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I have been wondering about this for a long time, but now that the Congressional Budget Office has released the numbers for the Senate healthcare bill, I figure it's a good time to ask.

Every time I read about the "cost" of various health care plans, I wonder what is really meant, and what their definition of a "cost" is and why they feel that's the right thing to label a cost. Here's an example:

http://news.yahoo.com/s/nm/20091118/pl_nm/us_usa_healthcare

So, the Congressional Budget Office says that the senate plan will "cost" $849 billion over the next 10 years. But they also say it will decrease the federal deficit by $127 billion over the next 10 years (and $650 billion more over the following 10 years). I remember having the same reaction to the CBO numbers on the house plans--how can you call it a cost if it is saving us money? Usually, spending more money on a government program you would expect to increase the deficit, not decrease it. With no change in the tax law, I would assume that the most sensible definition of the net cost of any program would be how much it increases the national debt. Here the deficit is decreasing, so the amount of federal debt you have at the end of 10 years would decrease by the same amount. which would mean the cost is negative, except for the fact that the bill does include a tax increase.

To state it more simply, the deficit is federal spending minus federal revenue. If you just increase spending without changing revenue, then I would think the cost is equal to the increase in deficit. If the deficit decreases due to increased spending, then clearly that spending should not be called a "cost", it should be called an investment or something else. When you pay some money and get some service in return, that's a cost. When you pay some money and get more money back, that's an investment that you made a profit on. I would never refer to the money that I give to my bank as the "cost" of banking. I'm giving it to them to hold onto so I can make *more* money. Yes, there is some cost of banking reflected in the difference between the interest they make off of my money and the interest they pay me, but this cost (what I'd call the "true cost") is far less than the total amount I'm paying to them initially... that's just not something that should be called a cost at all, in my book.

Now, this situation is not exactly the same as the bank account example, since in this case, there is a tax hike included in the bill. And I don't know what all the numbers are that went into coming up with these numbers, but I doubt that the increase in tax revenue is the sum of the two numbers they gave ($849B + $127B = $976B). If the new health care system is no more efficient than the current system, then I think their numbers imply that the bill includes a $976-billion tax increase, and that $849-billion of that money will be spent on healthcare while $127-billion will be spent on paying off some of the national debt. Except that one of the main purposes of health care reform is to save money on health care, since costs are spiraling out of control within the current system. The other main purpose is to make sure that more people are covered, which seems equally important, but I think the argument for keeping health care costs down is stronger and appeals to more people so it is usually cited as the primary reason for health care reform. Given this, you'd expect the numbers to not add up quite in the way I've described, since some of the deficit reduction would be coming from the increased efficiency of the new system.

So I guess what I'd like to know is what is the size of the actual tax hike? It seems like that would at least be more useful than the $849-billion number. Surely it isn't really $976-billion, because raising more money than you need and then using some of it to pay off the debt doesn't make much sense and would imply no increase in efficiency. But is it more or less than $849-billion? I would expect it's less, but I guess that depends on what their estimates are for how much waste in the current system is reduced. Whatever that number is, though, is it more correct to call that a cost or an investment? It seems like it is some of each, although mostly an investment. Like my bank account, most of the money is an investment, only a tiny fraction is paying for the actual cost of the service.

Then, another question is how do you figure out the "cost to society" once you know the "cost to the government"? If there's a public option, and you choose to pay your premium to the government under the new system rather than paying your premium to an insurance company, how does that affect the calculation of the cost to the government? If you're paying a lower premium, and getting the same service, then it seems like the net "cost to society" is negative (you were paying more before). And then while the government is presumably not going to try to make quite as large a profit off of your premium as the insurance company would have, if they do make some profit then that reduces the overall "cost to the government" of health care reform, but hopefully not as much as the overall cost to society of healthcare is reduced. Then there are administrative costs to the government, which would have been costs to insurance companies... also making the cost to society much less than the cost to the government.

According to KaiserEdu, the administrative costs of (government run) Medicare are less than 2% while the administrative costs of private health care are about 7%. I wonder if the CBO is assuming the increased efficiency of a government run program will be similar to the improvement you get with medicare, or better or worse. Given that the bloat factor is nearly 4 to 1 in favor of private industry having more beurocratic bloat in our current system, maybe there should be a slogan for the Obama era, "anything that can be done privately can be done publicly for a fourth of the cost".

Anyway, I would make a poll asking "is the true cost of health care reform positive or negative?" but there are so many different potential answers to that question I will leave it up to free-responses for whoever wants to take a crack at it. A related question would be, if you knew the cost was positive, in other words if you knew that society wouldn't save money on net by switching to the new system, would you still be in favor of reform (presumably because it would be a more fair system where everyone can afford health insurance)? I think my answer to this question is that I *think* the net cost is negative, but even if it is slightly positive it may still be worth doing. (And if the cost is large, like hundreds of billions, then it is not worth doing--at least, not in this way.) But if it is slightly positive, then I must admit I'm a bit outraged at the politicians who have all been lying to us, saying that reform is a way to "control spiraling health care costs".

Comments

( 90 comments — Leave a comment )
ankh_f_n_khonsu
Nov. 19th, 2009 03:09 am (UTC)
In this case, the "cost" they're most worried about is the hit to the Medical Industry's bottom line.

The "cost" they should be concerned with, IMO, is to the People.

All the noise about "cost" is empty rhetoric to keep fools occupied. There's billions for war, but cuts for libraries. It's a shell game.
roxymartini
Nov. 19th, 2009 03:18 am (UTC)
ah, i think you're mistaken
Except that one of the main purposes of health care reform is to save money on health care, since costs are spiraling out of control within the current system

one would certainly hope so! but the question is "save whose money"? having a public system may help save the average person money (though, this is debatable as taxes are being increased). in fact, what it might do is just help chop of that right end of the health care costs curve (where "costs are spiraling out of control"). but it won't help the government spend less money, because most health care today is covered by employers or privately purchased plans. and it certainly won't save you money if you plan to ever make over $100,000 a year, or even if you have an employer who covers (or would've covered) health care as a job perk.
easwaran
Nov. 19th, 2009 08:36 am (UTC)
Re: ah, i think you're mistaken
Note - there is no tax on planning to make over $100,000 a year. You don't pay a cent of tax until you actually make that money.

Also, the idea is that tax increases only go to people making more than $250,000 a year, not $100,000.

If your plan was to make $250,000 a year at a tax rate of 33% (or whatever it is), can't you just plan instead to make $260,000 a year at a tax rate of 37%?
Re: ah, i think you're mistaken - roxymartini - Nov. 19th, 2009 09:00 am (UTC) - Expand
Re: ah, i think you're mistaken - spoonless - Nov. 19th, 2009 09:41 am (UTC) - Expand
Re: ah, i think you're mistaken - easwaran - Nov. 19th, 2009 09:52 am (UTC) - Expand
Re: ah, i think you're mistaken - roxymartini - Nov. 19th, 2009 10:12 am (UTC) - Expand
Re: ah, i think you're mistaken - easwaran - Nov. 19th, 2009 10:25 am (UTC) - Expand
Re: ah, i think you're mistaken - easwaran - Nov. 19th, 2009 09:54 am (UTC) - Expand
Re: ah, i think you're mistaken - easwaran - Nov. 19th, 2009 09:56 am (UTC) - Expand
Re: ah, i think you're mistaken - roxymartini - Nov. 19th, 2009 10:13 am (UTC) - Expand
roxymartini
Nov. 19th, 2009 03:26 am (UTC)
also, i don't see what the point would be if the cost is positive.

i am okay with people being motivated to have a job rather than not have one.

i'm currently living at the povery line (maybe hovering a little above it) and there seem to be lots of good reasons to stay here. I think i qualify for all kinds of things like low tax rates, free health care, reduced rent, food stamps... and i live a very lazy beach life. i have no motivation to ever make more money than this because my life is very easy.

you know... i have actually personally known people who've begged NOT to get raises because a raise would put them into the next tax bracket and their take-home pay would decrease. i know it's off topic, but what kind of bullshit society would encourage this?

i'm really surprised everyone doesn't just buy a 1 way ticket to hawaii and become a homeless beach bum. free health care, $200+ a month in food stamps, free hot meals 3 times a day, all the surfing and the sunning and the leisure time you could ever want.
spoonless
Nov. 19th, 2009 03:49 am (UTC)

i am okay with people being motivated to have a job rather than not have one.

What upsets me is that it motivates people to take a job with a large corporation that can get special discounts on its large pool of employees, rather than work for a small company which can't afford health insurance, or to be an entrepreneur and go into business for themselves.

Many of my friends work for themselves, as freelance artists, writers, councilers, massage therapists, motivational speakers, etc. Most of them can't afford health insurance, not because they don't have a job, but because the cost of buying it yourself when you don't have a giant corporation to negotiate the price way down with the insurance company, is insanely high. By insanely high, I mean $500-$700/month, if you want a good plan like what you'd get working for a big company. This is more than most people pay for rent! It shouldn't cost this much, and we shouldn't be providing a strong incentive against entrepreneurs.

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easwaran
Nov. 19th, 2009 09:05 am (UTC)
It's very complicated. What I've gathered from the news reports I've read about health care over the past several months suggests the following. The $800 billion or so number that is mentioned is the sum of all new government expenditures in the bill. The effect on the deficit is calculated by subtracting various other factors from this one. One of those factors is new taxes (I believe that the amount they expect in either the house or senate bill is somewhere between $300 and $500 billion - there are differences between the House plan that adds a new tax on income over $250,000 and the Senate plan that adds a new tax on expensive health insurance plans together with an increase in the Medicare tax on income over $250,000, which I think is different from the first new tax).

Another factor is just a direct cut in the amount of money that is spent on Medicare - from what I've been able to gather, Medicare has some system where the government tells hospitals how much it will pay for various procedures, and they just have to take it, ignoring how much they charge private insurers. (At the same time, it seems like doctors and hospitals are also free to reject patients whose only coverage is Medicare - I don't quite get why any of them accept them if Medicare pays so much less than private plans.)

But I believe the Congressional Budget Office considers lots of other things as well. In particular, they consider how much the new health care plan will decrease the number of sick days taken and therefore increase the productivity of the workforce and thus increase the tax base and increase other tax revenues. They also consider how much certain improved preventive measures in the bill will decrease the number of sicknesses and therefore decrease the number of expensive conditions that Medicare and other government agencies will need to pay for. They also account for various other indirect costs of the plan too.

Of course, the news stories can't go into very much detail on any of this, because I'm sure it's all quite complicated, and you'd have to be some sort of accountant/economist to run any of these numbers. Really I think what they're doing is running a simulation of the economy over the next 10 years if the bill is passed, and running a simulation of the economy over the next 10 years if it's not passed, and seeing which results in a higher deficit.

What I really don't understand is where the original $800 billion number comes from - unlike the stimulus package, this bill doesn't specify how much money will be spent on anything (well, it probably does for lots of individual "pork barrel" grants that are included, and in salaries for new government employees, and so on, but it doesn't say "we will spend $400 billion on the public option" or anything). Instead, it says what sort of coverage it will provide to anyone who enrolls in Medicare or Medicaid or the public option, and then someone has to estimate how many people enroll in each of these programs, and how many of those people will have various conditions, and how much each of those conditions will cost to treat at each point over the next ten years.
spoonless
Nov. 20th, 2009 01:58 am (UTC)

Another factor is just a direct cut in the amount of money that is spent on Medicare - from what I've been able to gather, Medicare has some system where the government tells hospitals how much it will pay for various procedures, and they just have to take it, ignoring how much they charge private insurers. (At the same time, it seems like doctors and hospitals are also free to reject patients whose only coverage is Medicare - I don't quite get why any of them accept them if Medicare pays so much less than private plans.)

This sounds like the flip-side of the changes in Medicare that Bush passed. From what I've heard, it's stipulated in Bush's bill that the government will pay whatever the pharmaceutical companies list as the prices they charge private insurance companies for prescription drugs. If it weren't stipulated, then the government could negotiate a lower price, since it has the largest block of customers that each pharmaceutical company would want to be the one to profit off of. In other words, it would be kind of like having a consumer league or a labor union... if it's big enough, you can come closer to "dictating" your price. But of course, that would be bad for the drug companies, so Bush didn't do it that way--he chose the more expensive route. I wonder if the rest of Medicare works more like that (negotiated), or if it is actually literally dictated.
(no subject) - easwaran - Nov. 20th, 2009 04:00 am (UTC) - Expand
easwaran
Nov. 19th, 2009 09:08 am (UTC)
Also, the big "controlling costs" feature that has been pushed is that this plan is a way to "bend the cost curve downwards". As I understand it, this phrase means that we observe the current curve of healthcare expenditures, note that it is increasing exponentially (even after adjusting for inflation), and then suggest that with this bill, the costs will keep increasing exponentially, but hopefully with a somewhat smaller exponent. No one thinks that this bill will manage to get healthcare costs to decrease in real terms, or even to stay constant in real terms - they just think that it will decrease the rate of increase.
easwaran
Nov. 19th, 2009 09:20 am (UTC)
Oh, also, even if the total amount of money spent on healthcare is greater in a future with the bill than in a future without the bill, it may still be a way to "control spiraling health care costs". By increasing coverage from 86% to 94% (or whatever the exact numbers are), we should be guaranteeing that a lot more people are getting healthcare. If the total increase in expenditures is less than 8%, then surely the statement from the politicians is correct?

One might suppose the relevant number is really how much any particular treatment procedure costs, and not how much total is spent on health care. But that can't quite be right, because one of the important things is to cut down on the number of people that get an MRI for a minor sprained ankle, and other unnecessary procedures. We need a more efficient way to ration care than the current private-industry-based rationing system. We might save money as a result and get better healthcare results, even if every particular procedure costs more money under the new system than the current one.
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easwaran
Nov. 19th, 2009 09:16 am (UTC)
Regarding "cost" versus "investment" - the bank bailout plan got a lot of negative publicity because people saw that it would "cost" $750 billion. However, I believe all the spending that was permitted by that act was loans and equity investments by the Treasury. Of course, given that this money is being given precisely to companies that are in danger of collapse (including large amounts to automakers and others that weren't explicitly considered in the original vote on the bill), there was a good chance that some amount of this money would be lent out and not paid back, or would be spent on equity in a company whose stock price collapses to $0. However, I never heard any mention of what interest rate this money was being lent at (is it the standard Fed rate, which is currently basically at 0%? or is it a higher rate because this is clearly a subprime loan?). I've heard that the government made some profit on various loans that have been paid back, but I haven't heard anyone discuss how much the government may make or lose on the stock price of GM and Chrysler.

Anyway, that bill was described with "costs", even though it literally was entirely spent on traditional financial "investments" of loans and stock.

The stimulus package is a better candidate than the healthcare bill to be presented as "investment", because it is meant to keep people employed (which should cut costs to the government on unemployment rolls and increase revenues directly with the income taxes all those people pay) which will make those people spend money and stimulate many other portions of the economy, which will then generate tax revenues for the government. I don't remember hearing any discussion of a CBO score of that bill - perhaps they didn't bother running it? I don't really know.
sthira_sukha
Nov. 19th, 2009 08:40 pm (UTC)
Oh, yeah: Happy birthday!!
spoonless
Nov. 19th, 2009 09:24 pm (UTC)
thank you!

and I hope nobody holds me accountable for what roxymartini says on here, I am quite embarassed by how mean she can be sometimes.
(no subject) - sthira_sukha - Nov. 20th, 2009 11:46 pm (UTC) - Expand
datavortex
Nov. 19th, 2009 11:22 pm (UTC)
First off, happy birthday!

Secondly, the CBO numbers are pure fiction, if not outright vile lies.

Real cost of the bill to the American taxpayer, given federal mandates, state mandates, and private insurer mandates, along with their associated taxes is at least 2.5 trillion dollars. Personally, I'd be shocked if it doesn't cross the 3 trillion dollar mark and not surprised at all when it sails past the 4 trillion line.

The entire bill is one big accounting "trick", if you consider telling bald-faced lies a "trick".

A couple pieces with the basics, selected from among many more:

http://www.politico.com/arena/perm/Michael_F__Cannon_7685B271-D21F-44A4-9C8B-37A95FE88D7E.html

http://www.cato-at-liberty.org/2009/11/19/what-will-the-reid-bill-cost/
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radven
Nov. 20th, 2009 07:40 am (UTC)
"I must admit I'm a bit outraged at the politicians who have all been lying to us, saying that reform is a way to "control spiraling health care costs."

One theory I have is that we are setting up a one-two punch. First we get universal coverage (or as close as we can manage) locked down, then we work on implementing the cost controls.

We can't do the cost controls on the industry first, because it would be too easy for the insurers to cost-shift like they do today so that they are only covering the healthiest. And it is politically too hard to do both at once.

So instead - lock down universal coverage, then start mandating lower costs. For example, five years from now switch to Maryland-style universal pricing where all insurers pay the same for a given procedure.
datavortex
Nov. 30th, 2009 04:05 pm (UTC)
You're right on the first part, but off on the second. Leading Democrats have been pretty clear on this plan.

The first part will be extending coverage. The second part will be the slow introduction single-payer, likely under the guise of controlling costs, and possibly through a Maryland setup as you suggest. This will lead to insurance companies being outlawed and a British-style system put in place.
( 90 comments — Leave a comment )

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