to about 96 percent. Roughly 21 million people would purchase their own coverage through the new insurance exchanges, and there would be roughly 15 million more enrollees in Medicaid than the total number projected for Medicaid and CHIP combined under current law. (Under the bill, CHIP would no longer exist in 2019.) Relative to currently projected levels, the number of people purchasing individual coverage outside of the exchanges would decrease by about 6 million, and the number obtaining coverage through employers would increase by about 6 million.

Although CBO does not generally provide cost estimates beyond the 10 year budget projection period (2010 through 2019 currently), many Members have requested CBO analyses of the long-term budgetary impact of broad changes in the nation’s health care and health insurance systems. However, a detailed year-by-year projection, like those that CBO prepares for the 10-year budget window, would not be meaningful because the uncertainties involved are simply too great. Among other factors, a wide range of changes could occur—in people’s health, in the sources and extent of their insurance coverage, and in the delivery of medical care (such as advances in medical research, technological developments, and changes in physicians’ practice patterns)—that are likely to be significant but are very difficult to predict, both under current law and under any proposal.

All told, H.R. 3962 would reduce the federal deficit by $9 billion in 2019, CBO and JCT estimate. After that, the added revenues and cost savings are projected to grow slightly more rapidly than the cost of the coverage expansions. In the decade after 2019, the gross cost of the coverage expansions would probably exceed 1 percent of gross domestic product (GDP), but the added revenues and cost savings would probably be greater. Consequently, CBO expects that the legislation would slightly reduce federal budget deficits in that decade relative to those projected under current law—with a total effect during that decade that is in a broad range between zero and one-quarter percent of GDP. The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it, compared with CBO’s 10 year budget estimates, and the effects of the bill could fall outside of that range.

Those longer-term projections assume that the provisions of H.R. 3962 are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the “sustainable growth rate” mechanism governing Medicare’s payments to physicians has frequently been modified to avoid reductions in those payments, and legislation to do so again is currently under consideration in the Congress. The bill would put into effect (or leave in effect) a number of procedures that might be difficult to maintain over a long period of time. It would leave in place the 21 percent reduction in the payment rates for physicians currently scheduled for 2010. At the same time, the bill includes a number of provisions that would constrain payment rates for other providers of Medicare services. In particular, increases in payment rates for many providers would be held below the rate of inflation (in expectation of ongoing productivity improvements in the delivery of health care). Based on the extrapolation described above, CBO expects that Medicare spending under the bill would increase at an average annual rate of roughly 6 percent during the next two decades—well below the roughly 8 percent annual growth rate of the past two decades, despite a growing number of Medicare beneficiaries as the baby-boom generation retires. Based on the same extrapolation, Medicare spending per beneficiary under the bill would increase by roughly 4 percent per year, on average, during the next two decades—compared with a 7 percent average growth rate (excluding the effect of establishing Part D) during the past two decades.

Investment in research and development (R&D) over the past several decades has produced a wealth of valuable new drug therapies. Current and future pharmaceutical R&D will determine what drug therapies will become available, and thus will influence future health-care costs. Yesterday CBO released a brief that describes the state of investment in drug R&D and the factors that influence it. It also examines how various policy options to control the growth in health care costs or to expand insurance coverage could affect spending on R&D.

Rate of New-Drug Development

Spending on prescription drugs rose rapidly between 1994 and 2004, but has grown more slowly since then. The rising-then-slowing pattern of growth in prescription drug spending, as shown in the figure below, is related to the evolving pace of new-drug introductions and patent expirations over the past two decades. Specifically, drug introductions spiked in the mid- to late 1990s but have declined since 2000—in most years, back to levels not seen since the 1980s.  The introduction of priority drugs (those that, according to the Food and Drug Administration, provide a significant therapeutic or public health advance) has also subsided.

Slower revenue growth for drugmakers does not mean that consumers are using fewer prescription drugs. In fact, the total number of prescriptions continues to increase, albeit more slowly since 2004. But generic drugs, which cost less than their brand-name counterparts, comprise a greater share of prescriptions, having risen from 42 percent in 2000 to 58 percent in 2007.

Investment in R&D

According to Pharmaceutical Research and Manufacturers of America (PhRMA), the industry’s trade association, member firms spent $50 billion on pharmaceutical R&D in 2008, a 2.6 percent real increase over the previous year. That increase is unusually small; over the past 30 years, PhRMA has seldom reported less than a 5 percent real annual increase in R&D spending, and the average has been almost 9 percent. Generally, pharmaceutical R&D in the private sector is complemented by health-related research funded by the public sector, mostly through the National Institutes of Health. Analysts have found that increased public spending on basic (health-related) research stimulates additional private drug R&D.

Real R&D spending per successful new drug has been rising for many years, largely because of growth in the size and length of clinical trials and an increased rate of failure. Those changes generally reflect drug companies’ strategic choices about which kinds of drugs to pursue—choices that depend on anticipated demand and scientific opportunities. In particular, drug companies are devoting more resources to developing drugs for chronic illnesses, which generally require longer clinical trials.

The Role of Health Insurance in the Demand for Prescription Drugs and Drug R&D

Insurance plays a significant role in determining the demand for prescription drugs and, ultimately, drug R&D. By shielding individuals from the full costs of the drugs they use, insurance encourages higher spending on drugs. Further, the scope of health insurance coverage of prescription drugs has been expanding for many years, as has the number of prescriptions being filled. From 1997 to 2007, the share of consumers’ total drug expenses paid for by third parties (private health insurance plans and public programs) rose from 67 percent to 79 percent. At least partly as a consequence, the number of prescriptions increased by 72 percent over that same period.

Prospective Policy Options and Their Implications for R&D

The federal government finances a large and growing share of prescription drug sales, and it faces severe long-term budgetary pressures, with rising health care costs playing a key role. CBO’s brief discusses a number of policy options for reducing those costs or for expanding insurance coverage that would affect the market for prescription drugs. Those options—some of them detailed in the Congressional Budget Office’s December 2008 report, Budget Options, Volume 1: Health Care—include:

• Expand prescription drug coverage
• Expand the Medicaid rebate paid by manufacturers of brand-name drugs
• Require drugmakers to pay a minimum rebate on drugs covered by Medicare Part D
• Increase the availability and use of follow-on biologic drug products
• Incorporate findings on comparative effectiveness into decisions about insurance coverage

This brief was prepared by David Austin of CBO’s Microeconomic Studies Division and Colin Baker of CBO’s Health and Human Resources Division. 

Today CBO released a letter responding to a request from the Ranking Members of the House and Senate Budget Committees for information on the effects of S. 1776, the Medicare Physicians Fairness Act of 2009. Under current law, CBO estimates that Medicare’s payment rates for physicians’ services will be reduced by about 21 percent in January 2010 and by about 6 percent annually for several subsequent years. S. 1776 would repeal the Sustainable Growth Rate (SGR) formula, which determines the updates to those payment rates, and permanently freeze those rates. CBO estimates that enacting S. 1776 would increase net direct spending by $247 billion over the 2010-2019 period, relative to CBO’s current baseline projections, which assume the reductions in payment rates outlined above. Enacting the legislation would increase net federal spending by about $40 billion in 2019, which is equivalent to about a 5 percent increase in net Medicare spending projected for that year.

CBO’s estimate consists of three major components. First, repealing the SGR formula and replacing it with a freeze of payment rates would increase the fees paid to physicians under Medicare by about $236 billion over the 10-year budget projection window. Second, that increase in Medicare spending for physicians’ services would also result in higher spending for both the Medicare Advantage program and the Department of Defense’s TRICARE program. CBO estimates those changes would sum to about $80 billion over the budget window.

Third, over the 2011-2019 period, CBO estimates that aggregate Part B premiums would increase by about $70 billion. Premium collections are recorded as offsetting receipts (a credit against direct spending). Beneficiaries enrolled in Part B of Medicare pay premiums that offset about 25 percent of the costs of those benefits. (All of the changes in Medicare spending that would result from enacting S. 1776 would be for Part B benefits.) Therefore, about one-quarter of the increase in Medicare spending would be offset by changes in those premium receipts. The premium for 2010 has already been set and will not be changed, so S. 1776 would have no effect on Part B premium receipts until 2011.

On July 13, 2009, the Department of Health and Human Services issued a proposed rule that would remove physician-administered (P-A) drugs from the calculation of the SGR retroactively and prospectively. If the rule becomes final, baseline physician spending would be higher over the next 10 years. Because the rule is proposed, CBO has incorporated 50 percent of the effect into its scorekeeping baseline; it will incorporate the entire effect if the rule becomes final in early November. The estimate of S. 1776’s impact on direct spending would be about $40 billion lower over the 2010-2019 period if the rule, as proposed, becomes final.

The public and private sectors in the United States together spend over $500 billion a year on infrastructure projects, including highways and airports, water and energy utilities, dams, waste disposal sites and other environmental facilities, schools, and hospitals. The federal government makes a significant contribution to that investment through its direct expenditures and the subsidies it provides indirectly through the tax system, which are sometimes referred to as tax expenditures. Today CBO and the Joint Committee on Taxation (JCT) released a study on the importance of tax preferences, the types of tax-preferred bonds used in financing infrastructure, and the economic efficiency of such bonds.

That study concludes that the amount that the federal government forgoes through tax-exempt bond financing is greater than the associated reduction in borrowing costs for state and local governments. Some analysts have estimated the magnitude of that differential and conclude that several billion dollars each year may simply accrue to bondholders in higher income-tax brackets without providing any cost savings to borrowers.

The Importance of Tax Preferences in Financing Infrastructure

Most federal tax expenditures for infrastructure are the result of tax preferences granted for bonds that state and local governments issue to finance capital spending on infrastructure. Those tax preferences reduce borrowing costs. The amount of tax-preferred debt issued to finance new infrastructure projects undertaken by the public and private sectors totaled $1.7 trillion from 1991 to 2007. About three-quarters of those bond proceeds, or roughly $1.3 trillion, was for capital spending on infrastructure by states and localities, and the remainder was used to fund private capital investment for projects that serve a public purpose, such as schools and hospitals. That $1.3 trillion amounted to over one-half of the $2.3 trillion in capital spending on infrastructure by state and local governments (that is, net of federal grants and loan subsidies).

Tax preferences for debt are attractive to states and localities because they generally allow those governments to exercise broad discretion over the types of projects they finance and the amount of debt they issue. But unlike direct expenditures, tax expenditures—including tax preferences for state and local bonds—are not subject to the annual appropriation process that determines federal outlays for infrastructure and other discretionary programs. As a result, the cost of tax subsidies for infrastructure is not readily apparent, making the design of cost-effective tax preferences all the more important. For fiscal years 2008 to 2012, federal revenues forgone through the tax-exemot bond financing of infrastructure—both for new investments and for the financing of existing debt—are estimated to exceed $26 billion annually.

The Types of Tax-Preferred Bonds and Their Characteristics

The Internal Revenue Code provides for three forms of tax-preferred state and local bonds:

• Tax-exempt bonds pay interest to the bondholder that is not subject to federal income tax.  They are the most well established type of tax-preferred debt (tax exemption dates to the beginning of the federal income tax in 1913) and are issued to finance either the general functions of state and local governments or selected projects undertaken by the private sector. Tax-exempt bonds reduce the issuer’s borrowing costs because purchasers of such debt are willing to accept a lower rate of interest than that of taxable debt of comparable risk and maturity.
• Tax-credit bonds, by contrast, generally provide a credit against the bondholder’s overall federal income tax liability. They are much more recent in origin, and the outstanding amount of tax-credit bonds currently is minuscule in comparison with that of tax-exempt bonds.
• Direct-pay tax-credit bonds, in effect, require the federal government to make cash payments to the issuer of the bond in an amount equal to a portion of each of the interest payments the issuer makes to the bondholder. Such bonds, which were created by the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111- 5), in part because the direct payment to the issuer represents a “deeper” subsidy to the issuer than the provision of a tax credit represents to the bondholder.

Increasing the Economic Efficiency of Tax-Preferred Bond Financing

Replacing tax-exempt interest with tax credits could, in principle, increase the efficiency of financing infrastructure with tax-preferred debt. Tax-credit bonds transfer to issuers all of the federal revenues forgone through the tax preference; in addition, the amount of the tax credit can be varied across types of infrastructure projects, thus bringing the federal revenue loss in line with the benefits expected from the investment.

Nevertheless, tax-credit bond programs have not been particularly well received by the market for a number of reasons, including the limited size and temporary nature of tax-credit bond programs and the absence of rules for stripping and selling credits. That situation is likely to change, however, as a result of the ARRA, which greatly expanded the size and range of tax-credit bond programs. As those new programs are implemented, it will be possible to gauge more accurately the practical advantages and disadvantages of tax-credit bonds.

This study was prepared by Nathan Musick of CBO’s Microeconomic Studies Division and the staff of JCT.

In its October 7th analysis of the health care reform proposal that was ultimately approved by the Senate Finance Committee, CBO estimated that roughly 94 percent of the legal nonelderly population would have health insurance in 2019, compared with about 83 percent today. (That estimate did not reflect an analysis of the legislative language that has been drafted to implement that proposal, which was recently released.) The agency has received many questions about that estimate; let me try to answer the two most frequent questions here.

In its preliminary analysis of the Chairman’s mark, which was an earlier version of the proposal presented by Senator Baucus, CBO also estimated that about 94 percent of the legal nonelderly population would have health insurance in 2019. Why didn’t the committee’s adoption of an amendment that reduced the penalties for not having insurance reduce the projected percentage of people with insurance?

In general, proposals that have included a mandate to obtain insurance have also included penalties for not having insurance in order to encourage compliance with that mandate. Although the specific features have varied among proposals, the penalties would generally be collected by the Internal Revenue Service (IRS). An amendment adopted by the Senate Finance Committee during its consideration of the Chairman’s mark reduced penalties in several ways: It eliminated penalties on children; reduced the penalty on many adults from $950 to $750 per person; phased in that penalty over a period of several years; made it easier for adults to get an exemption from the penalty; and limited the IRS’s ability to enforce the intended penalties.

By itself, that amendment probably reduced the number of people who would have health insurance under the proposal by roughly 1 million to 2 million—but its effects were offset by other changes to the proposal that made insurance more attractive or easier to get. For example, the committee increased the subsidies available through the new insurance exchanges by reducing the share of income that people with income below 400 percent of the federal poverty level (FPL) would have to pay toward insurance premiums. As another example, the committee voted to continue the Children’s Health Insurance Program (CHIP) as a stand-alone insurance program. CBO expects that offering continuity of coverage for several million children in CHIP would keep some children insured who would not have been covered under the Chairman’s mark; under the mark as it was originally offered, which would have eliminated CHIP, CBO anticipated that some of those children would be eligible for subsidized coverage in the exchanges but would not be enrolled in an exchange plan (owing at least in part to the higher premiums and higher out-of-pocket costs that they would typically face in such a plan).

During its deliberations, the committee also adopted a number of other amendments that would have small effects on the number of people with insurance coverage. On net, taking all of those changes into account, CBO estimated that the proposal adopted by the committee would lead to roughly the same number of people with insurance coverage as the Chairman’s mark, as it was originally proposed, would have—although substantial uncertainty surrounds both estimates.

Why does CBO estimate that the percentage of people with health insurance would be so high without larger subsidies for buying insurance or larger penalties for not having insurance?

In the December 2008 volume entitled Key Issues in Analyzing Major Health Insurance Proposals, CBO indicated that one option for obtaining near-universal insurance coverage would be to combine “an enforceable mandate for individuals to obtain insurance” with “subsidies for lower-income households to help them pay their required premiums.”

However, judgments about the impact of a mandate to buy health insurance and of penalties for not buying insurance are fraught with uncertainty, because relevant evidence is limited. Some insights can be gleaned from the experience with health insurance mandates in Hawaii and particularly in Massachusetts—which has achieved a very high rate of insurance coverage—and from the experience with other sorts of mandates that are designed to achieve various policy goals (such as auto insurance coverage, seat belt usage, and income tax compliance). But neither type of experience yields definitive evidence regarding the issues at hand—because of limitations in geographic scope in the one case and limited relevance to health insurance in the other.

The effectiveness of subsidies in encouraging the purchase of insurance is also an important consideration. The proposal approved by the Senate Finance Committee would offer substantial subsidies to many people who would be uninsured under current law—most of whom have income below 200 percent of the federal poverty level. Those with the lowest income would be offered coverage under Medicaid, for which they would not have to pay premiums; not everyone eligible for that coverage would take advantage of it, but CBO expects that a large share would do so. In addition, CBO analyzed the subsidies available through the insurance exchanges under the proposal approved by the Finance Committee and found that people with income between 133 percent and 200 percent of the federal poverty level would receive subsidies typically covering between 75 percent and 90 percent of their premiums for a relatively low cost insurance plan; those people would also get federal help with their cost-sharing requirements. Reflecting those inducements, CBO estimates, about two-thirds of enrollees in the exchanges would have income below 200 percent of the FPL. Under the proposal, the premium subsidies would be less extensive for higher-income individuals and families, and cost-sharing subsidies would not be available—but those individuals and families are also more likely to have insurance through their employer.

The effectiveness of a mandate, penalties, and subsidies in encouraging the purchase of insurance would depend, in part, on the health status of the individuals who enrolled—which in turn would affect the premiums that insurers charged. With other factors held equal, relatively healthy individuals would be somewhat less likely to purchase health insurance than relatively unhealthy individuals, and the more limited penalties that were approved by the Senate Finance Committee would do less to offset that tendency for “adverse selection” than would the originally specified penalties. The greater the extent of that adverse selection, the higher the average premiums would be—and such premiums, in turn, could further discourage some people from obtaining coverage. However, the Finance Committee’s proposal also contains two features that would mitigate those effects: First, it would provide up to $20 billion in funding for reinsurance payments, which would cover some of the costs of insurers who attracted particularly sick enrollees and thus would help limit the impact of adverse selection on the premiums that those insurers charged. Second, the income-based caps on what enrollees would have to pay would lessen the risk of an adverse selection spiral because many enrollees would not have to pay more if premiums were higher (though federal costs would tend to be higher as a result).

For all of the proposals involving mandates that CBO has evaluated this year, the agency has considered both the monetary and nonmonetary factors that would affect people’s decisions about whether to purchase health insurance. The monetary factors include the cost of buying insurance (which depends on insurance premiums and any subsidies provided by the government) and the cost of not buying insurance (which depends on statutory penalties and the likelihood of the government’s collecting those penalties). There would also be a nonmonetary cost of not buying insurance, which would reflect a mix of factors, including personal values about following rules, social norms or pressures, awareness of the mandate and the penalties associated with it, perceptions of fairness in the penalties, and the hassle of complying with the mandate relative to that of not complying (including the perceived costs of dealing with the IRS). In CBO’s judgment, those nonmonetary factors would play an important role in determining whether people obtained coverage, although their impact would depend on the nature of the mandate and the enforcement procedures. As a result, CBO generally expects that a clear mandate to buy health insurance, in conjunction with substantial government subsidies, would significantly increase people’s purchasing of insurance compared with that under current law, even if the monetary penalties for not doing so were relatively small.

To get a quantitative sense of the importance of a mandate, penalties, and subsidies in CBO’s estimates, consider the agency’s analysis of three recent proposals:

• During the Senate Finance Committee’s markup, CBO analyzed an amendment that would impose no mandate to purchase insurance and concluded that it would reduce the number of uninsured in 2019 by an estimated 10 million to 15 million. It contained a combination of the subsidies provided under the Chairman’s mark, a late-enrollment penalty, an option for insurers to exclude coverage of preexisting conditions in some cases, and an expansion of Medicaid that would have been optional for states (instead of the mandatory expansion proposed in the Chairman’s mark).
• In contrast, CBO’s preliminary analysis of H.R. 3200 (the health care reform proposal released by the House tri-committee majority group on July 14) concluded that it would reduce the number of uninsured in 2019 by about 37 million; that proposal contained not only an individual mandate, penalties for noncompliance, and a mandatory expansion of Medicaid, but also subsidies for the purchase of insurance through new exchanges that were more extensive (and more expensive) than those adopted by the Senate Finance Committee.
• CBO’s preliminary analysis of the proposal adopted by the Finance Committee projected a result in between the two described above—a reduction of about 29 million in the number of uninsured in 2019.

Those figures for the reduction in the number of uninsured under each proposal can be compared with CBO’s projection that roughly 54 million nonelderly people would be uninsured in 2019 under current law. Thus, the “no-mandate” amendment considered by the Finance Committee would lead to about one-fourth of the uninsured obtaining coverage; the proposal adopted by the Finance Committee, to about half; and the July 14 version of H.R. 3200, to about two-thirds. Taking into account the limited available evidence, CBO believes that those differences are reasonable and appropriate. However, there is clearly a substantial range of uncertainty surrounding those estimates, because of the complexity of the changes involved and the range of possible responses by individuals, insurers, employers, and other key participants in the health care system.

From time to time, you may hear in the news about a CBO cost estimate, log on to our Web site to check it out, and discover that it’s not there. That raises the question: When are CBO’s cost estimates made public, and when are they not? 

Answer:  CBO does not provide confidential estimates for any proposals that have been made public.  However, it honors requests for confidentiality if a proposal is not public, and maintains that confidentiality even if information about the estimate becomes public, as long as the proposal itself is not public.

Explanation: By law, CBO is responsible for providing cost estimates for bills (other than appropriation bills) when they are approved by a full committee of the House or Senate. Those estimates, which constitute the majority of CBO’s formal estimates, are sent to both the Chairman and the Ranking Minority Member of the committee that approved it and are promptly posted on CBO’s Web site.

CBO sometimes prepares cost estimates at other stages of the legislative process. For example, the agency is sometimes asked to estimate the budget impact of various alternatives during the developmental stages of the legislative process before lawmakers have decided exactly what legislation they want to propose. Thus, CBO may prepare preliminary estimates for alternative proposals to be considered by a committee, subcommittee, or the full House or Senate, including draft bills not yet introduced, or for amendments to be considered at committee markups. Estimates provided at these stages in the legislative process are often informal and convey preliminary indications of budgetary effects. They are generally used by Members or committees as they work through the decisionmaking process of formulating legislation.

CBO’s long-standing policy regarding the distribution of estimates is stated on the agency’s Web site: “CBO seeks to ensure that key parties in the Congress who are involved in any particular issue have equal access to its analytic work. Insofar as possible, CBO delivers its cost estimates and analyses to all interested parties simultaneously. Requests for confidentiality are honored only for cost estimates for legislative proposals that have not been made public.”

Under that policy, CBO shares with Members of both parties (and, for formal estimates, makes public via its Web site) any cost estimates for legislation or proposals that have been made public—for example, introduced bills, amendments printed in the Congressional Record, legislation (or specifications for legislation) posted on a committee’s Web site. But when a committee or Member is in the process of developing legislation and has not made the proposal public, and if that committee or Member asks CBO to keep the estimate confidential, the agency will do so. This procedure enables lawmakers to take budgetary considerations into account when considering various policy options in the process of crafting  legislation. 

Today I testified about the economic effects of legislation aimed at reducing emissions of greenhouse gases, drawing on a report that CBO released a few weeks ago.

Global climate change poses one of the nation’s most significant long-term policy challenges. A strong consensus has developed in the expert community that, if allowed to continue unabated, the accumulation of greenhouse gases in the atmosphere will have extensive, highly uncertain, but potentially serious and costly impacts on regional climates throughout the world. Moreover, the risk of abrupt and even catastrophic changes in climate cannot be ruled out.

Reducing the extent of climate change would entail substantial reductions in U.S. emissions and in emissions from other countries over the coming decades. Achieving such reductions in this country would probably involve some combination of three broad changes: transforming the U.S. economy from one that runs on carbon-dioxide-emitting fossil fuels to one that increasingly relies on nuclear and renewable fuels; accomplishing substantial improvements in energy efficiency; and implementing the large-scale capture and storage of carbon dioxide emissions.

My testimony emphasized several points:

• The economic impact would depend importantly on the design of the policy. Decisions about whether to reduce greenhouse gases primarily through market-based systems (such as taxes or a cap-and-trade program) or primarily through traditional regulatory approaches that specify performance or technology standards would influence the total costs of reducing emissions and the distribution of those costs. The costs would also depend on the stringency of the policy; whether other countries imposed similar policies; the amount of flexibility about when, where, and how emissions would be reduced; and the allocation of allowances if a cap-and-trade system was used.
• Reducing the risk of climate change would come at some cost to the economy. For example, CBO concludes that the cap-and-trade provisions of H.R. 2454, the American Clean Energy and Security Act of 2009, would reduce GDP below what it would otherwise have been—by roughly ¼ to ¾ percent in 2020 and by between 1 and 3½ percent in 2050. By way of comparison, CBO projects that real (that is, inflation-adjusted) GDP will be roughly two and a half times as large in 2050 as it is today, so those changes would be comparatively modest. In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP because consumption falls by less than GDP and because households benefit from more time spent in nonmarket activities. Moreover, these measures of potential costs do not include any benefits of averting climate change.
• Climate legislation would cause permanent shifts in production and employment away from industries that produce carbon-based energy and energy-intensive goods and services and toward industries that produce alternative energy sources and less-energy-intensive goods and services. While those shifts were occurring, total employment would probably be reduced a little compared with what it would have been without such a policy, because labor markets would most likely not adjust as quickly as would the composition of demand for different outputs.
• CBO has estimated the loss in purchasing power that would result from the primary cap-and-trade program in H.R. 2454, incorporating both the higher prices that households would face and the compensation they would receive (primarily through the allocation of allowances or the proceeds from their sale). CBO’s measure omits some channels of influence on households’ well-being that cannot be readily quantified, and it appears that the measure probably understates the true burden to a small degree. As estimated, the loss in purchasing power would be modest and would rise over time as the cap became more stringent, accounting for 0.2 percent of after-tax income in 2020 and 1.2 percent in 2050. Households in the lowest fifth of households when arrayed by income would see gains in purchasing power in both 2020 and 2050, because the compensation they would receive would exceed the costs they would bear. However, households in the middle fifth would see net losses in purchasing power amounting to 0.6 percent of after-tax income in 2020 and 1.1 percent in 2050.

Today, CBO’s Acting Assistant Director of the National Security Division testified before the House Budget Committee about the long-term implications of the fiscal year 2010 budget submission for the Department of Defense (DoD). Decisions about national defense that are made today—whether they involve weapon systems, military compensation, or numbers of personnel—can have long-lasting effects on the composition of the nation’s armed forces and the budgetary resources needed to support them.

In previous years, CBO used DoD’s Future Years Defense Program (FYDP), which the department typically prepares each fiscal year and submits to the Congress as part of the President’s budget request. This year, CBO’s projections for fiscal years 2011 through 2028 are based on the President’s 2010 budget request; changes to defense plans announced in early April 2009 and subsequently by Secretary of Defense Robert M. Gates; and other sources, including press releases and briefing materials.

Base Projections of Defense Spending

CBO’s base projection of DoD’s current plans excluding overseas contingency operations (those in Iraq, Afghanistan, and elsewhere) would average about $567 billion (in constant 2010 dollars) annually from 2011 to 2028.  That amount is about 6 percent more than the $534 billion in total obligational authority requested by the Administration in its regular 2010 budget. Four main factors in particular account for the higher resources in the long term:

• The likelihood of continued real growth in pay and benefits for DoD’s military and civilian personnel;
• The projected increases in the costs of operation and maintenance for aging equipment as well as for newer, more complex equipment; 
• DoD’s plans to develop and field advanced weapon systems to replace many of today’s military systems that are nearing the end of their service lives; and
• Investments in new capabilities, such as advanced intelligence, surveillance, and reconnaissance systems, to meet emerging security threats.

Rather than having funding provided through supplemental and emergency appropriations, the Administration has requested a full year of anticipated appropriations for overseas contingency operations along with its regular defense budget request for fiscal year 2010. The Administration’s request of $130 billion would support 100,000 service members in Iraq and 68,000 in Afghanistan. CBO does not have access to DoD’s estimates of costs for overseas contingency operations in 2011 or later that would have been contained in the 2010 FYDP.

Unbudgeted Costs

The long-term demand for defense resources could be larger than CBO’s base projections. CBO has developed a scenario under which, consistent with the Status of Forces Agreement signed by the governments of Iraq and the United States in November 2008, all U.S. troops would be withdrawn from Iraq by December 31, 2011. Under that scenario, the total number of U.S. military personnel deployed worldwide would decline to 30,000 starting in fiscal year 2013, although those troops would be in unspecified locations and not necessarily in Iraq or Afghanistan. CBO estimates that supporting that number of deployed service members would require recurring annual appropriations of about $20 billion. CBO refers to those costs as “contingency unbudgeted costs.”

Other factors also could increase defense resources above CBO’s base projections. There could be higher costs for developing and purchasing new weapon systems. In addition, as has been true historically, medical costs could rise more rapidly than DoD has assumed. Accounting for those and other factors, as well as contingency costs, CBO has projected the “total unbudgeted costs” of current defense plans. The inclusion of total unbudgeted costs increases the overall projection to an annual average of $624 billion through 2028, or 17 percent more than the regular funding requested for 2010. Some 38 percent of the total unbudgeted costs between 2013 and 2028 are associated with overseas contingency operations.

CBO just distributed two tables of additional analysis of the Senate Finance Committee Chairman’s Mark, as amended, of the America’s Healthy Future Act of 2009. The first table updates information (originally provided in a September 22nd letter to Chairman Baucus) about the subsidies offered through insurance exchanges and enrollees’ payments for that coverage. The second table updates information (originally provided informally to the Committee) about the distribution of penalties for not adhering to the individual mandate in the proposal. Both tables are based on estimates made by CBO and the staff of the Joint Committee on Taxation.