Doug Elmendorf, CBO

Yesterday, Doug Elmendorf, the director of the Congressional Budget Office, testified before the Senate energy committee about the “comparatively modest” cost of a cap-and-trade system to limit carbon pollution. The Washington Post and Wall Street Journal blared “Congressional Budget Chief Says Climate Bill Would Cost Jobs” and “Cap-and-Trade Would Slow Economy, CBO Chief Says.” Conservatives leapt on the reports to cheer the “end” of “cap-and-tax.”

Of course, Elmendorf’s testimony is nothing new. Elmendorf warned that jobs in the fossil fuel industry would be lost, and that overall GDP growth would be slowed by less than one percent by 2020. No one is arguing that there won’t be a shift from pollution-based industries to clean-energy industries. But doing so will create millions more jobs than are lost, as energy companies invest in American workers instead of foreign oil and mountaintop removal. The effect on GDP is within the margin of error of future estimates of growth. Even pessimistic studies by the National Association of Manufacturers find that U.S. GDP will increase by $9 trillion with limits on carbon pollution.

What upset me, however, was the portion of Elmendorf’s testimony that was not reported. Although he recognized that his estimates do not take into account the economic impacts of climate change, he testified that the changes that scientists call “catastrophic” would be barely noticeable in the U.S. economy:

Most of the economy involves activities that are not likely to be directly affected by changes in climate. Moreover, researchers generally expect the growth in the U.S. economy over the coming century to be concentrated in sectors — such as information technology and medical care — that are relatively insulated from climate effects. Damages are therefore likely to be a smaller share of the future economy than they would be if they occurred today. As a consequence, a relatively pessimistic estimate for the loss in projected real gross domestic product is about 3 percent for warming of about 7° Fahrenheit (F) by 2100. [Dale W. Jorgenson et al., 2004]

Elmendorf goes on to cite Nordhaus & Boyer (2000) to claim “the risk of catastrophic outcomes associated with about 11°F of warming by 2100″ gives a projected “loss equivalent to about 5 percent of U.S. output and, because of substantially larger losses in a number of other countries, a loss of about 10 percent of global output.” (By way of comparison, US GDP collapsed by nearly 50 percent during the Great Depression.)

This is frighteningly nonsensical. The CBO is arguing that the collapse of the national electricity grid, water supply, food system, and physical infrastructure from heat waves, desertification, disease outbreaks, wildfires, floods, and catastrophic storms would barely affect the national economy. In fact, seven to 11° F (4 to 6°C) warming would lead to unimaginable changes in our planet by 2100:

– One to three billion people around the world exposed to “increased water stress” (aka drought)

– More than 40 percent of the world’s species go extinct

– Widespread coral reef mortality

– Terrestrial biosphere becomes a net carbon source

– Productivity of cereal grains decreases in low, mid, and high latitudes

– Sea level rise of 0.6 – 1.3 meters (2 to 4 feet)

– About 35 percent of global coastal wetlands are lost

– Twenty percent of world’s population exposed to increased floods

– About 20 percent of arable land disappears (same amount becomes arable in previously frozen north)

– Arctic warms by 27°F

The effects in the United States would be similarly disastrous:

— heat waves of greater than 90° six months of the year in Texas, Florida, Arizona, southern California

– 5-month heat waves in California interior, Oklahoma, Louisiana, Arkansas, Mississippi, Georgia, South Carolina

– 4-month heat waves in Kansas, Missouri, Tennessee, North Carolina

– 4-month heat waves greater than 100° in Texas, Arizona, southern California

– 3-month heat waves greater than 100° in Louisiana, Arkansas, Oklahoma, California interior

– 2 to 3-month heat waves everywhere in US except New England, northern Great Lakes, and the mountains, Pacific NW coast

– 1 to 2 months of greater than 100° everywhere except New York-New England, northern Great Lakes, mountains, Pacific NW coast

– 40 percent less precipitation in the Southwest

– Dust Bowl returns to Midwest

– Smog levels throughout summer above 10 ppb all across country

– Pollen count doubles again to four times pre-industrial levels

– Doubling of large wildfires in the West, as aspen and lodgepole pine disappear completely

– Tripling of coastal damage from storms

– Inundation of 10,000 square miles of U.S. land, including 25 to 80 percent of coastal wetlands

Texas and California, our top agricultural states, are already suffering from unprecedented heat and drought. Under 7 to 11°F warming, they would no longer be able to support agriculture. Corn crops start failing at above 90 degree weather, and soybean fails above 100 degrees. There would be no snow, maple, or cranberry industries in New England. The economists’ argument is that since the U.S. agriculture industry only represents about three percent of GDP, its total devastation would be hardly noticeable.

The above figures are actually misleading, because these are just the effects estimated under 4°C warming, not the even more unimaginable 6°C. Scientists are now warning that our current emissions levels may lead to 4°C warming by the 2070s.

It should also be noted that this kind of catastrophic warming would guarantee the long-term collapse of the Greenland and west Antarctica ice sheets, leading to sea level rise of over 12 meters (39 feet) in about 300 to 1000 years. But hey, I guess economists would argue that would spur growth in the floating-city industries.

The Congressional Budget Office estimated that the new version of the Senate Finance Committee’s health bill “will result in a net reduction in federal budget deficits of $81 billion over the 2010-2019 period” and would actually “reduce the federal budgetary commitment to health care.” But Republicans are stressing that the CBO analysis is “preliminary,” insisting that Democrats have a secret plan to scrap the existing health care legislation that “expands the role of the federal government in the personal health care decisions of every American.”

- Sen. Chuck Grassley (R-IA): “I think it’s going to be closer to a trillion dollars…It’s going to lead to a massive involvement of the federal government in health care.” [Fox News, 10/07/2009]

- Dick Morris: “If that sells well, they should list it under fiction on the best sellers list.” [Fox News, 10/07/2009]

- Michelle Malkin: “These are fantasy numbers, that’s the bottom line.” [Fox News, 10/08/2009]

Watch a video compilation:

The Baucus bill requires some substantial changes, but the Republican effort to invalidate the CBO scores is highly disingenuous. It’s hard to argue that you support bipartisan deficit-neutral health care reform and oppose a measure that incorporates pages of Republican ideas and actually reduces the deficit by $81 billion over 10 years. To make that argument, one must pretend that the Baucus bill is something it’s not.

To be clear, the bill is far from perfect and many progressives have their share of complaints. As Jonathan Cohn points out, the coverage provisions are “significantly lower than the projections from the House bill.” “In raw numbers, it’s the difference between 25 million people (Senate Finance bill) and 17 million (House bills) still uninsured ten years from now.” The Committee has some $71 billion (before it meets President Obama’s cost threshold of $900 billion) and could invest in higher affordability credits or improve affordability measures by allowing the Exchanges to “negotiate with plans for lower bids, encourage plans to form select networks, and exclude plans that do not offer good value and cost-effectiveness.”

Moreover, Congress should replace the proposed network of cooperatives — which, according to the CBO, are “unlikely to establish a significant market presence in many areas of the country or to noticeably affect federal subsidy payment — with a robust public option that could save the government as much as $150 billion over 10 years. It should eliminate the “failsafe” clause that “automatically” cut subsidies in the exchange to avert a projected increase in spending, strengthen employer-based coverage by replacing the bill’s free-rider provision with a pay-or-play employer mandate, and improve consumer protections by regulating the insurance plans of large self-insured corporations and lowering the amount insurers can charge older people for coverage. The Committee bill should also invest in long term care by adopting the Community Living Assistance Services and Supports (CLASS) Act, “a national insurance program to be financed by voluntary payroll deductions to provide benefits to adults who become severely functionally impaired.” The legislation establishes a safety net for long term care needs and also generates new revenue for reform. The House bills and the Senate’s health committee both include the program.

The Baucus bill provides Congress with an important opportunity to build up and incorporate many progressive criticisms into the final Senate bill. After all, Republicans have demonstrated, once again, that they will paint even the most conservative health bill as an expensive government take-over of health care.

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.

Enzi and Hatch argued that the penalty levied on employers who fail to obtain coverage for their workers and individuals was “a new tax” that undermined “President Obama’s own commitment to not raise taxes on 95% of Americans.”

Watch a compilation:

But to characterize the employer and individual mandates as new taxes is highly disingenuous. Health reform builds on the principle of “shared responsibility,” an approach that envisions “joint contributions by the public sector, individuals and employers.” While individuals are responsible for purchasing health insurance coverage — with a waiver for those who cannot afford to do so — “firms that do not directly provide health care to their employees” would be required to pay into a public pool to help finance their employees’ coverage.

Both policies are part of a larger strategy designed to lower health care costs. The bill exempts small businesses from the mandate, offers a tax credit to help them afford coverage, subsidizes insurance for middle class Americans, and allows the lowest income Americans to enroll in the Medicaid program. All this is designed to slow the growth of health care premiums. After all, only if you have everyone in the system, can you really invest in preventive care, reduce expensive chronic disease treatments, and eliminate the cost shift from the uninsured.

Moreover, as UC Berkeley Labor Center chair Ken Jacobs and Berkeley professor Jacob Hacker explain, an employer mandate enhances the existing system of employer-based coverage, levels the playing field between employers “that provide insurance and those competing with them that do not,” reduces “crowd-out of private coverage by new public programs,” and preserves the employer contribution — an important source of funding for health care reform. And while Republicans charge that an employer mandate to provide coverage would lead to fewer jobs or mass layoffs, especially for low-wage workers, Hacker contends that “these concerns are overstated when it comes to the play-or-pay proposals currently under consideration, with their relatively modest employer requirements.”

A study of the impact of the Hawaii health care mandate, for instance, “found no evidence of reduced employment.” In Massachusetts, where employers with more than 10 employees are required to provide coverage or pay a fine, “few firms reported making changes as a result of health reform.” Moreover, “it is also important to keep in mind that health reforms with employer requirements promise new benefits for firms and workers as well as new costs,” Hacker explained in testimony to the House Education and Labor Committee. “All firms would benefit from the reduction in unpaid medical bills incurred by the uninsured. Firms would further benefit from any savings due to a reduced rate of health-care cost growth,” Hacker said.

On the whole, the consequences of failing to reform health care reform far outweigh any penalty levied on the individual or the employer. As economist Uwe Reindhardt points out, the “cost” of the health care reform bill is a small fraction of the $40 trillion we’re projected to spend on health care in the next ten years. Should we fail to reform the health care system, the cost of health insurance for a family of four “will stand at $18,000 by 2010″ or $36,000 per typical nonelderly family of four by 2020. “Millions upon millions of middle-class families will see themselves pushed into the ranks of the uninsured — and possibly into bankruptcy — unless someone helps them financially.” Currently, too many Republicans are simply standing in the way.

Transcript:

ENZI: We also need to acknowledge why the estimates of the bill are lower than the first numbers we saw. The first reason is because the bill contains a new tax on employers who do not offer health insurance to their employees. This new tax will drive down wages and cause employers to reduce the number of their employees.

HATCH: Job killing employer mandate, that is going to tax American businesses by almost 52 billion dollars?

ENZI: Most economists agree that the effect of this economic growth killing tax will fall disproportionatly on low income and minority populations.

HATCH: Now this is at a time that American families are struggling to pay their bills and keep their homes.

ENZI: With the unemployment rate now close to 10% we should be finding ways to create new jobs for Americans rather than imposing new taxes that will cut their pay and cost them their jobs.

HATCH: This is going to lead to lower wages and more job loss at a time where our national unemployment rate is at almost 10% and rising.

ENZI: The bill also reduces its cost estimate by violating one of President Obama’s campaign pledges from last year. President Obama promised that he would not increase taxes on families who made less than $250,000.

HATCH: This onerous mandate flies in the face, as the distinguished ranking member said, of President Obama’s own commitment to not raise taxes on 95% of Americans.

ENZI: But that is what this bill does. It taxes Americans who do not have health insurance. Most of those families make less than $250,000 a year. But according to the CBO under this bill they’ll have to pay 36 billion in new tax penalties over the next ten years.

HATCH: 36 billion dollars in additional tax revenue?

ENZI: There should be no doubt the American people should understand, and the Administration should understand, that this bill breaks that campaign pledge on taxes.

Here is a partial comparison of how the committee reduced the price tag (all numbers are over a ten-year period):

The most interesting saving came from the reduction in subsidies. The original language allowed for $1,279 billion in subsidies, but the new bill scored a $723 billion price tag with the CBO, a 40 percent reduction. What happened? Well, the CBO concluded that by implementing an employer mandate more Americans would retain their work-place insurance and fewer would have to purchase coverage from the Exchange. As a result, the government would have to spend less money subsidizing coverage (since the employer contribution would be preserved); employers who don’t offer coverage would pay a penalty of $750 per full-time employee, $375 for each part-time employee, that would bring in an extra $52 billion for health care reform!

The bill also saves money by reducing the subsidy eligibility from 500% FPL to 400% FPL. Now, American families of four with incomes between 400% FPL ($88,000) and 150% FPL ($33,000) would receive government assistance when purchasing insurance, but the subsidies do not kick in for a family of four at $400% FPL until they have spent more than 12.5% (or $11,000) of their gross adjusted income on health insurance — a percentage that’s substantially higher than the 6% threshold most affordability experts recommend.

The bill also finds approximately $59 billion in new revenues from premiums collected for long term care paid by individuals purchasing disability insurance through the Community Living Assistance Services and Supports (CLASS) Act, legislation currently under consideration that would create an insurance program for adults who become functionally disabled. The CLASS Act establishes “a national insurance program to be financed by voluntary payroll deductions to provide benefits to adults who become severely functionally impaired.” All working adults will be automatically enrolled in the program, unless they choose not to be.

The HELP committee does not have jursidiction over Medicaid expansion or financing of reform. Thus, its bill only covers an additional 20 million Americans and costs approximately $600 billion. However, if we assume Medicaid expansion to about 150% FPL we expand coverage, but we also add to cost, bringing the final bill to somewhere around $1 trillion over 10 years. Cohn runs the numbers for what the final results may look like:

- 20 million: Number of uninsured in 2019, compared to 54 million without reform.

- 95 percent: Percentage of Americans with coverage in 2019.

- 21 million by 2019: Additional people covered through Exchange and employer mandate.

- 20 million by 2019: Additional people covered through Medicaid expansion of up to 150% FPL.

The preliminary CBO score of the early and incomplete HELP legislation placed the cost at $1 trillion and this latest analysis suggests that the committee has been able to find savings of some $400 billion ($1 trillion – $600 billion = $400 billion). Some of that new revenue will come from the employer mandate (an AP story suggests that the mandate will generate $52 billion over 10 years), but where do we get the rest? Lower subsidies (the original version may have provided subsides at 500% FPL, now it looks like it’s down to 400% FPL)? The public option? Only the yet-to-be released CBO score can provide those answers.

But the HELP Committee’s chairman’s mark – which, for the first time includes language on the public plan and the employer mandate – does offer some new details for how the mandate and the public plan could be structured:

- Employer mandate: Large employers would have to provide coverage to their workers or pay $750 per full-time employee, $375 for each part-time employee. Businesses with less than 25 employees will receive a tax credit, on a sliding scale, based on the number of workers. Ezra Klein points out, “the CBO estimates that “a mere 150,000 will lose their coverage. That’s nothing. And it means that a lot more Americans end up insured and the government spends a lot less in subsidies.”

An employer mandate is meant to strengthen the employer-based system of coverage and reduce crowd-out into the Gateway. Crowd out (and this is what critics latch on to when they claim that Obama overstated his promise to allow Americans to keep their present coverage) is less likely if employers are required to contribute a meaningful amount “to the cost of covering their uninsured workers,” because the cost of allowing their workers to be covered through other options is not much lower.

The dear colleague letter that accompanied the new mark stated that “the completed bill virtually eliminates the dropping of currently covered employees from employer-sponsored health plans,” but some may be surprised that a modest flat fee is a sufficient deterrent to dropping coverage. The decision to charge every firm the same penalty — instead of charging firms on a sliding scale based on payroll — does not account for firm size or profitability and smaller firms and firms with lower-wage workers, could be disadvantaged.

However, it should also be noted that Massachusetts requires employers with more than ten employees to either offer a “fair and reasonable” contribution for their employees’ coverage, or “pay an annual ‘fair share’ contribution of $295 per employee.” In Massachusetts, few firms reported making changes as a result of health reform, firms reported making few changes in cost sharing or in offering more plans are a result of the mandate.

- Community Health Insurance Option: Will have to compete on a level playing field with private providers and offer competitive rates and premiums. Presumably, the plan will be able to use its administrative efficiency and its market power (assuming it is able to attract a significant number of applicants and providers) to lower premiums:

- Health care providers and individuals are NOT required to participate in the new plan, it is entirely voluntary.

- The Secretary of Health and Human Services will establish the public option in every single Gateway (whether it is regional or national) and provide the national plan with start-up funds that will have to be repaid in 10 years.

- The new plan provide coverage only for the essential health benefits, but states may offer additional benefits if they choose

- Premium rates should cover the expected costs of the plan

- The rates negotiated with providers shall not be higher, in aggregate, than the average reimbursement rates paid by health insurance issuers offering qualified health plans through the Gateway.

The main argument conservatives and big oil and coal companies use against the American Clean Energy and Security Act (H.R. 2454) is that it would cripple American households with a crushing energy tax. To make that claim, they have distorted cost estimates from the Massachusetts Institute of Technology and conducted their own biased studies. Today, the Environmental Protection Agency obliterated these phony numbers with the release of its economic analysis of H.R. 2454. The EPA estimated the bill would actually lower household electricity bills:

As a result of energy efficiency measures, consumer spending on utility bills would be roughly 7% lower in 2020 as a result of the legislation.

That’s right — lower bills. In 2007, this would have saved the average residential user $84, or 23 cents per day. EPA’s analysis also found:

The overall impact on the average household, including the benefit of many of the energy efficiency provisions in the legislation, would be 22 to 30 cents per day ($80 to $111 per year).

We don’t have to just wish we were there — we can have a clean energy economy for the cost of a postcard stamp a day. And the EPA’s analysis does not “take into account the benefits of reducing global warming.”

EPA’s findings are consistent with the independent Congressional Budget Office analysis released on June 19th. CBO determined “that the net annual economywide cost of the cap-and-trade program in 2020 would be $22 billion—or about $175 per household.” CBO did not evaluate the impact of the energy efficiency measures on consumer spending on utilities.

The bottom line is that independent analyses found that ACES would cut spending on utilities, as well as have minimal overall costs to the average household – somewhere between 22 to 48 cents a day. Hopefully, representatives will pay heed to these government studies and ignore conservatives’ counterfeit estimates when they vote on the American Clean Energy and Security Act this Friday.

The Congressional Budget Office released a letter that stated that the Kennedy bill, the bill now pending for mark-up tomorrow, beginning tomorrow in committee would insure only one-third, only one third of the 47 million Americans who are currently uninsured for the cost of a trillion dollars….I strongly believe that we have to start over and act in a truly bipartisan fashion to address the issue.

Watch it:

As the Huffington Posts’ Sam Stein explains, “the CBO’s findings, however, are for an incomplete piece of legislation, making the cost-per-coverage estimates much worse than they will ultimately be. Republicans on the committee knew this, according to Democrats. But they pushed for the bill to be studied by the CBO now. And when poor results came back, they ran with them.”

Indeed, McCain is following the lead of Reps. John Boehner (R-OH), Eric Cantor (R-VA) and Sen. Mike Enzi (R-WY) in pretending that the organization’s estimates — which found that 15 million Americans would lose their employer-sponsored coverage and only 16 million uninsured Americans would obtain coverage — considered the whole of the legislation.

But as CBO chief Douglas Elmendorf pointed out in his letter to HELP Chairman Ted Kennedy, since the draft legislation did not include language on the extent of the employer’s responsibility or expansion of Medicaid, “those figures are not likely to represent the impact that more comprehensive proposals…would have both on the federal budget and on the extent of insurance coverage.”

“The bottom line is that we should expect the real bill to have a somewhat higher cost number but a much higher number of people getting health coverage,” Matt Yglesias writes. “Consequently the cost per person will be much lower and the legislation will look much more reasonable.” Moreover, as a new report by Ken Jacobs and Jacob Hacker explains, an employer mandate to build on the existing coverage would “reduce the incentive for firms to drop coverage” and enable most Americans to keep their existing employer-sponsored health care plans:

The employer contribution level will need to be high enough to reduce the incentive for firms to drop coverage, while also taking into account firms’ abilities to absorb the higher costs. If a sliding scale is used, payroll cost is a better measure of firms’ ability to pay than the number of employees. Sliding scales should be designed in such a way to minimize cliffs by size of firm.

In his rather bizarre floor speech, McCain called for greater bipartisanship in crafting health care reform legislation but then demanded to see the administration’s bill and re-introduced his campaign health care proposal, which, despite being rejected by all of the major stakeholders, McCain promised would be enacted “within weeks.”

According to that assessment, enacting the proposal would result in a net increase in federal budget deficits of about $1.0 trillion over the 2010–2019 period. Once the proposal was fully implemented, about 39 million individuals would obtain coverage through the new insurance exchanges. At the same time, the number of people who had coverage through an employer would decline by about 15 million (or roughly 10 percent), and coverage from other sources would fall by about 8 million, so the net decrease in the number of people uninsured would be about 16 million.

But as Ezra Klein and Jonathan Cohn observe, the estimate says very little about the actual cost of health care reform. Cohn:

Imagine you were trying to build your dream house and the architect gave you a status report. The design still wasn’t finished: He hadn’t sketched out the plumbing, the wiring, and the roof. But, he said, he could tell how much it would cost to build what he’d already designed. You’d be curious about the number; it might offer some hints about how much the house would cost in the end. But you wouldn’t spent too much time dwelling on it since, after all, the final price was going to be much different. Well, that’s the same attitude you should take about the estimates of the Senate Health, Education, Labor, and Pensions (HELP) Committee bill that the Congressional Budget Office (CBO) delivered yesterday.

Indeed, in an effort to reach a compromise with Republicans, the committee omitted language about the employer mandate or the new public health care plan. Medicaid expansion is outside of the HELP Committee’s jurisdiction (that’s up to Senate Finance) and the CBO incorrectly assumed that individuals would only pay a $100 fine if they remained uninsured. As a result, the organization concluded that reform would cost “$1 trillion over the next decade and reduce the ranks of the uninsured by about one-third, or 16 million individuals.”

The CBO scored a ‘draft of a draft’ proposal. As Paul Krugman concludes, “this was a failure of communication, partly the result of an attempt at bipartisan outreach, rather than a failure of policy.”

Klein writes that I went “a couple of steps too far“:

This is, I think, going a couple of steps too far. There’s no doubt that the Congressional Budget Office is a pain in the neck for health reformers. But that’s not the fault of the Congressional Budget Office. It’s because the cost of health reform — at least in the plans under consideration — is a pain in the neck for health reformers. Attacking the CBO is like attacking the guy who writes the numbers on the price tag…. Reformers fear CBO’s honest estimates, however, because they recognize that the opponents of reform will use them dishonestly.

I fully recognize that the cost of reform is the “real pain in the neck for health care reformers.” $1.5 trillion over 10 years ain’t chump change and my post was not intended to obfuscate the fact that comprehensive health care reform would require a serious upfront investment. Nor was it prompted by my “fear of CBO’s honest estimates.” Rather, I was highlighting the deficiencies within CBO’s accounting process. I’m not attacking “the guy who writes the numbers on the price tag,” I’m questioning how “the guy” comes up with the numbers in the first place.

As CBO chief Doug Elmendorf admitted during a recent Senate Budget Committee hearing, “we have very little evidence about interlocking changes in the complex health-care system, and I don’t think that our numbers should be the ultimate determinant of the policies that you and your colleagues will vote for and against”:

WHITEHOUSE: And I have two concerns about your actuarial science. One, there is a limited amount of evidence, and so you’re very limited in what you can sign off on in terms of scoring. And two, areas that we’ve been talking about like health information infrastructure and investment in quality reform that saves money and reimbursement reform end up being dynamically inter-engaged. [...]

ELMENDORF: I agree entirely with your concerns, Senator. CBO is going to draw on existing evidence about the effects of changes. And that evidence will be weak in many cases, and it will be particularly weak in cases that involve the interactions of several policy changes. We have a fair amount of evidence related to incremental changes that, on policies that have been in place for a long time, because almost everything has been moved up and down, and you can see how the world has responded to that. We have very little evidence about interlocking changes in the complex health-care system, and I don’t think that our numbers should be the ultimate determinant of the policies that you and your colleagues will vote for and against.

WHITEHOUSE: We’ll have to make some leaps of faith based on our best judgments.

ELMENDORF: Yes. Now, however, let me say I think we can be of great service to you in judging what leaps are worth taking.

Put simply, the fear is that the CBO understimates the savings from health care reform. It has a hard time identifying long-term savings, doesn’t consider the ledgers of businesses or families — who would benefit from progressive prescriptions — and has some serious scoring problems. For instance, health care reform would improve the health of the population, increase workers’ productivity and in turn yield greater revenue. The CBO does not score these savings. Klein is correct to note that this isn’t the CBO’s fault — Congress demands exact numbers and so the CBO tries to come up with ballpark estimates.

As Robert Reischauer — the CBO head from 1989 to 1995 — put it after one member of Congress wished to know if the CBO’s estimates about President Clinton’s health care reform plan were “in the ballpark,” “Congressman, I believe that we are in the town the ballpark is in. ”

In 1994, a pretty similar question was decided in the other direction. Robert Reischauer, then the director of the CBO, decided that the premiums that individuals were charged to purchase private insurance under Clinton’s plan would be included in the budget. This didn’t change the nature of the proposal. But it made its cost tag look huge.

Donna Shalala, Clinton’s secretary of health and human services, later termed the ruling “devastating.” And it was. It made health care reform look obscenely expensive. And the same thing could have happened this year. Rather than costing $100 billion per year or so, it could have cost a couple trillion a year. No change in the plan. Just a change in the budgetary treatment of the plan.

This time, the CBO ruled that the mandate could remain off the books if consumers could “choose among a number of insurance plans,” the plans offered “different levels of coverage,” and consumers could “choose among several different insurance companies competing on price.” Most conceptions of the health insurance exchange envision just this kind of competition — a key distinction from the Clinton proposal which funneled all health insurance dollars through various Health Alliances.

But the very fact that we’re all so worried about the CBO highlights the craziness of allowing one office to hold health care reform hostage. Why exactly are reforms jumping through hoops to satisfy the CBO? We do it because we have to — that’s the process, the CBO has the magic numbers — but shouldn’t we design legislation based on what’s most effective in controlling costs and increasing access, not around how some actuary chooses to calculate something?

HALL: They were talking about what hard decisions the President will have to make in his first term, if he’s obviously not elected to a second one. He wants to tackle health care, he was at that town hall, talking about his bold agenda. Will he have to soon start to perhaps give Americans the tough love that maybe it won’t all be done now?

Watch it:

Pearlstein pushed back the conventional wisdom and pointed out that the best way to get deficits under control is to slow down “the key driver of those long-term deficits,” skyrocketing health care costs.

In fact, according to the CBO report, the president’s $634 billion health care fund is entirely revenue neutral:

Therefore, the President’s budget—and CBO in its analysis of the budget—shows no net effect on either revenues or outlays from this set of proposals (that is, revenue reductions related to health care reform are assumed to offset the revenue gains from changing the rate applied to itemized deductions, and outlays for health care reform are assumed to equal the outlay savings from the proposed policy changes).

So to make sure everyone is on the same page we should just call the health care bill what it actually is: a deficit reduction act.

We’re all familiar with the numbers. General Motors spends $71 per worker per hour on health care, while Toyota spends only $47. Health care costs add $1,525 to the price of every GM vehicle, and the company spent $5.2 billion on health care benefits in 2004. It spends more on health care than on steel, and Starbucks pays more for benefits than coffee beans.

But while Pipes’ argument is counterintuitive, it’s not entirely wrong. At least not according to the Congressional Budget Office (CBO), the agency responsible for scoring Congressional proposals. Last week, while testifying before the Senate Finance Committee, CBO director Douglas Elmendorf explained that “for employers, health care is merely a part of total compensation“:

Although U.S. employers may appear to pay most of the costs of their workers’ health insurance, economists generally agree that workers ultimately bear those costs. That is, when firms provide health insurance, wages and other forms of compensation are lower (by a corresponding amount) than they otherwise would be. As a result, the costs of providing health insurance to their workers are not a competitive disadvantage for U.S.-based firms.

But this doesn’t tell the whole story. Health care costs are soaring faster than inflation, and instead of cutting worker’s wages, businesses are struggling to keep up with costs and are scaling back coverage. The National Federation of Independent Businesses reports that “58 percent of all small-business owners” are having a “hard time keeping up with the cost of health care.”

Consequently, “in 2010, 49% of employers will reduce their health benefit plan offerings. Forty percent of employers will increase adoption on consumer-driven health plans and two-thirds of employers will move more costs to employees.

Meanwhile, the business groups are clamoring for health reform, arguing that they can’t sustain growing health care costs:

- NFIB: NFIB agrees that the current growth in healthcare costs is unsustainable for the government and for small businesses alike.

- Business Roundtable: Rising health care costs affect all American workers, employers and the government. Rising costs impact job creation, diminish the nation’s competitiveness and reduce Americans’ ability to save for retirement

- Chamber of Commerce: A healthy workforce is the backbone of a strong economy, but spiraling health care costs curb the competitiveness of U.S. businesses and constrain tight family budgets.

The CBO’s analysis, while economically and theoretically sound, is completely divorced from reality. While wages may pay for health care costs in the long run, workers won’t accept smaller paychecks every time premiums increase. As Sen. Max Baucus (D-MT) pointed out at the hearing with Elmendorf, when considering the costs and consequences of health care reform proposals, Congress should not be “in the old situation where whatever CBO says is God.” “In my judgment you’re not God,” he said.