The Wonk Room

CBO’s Douglas Elmendorf And Bending The Cost Curve With Health Reform

Today, in testimony before the Senate Budget Committee, Congressional Budget Office chief Douglas Elmendorf suggested that the health care legislation before Congress does not achieve “the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount.” “And on the contrary, the legislation significantly expands the federal responsibility for health care costs,” Elmendorf said:

But it is very hard to look out over a very long term and say very accurate things about growth rates. So most health experts that we talk with focus particularly on what is happening over the next 10 or 20 years, still a pretty long time period for projections, but focus on the next 10 or 20 years and look at whether efforts are being made that are bringing costs down or pushing costs up over that period. As we wrote in our letter to you and Senator Gregg, the creation of a new subsidy for health insurance, which is a critical part of expanding health insurance coverage in our judgment, would by itself increase the federal responsibility for health care that raises federal spending on health care.

Part of Elmendorf’s message is painfully obvious: investing in health care reform by providing Americans up to 400% of the federal poverty line with subsidies is going to cost the federal government a good deal of money — somewhere between $1 trillion and $1.5 trillion, to be exact. Progressives have always argued that in order to reduce the growth of health care costs in the long term and avoid the kind of catastrophic spending levels that could swallow-up our entire economy, we’re going to have to bring everyone into the health care system. As Elmendorf points out, that shows up on the federal books.

But the budget outline that passed the Senate Budget Committee requires a fully funded health reform bill, and both the Senate Finance Committee and the House Ways and Means Committee are proposing different options to pay for reform and ensure that the bill does not add to the deficit. For his part, Elmendorf, is isolating the ledger of the federal government from the context of the entire system. In other words, since many of the savings from reform won’t be reflected in the federal budget, Elmendorf does not consider them. But modernizing the health care system (implementing electronic medical records, health information technology) and reforming the way Medicare and Medicaid reimburse providers will save money for the system as a whole. As Melinda Beeuwkes Buntin and David Cutler pointed out in a recent analysis, these savings can total to some $2 trillion. In fact, even the industry is on record as saying we can reduce the growth rate in annual health spending by 1.5 percentage points a year over the next 10 years, lowering spending overall health care spending by $2 trillion (this represents a 20 percent reduction in projected growth.) Elmendorf is looking at the trunk of the elephant and not the whole.

Still, what’s most peculiar about the Elmendorf statement is the suggestion that lifting the tax exclusion for employer-sponsored health benefits is one of the few ways to bend the cost curve. Technically, such an approach would save the government a good deal of money, but would it bend the curve? As Elise Gould points out in a brief for the Economic Policy Institute, there is no evidence that the exclusion — or this idea that health care costs are increasing because Americans are “cavalier” about the price of health care — “is a primary driver of price increases in health care. In fact, the tax exclusion has been around for decades, even during periods of low health care inflation.”

In testimony before the House Ways and Means Committee, Elmendorf walked back his comments, saying that in some ways federal spending will increase and in some ways it will decrease. When pressured by the Republicans on the committee, Elmendorf did not directly confirm his accusations.