Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Budget Arbritrage Strikes Healthcare Reform

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In December, the CBO gave Congress a buffet-like price list on how to pay for healthcare reform.  The likely result of that approach is that lawmakers would comb through the CBO options, find those that were based on the flimsiest assumptions and/or that were fundamentally mis-estimated.  I believe that has happened with healthcare reform, and there’s some evidence from Arkansas’ own Senator Blanche Lincoln.

“Everything’s on the table,” Lincoln is quoted as saying in today’s Arkansas Democrat-Gazette.  She suggests that she might support taxing healthcare benefits, but only at a level that “would certainly be way above anything that your average Arkansan is paying for health care — if it occurs at all.”  Implicitly she’s arguing that the hundreds of billions of revenue that the CBO estimates will flow from taxing healthcare benefits greater than $17,000 or $20,000 per employee may not “occur at all” … yet it appears to be on the table as one way the plan can be “paid for”.

I’d call this the “strong form” of budget arbitrage.  Specifically, budget arbitrate can happen simply because of the uncertainty of the estimates; in such cases, however, the uncertainty could go either way.  Let’s call that the “weak form”.  In the “strong” form, Congressmen specifically “select” against the CBO in a non-deficit neutral way.  The bill will appear to be “paid for”, but the needed revenue offsets fail to appear.  That may be what is happening here.

Specifically, I suspect the CBO models are failing on at least one of two dimensions with respect to this particular revenue proposal.

1) We don’t know exactly who is paying more than $17,000 per year today.  This uncertainty is emphasized by a recent paper by Gould and Minicozzi.  Note that this paper was published this year, after the CBO options were presented in December, 2008.  They hypothesize and show some evidence in support of the notion that the people paying these high premiums are disproportionately sicker, older, and in smaller groups in high cost areas, perhaps in areas that also have relatively limited rate regulation.  Under Healthcare Reform, will those high rates continue to exist, or will those high cost individuals enjoy subsidization from the rest of us?  If their premiums get lowered, there may not be any tax revenue there at all.  And if they don’t, you have to wonder whether healthcare reform is worth doing.

2) We don’t know how those offering and buying those plans will adjust to the taxation of their “excess” benefits.  Even if healthcare reform doesn’t lower premiums for the sickest and costliest among us in the small group market (as per my previous point), these firms might change their behavior and simply lower the value of their benefits to avoid taxation.  As an outsider, I suspect that this sort of dynamic response may not be fully incorporated into the CBO’s models.

These are just educated guesses.  Alex Minicozzi is one of the 50 economists working at the CBO on healthcare reform, and she’s the coauthor mentioned in the aforementioned paper.  So the core intellectual base is there in the CBO to minimize the damage from this situation.  On the other hand, these models are very complicated and take considerable time to evolve.  And I’m just not sure anyone could accurately reflect what will happen to “high tail” health premiums.  This smells a lot like Bush I’s luxury taxes that raised very little revenue.

Lincoln is smelling the same thing, apparently.  Let’s see if she’ll consider this a valid option to “pay for” reform.

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Written by Victor

June 28, 2009 at 8:55 pm

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