EVENTS

Date:	Monday, September 13, 2004
Time:	9:00 AM -- 10:30 AM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

September 2004

Election Year Health Proposals: What Would They Cost?

Led by AEI's Joseph Antos, a team of independent actuaries and cost estimators presented a new detailed study of Senator John Kerry's and President George W. Bush's health proposals at a September 13 AEI  event. The full report is available at www.aei.org/publication21166. Much controversy has been generated by the candidates' sharply different plans to extend health insurance to more people. Although the general contours of those plans are known, specific information is elusive and has led to speculation about how much federal spending would increase and how many people would be helped under the two plans.

How would the proposals really work?  How much would they actually cost?  How many of the uninsured would realistically gain health coverage? Answers to these and other questions were provided by the authors of the study.  Following their presentation, a panel of health care experts discussed the study and its broader policy implications.

Joseph Antos
AEI

We released this morning a new estimate of Senator Kerry's and President Bush's health care proposals. That cost estimate adheres to scoring conventions used by the Congressional Budget Office--the authority that measures the budgetary impact of legislative proposals before Congress. The team of estimators used public information on both candidates' health plans, including documents on the Kerry campaign website, the president's recent budget proposals, and a September 2 fact sheet released by the White House.

The AEI study found that Kerry's health plan would increase federal spending by $1.5 trillion over the ten-year period between 2006 and 2015 and newly insure 27.3 million Americans. The Bush proposal would cost the federal government $128.6 billion over the same ten-year period to extend coverage to 6.7 million people.

During the last several months, the Kerry campaign and the media have widely cited an estimate of the Kerry plan produced by Emory University professor Kenneth Thorpe. Over the nine-year period between 2006 to 2014, Thorpe scored the Kerry plan at $653 billion and estimated an increase in coverage of 26.7 million Americans. The AEI score is substantially higher than Thorpe's, though the overall take-up is similar.

The Kerry plan is an ambitious proposal to expand the government Medicaid and State Children Health Insurance Program (SCHIP) programs, offer tax breaks and subsidies for private insurance, and create a new insurance purchasing pool.

Donald Muse
Muse & Associates

Over the last two decades, there have been close to ten major proposals to expand the Medicaid program. Senator Kerry's is among the largest and most comprehensive. It has four main components. The Kerry "swap" transfers 100-percent responsibility for children in Medicaid to the federal government in exchange for states expanding their SCHIP programs. The federal government also picks up the full cost of the disabled and immigrant pregnant women and children who currently face a waiting period for coverage. The "swap" also gives states the option of expanding eligibility to certain new groups who would also be covered at the federal government's full expense. The law identifies seventy-two groups that states can elect to cover, and with full federal payment, the incentives for states to do so are strong. Over ten years, Kerry's proposed Medicaid expansion would cost about $436 billion, most of which would go to children who already have health insurance.

Some of the money earned by the states under the federal government's assumption of costs for Medicaid kids would be spent on the uninsured. Kerry proposes to expand SCHIP eligibility to children up to 300 percent of the federal poverty level. We assumed a 75 percent take-up rate, as well as a modest 5 percent "woodwork effect"--the tendency of individuals to underreport income in order to qualify for a new program.

Kerry would also expand SCHIP to parents up to 200 percent of poverty, and to other adults up to 100 percent of poverty. For these categories, we also applied a 75-percent take-up rate and 5-percent woodwork effect. Our population estimates relied on Kerry campaign data where they seemed reasonable, and our per-capita cost data was consistent with the CBO baseline.

Overall, Kerry's proposed Medicaid and SCHIP expansions would cost $881 billion over ten years and newly insure 18.5 million Americans. Senator Kerry would secure SCHIP program expansions with a more than $250 billion windfall to the states.

Roland (Guy) King
King Associates

The premium rebate provision of the Kerry plan would reimburse employer-sponsored insurance plans for 75 percent of per-person costs above a catastrophic spending cap. That threshold would be set so that savings average 10 percent. The campaign has set the catastrophic limit at $30,000, but using more accurate claims data from the Society of Actuaries, we pegged the threshold at $36,000.

The premium rebate would be attractive to employers despite certain requirements they would face to qualify. They would have to provide health insurance to all employees, including part-timers and new employees usually subject to a waiting period for benefits; adopt disease management programs; and pass the savings along to employees. These constraints will be fairly easy for employers to comply with, so we estimated that 77 percent of employers would participate. We also assumed that 52 percent of those firms' employees currently without coverage would take up insurance. Over the ten-year budget window facing the next president, the rebate proposal would increase federal government spending by $573 billion and result in 1.8 million newly insured Americans.

Kerry also proposes creating a new purchasing pool called the Congressional Health Plan. It would be structured like the Federal Employee Health Benefits Program (FEHBP), but with a separate risk profile and separate pricing.  While the FEHBP is extremely generous to federal employees, small and medium firms joining the new arrangement would likely offer far less generous subsidies to their employees. The impact of the Congressional Health Plan on federal costs would be negligible.

Judy Xanthopoulos
Economic Consultant

Senator Kerry has proposed a series of tax credits to encourage the purchase of health insurance. Their impacts are difficult to measure because behavioral responses to tax breaks cannot easily be gauged. Small businesses would receive tax credits of up to 50 percent of the premium--an extremely generous subsidy. For small firms that already provide insurance to their employees, the credit is a windfall. The provision may induce some new coverage, but most of the spending will go to businesses already offering insurance.

Another tax provision in the Kerry plan is a 75-percent tax credit to unemployed workers between jobs. Because spells of unemployment tend to be short and payments to the unemployed would not be immediately available, this tax break would have only a marginal impact on coverage.

Kerry also proposes to offer tax credits to individuals between the ages of fifty-five and sixty-four. We assumed no limit to the duration of this benefit. Because this age band typically has higher costs and faces higher premiums, this provision should receive a better response and more effectively boost coverage.

A final tax break put forth in Senator Kerry's health plan is a credit to individuals whose premiums exceed 6 percent of their income. We estimated that the impact of this proposal would be minimal because few people would be eligible for the subsidy.

Joseph Antos
AEI

Senator Kerry's comprehensive health agenda also includes several provisions intended to produce savings, including direct government price negotiation with drug manufacturers, reimporting prescription drugs, and requiring pharmacy benefits managers to disclose prices and discounts. The CBO, however, has given the first two proposals scores of zero and determined that the third proposal would increase federal spending.

We considered closely the four provisions that Professor Thorpe scored as net savers. The first two are disease management and health information technology (IT). Most experts agree that these are two positive developments in our health system. In fact, both of these ideas are being rapidly adopted, and there are ongoing federal initiatives to promote those innovations. While the Kerry plan and Professor Thorpe's estimate tout substantial savings from these provisions, Senator Kerry has not proposed any concrete measures to speed their adoption. Savings from disease management and health IT that would occur without legislative actions are not scored by the CBO for budget purposes.

In contrast, cutting payments to providers would yield scoreable savings. According to Thorpe, the Kerry plan would cut payments to disproportionate share hospitals and Medicare Advantage plans. In our estimate, these payment reductions earn the Kerry plan $116 billion in savings.

The discrepancy between the cost estimates produced by AEI and Professor Ken Thorpe is rooted in three major differences. First, Thorpe considers nine years of costs, from 2006 to 2014, instead of the full budget window facing the president next year. Nonetheless, AEI's estimate of the Kerry plan over the comparable nine-year period is still $650 billion higher. The AEI estimators also consider Kerry's spending proposals--especially the Medicaid-SCHIP "swap"--to be more expensive than does Thorpe. Finally, the AEI team found lower scoreable savings in the Kerry proposal.

The two estimates agree, however, on the coverage impact of the Kerry plan. Both Thorpe and AEI believe roughly 27 million Americans would gain insurance. The AEI analysis believes Kerry's agenda would work, though at a far greater cost than the campaign has suggested.

We estimated President Bush's plan largely from recent budget proposals but also adjusted our analysis to include new provisions added on September 2, 2004. In contrast to the Kerry proposal, the Bush plan is centered on refundable tax credits. Tax breaks for the purchase of individual insurance have been in his budget proposals for the last several years. The president recently proposed an above-the-line deduction for high-deductible health insurance premiums, a small business tax credit, and private insurance market reforms.

Judy Xanthopoulos
Economic Consultant

The Bush tax credits are better targeted at low-income individuals and more effectively encourage the uptake of certain kinds of insurance. Low-income people would receive tax credits for the purchase of health insurance of up to $3,000 for a family, and $1,000 for an individual. Alternatively, families could take as much as a $1,000 contribution to a Health Savings Account (HSA) and a $2,000 tax credit for insurance premiums. Individuals could opt to take up to a $300 HSA contribution and $700 tax credit.

Small employers would also qualify for tax credits if they contributed to their employees' HSAs. Most of this benefit would accrue to firms that already offer high-deductible health plans--the companion insurance policies to HSAs. The coverage impact of small business tax credits, therefore, would be marginal. Bush also proposes an above-the-line deduction for high-deductible insurance premiums to encourage the purchase of this sort of insurance plan. Again, this provision would benefit primarily individuals who already hold high-deductible plans. The president's three tax proposals would cost $125 billion and newly insure 5.7 million people.

Joseph Antos
AEI

In addition to his tax credits and deductions, President Bush has also proposed various private insurance market reforms. He would promote Association Health Plans (AHPs), interstate regulatory competition among non-group insurance providers, and new state risk pools. The CBO has scored AHP proposals in the past and estimated modest gains to coverage and marginal costs. We assumed a small impact for the AHP provision as well. Allowing interstate purchase of insurance is also unlikely to have a notable budgetary effect. The new risk pools would cost the federal government $4 billion in grants to the states.

Overall, federal spending under the Bush plan would increase by $129 billion over ten years and newly insure 6.7 million people.

Gail Wilensky
Project Hope

The AEI analysis of the Kerry health plan suggests that most of the newly insured under the Kerry proposal would become covered by the Medicaid expansion and tax breaks. Nevertheless, the reinsurance pool, or premium rebate, has captured the most public attention. The rebate represents a shift in costs, but not new coverage. Senator Kerry proposes spending an incredible amount of money on people who already have insurance.

Kerry proposes expanding Medicaid and SCHIP eligibility for kids and parents below certain income limits. In evaluating these proposals, we should first consider if Medicaid is the right program to cover the uninsured.

President Bush's plan is very different in its approach. He proposes to address the uninsured through refundable tax credits and insurance market reforms. The two candidates' proposals embrace widely different strategies and have immensely different price tags. The Kerry plan is far less efficient than the president's. Instead of targeting federal dollars at the uninsured, Kerry proposes subsidizing people who already have coverage. This is a cost-shift to taxpayers, not a true reduction in health costs.

Ken Kies
Clark Consulting

We can evaluate the efficiency of each candidate's proposal by comparing per-capita costs for each newly insured person. According to AEI study's ten-year cost estimate, Kerry proposes to spend $5,500 per newly insured American per year. Bush, on the other hand, proposes to spend $1,900 per newly insured individual per year. Kerry's premium rebate provision is particularly inefficient. Of the $573 billion price tag, only $8 billion would go to employers that currently do not offer health insurance. The remaining $565 billion would subsidize firms that already cover their employees.

The Bush proposal relies heavily on the potential of HSAs--established last year in the Medicare Modernization Act. The Treasury Department recently issued transitional regulatory guidance, but legislative changes may be necessary to extend transitional relief provisions permanently.

Senator Kerry insists that his comprehensive health proposal could be financed by repealing a portion of the 2001 tax cuts. This is an illusory source of funding because the tax cuts sunset in 2010 under current law. Claiming to repeal expired tax provisions would not improve the Kerry plan's budget score.

Kevin A. Hassett
AEI

Senator Kerry claims he would repeal tax cuts to the wealthiest Americans to finance his health plan. The cost of the Kerry health plan over the next decade, however, quickly exceeds the revenue gained from repealing the high-income tax cuts. By 2014 or 2015, Kerry would be forced to roll back all the tax cuts to finance his health proposal.

Worse still, the enormous price tag scored by AEI at $1.5 trillion does not include certain components of Kerry's health agenda and certainly not all his spending proposals. He has additional proposals to expand veterans' health benefits and commit greater funds to education. All of Senator Kerry's spending proposals would cost upwards of $3 trillion from 2006 to 2015. He would have to repeal all the tax cuts to finance his health proposals alone. Confronting this budgetary reality, we can expect that Kerry would drop many of his campaign promises.

This discussion of competing AEI and Thorpe scores has given the Thorpe estimate too much credit. Professor Thorpe has produced a truly ludicrous estimate of the Kerry proposal. He has awarded Kerry hundreds of billions of dollars in savings for disease prevention, while the candidate has not defined a single concrete proposal to that end.

AEI research assistant Ximena Pinell prepared this summary.