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Director’s Blog 11/17/09 8:55 PM
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Director’s Blog
Entitlement Spending and the Long-Term Budget Outlook
November 10th, 2009 by Douglas Elmendorf
Last week I gave a talk at the annual fall research conference of the Association for Public Policy Analysis
and Management. The session was titled “Aging and Health: The Challenges of Entitlement Growth,” and my
slides drew on our August report The Budget and Economic Outlook: An Update and our June report The
Long-Term Budget Outlook.
Entitlement spending is often viewed as a long-term budget challenge, but in fact such spending contributes
significantly to the budget challenge facing the country during the next 10 years as well as the more distant
future. CBO estimates that, if current laws remained in place, the federal deficit would shrink sharply during
the next few years but would remain a little more than 3 percent of gross domestic product (GDP) between
2013 and 2019. Although the country has experienced persistent large deficits before—deficits during the
economic expansion of the 1980s averaged about 4 percent of GDP—the budget challenge of the next decade
will be especially acute in three respects:
• Federal debt held by the public will equal about 60 percent of GDP by the end of this fiscal year, the highest
level since the early 1950s. As a result, further large deficits and increases in the debt will raise serious
economic risks.
• The difference between current law (which underlies CBO’s baseline projections) and current policy as
perceived by many people (in particular, the personal income tax rates now in effect) is very large. If the 2001
and 2003 tax cuts were extended (rather than expiring at the end of 2010, as under current law), the exemption
amount for the alternative minimum tax (AMT) was indexed to inflation (rather than falling back sharply, as
under current law), and no other policy changes were made, the deficit would exceed 6 percent of GDP by
2019 and debt would be nearly 90 percent of GDP.
• The aging of the U.S. population and rising costs for health care are making federal spending on Social
Security, Medicare, and Medicaid a much larger burden relative to GDP. During the expansion of the 1980s,
federal spending on those three programs stayed close to 7 percent of GDP; by 2019, CBO projects that
spending on those programs will be a little below 12 percent of GDP.
Beyond the 10-year budget window, the budget outlook is even more sobering. CBO’s report on the long-term
budget outlook presented two scenarios—one that adheres closely to current law, and one that extrapolates
current policy as many people might view it (including the tax changes I mentioned earlier and federal
spending apart from Social Security, Medicare, and Medicaid that stays a roughly constant share of GDP). In
the latter scenario, debt continues to rise sharply relative to GDP in the 2020s and beyond.
The imbalance between spending and revenues widens in part because of the aging of the population. As the
baby boomers retire during the next two decades, the number of beneficiaries of Social Security, Medicare,
and Medicaid will increase significantly. The imbalance between spending and revenues also widens because,
under current law, spending per beneficiary in the Medicare and Medicaid programs will probably continue to
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increase more rapidly than total spending and income in the economy (and thus more rapidly than the tax base
that supports that spending).
I concluded the talk by emphasizing that fiscal policy is on an unsustainable path to an extent that cannot be
solved by minor tinkering. The country faces a fundamental disconnect between the services the people expect
the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that
people are willing to send to the government to finance those services. That fundamental disconnect will have
to be addressed in some way if the budget is to be placed on a sustainable course.
Posted in Budget Projections, Health | Comments Off
Updated Estimate for Health Care Legislation Pending in the House
November 6th, 2009 by Douglas Elmendorf
Earlier today, I posted a blog about the cost estimate for the health care legislation pending in the House. I
explained how the repeal of certain tax rules in H.R. 3962, the health care bill, would now generate less
revenue because the rules would only be in effect for two years during the 2010-2019 period as a result of the
unemployment legislation that was signed into law today. The original estimate for the impact of that repeal
under H.R. 3962, about $26 billion over the 10-year period, will now be reduced to about $6 billion. CBO just
issued an updated estimate for the health care bill, reflecting the fact that the additional revenues that would
result from its enactment will be smaller than those shown in last night’s estimate. Reflecting this change,
CBO and the staff of Joint Committee of Taxation now estimate that, on balance, the direct spending and
revenue effects of enacting H.R. 3962, incorporating the manager’s amendment, would yield a net reduction in
federal budget deficits of $109 billion (rather than $129 billion) over the 2010-2019 period.
Posted in Budget Projections, Health | Comments Off
Federal Budget Deficit Totals $1.4 Trillion in Fiscal Year 2009
November 6th, 2009 by Douglas Elmendorf
The Treasury recently reported that the federal government recorded a total budget deficit of $1.4 trillion in
fiscal year 2009, about $960 billion more than the deficit incurred in 2008. CBO notes, in its latest Monthly
Budget Review, that the federal deficit rose as a share of the nation’s gross domestic product (GDP) from 3.1
percent in 2008 to 9.9 percent in 2009—the highest deficit as a share of GDP since 1945.
As shown in the figure below, federal spending and receipts diverged dramatically in 2009, reflecting the
weakening economy and the federal response. The increase in the deficit of almost 7 percentage points of
GDP from 2008 reflected a sharp drop in revenues and a substantial increase in spending. Receipts in 2009
tumbled to $2,105 billion, a decrease of $419 billion, or 17 percent, from 2008. That year-over-year decline
follows a small drop in revenues for fiscal year 2008 and is the largest annual percentage decline in revenues
in more than seven decades. Total revenues fell from 17.5 percent of GDP in 2008 to 14.8 percent of GDP in
2009; individual income tax receipts showed the largest decrease—from 7.9 percent to 6.4 percent of GDP.
Receipts and Outlays as a Percentage of GDP
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Outlays rose by 18 percent in 2009, the fastest rate of growth since 1975. Three initiatives—the Troubled
Asset Relief Program (TARP), net cash infusions for Fannie Mae and Freddie Mac, and ARRA—drove that
growth, adding $353 billion to outlays in 2009, or 2.5 percent of GDP. Specifically, stimulus spending from
ARRA totaled $108 billion in 2009—$32 billion for Medicaid, $22 billion for unemployment benefits, and $54
billion for other programs and activities. All other federal spending accounted for 22.2 percent of GDP in
2009, up from 20.6 percent in 2008.
Payments for unemployment benefits in 2009 were more than 2½ times the amount paid in 2008, an increase
of $73 billion. That jump was caused by substantially greater unemployment and increased benefits.
Conversely, spending for net interest on the public debt decreased by $58 billion (from 1.8 percent of GDP in
2008 to 1.4 percent in 2009) because of lower short-term interest rates and lower costs for inflation-indexed
securities.
Posted in Budget Projections | Comments Off
Cost Estimate for Health Care Legislation Pending in the House
November 6th, 2009 by Douglas Elmendorf
Last night CBO and the staff of the Joint Committee on Taxation (JCT) released an estimate of the direct
spending and revenue effects of H.R. 3962, the Affordable Health Care for America Act, as introduced on
October 29, 2009, incorporating the manager’s amendment proposed by Representative John Dingell on
November 3, 2009.
Among other things, the legislation would establish a mandate for most legal residents of the United States to
obtain health insurance; set up insurance “exchanges” through which certain individuals and families could
receive federal subsidies to substantially reduce the cost of purchasing that coverage; establish a public plan
that would be administered by the Secretary of Health and Human Services; significantly expand eligibility for
Medicaid; substantially reduce the growth of Medicare’s payment rates for most services (relative to the
growth rates projected under current law); impose an income tax surcharge on high-income individuals; and
make various other changes to the federal tax code, Medicaid, Medicare, and other programs.
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CBO and the staff of JCT estimate that, on balance, the direct spending and revenue effects of enacting H.R.
3962, incorporating the manager’s amendment, would yield a net reduction in federal budget deficits of $129
billion over the 2010-2019 period. (CBO has not completed a comprehensive estimate of the legislation’s
potential impact on spending that is subject to future appropriation action.) In the decade after 2019, the bill
would probably result in slight reductions in federal budget deficits.
On October 29, 2009, CBO transmitted a preliminary analysis of H.R. 3962 as introduced. (As discussed in
that analysis, CBO and JCT estimated that enacting H.R. 3962 would result in a net reduction in federal
budget deficits of $104 billion over the 2010–2019 period.) This estimate differs from that preliminary
analysis for several reasons:
• First, this analysis incorporates the effects on spending and revenues of the manager’s amendment. Those
changes are relatively small with the exception of the addition of a tax provision regarding credits for
producers of biofuel, which would increase net revenues by about $24 billion over the 2010-2019 period,
according to JCT.
• Second, the updated analysis reflects Medicare’s payment rates for calendar year 2010 and other changes
announced in final rules that were posted on the Federal Register’s Web site on October 30, 2009. Those final
rules involve home health services, hospital outpatient services, the physician fee schedule, and other Medicare
Part B services.
• Finally, this analysis incorporates several technical revisions that had a small impact on the estimated
budgetary effects of the legislation.
By 2019, CBO and JCT estimate, the number of nonelderly people who are uninsured would be reduced by
about 36 million, leaving about 18 million nonelderly residents uninsured (about one-third of whom would be
unauthorized immigrants). Under the bill, the share of legal nonelderly residents with insurance coverage
would rise from about 83 percent currently to about 96 percent.
Those estimates for H.R. 3962 include revenue increases from a tax provision similar to one that was included
in a bill that the Congress cleared yesterday. H.R. 3962 would repeal certain tax rules, scheduled to take effect
in 2011, that would allow corporations with worldwide activities to reduce their U.S. income taxes by
allocating more of their interest expenses to domestic profits. Yesterday, the Congress cleared for the
President’s signature legislation that extends unemployment benefits, which also included a provision that will
delay the implementation of those worldwide interest allocation rules until 2018. So, the repeal of those rules
in H.R. 3962, the health care bill, would now generate less revenue because the rules would only be in effect
for two years during the 2010-2019 period. Consequently, the original estimate for the impact of that repeal
under H.R. 3962, about $26 billion over the 10-year period, will now be reduced to about $6 billion as a result
of the cleared unemployment legislation. Later today, CBO will issue an updated estimate for the health care
bill, reflecting the fact that the additional revenues that would result from its enactment will be smaller than
those shown in last night’s estimate.
Posted in Budget Projections, Health | Comments Off
Unauthorized Immigrants and Health Care Legislation
November 6th, 2009 by Douglas Elmendorf
One question receiving much attention in the discussion of the pending health care legislation is: How would
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it affect unauthorized immigrants? In a recent letter (dated October 29), we noted that unauthorized
immigrants would constitute “about one-third” of the 18 million nonelderly residents who we estimate would
remain uninsured under H.R. 3962, the bill currently being considered in the House. In our preliminary
analysis of an earlier version of the legislation, H.R. 3200 as introduced, we said that “nearly half” of the 17
million residents who we estimated would remain uninsured would be unauthorized immigrants.
The use of the terms “about one-third” and “nearly half” was meant to convey the uncertainty and imprecision
surrounding our estimates of the characteristics of the remaining uninsured population. Because of that
uncertainty and imprecision, we cannot provide a specific figure for coverage of unauthorized immigrants
under any of the proposals. Despite the difference in wording, we would not expect any significant differences
between the two bills in the number of uninsured who are unauthorized immigrants, because the relevant
features of the two proposals are similar. (Our analysis of H.R. 3200 was preliminary and based on
specifications rather than a reading of the legislative language.) Further, we have not changed our
methodology for estimating the relevant factors in the intervening period.
Posted in Budget Projections, Uncategorized | Comments Off
A Preliminary Analysis of a Substitute Amendment to H.R. 3962, the
Affordable Health Care for America Act
November 4th, 2009 by Douglas Elmendorf
This evening, CBO released a preliminary analysis of a substitute amendment to H.R. 3962, the Affordable
Health Care for America Act, proposed by Representative John Boehner, the Republican Leader in the House
of Representatives. CBO and the staff of the Joint Committee on Taxation (JCT) estimate that the amendment
would reduce federal deficits by $68 billion over the 2010-2019 period; it would also slightly reduce federal
budget deficits in the following decade, relative to those projected under current law, with a total effect during
that decade that is in a broad range between zero and one-quarter percent of gross domestic product.
That amendment contains several provisions that are intended to increase rates of insurance coverage by
reducing its costs or subsidizing its purchase, including:
· Regulatory reforms in the small group and non-group markets, including establishing association health
plans (insurance coverage that is offered to members of an association) and individual membership
associations, and allowing states to establish interstate compacts with a unified regulatory structure;
· A State Innovations grant program to provide federal payments to states that achieve specified reductions in
the number of uninsured individuals or in the premiums for small group or individually purchased policies;
· Federal funding for states to use for high-risk pools in the individual insurance market and reinsurance
programs in the small group market; and
· Changes to health savings accounts (HSAs) to allow funds in such accounts to be used to pay premiums
under certain circumstances, to make net contributions to HSAs eligible for the saver’s tax credit, and to
provide a 60-day grace period for medical expenses incurred prior to the establishment of an HSA.
CBO and JCT estimate that those provisions would increase federal budget deficits by about $8 billion over
the 2010-2019 period, reducing the number of nonelderly people without health insurance by about 3 million
in 2019 and leaving about 52 million nonelderly residents uninsured. The share of legal nonelderly residents
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with insurance coverage in 2019—83 percent—would be roughly in line with the current share.
Other provisions of the amendment would alter federal spending and revenues in significant ways. The key
provisions include:
· Limits on costs related to medical malpractice (“tort reform”), including capping noneconomic and punitive
damages and making changes in the allocation of liability;
· Requirements that the Secretary of Health and Human Services adopt and regularly update standards for
electronic administrative transactions that enable electronic funds transfers, claims management processes, and
verification of eligibility, among other administrative tasks;
· Establishment of an abbreviated approval pathway for follow-on biologics (biological products that are
highly similar to or interchangeable with their brand-name counterparts); and
· An increase in funding for HHS investigations into fraud and abuses.
CBO anticipates that the combination of provisions in the amendment would reduce average private health
insurance premiums per enrollee in the United States, relative to what they would be under current law-by 7
percent to 10 percent in the small group market, by 5 percent to 8 percent for individually purchased
insurance, and by zero to 3 percent in the large group market. Those are averages, however, and they are
subject to a great deal of uncertainty; some individuals and families in each market would see different results.
Posted in Budget Projections, Health | Comments Off
The National Flood Insurance Program: Factors Affecting Actuarial
Soundness
November 4th, 2009 by Douglas Elmendorf
In 2005, the National Flood Insurance Program (NFIP), administered by the Federal Emergency Management
Agency (FEMA), experienced an unprecedented volume of claims resulting from hurricanes Katrina, Rita, and
Wilma. Total payments on those claims were greater than the total for all of the program’s previous years
combined and led the NFIP to borrow about $17 billion from the Treasury. The 2005 losses highlighted a
number of factual and policy questions—discussed in a CBO paper released today—about the NFIP’s
financial health, including the actuarial soundness of the premium rates charged on policies that are not
explicitly subsidized and the cost of paying claims for properties that have suffered multiple flood losses.
As of July 31, 2009, the NFIP had 5.6 million policies, with a total insured value of $1.2 trillion and total
premiums of $3.1 billion. For most of those policies, about 80 percent, FEMA charges “full-risk” premium
rates, which it considers to be actuarially sound (that is, sufficient to cover the expected value of flood claims
and administrative costs). About 20 percent of the premium rates are explicitly subsidized under current law;
those explicit subsidies give the NFIP a built-in actuarial deficit of about $1.3 billion per year, by CBO’s
estimate. Those policies mainly cover older structures in areas at high risk of flooding.
Are FEMA’s full-risk premium rates actuarially sound?
Historically, the NFIP’s full-risk premiums have been too low to cover the flood claims and administrative
costs of the policies insured at those rates. Between 1978 and 2004, premiums for such policies totaled $10.2
billion in nominal dollars, while claims and expenses totaled $10.7 billion. The result was a loss of $0.5 billion
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over that period on policies with full-risk rates. Taking into account the large losses of 2005, income was
about half of costs over the 1978-2006 period—total premiums were $12.6 billion while claims and expenses
were $24.2 billion.
Previous experience does not necessarily imply that current premium rates are too low, however, because rates
have risen over time and because the frequency of future catastrophic years like 2005 is highly uncertain. In
part because of that uncertainty, CBO does not have enough information about the current distribution of flood
risks to calculate whether the present full-risk premiums are actuarially adequate.
Further, analyzing the methods that FEMA uses to set the full-risk rates also does not provide definitive
answers. Some aspects of those methods tend to contribute to an actuarial surplus—the primary one being the
additional 10 percent that FEMA includes in the rates in high-risk areas (20 percent in high-risk coastal areas)
as a safety margin for uncertainty. Other aspects of the agency’s rate-setting methods tend to contribute to an
actuarial deficit. FEMA is not reviewing its flood maps every five years as required by law, and some older
maps do not reflect significant changes in local conditions, such as coastal erosion, which can increase the
probability of flooding. In addition, evidence suggests that climate change has increased the risk of flooding
from rivers and perhaps also from coastal storms, making FEMA’s models of flood frequencies out of date.
Those issues may warrant attention regardless of the overall adequacy of the program’s full-risk rates.
To what extent are the NFIP’s losses attributable to properties that have experienced multiple floods?
Currently insured repetitive-loss properties (RLPs)—defined by FEMA as those that have been the subject of
at least two flood-claims payments of more than $1,000 apiece in any 10-year period—account for 2 percent
of current policies and 3 percent of current premiums but about 12 percent of total claims since 1978.
Including formerly insured RLPs, such properties accounted for almost one-quarter of claims payments since
1978. About 23,000 RLPs nationwide have been the subject of at least four claims payments while insured,
and 10,000 of those have prompted six or more payments. FEMA’s approach to reducing the cost of
repetitive-loss properties focuses more on measures to mitigate the worst flood risks—such as elevating,
relocating, flood-proofing, or demolishing properties—than on charging higher premiums for flood insurance.
More than half of the policies covering RLPs in high-risk areas have subsidized rates.
This paper was prepared by Perry Beider of CBO’s Microeconomic Studies Division.
Posted in Microeconomic Analysis | Comments Off
An Overview of Federal Support for Housing
November 3rd, 2009 by Douglas Elmendorf
The federal government commits substantial budgetary resources to support housing and mortgage markets
through a combination of spending programs and tax provisions. During the crisis of the past two years, the
commitment expanded—to about $300 billion in 2009—from the placement into conservatorship in September
2008 of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac) and the creation of new housing programs. Today CBO released a brief describing,
in broad terms, the array of federal activities that support housing and the recent expansion of particular
programs.
As shown in the figure below, most of the federal government’s spending for housing supports
homeownership. In fiscal year 2009, the federal government devoted almost four times the amount of
budgetary resources to supporting homeownership (about $230 billion) as it devoted to improving rental
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affordability ($60 billion).
Federal Spending for Housing, 2009
(In Billions of Dollars)
The government supports homeownership by subsidizing the costs of owning a home (reducing down
payments, mortgage insurance costs, and tax liability) and increasing the availability of mortgage loans. Until
recently, the bulk of federal support for homeownership took the form of tax expenditures (that is, subsidies
conveyed through reductions in taxes), which make it less expensive to own a home by reducing taxes for
homeowners and investors.
As a result of recent actions to address the crisis, the government now provides roughly equivalent amounts
of support for homeownership through tax expenditures and spending programs. About 80 percent of the
federal support for renters is provided by spending programs; the remainder is provided through tax
expenditures. The federal government also shapes the housing and mortgage markets through regulation—as
provided, for example, in the Truth in Lending Act and the Home Mortgage Disclosure Act.
This brief categorizes 28 federal housing activities by type of support (homeownership or rental), mechanism
(spending or taxation), and budgetary cost in 2009. The largest single budgetary cost is associated with the tax
deduction for mortgage interest, which resulted in an estimated revenue loss of $80 billion in 2009. On the
spending side, in 2009 the Treasury Department initiated the Making Home Affordable program, which
provides incentive payments to mortgage servicers and homeowners to facilitate the process of refinancing or
modifying loans so that homeowners can move into lower-cost or fixed rate mortgages. The Treasury has
committed up to $50 billion to that program, and Fannie Mae and Freddie Mac are expected to spend up to
$25 billion—though only a very small portion of the $75 billion was spent in 2009.
This brief was prepared by Elizabeth Cove Delisle of CBO’s Budget Analysis Division.
Posted in Budget Projections, Housing | Comments Off
ARRA Spending for 2009 Close to CBO’s Estimate
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November 2nd, 2009 by Douglas Elmendorf
In February 2009, CBO issued its estimate of spending from the American Recovery and Reinvestment Act
(ARRA)—commonly referred to as the stimulus package. At that time, CBO expected that federal agencies
would spend about $120 billion over the remaining months of fiscal year 2009. That figure included $14
billion in payments for health insurance premiums of unemployed workers, but those payments were
ultimately recorded as a reduction to federal revenues (instead of as federal outlays, as CBO initially assumed)
because the payments were conveyed by reducing the amount of withholding taxes that businesses remit, and
requiring them to pass those savings on to their employees by charging lower premiums. Setting aside those
payments, the estimate of roughly $106 billion in outlays proved to be quite accurate: At the close of fiscal
year 2009, agencies reported spending a little under $108 billion in ARRA funds—about 1 percent
higher than CBO’s initial estimate (see the table below). In a few cases, agencies that received stimulus
funds for certain programs spent less than CBO expected from their regular appropriations for those programs,
so the net change in outlays that can be attributed to the stimulus package was actually a bit less that CBO
initially estimated.
ARRA also included provisions that reduced taxes, and the Joint Committee on Taxation estimated that the
legislation would reduce federal revenues by about $65 billion in 2009. Adjusting for the reclassification of
payments for health insurance premiums, that total would be $79 billion. It is not possible to determine how
closely the 2009 revenue effects of ARRA were to the initial estimates because detailed data on 2009 tax
collections are not yet available.
Half of the 2009 stimulus spending is attributable to two programs: $32 billion for Medicaid and $22 billion
for unemployment insurance. A one-time payment to Social Security beneficiaries added another $13 billion;
spending for financial assistance to states (from the new State Stabilization Fund) added $12 billion; and direct
assistance to college students (mostly for Pell grants) added $7 billion. Together, those five programs account
for almost 80 percent of stimulus spending in fiscal year 2009.
As shown in the following table, outlays by individual agencies differed from CBO’s estimates in both size
and direction. Here are a few key points:
Outlays for Medicaid, in the form of increased federal payments to states, were within $0.5 billion of
CBO’s estimate. Outlays for other activities of the Department of Health and Human Services (such as
health research) came in several billion dollars lower than CBO’s estimate.
A few agencies spent more than CBO expected from amounts authorized in the stimulus package for
some programs and less than CBO expected from regular appropriations for those same programs. For
example, stimulus spending by the Department of Education for Pell grants was about $6 billion more
than CBO’s original estimate—but those higher-than-expected outlays were partially offset by lower-
than-expected spending from funds provided through the annual appropriation process.
CBO underestimated the costs of providing additional unemployment benefits under ARRA. The
agency’s original estimate of such benefits was about $17 billion for 2009, but the total for the year
came in about $6 billion higher.
Infrastructure-related spending fell short of CBO estimates. For example, spending by the Departments
of Transportation, Energy, and Commerce totaled just over $5 billion, compared with CBO’s original
estimates of about $8 billion for those three agencies.
Funding for a broad range of other federal agencies has been spent considerably more slowly than
originally estimated. The last line in the following table shows outlays of about $6 billion in 2009 for a
group of agencies that received over $60 billion in stimulus funding.
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CBO’s Estimates and Actual Spending from ARRA through September 2009
Estimated Actual $ %
$ in Billions Outlays1 Outlays2 Difference Difference
Health and Human Services 38.7 33.0 -5.7 -15%
Labor 3 18.2 24.7 6.5 36%
Education 8.9 20.6 11.7 131%
Social Security Administration 13.7 13.2 -0.5 -4%
Agriculture 6.0 5.0 -1.0 -17%
Transportation 5.0 3.7 -1.3 -26%
Energy 1.8 0.8 -1.0 -56%
Commerce 1.3 0.6 -0.7 -54%
All Other Agencies 12.7 6.2 -6.5 -51%
Total 3 106.3 107.8 1.5 1.4%
Notes
1. CBO’s March baseline estimates, which were identical to those provided in the February 13, 2009, cost
estimate for the conference agreement for H.R. 1, the American Recovery and Reinvestment Act of
2009.
2. Actual outlays are based on agency reports posted on www.recovery.gov, through September 30, 2009.
CBO made adjustments for some of the loan-related cash flows that were reported as outlays of the
Small Business Administration ($3.4 billion) and the Department of Agriculture ($0.2 billion), because
the federal budget records as outlays the estimated subsidy costs of such loans rather than the annual
cash flows for loan disbursements and repayments. CBO also adjusted the reported outlays of the
Department of Labor to reflect transfers between federal government funds that were recorded as
outlays but not spent ($2.8 billion).
3. CBO’s original estimate of outlays for the Department of Labor included $13.8 billion for payments of
health insurance premiums for unemployed workers under COBRA (the Consolidated Omnibus Budget
Reconciliation Act of 1985). Those payments ended up being classified as reductions in revenues as
opposed to outlays (as CBO initially expected). The numbers shown in the table for the Department of
Labor reflect an adjustment for that change in classification.
Posted in Budget Projections | Comments Off
Subsidies for Premiums and Cost-Sharing in H.R. 3962 As
Introduced in the House of Representatives Last Week
November 2nd, 2009 by Douglas Elmendorf
Today CBO released a letter responding to questions about the subsidies that enrollees would receive for
premiums and cost sharing, and the amounts that they would have to pay, on average, if they purchased a
relatively low cost plan in the new insurance exchanges to be established under H.R. 3962 as introduced in the
House of Representatives on October 29. The analysis reflects the preliminary analysis of that bill that CBO, in
conjunction with the staff of the Joint Committee on Taxation, released last week.
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The table accompanying the letter focuses on enrollees who purchase a “reference” plan (the premiums equal
the average of the three lowest-cost “basic” plans, as defined in the bill), because federal subsidies would be
tied to that average. Such a plan would have an actuarial value of 70 percent, which represents the average
share of costs for covered benefits that would be paid by the plan. Although premiums would vary by
geographic area to reflect differences in average spending for health care and would also vary by age, the table
shows the approximate national average for the reference plan—about $5,300 for single policies and about
$15,000 for family policies in 2016. Enrollees could purchase a more expensive plan or more extensive
coverage for an additional, unsubsidized premium—and CBO anticipates that many enrollees would do that, so
the average premiums actually paid in the exchanges would be higher (although average cost-sharing amounts
could be lower than those shown in the table). The figures are presented for 2016 in order to illustrate the
likely situation after the proposed changes in insurance markets were fully implemented. (A downside of that
approach is that the figures are harder to compare with those observed in 2009.)
Under the House bill, the maximum share of income that enrollees would have to pay for the reference plan in
2013 would range from 1.5 percent for those with income less than or equal to 133 percent of the federal
poverty level (FPL) to 12 percent for those with income equal to 400 percent of the FPL. (People with income
below 150 percent of the FPL, however, would generally be eligible for Medicaid and thus ineligible for
subsidies within the exchanges.) After 2013, those income-based caps would all be indexed so that the share of
the premiums that enrollees (in each income band) paid would be maintained over time. As a result, the
income-based caps would gradually become higher over time; for example, they are estimated to range from
about 1.6 percent to about 12.8 percent in 2016. Enrollees with income below 350 percent of the FPL would
also be given cost-sharing subsidies to raise the actuarial value of their coverage to specified levels—ranging
from 97 percent for those with income below 150 percent of the FPL to 72 percent for those with income
between 300 percent and 350 percent of the FPL.
To illustrate the effects of those features, the table shows the amounts of income that would correspond to the
midpoint of each FPL band, the resulting premiums that single individuals and families of four would have to
pay for a reference plan if their income equaled that midpoint, and the share of their income that would be
represented by the sum of the enrollee premiums and the average cost-sharing amount at that midpoint. For
instance, a single person with income of $26,500 in 2016 (225 percent of the FPL) would pay a premium of
about $1,900 (after getting a premium subsidy of 64 percent) and could expect to pay another $900 in cost
sharing (net of federal subsidies); thus, the average payment by such a person for the premium and cost
sharing combined is projected to be $2,800, or about 11 percent of income. A family of four with income of
about $54,000 (also 225 percent of the FPL in 2016) could expect to pay about the same share of its income
for premiums and cost sharing. (Because use of health care in a given year varies widely, many people would
pay less in cost sharing than the average, but some would pay more—subject to the limits on out-of-pocket
costs that are specified in the bill.)
The estimated average premiums and average cost-sharing amounts for the reference plan shown at the top of
the table—before any subsidies are applied—are slightly higher than the premiums for the comparable plan
shown in a similar table that CBO released on October 9 for the health care reform proposal introduced by the
Chairman of the Senate Committee on Finance, as amended by the committee. (That table represented an
update to a table enclosed in a letter to Chairman Baucus on September 22 that addressed the earlier
Chairman’s mark.). Because the reference plans in both proposals would cover the same range of benefits and
have the same extent of coverage (actuarial value), the difference in premiums cannot be attributed to a
difference in coverage. Instead, the difference is the net result of a number of other provisions of each
proposal and primarily reflects higher average health care costs projected for enrollees in the exchanges under
the House bill than for enrollees in the exchanges under the Finance Committee’s proposal. That difference in
average health costs would arise because exchange enrollees under the House bill would be slightly less
http://cboblog.cbo.gov/ Page 11 of 13
Director’s Blog 11/17/09 8:55 PM
healthy, on average, than exchange enrollees under the Finance Committee’s proposal—a difference that itself
reflects a number of opposing factors described in the letter.
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