Estimating the Budgetary Effects of Health Reform Proposals

June 8, 2009

CBOs long-standing practice in formulating cost estimates is to look for evidence that proposed policies would affect peoples behavior in ways that would generate budget savings or costs and then to include such behavioral responses in our analysis. (One exception to this practice is when budgetary scorekeeping rules specify that only certain types of effects be consideredthe topic of a blog entry tomorrow.) Examples of behavioral responses incorporated in CBO cost estimates include the changes in the production of various crops that would result from adopting new agriculture price or income support policies, changes in individuals driving behavior that would result from increases in gasoline taxes, and the likelihood that veterans will take up certain education or health benefits when policies pertaining to those benefits are changed.

In the health area, CBOs cost estimates regularly incorporate many types of behavioral responses on the part of patients, providers, employers, workers, insurers, and even state governments. CBOs cost estimate for the Childrens Health Insurance Program Reauthorization Act of 2009 provides a recent example. That legislation raised the federal excise tax on tobacco, which will lead to higher cigarette prices. Economists have studied how smokers respond to price changes, and reliable evidence shows that people smoke less when cigarette prices rise. One channel through which that change in behavior would affect the budget is by reducing Medicaid spending, because a decline in smoking among pregnant women in the program would reduce the number of low-birthweight babies; CBOs estimate reflected that effect. Similarly, the Joint Committee on Taxations (JCTs) estimate of the revenue impact of the bill also reflected a projected decline in smoking.

Most current proposals for broad reform of the health care system would affect the price of health insurance for some individuals, and CBOs cost estimates will take account of how consumers would probably respond. For example, some proposals would create subsidies that effectively lower the price of insurance for eligible persons, and CBOs analysis will project how many more individuals would take up coverage. Indeed, for any proposal that would affect insurance pricesmandating certain types of coverage, changing the tax treatment of employer-based health benefits, or providing tax credits for health coverageCBO and JCT will develop estimates that incorporate expected responses by consumers and employers.

Consumers and employers are not the only ones who respond to incentives. One recent CBO analysis found that physicians generally respond to reductions in Medicare payment rates by increasing the reported volume and intensity of the services they deliver to Medicare beneficiaries, offsetting about a quarter of the reduction in federal spending that would otherwise have occurred. Our cost estimates routinely incorporate the most recent available evidence on how providers respond to payment changes.

Certain policies could result in some budget savings and also impose some costs. CBO tries to assess both. For example, many health reform proposals include expanded support for preventive care and wellness services, as well as greater emphasis on primary care. Such policies have the potential to improve health outcomes and enhance the quality of patients lives. To the extent that policies avert diseases or lead to more effective medical care, they also might reduce health spending on balance. However, some policies of this sort might actually raise health spending, because additional preventive or primary care generally costs money, not every aspect of preventive or primary care is effective at averting disease, and people who avoid certain diseases may fall victim to other diseases instead. For a detailed discussion of how CBO estimates the effects of proposals aimed at improving health or increasing the use of clinical preventive services, see Chapter 7 of our December 2008 volume on Key Issues in Analyzing Major Health Insurance Proposals.

Although CBOs estimates reflect how certain individuals and firms would respond to enactment of a legislative proposal, those estimates generally do not reflect how gross domestic product (GDP) might change. That long-standing convention of not incorporating macroeconomic effects in cost estimates is consistent with the practice of the House and Senate Budget Committees to adopt an annual budget resolution with a specific underlying set of baseline economic assumptions, so that all legislation throughout a Congressional session can be evaluated against those assumptions.