The Spectacle Blog

Explaining the GOP’s $2.5 Trillion Health Care Cost Estimate

By on 12.4.09 | 4:57PM

Throughout the ongoing health care floor debate, Republican Senators have been repeatedly saying that the real cost of the health care bill is $2.5 trillion rather than the $848 billion frequently cited by Democrats and in media reports. Brian Beutler of the liberal site Talking Points Memo wrote the GOP estimate “seems to have been made up entirely out of whole cloth.” As it turns out, the number was not simply made up, but was generated by the office of Sen. Judd Gregg, the ranking Republican on the Budget Committee, based on an analysis of data from the Congressional Budget Office. You may be wondering how both estimates could rely on CBO data, and yet the Republican figure is triple the figure used by Democrats. Well, the difference arises from starting the estimate on a different year, and then applying a different definition of “cost.”

Much of the discrepancy can be explained because the Democrats delayed the enactment of the major spending provisions of the bill until 2014 so that it would appear cheaper over the CBO’s 10-year budget window.  The Senate bill only spends $9 billion from 2010 to 2013 on measures to expand coverage, while the remaining 99 percent of the $848 billion cost comes over the next six years. Simply by shifting the start of the cost estimate to 2014 – when the key components of the bill go into effect – the 10-year cost of expanding coverage swells to about $1.8 trillion.  (The CBO noted in a letter to Sen. Harry Reid last month that “cost is growing at about 8 percent per year toward the end of the 10-year budget window,” so Republicans used the 8 percent growth rate to estimate costs in the years from 2020-23).

To be clear, the $1.8 trillion figure represents the cost of expanding Medicaid and S-CHIP as well as offering subsidies and tax credits to individuals and small businesses to purchase insurance through the government-run exchanges. But keep in mind that the cost of expanding coverage, while accounting for the bulk of the cost of the bill, does not represent the total cost. 

For instance, there are a number of measures in the bill to increase the benefits offered by Medicare and Medicaid, which Gregg’s office estimated, based on CBO figures, would cost $169 billion over the 2014 to 2023 period.

There are also a number of spending measures that have not been counted as costs because they have dedicated offsetting revenue streams, but in preparing their estimate, Gregg’s office took the position that all outlays should be considered when calculating the amount that the bill spends.

For instance, the bill requires insurers who have managed to obtain a disproportionate amount of healthy beneficiaries with lower medical costs to pay into a fund, from which the government will make payments to insurers that have had a sicker pool of beneficiaries. These “risk adjustment payments” would total $235 billion over the ten years beginning in 2014, according to Gregg’s office.

There’s also a program known as the CLASS Act, initially pioneered by Ted Kennedy, in which Americans could pay premiums into a government-run long-term insurance plan. Gregg’s office estimates that $43 billion would be spent on the program over 10 years.

And then there’s the government-run plan itself, or so-called “public option.” As currently described, the government plan would be offered on the government-run exchanges along with privately administered plans. At least in theory, beyond the start-up costs, the government plan would be financed by the premiums it collects, just like any other insurer. But when a private insurer files an earnings report, it lists its premiums collected, and then the medical costs it pays out. (See, as an example, UnitedHealth’s most recent earnings release.) Similarly, the Republican estimate includes a line item called “government run plan payments,” which is the cost of providing benefits through the government plan – a cost of $274 billion.

When you add everything up, you come to the $2.5 trillion cost estimate that’s being used by Republicans. And as it turns out, even the Democratic Finance Committee Chairman Max Baucus (see video).

This table below, taken from a fact sheet (PDF) released by Gregg’s office, breaks down the numbers further.

Spending Increases From Senate Health Care Bill from 2014-23

Medicaid/CHIP (coverage) $807 billion
CLASS Act Spending  $43 billion
Exchange subsidies  $747 billion 
Government Run Plan Payments $274 billion
Risk Adjustment Payments $235 billion
Other Medicare/Medicaid Spending $169 billion
Small employer tax credits $31 billion
Exchange Premium Credits $225 billion

Total Spending $2.53 trillion

If you click on the PDF, you can also see the offsetting tax increases, revenue streams, and Medicare cuts that make the bill reduce the deficit by $176 billion if enacted. Liberals argue that this makes the whole discussion of the bill’s actual cost moot, but of course any money spent as a result of this bill could have been allocated somewhere else.

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