Paying for Health Care Reform

Given the precarious fiscal position of the country, it is critical that any efforts to reform the nation's health care system are fiscally responsible. Accordingly, the Committee for a Responsible Federal Budget has developed a list of principles for enacting reform:

1) Health Care Reform Should Focus on Slowing Cost Growth
2) New Government Health Care Spending Should be Fully Offset
3) Government Health Care Programs Must be Made Sustainable
4) The Need to Reform Health Care Does Not Displace the Need to  Reform Other Areas of the Budget
5) Health Care Reform is a Continuous Process

In our previous health care paper, Principle #1: Slowing Health Care Cost Growth, we argue that controlling growing health care costs must be at the center of any health care reform plan. If unchecked, health care costs, which have been growing faster than the economy, will contribute to unsustainable levels of government spending, and produce unmanageable costs for the overall health system.

In addition to controlling our nation's existing commitments, health care reform must not introduce any new unfunded commitments.

This is the time to be reducing, not increasing, the nation's unfunded liabilities. We should be focused on putting the budget on a sustainable path, not on adding new government entitlement programs. But given the political commitment to expanding health insurance coverage as part of comprehensive health care reform, it is absolutely necessary that any new costs to the government be fully offset—and a comprehensive health care reform plan should  reduce the long-term deficit.

We agree with the Administration's stated view that "health care reform must be deficit neutral over the next decade. That means that every dollar spent on this effort must be paid for—with real savings or revenue proposals that can be scored by the Congressional Budget Office (CBO). The offsets are not in any way theoretical; they are specific proposals that have been determined by the CBO to reduce spending or raise revenue."

In our view, pay-as-you-go (PAYGO) rules should be the minimum standard for new health legislation. At the very least, responsible health care reform should be deficit neutral over five and ten years, and should reduce the overall budget deficit in subsequent years. Enforcement mechanisms, perhaps in a form similar to sequestration, should be in place to scale back the government's health care commitments if these goals are not achieved.

Meeting this standard will not come easily. Health care expansion will not pay for itself through system rationalizing, and even aggressive general health care cost control measures cannot achieve enough public savings over the next decade to compensate for new costs of the types of plans that are being discussed.

Health care reform is going to be a costly endeavor. The plans being considered would cost over $100 billion a year. The Congressional Budget Office has said, "such proposals could permanently boost the government's budgetary commitments to health care by something in the vicinity of 10 percent." If we proceed down the path of coverage expansion, hard choices will have to be made on cutting spending, increasing taxes, or scaling back plans to expand and subsidize health care coverage. Given the trillion dollar deficits we currently face, failure to pay for a large new entitlement would be extremely dangerous for our country's financial future - and plunge us deeper into an era of unsustainable debt.

The Cost of Reform

Given the goal of expanding health care coverage, health care reform promises to be expensive, at least over the short run. Although expanding coverage can put some downward pressure on costs by expanding the risk pool and decreasing emergency room costs, any such savings are dwarfed by the costs of covering the nation's uninsured and subsidizing many already insured individuals. Even active measures to slow economy-wide health care cost growth will take time to play out, and are unlikely to dramatically decrease public health care spending over the next decade. Expanding coverage, while admirable, will no doubt increase health care spending significantly.


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The Precarious Fiscal Situation

Although troublesome in any fiscal circumstance, creating a large and permanent deficit-financed program would be particularly dangerous in the current climate. This year, the budget deficit is expected to hit $1.8 trillion, or 12.9 percent of GDP. This is almost four times the previous nominal record of $459 billion set in 2008, and more than double the post-war record as a percent in GDP, set at 6 percent in 1983. A portion of this short-term deficit is an intentional economic stimulus, and its full magnitude may prove to be useful in boosting the flagging economy. But the problem goes beyond the current stimulus. Large structural deficits are projected to persist over the next decade, at which point the economic effect of running deficits will be damaging rather than stimulative.

Under the President's budget, deficits would total $9.1 trillion between 2010 and 2019, and never drop far below $650 billion in any given year. Debt held by the public is projected to grow from 41 percent of GDP in 2008 to 82 percent by 2019. Over the medium- and long-run, this debt promises to slow economic growth by crowding out public investment and adding significantly to federal interest payments.


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Worries over budget deficits, in fact, have already led so-called "bond vigilantes" to demand higher interest rates on long-term U.S. debt, even before a recovery takes hold.

Policy makers should be focused on reducing the deficit, not increasing it. Failing to fully pay for the costs of new permanent health policies would be a mistake, as deficit financed health reforms would only dig our fiscal hole deeper.

The Need for PAYGO

The Obama Administration has already promised to fully pay for the costs of its health care plan, and more generally has called for reinstating statutory PAYGO. Some outside groups and individuals, though, have put pressure on the Administration and the Congress to waive PAYGO for health care reform. Those who oppose fully paying for health care expansion generally rely on three arguments: 1) CBO scoring is too conservative; 2) health care reform will pay for itself over the long-term; 3) health care reform is too important to worry about paying for.

On the first point, it is important to note that CBO is considered the authoritative nonpartisan budget group. In such a complex system, the actual effects of a given policy are highly uncertain, and CBO's estimates will not be perfect. But their scoring takes into account behavior changes - including those on the part of patients, providers, employers, workers, insurers, and state governments - based on the best available evidence. Moreover, they look not only at the savings that may be produced from a given cost-reducing policy, but also at the additional costs imposed - often from higher demand as a result of lower prices or from increased life expectancy.

As for the second argument, we would point out that not only are future savings highly uncertain, but they are projected to come mainly from Medicare and Medicaid. Since these programs are already on dangerously unsustainable paths, future health care savings will be needed simply to keep them viable, and so should not be used to finance unnecessary past borrowing. And finally, if health care reform is as important as advocates suggest, it should be easier - not harder - to pay for. Taxpayers and beneficiaries of government programs should be willing to give up more in exchange for comprehensive health care reform.

Given this, we support President Obama and the members of Congress who believe in fully paying for new health care spending with scoreable offsets. In our view, though, legislation should have to be at least deficit-neutral over five as well as ten years, to prevent back-loading offsets which may never come to be, or dangerously enlarging the deficit during that five year period. It is also important that the costs do not balloon in the next ten-year period, due to a slow phase-in of coverage expansion or budget gimmicks used to mask the full costs.  The Congressional Budget Office has warned of this risk, since many offsets used to pay for health care reform would grow more slowly than would health care costs. Beyond the ten year window, any health reform plan must be deficit-reducing, and this should be enforced through a budgetary mechanism that would come into play if costs grow too high or savings are too small.

An Exercise in Hard Choices

Paying for health care reform means making hard choices. Specifically, it will require raising taxes, cutting spending, scaling back the size of a health care reform plan, and/or proposing major reforms to dramatically reduce system-wide health care spending.

Revenue options can focus on scaling back or eliminating current tax benefits for health care, increasing other existing taxes, or establishing new ones. Spending options can focus on reducing the size or scope of federal health programs, reducing their spending through payment or general health care reforms, or cutting spending elsewhere in government. And reform plans can be scaled back by reducing the size of subsidies, focusing them more narrowly, reducing the standard provided insurance package, or relying more heavily on regulatory rather than budgetary actions.


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The Administration has already put forth around $950 billion in proposals representing a "down payment" on health reform. Nearly two thirds of this come from savings in Medicare and Medicaid, including cutting payments to Medicare Advantage, slowing the growth of provider payments, reducing subsidies to hospitals for treating the uninsured, and enacting a number of measures to reduce the cost of medicine and medical care. The remaining third comes from revenue measures - mainly by limiting itemized deductions for income over $250,000.

These offsets could go a long way to finance health reform, but more will be needed if current plans are not scaled back. Moreover, some of these proposals have been met with political resistance, and members of Congress have explored other means of financing health care reform.

Here, we have put together our own list of options, taken from a variety of sources, which could help to pay for the impending health care plan. We've divided these options into three charts - one dealing with options to scale back existing federal health care programs, one with options to reform provider payments and reduce overall health care costs, and one with ways to raise new revenue to pay for health care reform. These tables in no way represent an endorsement, but rather are meant to highlight the choices being presented in the current debate. Policy makers should carefully consider these options and others, making sure that health care reform reduces, rather than increases, our enormous budget deficits.

Click here to view CRFB's Option Charts for paying for health care reform.

View a PDF of this document here.

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CRFB Health Care Reform Series

Five Principles for Responsible Health Care Reform
Principle #1: Slowing Health Care Cost Growth
Principle #2: Paying for Health Care Reform
Principle #3: Making Medicare and Medicaid Sustainable
Principle #4: Addressing Other Areas of the Budget
Principle #5: Continued Vigilance in Health Care Reform