CBO Analysis of Kennedy/Dodd Legislation: The Trillion Dollar Bill–And Counting
SUMMARY
The Congressional Budget Office (CBO) preliminary analysis of the Affordable Health Choices Act introduced by Senators Dodd (D-CT) and Kennedy (D-MA) estimates that their bill would increase the federal deficit by $1 trillion over ten years. However, the preliminary nature of the estimates—coupled with provisions not included in the bill’s initial draft—mean that the true cost of the so-called “affordable” bill could well grow to more than double the initial estimate.
PROVISIONS INCLUDED IN ESTIMATE
The CBO estimate includes only certain sections of the bill’s first title dealing with expanded coverage and insurance rating. Specifically, the preliminary score includes:
- The establishment of health Gateways for the purchase of insurance;
- Guaranteed issue and community rating provisions requiring carriers to accept all applicants and price policies the same regardless of health status;
- Standardization of insurance policies into three broad tiers;
- An individual mandate to purchase coverage, subject to government-imposed taxation;
- Subsidies to individuals making under 500 percent of the Federal Poverty Level ($110,250 for a family of four) to purchase health insurance; and
- Tax credits to small businesses who pay at least 60 percent of the cost of their employees’ policies.
Based on these provisions—and these provisions alone—federal spending would total $1.34 trillion over ten years, with all but $60 billion of that spending (for the small business tax credits) directed to subsidies for individuals to purchase coverage through the Gateways.
OFFSETTING TAX INCREASES
The CBO score presumes $297 billion in offsetting savings, most of which would be derived from tax increases. CBO estimates that some states will change their Medicaid programs to shift beneficiaries into Gateway-subsidized coverage, saving $38 billion from the current Medicaid baseline. The Joint Committee on Taxation estimates that $2 billion in taxes would be generated from individuals failing to comply with the individual mandate to purchase insurance; while JCT estimates that the Treasury Department would impose only a $100 tax on individuals not buying coverage that meets federal bureaucrats’ standards.
Most of the additional revenue generated—$257 billion total—would come from individuals moving out of their current employer-based coverage and into subsidized plans through the Gateways. As a result, some individuals would exclude less of their income from payroll and income taxes, resulting in net tax increases. Note that this particular estimate not only means that individuals will not keep their current employer-based coverage under the Kennedy bill; it also represents a tax increase on individuals with incomes of under $250,000—which President Obama pledged to avoid.
PROVISIONS EXCLUDED FROM ESTIMATE
The CBO score issued is preliminary in nature, and does not include important information regarding the bill’s effects—for instance, whether premiums directed through the Gateways would be considered “on-budget,” which would confirm the federal government’s takeover of private insurance, as well as the extent to which the bill makes good on its promises to reduce health insurance premiums and overall health spending. In addition, many of the bill’s most costly provisions and mandates are excluded from the CBO scoring estimate, including:
- Creation of a government-run health plan;
- Medicaid expansion to cover all individuals making under 150 percent FPL ($33,075 for a family of four);
- Establishment of a new long-term care entitlement;
- Higher taxes on businesses in the form of “pay-or-play” employer mandates;
- A $10 billion reinsurance trust fund to pay catastrophic claims for retirees aged 55 to 64 covered under their previous employers’ coverage;
- A $100 billion prevention trust fund to finance grants for jungle gyms, healthy groceries, and other wellness-related programs;
- A new “Right Choices” entitlement program costing $5 billion per year;
- Administrative costs for establishing the bureaucracy necessary to create Gateways and approve all new health insurance offerings, likely to run in the tens of billions of dollars; and
- Mandates on insurance carriers to cover dependents under 27 years of age, and mandates imposed by the Medical Advisory Council in the form of minimum benefit standards—if these mandates raised the total cost of insurance, as most mandates do, total costs for federal insurance subsidies would likely be higher.
The plain text of the bill indicates that these provisions will cost hundreds of billions of dollars—and could well more than double the bill’s current $1 trillion cost. Members will also note that, per budgetary scoring guidelines, the CBO estimate excludes the servicing cost of the more than $1 trillion in debt the Kennedy bill would create.
“OUT-YEAR” SPENDING
While the bill’s $1 trillion cost is spread out over the ten year scoring window, CBO assumes that many of the key provisions regarding establishment of Gateways, and subsidies provided through them, will not be fully implemented until 2014. Thus only $108 billion (just over 8 percent) of the bill’s more than $1.3 trillion in spending occurs in the first four years after enactment—meaning that the bulk of spending occurs in the final six years of the budget window. During these six years—from 2014 through 2019—the total deficit spend increases from $116 billion to $189 billion, meaning that the total cost of the provisions scored for the ten years following full implementation would likely exceed $1.5 trillion.
INSURANCE EFFECTS; “CROWD-OUT”
Based on the provisions examined, CBO estimates that the health Gateways would enroll a total of 40 million individuals by 2019—less than half of whom (17 million) would have otherwise been uninsured. Most of the other enrollees would have lost their current insurance, either from employer-sponsored plans (15 million) or from individual coverage (6 million), with a further 2 million transferring to the Gateways from Medicaid and SCHIP. Note however that these “crowd-out” numbers exclude the impact of a government-run plan—which could result in many millions more Americans losing their current coverage.
CONCLUSION
Press commentators have dubbed the Kennedy legislation “the most liberal approach to health reform being discussed in Washington”—and even the CBO’s preliminary estimates confirm the bill’s scope and cost. The bill’s rich subsidies would result in a fiscal monstrosity increasing the deficit by $189 billion in 2019—without including the Medicaid expansions and other new entitlements in the bill. Moreover, some Members may note that the bill’s provisions would force more currently insured individuals into the bureaucrat-run Gateways than they would actually reduce the number of uninsured. While many Members may support enactment of comprehensive health reform legislation that would actually slow the growth of health care costs, some Members—responding to the Kennedy bill’s enormous federal spending—may consider this particular piece of legislation change that America can ill afford.