Health reform bills won't reduce costs

Congressional Budget Office director tells Senate panel that 2 health reform bills would increase government spending and not do enough to contain costs.

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By Jeanne Sahadi, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- The health reform bills released so far would increase government spending on health care without sufficiently reining in health care costs.

And at least initially they aren't likely to significantly lower premiums for the majority of Americans with employer-sponsored health insurance.

That's the sobering takeaway from testimony Thursday by Congressional Budget Office Director Douglas Elmendorf.

Elmendorf's preliminary conclusions were based on a bill jointly released by three committees in the House this week and another bill passed by the Senate health committee on Wednesday.

"The creation of a new subsidy for health insurance ... would by itself raise federal spending on health care. ... [T]o offset that there have to be substantial reductions (on the tax or spending sides of the ledger]," Elmendorf told the Senate Budget Committee. "The changes we've looked at so far don't represent the fundamental change on the order of magnitude that would be necessary."

CBO analyzes the costs of legislation. Congress is not obligated to follow their lead on estimates, but the agency can play a key role in shaping bills.

Both the House bill and the Senate health committee bill would use federal money to subsidize financially strapped Americans so they can buy health insurance. They would also create a national insurance exchange from which eligible Americans could choose among insurance plans. And they would establish a public health plan to compete with private insurers on the exchange.

Elmendorf did not offer any assessment of a bill in the works at the Senate Finance Committee, which has yet to release draft legislation.

Health policy analysts support two ways to "bend the curve" on health care costs above others, Elmendorf said.

  • Change how employer-paid premiums for workers are treated -- currently they're tax-free to the worker.
  • Change how Medicare pays providers to reward cost efficiency and quality of outcome rather than the a la carte approach of fees for service.

The prospect of taxing a portion of employer-provided health benefits has become a political lightening rod on Capitol Hill as many lawmakers and unions expressed staunch opposition, and President Obama did not offer his outright support.

Consequently, while taxing a portion of health benefits was a leading "pay-for" idea -- at least in the Senate Finance Committee -- the political pushback has muted its prospects for being a serious contender at this writing.

"Basically, the president is not helping us," Senate Finance Committee Chairman Max Baucus, D-Mont., told reporters Thursday. "He does not want the exclusion and that's making it difficult."

In response, White House spokesman Bill Burton told reporters that Obama has consulted lawmakers of both parties about how to "save money and find revenue to pay for our health care reform. If that's disagreeing with Baucus, somebody else will have to make that determination."

The tricommittee House bill proposes to pay for half the cost of reform by taxing the richest households -- imposing a surtax as high as 5.4% for income over $1 million, and imposing lower rates on households making at least $350,000.

Asked if cost containment becomes more difficult by relying primarily on Medicare cost savings without taxing employer-provided health benefits, Elmendorf said, "Tying one of the two hands behind one's back makes the job that much harder."

The long-term concern

The CBO has said numerous times and in numerous ways that the federal budget is on an unsustainable course. The economic crisis has made the debt situation more urgent, but it is not the primary cause.

"Over the next 50 years, with rising health care costs, the retirement of the baby boom generation, and the permanent extension of the 2001 and 2003 tax cuts, federal debt will climb to more than 400% of the gross domestic product," Senate Budget Committee Chairman Kent Conrad, D-N.D., noted during Thursday's hearing.

But there will be risk to the economy within the next 10 years. The country's debt is on track to exceed 60% of GDP next year and will top 80% by 2019. And that assumes interest rates stay low.

Should buyers of U.S. debt grow concerned, however, that the country is not addressing its debt situation adequately they will start demanding higher rates, which would make the country's debt situation even worse. That's why fiscal policy experts have been calling on lawmakers to rein in health care costs, find ways to boost tax revenue and cut spending as soon as the economy is in recovery.

Premiums unlikely to go down soon

When asked whether the health bills released so far would help reduce premiums for Americans with health insurance, Elmendorf said the people most likely to see a decrease in what they pay are those who currently buy policies on their own because their employer doesn't provide a policy.

That group could see their costs go down for three reasons: the creation of an insurance exchange; the additional competition from a public plan option in the exchange; and guarantees that insurers could not refuse coverage to anyone with a pre-existing condition, Elmendorf noted.

But for the vast majority of Americans -- those who get their insurance through their employers -- the cost-reducing potential of the exchange and public plan, at least initially, would have "fairly small effects relative to the level and trajectory that health care premiums are taking," he said. "We don't think those workers will see noticeable changes in their premiums."

That's in part because the two bills as they're written currently would limit eligibility for who may use the exchange.

- CNN's Ted Barrett contributed to this report

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