Understanding Estimates of the Impact of

Health Reform on the Federal Budget

July 1994

OTA-BP-H-132

NTIS order #PB94-209889

GPO stock #052-003-01383-5
Recommended Citation: U.S. Congress, Office of Technology Assessment,

Understanding Estimates of the Impact of Health Reform on the Federal Budget,

BP-H-132 (Washington, DC: U.S. Government Printing Office, July 1994).
Foreword

H

ealth care reform is at the top of the nation’s domestic policy

agenda, and numerous reform bills have been introduced in

Congress. Each reform proposal takes a somewhat different approach to containing costs and providing insurance coverage to

more people. A variety of organizations (for example, the Congressional

Budget Office, the Administration, and private consulting firms) have

estimated the economic effects of health reform on the federal budget.

Because analysts often do not provide details about their estimation process, it is not always easy for people to understand why estimates differ.

This background paper describes and evaluates the sources of variation in analysts’ estimates of the federal budget impacts of key reform

provisions. In particular, it uses three different estimates of federal budget effects of the Health Security Act (from the Administration, the Congressional Budget Office, and Lewin-VHI, a private consulting firm) as

an example of the types of factors that may cause analysts’ estimates to

differ. The paper also discusses potential variations in the estimates of

federal budget effects of the American Health Security Act and the Managed Competition Act, and of health reform proposals in general. The

background paper aims to improve understanding of the reasons for the

differences among various estimates of federal budget effects under

health reform.

This background paper is part of an OTA assessment, Understanding

the Estimates Under Health Reform, that was requested by the members

of the Technology Assessment Board (see inside front cover) and Senator Ted Stevens. OTA recently published the main report from the assessment, Understanding Estimates of National Health Expenditures Under

Health Reform, which focuses on the assumptions used in estimates of

national health expenditures under various reform proposals.

Numerous individuals, including an advisory panel chaired by Joseph

Newhouse, assisted in the development of this report. OTA gratefully acknowledges the contribution of each of these individuals. As with all

OTA publications, the final responsibility for the content of the background paper rests with OTA.

ROGER C. HERDMAN

Director

.,.

Ill
Advisory Panel

Joseph Newhouse, Chair

Director of the Division of Health

Policy Research and Education

Harvard University

Boston, MA

Stuart H. Altman

Professor of Health Policy

Graduate School of Social Policy

Brandeis University

Waltham, MA

Harold Cohen

President

Harold Cohen, Inc.

Baltimore, MD

Karen Davis

Executive Vice President

Commonwealth Fund

New York, NY

Tom J. Elkin

Assistant Executive Officer

Health Benefit Services

California Public Employees’

Retirement System

Sacramento, CA

Deborah A. Freund

Vice Chancellor of Academic

Affairs

Dean of the Faculties

Director of the Bowen Research

Center

Indiana University

Indianapolis, IN

Fernando A. Guerra

Director of Health

San Antonio Metropolitan Health

District

San Antonio, TX

William Hsiao

Professor

Harvard School of Public Health

Harvard University

Cambridge, MA

Lawrence J. Kiein

Professor of Economics, Emeritus

Department of Economics

University of Pennsylvania

Philadelphia, PA

Woodrow Myers

Vice President for Medical Affairs

The Associated Group

Indianapolis, IN

Jack Rodgers

Senior Manager and Director of

Health Policy Analysis

Price Waterhouse

Washington, DC

Allen J. Sorbo

Principal

Tillinghast, A Towers Perrin

Company

Minneapolis, MN

Gail Wilensky

Senior Fellow

Project HOPE

Bethesda, MD

Michael C. Wolfson

Director General of Institutions

and Social Statistics Branch

Statistics Canada

Ottawa, Canada

Special Consultant

Joseph Anderson

President

Capital Research Associates

Chevy Chase, MD

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this background paper. OTA assumes full responsibility for

the report and the accuracy of its contents.

iv
—

Clyde J. Behney

Assistant Director

Sean Tunis

Health Program Directorl

ADMINISTRATIVE STAFF

Beckie Erickson

Office Administrator

Carolyn Martin

Word Processing Specialist

Daniel B. Carson

PC Specialist

Carolyn Swann

PC Specialist

Preject Staff

PRINCIPAL STAFF

Tami L. Mark

Project Co-Director

Denise M. Dougherty

Project Co-Director

Yen-pin Chiang

Senior Analyst

Douglas Berkson

Research Assistant

David Grabowski

Research Assistant

1 Effective January 1994.
— --- .-—

1

2

3

4

American Health Security Act of 1993

(H. R.1200/S.491) 41

Managed Competition Act of 1993

(H. R.3222/S.1579) 43

APPENDIXES

A

B

c

D

E

Acknowledgments 45

General Descriptions of the Budgetary

Process 46

Databases Used To Develop Health

Reform Estimates 50

Method of the Study 55

Abbreviations and Glossary 58

contents

Summary 1

Key Findings 2

Organization of the Report 6

Estimates of the Health Security Act 9

Sources of Information 10

Estimates of Federal Outlays 12

Estimates of Federal Revenues 22

Overview of Selected Issues 29

Provisions That Affect Federal Outlays 29

Provisions That Affect Federal Revenues 36

Estimates of Other Reform Proposals 41

r 1

I I

REFERENCES 65
c

urrently, in the United States, the federal government directly finances various health insurance programs, such

as Medicare, Medicaid, and CHAMPUS—the Civilian

Health and Medical Program of the Uniformed Services.

The government also indirectly finances the purchase of medical

care and private health insurance through various forms of tax expenditures, such as the exclusion of employer-sponsored health

benefits from the employees’ taxable income. 1 In 1991, spending

for all health programs constituted approximately 14 percent of

the total $1.3 trillion in federal outlays (10,32,46). CBO has projected that, under current law, in 1998, federal spending for health

will constitute 23.6 percent of total spending by the federal government (32).

Estimates of the effect of the health reform on the federal budget are an important part of the current health reform debate. Yet

different analysts’ estimates are not always in agreement and

questions remain about the certainty of all of the estimates.

1 Ta expenditures, as defined by the Congressional Budget and Impoundment Act of

1974 (Public Law 93-344), are “reductions in individual and corporate income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers. These special tax provisions can take the form of exclusions, credits, deductions, preferential tax rates, or deferrals of tax liability.” Examples of health care related tax expenditures prescribed by the Internal Revenue Code include: the exclusion of

employer contributions to workers’ health care benefits from employee taxable income

(sections 105 and 106), the personal deduction of a specified portion of the health insurance premium paid by self-employed individuals (section 162), and the Schedule A deduction from personal income of a portion of the medical expenses over a specified proportion of adjusted gross income (section 21 3).

Summary

I I

P

I!El

r

II
2 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

State and local

government

(29.6%)

Private

(56.1 %)

SOURCE S W Letsch, H C Lazenby, K R Levit, et al , “National Health

Expenditures, 1991 ,“ Health Care Financing Review 14(2). 1-30, 1992

This Office of Technology Assessment (OTA)

background paper describes three estimates—by

the Congressional Budget Office (CBO), LewinVHI, and the Clinton Administration-of the

budget impact of the Health Security Act. The paper examines the major differences in analysts’ estimates and the reasons for those differences.2 The

paper also describes more generally why estimates of health reform proposals might differ.

This background paper is published as part of

the OTA’s study Understanding the Estimates Under Health Reform. The study was requested in

August 1993 by OTA’s Technology Assessment

Board and Senator Ted Stevens.

In a separate OTA report, Understanding Estimates of National Health Expenditures Under

Health Reform (45), OTA examined estimates of

the impact of various health care reform proposals

on national health expenditures, as well as the assumptions behind the estimates. The effects of the

reform proposals on the federal budget may not

necessarily parallel their intended effects on national health expenditures. Specific provisions in

the reform proposals may increase or decrease

federal spending and receipts, independent of

their effects on national health expenditures. As

shown in figure 1-1, federal spending accounted

for about 30 percent of the national health expenditures in 1991.

This paper does not compare or evaluate different reform proposals, nor does it provide new estimates of the effect of health reform on the federal

budget.

KEY FINDINGS

I Major Areas of Difference in Estimates

Thus far, much policy discussion has focused on

the aggregate “bottom line” estimates of health reform’s impact on the federal budget. For example,

the Clinton Administration projected that the

Health Security Act would reduce the deficit by

$58.5 billion, from 1995 through 2000. LewinVHI projected a much lower reduction of $24.6

billion. The Congressional Budget Office (CBO),

by contrast, projected that the federal deficit

would increase by $74 billion. In fact, these estimates of the aggregate budgetary effects may actually overstate the degree of consistency across

analyses. Significant disparities may exist on the

budgetary effects of certain reform provisions and

these differences may be offsetting, thus agreement on the “bottom line” estimates may provide

a false sense of consistency and certainty. This

2 OTA chose t. examine ~ese three particular analyses because they provide separate estimates for specific budget items, not just an aggregate “bottom line” estimate. and OTA has relatively more information regarding the general methods used by these analysts. In addition, this is

one of the relatively rare instances where analysts provide estimates for the same legislation. This condition is critical because estimates of

federal budget impacts under health reform are sensitive to the specific provisions in the legislation. KPMG Peat MarWick, a private consulting

firm, published its analysis of the Health Security Act on March 28,1994. OTA did not include the KPMG estimates in its analysis because they

were not available until after OTA had completed its draft report. In addition, the KPMG analysis provided relatively less information regarding

its estimates.
Chapter 1 Summary | 3

background paper evaluates the estimates of each

of the bills’ major provisions separately.

Figure 1-2 depicts the provisions in the Health

Security Act (H. R.3600/S.1757) that differ the

most across the various estimates. 3 The differences between the Clinton Administration, CBO,

and Lewin-VHI’s “bottom line” estimates of the

federal budget effects of the Health Security Act

result mainly from analysts’ estimates of the following four specific budget items that differ most

in absolute monetary terms:

■ Costs of employer and family premium subsidies, especially subsidies for employers. In absolute terms this represents an area where analysts’ estimates disagree most.4 Lewin-VHI’s

and CBO’S estimates of the employer subsidies

are 54 and 92 percent higher (respective y) than

those of the Clinton Administration (nearly

$50 billion and $86 billion higher, respectively,

than the $93.1 billion projected by the Clinton

Administration for period from 1995 through

2000). However, the Clinton Administration

added a 15 percent contingency, equal to $41.2

billion, to the estimates of the premium subsidies. The Clinton Administration used the 15

percent as a “cushion” to cover potential behavioral responses that it believed difficult to model. The three estimates would be closer if the

cushion were included (see Chapter 2).

■ Potential revenues gained from the additional

income and payroll taxes resulting from lower

health care expenses and higher income due to

universal coverage, subsidies, and cost containment. CBO’S estimates are only about 16

percent lower than the Clinton Administra9

■

tion’s ($24 billion versus $28.4 billion for the

period from 1995 through 2000), but LewinVHI’S estimates are 113 percent lower (i.e., Lewin-VHI projected a revenue loss, not gain, of

$3.7 billion).

Potential revenues gained from recovered tax

expenditures by excluding health benefits from

cafeteria plans. CBO’S and Lewin-VHI’s estimates of these revenues are 68 and 46 percent

lower, respectively, than those of the Clinton

Administration ($10 billion and $17 billion

versus $31.4 billion for the period from 1995

through 2000).

Potential revenues gained from the 1 percent

payroll tax for corporate alliances. CBO’S estimates are 67 percent lower than those of the

Clinton Administration ($8 billion versus

$24.2 billion for period from 1995 through

2000), while Lewin-VHI’s estimates are 36

percent higher than the Clinton Administration

($33.0 billion versus $24.2 billion).

In general, CBO’S estimates of the Health Security Act tend to generate higher figures for expenditure items, and lower figures for revenue

items than those of the Clinton Administration.

Fewer consistent differences exist between the

Lewin-VHI and the Clinton Administration estimates.

| Determinants of the Difference

in the Estimates5

OTA found that inconsistencies between analyses

often indicate that the data and research evidence

necessary to make accurate predictions are lack3 There are many ways to define the areas of greatest disparity across the estimates (e.g., in terms of absolute or relative terms), and the

differences will depend on whose estimates are being compared. These areas were found to differ most in absolute terms when all possible

comparisons are considered (i.e., CBO vs. the Clinton Administration, CBO vs. Lewin-VHI, Lewin-VHl vs. the Cl inton Administration). All the

provisions identified differed by more than $20 billion (between at least two organizations).

4 For example, dl fference5 In the e5t1mated cost of the subsidies for employers account for approximately half tie total difference between

CBO’S and the Administration’s estimate.

s Since ~a]ysts IYplcal]y do not pub]]sh information on the specific input parameters and algorithms (i.e., the basic calculation steps) used in

their analyses, it is extremely difficult to assert with complete certainty what has contributed to the differences in analysts’ estimates. OTA’s

analysis is based on its understanding of the general methods used by various analysts and analytically infers the major factors that may have

contributed to the differences in estimates. This background paper was sent to the relevant analytic organizations for review.
4 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

Employer

subsidy

Family

subsidy

Cushion for

subsidy b

Income and

payroll taxes

Corporate

assessment

Recovered tax

expenditures

$179 +92.3%

I $142.91 +53.5%

I $195.5 +1.3%

N/A

N/A

I $24\ -15.5?40

,

+36.4% _ Clinton Administration

m Congressional Budget Office

D Lewin-VHI

-lo 0 40 90 140 190 240

Billions of dollars

8 The percentages shown m the figure are the ddferences relatwe to the Clinton Admmlstratlon’s projechons.

b Note that the Clinton Admmlstrahon’s estlmatesfor subsldlesdonot mcludethe potential behavioral responses to the subsdles The Clinton AdmmIstratlon uses a separate “cushion” to cover the behaworal responses to subsldles. Neither CBO nor Lewm-VHl adopted such methodology m

their estimates of the subsdles

SOURCE Off Ice of Technology Assessment, 1994
Chapter 1 Summary | 5

ing. Differences across estimates may also result

from the nature of the legislation being estimated.

Some legislation may not be specific enough to allow for exact and consistent estimation. In contrast, inconsistencies did not indicate that analysts’ methods were incorrect or biased.

Table 1-1 summarizes the major factors that

have contributed to the differences in analysts’ estimates of various provisions under the Health Security Act. The factors fall into three major categories:

● Analysts estimates of the premiums for standard benefit packages under the regional alliances.

● Analysts’ assumptions about behavioral responses to specific reforms. These include assumptions about individual and employer responses to changes in premiums (e.g., whether

employers will opt for corporate alliances), to

premium subsidies (e.g., whether employers

will set up small low-wage subsidiaries to maximize the premium subsidies), and to changes

in the tax treatment of health benefits (e.g.,

whether individuals will prefer tax-exempt

benefits over additional wages).

Baseline information on numerous household

and firm-level economic variables. For example, information on the distribution of average

payroll and employer spending on health benefits by firm size, and the distribution of medical

expenses by household income, are essential

for estimating the premium subsidies.

Federal budget-related provisions Factors accounting for differences in estimates

Expenditures for

Expenditures for

Expenditures for

family and employer subsidies

Medicare drug benefit

long-term care benefit

Savings from Medicare and Medicaid

Taxes on corporate and personal income

Taxes on tobacco products

Assessment for corporate alliances

Recovered tax expenditures (from cafeteria

plan provision)

SOURCE Office of Technology Assessment, 1994

Premium level and growth

Baseline estimates of families and firms eligible for subsidies

Behavioral responses to premium subsidies

Baseline expenditures for prescription drugs among

beneficiaries

Additional demand due to the benefit coverage

Participation rate among eliglble beneficiaries

State spending on optional Medicaid services

Growth rates of Medicare and Medicaid baseline expenditures

Decreased demand for certain services due to cost-sharing

Baseline spending on health benefits and health care

Estimated spending on health benefits and health care under

Teform

Baseline expenditures on tobacco products

Reduction in tobacco consumption due to higher taxes (i.e.,

elasticity of demand)

Participation rate of corporate alliances

Baseline employer spending on health benefits

Estimated employer spending on health benefits under reform

Baseline tax expenditures associated with health benefits

under cafeteria plan

Behavioral responses to changes in income tax code

b In this background pa~r, the term baseline means the state of the system before any proposed policy change or reform. It is a benchmark

for measuring the effects of the proposed policy changes. It can refer to the expenditures, the demographic compositions, or the underlying

macroeconomic factors that are generally used as the input parameters in estimating the effects of reform.
6 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

Both CBO and Lewin-VHI projected higher

premiums than the Clinton Administration. Higher premium estimates will lead to higher subsidy

estimates. In part, the difficulty in estimating the

premiums is a product of the multiple sources of

financing for people currently without insurance.

For example, under the current system services

used by people without insurance are partially financed through cost-shifting to private health insurance premiums. Analysts differ in their estimates of the size of uncompensated care and of the

effect that eliminating uncompensated care will

have on premiums. Differences also reflect a lack

of consensus over the appropriate data for pricing

benefits (e.g., the national health accounts or private health insurance claims data) and over the effect of HMOs on premiums.

Analysts’ assumptions about the behavior of

individuals and employers under reform also contributed to the differences in the estimates. For example, as the premiums for the standard benefit

package under regional alliances increase and become more burdensome to employers, employers

may be more likely to find ways to meet the eligibility criteria for the subsidy program (i.e., to

“game” the system). However, analysts differ in

their assumptions about the magnitude of such responses and, at this time, no good evidence exists

on how employers will respond to the incentives

inherent in the subsidy program.

In some cases differences across the estimates

resulted from a lack of data on certain key elements necessary to arrive at the estimates, or from

a lack of consensus about the appropriate data

sources. OTA’s review of various estimates suggests that data on expenditures and utilization in

public health insurance programs are usually

readily available. However, there is no consensus

about the appropriate sources of data for expenditures in private-sector fins, such as the distribution of average payroll and health benefits by firm

size. To date, the federal government has collected

health-related data primarily through household

surveys.

7 Better firm-level data maybe warranted

if health care reform is to be built upon the existing

structure of employment-based private health insurance.

8

ORGANIZATION OF THE REPORT

This introductory chapter provides a summary of

the findings about major areas of disparity, and the

determinants that may account for those differences, across various estimates of the federal

budget effects of the Health Security Act. Chapter

2 uses various estimates of the Health Security

Act to illustrate how estimates of federal budget

effects of health reform might differ and the factors most likely to contribute to the differences in

analysts’ estimates. The discussion focuses on

three different estimates of the Health Security

Act, by the Clinton Administration (51), CBO

(38), and Lewin-VHI, a private health care consulting firm (13).

Chapter 3 describes more generally how federal expenditures and receipts are likely to be affected by reform provisions that seek either to expand or limit the federal government’s presence in

the health care sector. The main objective of

chapter 3 is to identify, more generally, relevant

determinants and assumptions that are most likely

7 within tie u.S. ~b]ic Hea]~ service, the National Center for Health Statistics (NCHS) is currently coordinating a National Employer

Health Insurance Survey cosponsored by the Health Care Financing Administration and the Agency for Health Care Policy and Research. The

survey, which will sample a nationally representative 51,000 establishments, is designed to be representative of employers in the nation, as well

as by region, state, standard industrial classification, and size. The data are scheduled to be publicly available by 1995 (26).

S mere we Cumently some fim.]eve] &ta on employment-based health insurance and benefits from numerous private sector trade associations and benefit consulting firms, For example, before 1993 the Health Insurance Association of America conducted an annual survey of employer-sponsored health benefits. Major benefit consulting firms, such as Hay/Huggins, A. Foster Higgins, and KPMG Peat MarWick, all have

their own annual health benefits survey of various size of employers. However, there are some weaknesses (e.g., representativeness of the sample design, inadequacy of the instrumentation, low item response rate) in these sutvey data that limit their reliability and accuracy in estimating

the effects of employer premium subsidies (26).
Chapter 1 Summary | 7

to affect analysts’ estimates for major categories

of federal outlays and revenues under health care

reform.

Chapter 4 provides a brief review of CBO’s estimates for the American Health Security Act

(H.R. 1200/S.491 ) and the Managed Competition

Act of 1993 (H. R.3222/S.1579), and discusses

areas that are likely to be subject to some uncertainty in the estimates. Finally, since the federal

budget process largely affects how executive and

congressional agencies estimate the impact of

statute changes, a general description of the process is included as appendix B. Appendix C provides an overview of the data sources analysts

generally use to derive the necessary baseline information about insurance coverage, health expenditures, employment and income, and demographic compositions, which are essential for

their estimates.
— — — . . . . ..-

E

stimates of different reform provisions present different

challenges for analysts. In some cases, estimates of the

effect of certain reform provisions on the federal budget

are relatively straightforward because only a few factors

are necessary for estimates and good data and research exist on

critical inputs and assumptions. In other cases, the estimates are

complicated by the large number of factors involved, the scarcity

and quality of data, and the lack of information on behavioral responses to various changes under the reform. Under such circumstances, analysts often have to make subjective or somewhat uncertain assumptions in the estimation process. Differences in

assumptions and data sources are often the major reason why analysts’ estimates differ. Although different methods of estimation

may also lead to variations in estimates across analysts.

This chapter reviews various estimates of the Clinton Administration’s Health Security Act to examine in more detail how and

why analysts’ estimates differ. The Health Security Act has various provisions that would affect both government spending and

receipts, and therefore serves as a useful example of how health

reform might affect the federal budget. 1 The chapter will describe

three much-discussed estimates of the act: by the Clinton Administration (50,51), by the Congressional Budget Office (CBO)

(38), and by Lewin-VHI (13), a private consulting firm.

Estimates

of the

Health

Security

Act 2

T“Ou#.— .41..”1> -.1, 11”...tbllmllba. -to. I

I

I

I

1 So far, the Clinton Administration’s Health Security Act has received the most publicly available program-specific analyses of its federal budgetary effects.
10 | Understanding Estimates of the Impact of Health Reform on the Federal Budget

Much attention has focused on the Clinton Administration’s estimate that the Health Security

Act would reduce the federal budget deficit by

$58.5 billion, while Lewin-VHI projected a much

lower reduction of $24.6 billion, and CBO projected that the net effect would be a deficit increase of $74 billion from 1995 through 2000. It

should be noted, however, that estimates of the aggregate budgetary effects may overestimate the

degree of consistency across analyses. Analysts

can come up with different estimates of specific

reform provisions, but arrive at similar aggregate

budgetary effects. For example, an analysis with

relatively higher estimates of both federal expenditures and revenues may have the same aggregate

level budgetary impact as any analysis with relatively lower estimates for both expenditures and

revenues.

The analysis in this chapter will be organized

around the specific reform provisions in the

Health Security Act. Since the Health Security

Act contains a relatively large number of reform

provisions that will directly or indirectly affect

federal outlays and receipts, the discussion will

focus on three major areas of federal outlays:

■ expenditures associated with employer and

family subsidies;

■ expenditures associated with Medicare prescription drug benefits and the long-term care

program for severely disabled individuals; and

■ savings from Medicare and Medicaid.

It will also focus on three major areas of federal’

revenues:

B

●

new taxes on tobacco products, additional revenue from income and payroll taxes, taxes on

corporate alliances and an early retiree assessment;

recovered tax expenditures from limiting the

tax exclusion of health benefits; and

● revenue loss from new tax expenditures

associated with the tax deduction for selfemployed health insurance premium.

Estimates for other reform provisions such as the

various public health initiatives, new administrative and start-up functions and savings from the

VA, the Department of Defense, and federal employee health programs that will also affect federal outlays and receipts are not examined in detail.

The choice of specific reform provisions discussed in this report is based on the relative size of

the expenditures or revenues involved. The provisions reviewed make up more than 85 percent of

the estimated federal budget effects (both in terms

of additional outlays and revenue). Figure 2-1 provides an overview of analysts’ estimates of the

act’s major reform provisions.

SOURCES OF INFORMATION

Since the introduction of its health care reform

proposal in September 1993, the Clinton Administration has released four major documents depicting its estimates of the effect of the Health Security Act on the federal budget.

The Health Security Act of 1993: Documentation of Federal Budget Effects (50), released by

the Office of Management and Budget (OMB) in

December 1993, provided estimates for all major

reform provisions that affect federal spending.

Based on the same expenditure estimates, Rivlin,

Cutler, and Nichols, all officials of the Clinton

Administration, published an article, “Financing,

Estimation, and Economic Effects,” in the spring

1994 issue of Health Affairs ( 18). The article provides the same set of estimates as the December

1993 OMB document, but it contains additional

discussion of the general methodology that the

Clinton Administration used to arrive at its estimates. 2 Additionally, the Office of Tax Analysis

in the Treasury Department also prepared a docu2There is ~]~o “~ou~ Congressional testimony by Clinton Administration officials regarding the prokctions and fin~cing issues. All of the

testimony relied on the same set of expenditure estimates, which appeared in the December 1993 OMB documentation, and they will also be

referred to as the Clinton Administration’s December 1993 estimates.
——.—.—

Chapter 2 Estimates of the Health Security Act | 11

Family

subsidy

Employer

subsidy

Cushion for

subsidy

Medicare

drug benefit

expenditures

Long-term care

expenditures

Medicare

savings

Medicaid

savings

Tobacco tax

revenues

Income and

payroll taxes

Corporate

assessment

Assessment for

retiree subsidy

Recovered tax

expenditures

New tax

expenditures

$195.5[ +1 .3%

93.1

$179 +92.3%

$142.9] +53.5%

NA

NA

I $64.7| +14.1%

[ $123.9 +4.7%

I $66.7] +9.7%

$68.5] +1 .61%0

$65.8] -2.4%

-lo 0 40 90 140 190 240

Billions of dollars

a The percentages shown in the figure are the differences relative to the Clinton Admmlstratlon’s projections

KEY NA = not applicable

SOURCE Office of Technology Assessment, 1994
12 | Understanding Estimates of the Impact of Health Reform on the Federal Budget

ment, Estimating the Impact of Health Reform on

Federal Receipts, describing the general methodology used by the Clinton Administration in its estimates of the revenue effects under the Health Security Act (49).3

Another document containing the Administration’s most recent estimates was the FY1995

budget proposal, Budget of the U.S. Government,

FY95 (51). Because the underlying assumptions

about the future of the economy and related factors used in the Clinton Administration’s estimates were changed between December 1993 and

February 1994, there are some differences in the

Clinton Administration’s two estimates of the federal budget effects of health reform.4 The revision

is an example of how an overall estimate may

change due to new projections of inflation, interest rates, and other macroeconomic factors. This

background paper deals with the most recent estimates.

OTA’S analysis of CBO’s estimate of the Health

Security Act is based mainly on a CBO report, An

Analysis of the Administration’s Health Proposal,

released in February 1994 (38) and a related revenue estimate released by the Joint Committee on

Taxation, Summary and Estimated Revenue Ef

fects of Tax Provisions of the Administration’s

Health Security Act (43).

OTA’s analysis of Lewin-VHI’s estimate is

based on a Lewin-VHI report, The Financial Impact of the Health Security Act, released in December 1993 (13).

Compared with analyses of other major legislation, federal analysts have released relatively

more information about the methodology used to

estimate the effects of health reform (7). However,

most of the information federal and private analysts have released so far provides only a general

description of their methodology. With a few rare

exceptions, analysts typically do not publish information on the specific input parameters and algorithms (i.e., basic analytic steps) that they used.

Without such information, it is extremely difficult to account for the differences in analysts’ estimates. In most instances, OTA can only infer the

major factors that may have contributed to the differences based on its understanding of the general

methodology.

ESTIMATES OF FEDERAL OUTLAYS

I Expenditures for Subsidies/Discounts

To ease the burden of insurance costs on individuals and expand insurance coverage, the Health Security Act would provide subsidies for premiums

and cost-sharing to early retirees, low-income

families, and employers. Employer subsidies

would be determined by firms' h-ms’ health insurance

costs, payroll, and size. Specifically, the Health

Security Act would place limits on insurance payments by employers in regional alliances on a sliding scale from 3.5 to 7.9 percent of the payroll, depending on the size and average wage of the firm.

Differences in Analysts’ Estimates

Analysts’ estimates of federal subsidies represent

the single largest budgetary item in the estimated

additional Federal expenditures under the Health

Security Act (from 40 to 60 percent, depending on

different analysts’ estimates). The estimates also

account for the greatest variation across analysts’

estimates of federal budget effects. In absolute

monetary terms, the largest difference in analysts’

estimates is the employer subsidies, with the difference between CBO and the Clinton Administration amounting to approximately $86 billion

for the six-year period 1995 to 2000. Table 2-1

3 In this background paper,, OTA does not distinguish between documents with the same estimates and will refer to them AS the Clinton

Administration’s December 1993 estimates.

4The C]titon Adminis~tion attributes the differences in two estimates to the fact that its most recent projections are based on the economic

assumptions in the 1995 budget proposal, while the earlier projections are based on the economic assumptions in the 1993 midsession review

(51).
Chapter 2 Estimates of the Health Security Act |13

Lewin-VHI vs.

CBO vs. Clinton Clinton Lewin-VHl

Premium subsidy Clinton Congressional Administration Administration vs. CBO

estimates Administration Budget Office Lewin-VHl $ (%) $ (“/0) $ (“/0)

Family subsidy $1930 $217 $195,5 $24 (12,4 %) $25 (1 3%) -$21.5 (-99%)

Employer subsidy 931 179 1429 859 (92 3) 49.8 (53 5) -361 (-20.2)

“Cushion” 412 NA NA NA NA NA

Total gross subsidy 3274 396 3384 686 (21) 11 (34) -576 (-14 5)

KEY . NA = not applicable

SOURCE Office of Technology Assessment, 1994, based on data from Lewin-VHl, Inc., The Financial Impact of the Health Securi

ty Act (Fairfax VA. Dec. 9, 1993), U S Congress, Congressional Budget OffIce, An Analysis of the Administration's Health Proposal

(Washington, DC February 1994), U S Executive Office of the President, Off Ice of Management and Budget, Budget of the U.S.

Government, FY95 (Washington, DC U S Government Priting Office, February 1994)

provides a detailed comparison of analysts’ estimates for the various types of subsidies.

The estimates of federal premium and out-ofpocket subsidies essentially are determined by

three critical factors:

the estimated premium levels in the first year of

reform for health plans in regional alliances,

assumptions about the growth rate of premiums, and

the baseline estimates of eligible families and

firms, assumptions about future eligibility, and

assumptions about the behavioral responses to

the subsidies.

The Estimated Premium Level

The relationship between the regional alliance

premium and the estimates of federal premium

subsidies is intuitive. Higher premium levels will

lead to an increase in premium subsidies for both

employers and families, other things being equal.

Because of the uncertainty of determining, a priori, the premiums for the “standard benefit package” and thus the cost of the subsidy program, the

Health Security Act capped the amount of total

federal payments for premium subsidies to the regional alliances (section 9102).5 The act also

specifies the method for estimating the average

premium level for the “standard benefit package”

under the regional alliances (section 6002) and establishes limits on the growth rate of regional alliance average premiums.

The general methodology used to estimate the

premiums takes into account the baseline spending for the covered benefits, the inducement effects among the previously uninsured and underinsured individuals, and the number of persons

with different family structures covered by regional alliances.

The premiums CBO estimated were on average

15 percent higher than those of the Clinton Administration and about the same as those estimated by Lewin-VHI. Table 2-2 shows a comparison of the average premium levels under the

regional alliances estimated by the three analytical groups. Differences in the methods and data

used account for the differences in premium estimates.

s In many instances, the Clinton Administration’s reform proposal has placed a cap on federal spending for specific programs (e.g., longterm care grants to states and premium subsidy payments to regional alliances). Other analysts mayor may not accept the capped amount in the

legislation as a “reasonable” estimate for the specific federal spending, The spending caps specified in the legislation are based on what the

Clinton Administration has projected the spending levels would be to achieve its policy objectives. Other analysts might contest whether the

projections are based on “appropriate” data and/or methodologies. In the case of the premium subsidy, for example, CBO’S estimates suggest

that it believes the Clinton Administration has underestimated the premium costs under the reform as well as the size of the population eligible

for the premium subsidies.
. . . .

14 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

Clinton Administration CBO Lewin-VHl

1994 dollars 1994 dollars 1998 dollars

Single person $1,933 $2,100 $2,732

Married couple 3,865 4,200 5,464

One-adult family 3,894 4,095 5,172

Two-adult family 4,361 5,565 5,975

a The Clinton Administration and CBO’s estimates are for average premiums in 1994, whereas Lewm-VHl’s premiums reflect the average regional alliance premiums in 1998, taking into account the effect of premium cap prescribed in theHealth Security Act

SOURCE. Office of Technology Assessment, 1994, based on data from A.M. Rivlin, D .M. Cutler, and L .M. Nichols,

“Financing, Estimation, and Economic Effects, ” Health Affairs 13(1) 30-49, 1994, Lewin-VHl,, Inc , The Financia/

Impact of the Hea/th Security Act (Fairfax, VA. Dec. 9, 1993), U.S. Congress, Congressional Budget Off Ice, An

Analysis of the Administrations Hea/th Proposa/ (Washington, DC. February 1994)

The Clinton Administration’s premium estimates are based on the March 1992 Current Population Survey (CPS) and the expenditure and utilization data reported in the 1987 National

Medical Expenditure Survey (NMES).6 Since the

sum of health care expenditures reported in the

NMES is less than the comparable totals reflected

in the National Health Accounts (NHA), the expenditure data are adjusted to be in line with the

1994 NHA. To estimate expenditures under reform, analysts at the Health Care Financing Administration (HCFA) further adjust the predicted

utilization and expenditure figures to account for

the changes in health insurance coverage and outof-pocket costs for health care among the uninsured and underinsured population that would occur under the Health Security Act. Finally, to

account for the fact that uncompensated care is expected to disappear with universal coverage, the

estimated premiums are adjusted downward to reflect the effect of reduced cost-shifting ( 18).

CBO provided only brief discussion in its report on how it derived its estimates of the premiums under the Health Security Act. No information on the data sources for the estimates

was presented in their report. However, CBO analysts indicated to OTA that the premium estimates

were based on the March 1993 CPS (which provided demographic and income data) and the 1987

NMES (which provided information on the use of

health care services) (9).

According to CBO, the premium estimates

were derived from baseline spending on private

health insurance premiums and all other health

care spending for individuals who could be covered by regional alliances under the Health Security Act. The baseline spending was then adjusted

for two factors. First, CBO increased the baseline

spending in proportion to the anticipated changes

in utilization by currently uninsured people. Second, CBO increased the base amount by another 5

percent to reflect its assumption that the standard

benefit package would be 5 percent more expensive than the current average benefit package for

insured people. In comparing its own premium estimates with those of the Clinton Administration,

CBO suggested that the Clinton Administration’s

calculation did not include certain public spending such as state and local subsidies to public hospitals for the uninsured people. Also, the Clinton

Administration estimate was not adjusted to reflect private health insurance data.

Lewin-VHI derived its premium estimates using the expenditure data reported in the 1987

b Bo~ tie HCFA ~d tie Agency for Hea]~ Care Policy and Research (AHCPR) within the Clinton Administration have developed their

own estimates of the premiums under the reform. The Clinton Administration used the HCFA premiums in all of its estimates of the subsidies as

well as the federal budgetary and national health expenditure effects of the reform, therefore the discussion here will foeus only orI HCFA’S

analysis.
Chapter 2 Estimates of the Health Security Act | 15

NMES and then adjusted the NMES data on

household health care spending to reflect the comparable totals in the NHA. The NMES health care

spending data were further adjusted to reflect

higher premium payments and cost-sharing requirements reported in the 1991 Health Insurance

Association of America (HIAA) employer survey.

Based upon a review of documentation provided

by the Clinton Administration, Lewin-VHI suggested that five factors account for the fact that its

premium estimates are 15 to 17 percent higher

than the Clinton Administration’s:

● the fact that Lewin-VHI accounted for aging of

the baby boom population (i.e., a faster growth

of the elderly population that tends to use more

health services), while the Clinton Administration did not,

● Lewin-VHI’s assumption that HMO premiums

would be higher than the fee-for-service premiums because HMOs require little patient

cost-sharing,

● Lewin-VHI lower adjustment for uncompensated care,’

= the fact that Lewin-VHI estimated higher unit

costs for care to newly insured persons, and

- the fact that Lewin-VHI made additional adjustments of the NHA (which was used as a

benchmark for current spending) with privatesector data sources (22).

The Growth Rate of Premiums

In addition to the differences in premium estimates in the first year of reform, another issue is

the growth rate for premiums. If the growth in premiums is much higher than projected, the federal

subsidies will increase substantially. The Health

Security Act would cap on the growth rate of premiums for the standard benefit package under the

regional alliances such that it would not exceed

the population growth and inflation factors specified in the legislation.

The Clinton Administration’s subsidy estimates were based on the assumption that under reform premiums would grow only at the rates specified in the Health Security Act. CBO also

assumed that the growth rate of premiums under

the regional alliances would not exceed the legislated level. In other words, the premium limit set

forth in the Health Security Act would be 100 percent “effective.” Although CBO discussed the uncertainty of the impacts of the limits on the quality

of care and access to care it did not elaborate on

why it assumed the premium limit would be 100

percent effective.8

As detailed in a separate OTA report (45), Lewin-VHI assumed the premium cap would be

about 85 percent “effective” (21). According to

Lewin-VHI, the aging of the baby boom generation and the higher failure rate of health plans in

the regional alliances would force the premiums

to grow above the proposed target rates.

Analysts’ assumptions about the effectiveness

of the premium limit were based large] y on a judgment of how the various cost control mechanisms

are designed and whether they will support the

limit specified in the legislation. As discussed in

the previous OTA report Understanding the Estimates of National Health Expenditures Under

Health Reform, there is evidence that some government cost-control mechanisms have reduced

the growth of certain type of expenditures (45).

Analysts may have taken this evidence into con7 Currently, private sector premiums reflect some of the costs to providers of uncompensated care due to cost-shifting. Presumably, with

universal coverage these costs would no longer exist. In their calculation, Lewin-VHI assumed that only hospital uncompensated care would

disappear under reform while the Clinton Administration assumed that both hospital and physician uncompensated care would disappear.

s CBO’s ~tlona]e for the l(X) -Wrcent effectiveness rating may be based on the fact that the Health Security Act not only specified the pr~~cess for setting the initial premiums and the premium targets in subsequent years, it also went further to define the “penalties” for breaching the

premium targets.
— —. . -

16 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

sideration. However, there is currently no direct

empirical evidence to validate the effectiveness of

premium limits per se in containing the growth of

health care costs, or, more specifically, the increases in health alliance expenditures.

Eligibility and Behavioral

Responses to Subsidies

Estimates of total federal subsidies also hinge on

assumptions about the behavioral responses to the

subsidies, which in turn affects the estimates of

the numbers of families and firms eligible for subsidies. These issues place a great demand on the

data system, especially in the case of estimates of

employer subsidies. 9 There is, however, no consensus among analysts on the appropriate sources

for firm-level data for the estimation of employer

subsidies.

To estimate the employer subsidies, the Clinton

Administration used the CPS and imputed an average wage per worker (50). In contrast, CBO obtained the firm-level payroll information from the

Census Bureau’s 1990 County Business Patterns

data, adjusted for the growth in employment and

wages over time (38). CBO suggested that the

Clinton Administration’s method of imputation

understates the variation in average wages among

firms and led to an underestimate of the baseline

number of workers in the firms eligible for subsidies (38). Lewin-VHI has suggested that CBO’S

method overestimates the costs of the subsidies by

underestimating the number of low-wage workers

who are in single family households (and therefore would receive lower subsidies).

CBO assumed that the subsidy provisions

would create incentives to cluster, or sort, lowwage workers into firms with lower average payroll to minimize premium payments and maximize federal subsidies.10 Although empirical

research is lacking, CBO assumed that such sorting would affect 20 percent of the workers potentially eligible for the subsidies within the 10-year

period after reform. CBO did not present any additional rationale for this particular assumption.

The Clinton Administration, in its estimates of

the cost of the subsidies, did not directly model the

effect of behavioral responses to the subsidies.

Rather, its estimates rely upon a separate allowance, or “cushion,” equal to 15 percent of the estimated total subsidy. The Clinton Administration

suggested that this 15-percent contingency would

cover potential behavioral responses to the subsidies. There is, however, no explanation in the

Clinton Administration’s document why it chose

this particular figure. In a personal correspondence with OTA analysts, a Clinton Administration official indicated that the 15 percent figure

was derived from two factors. First, an assumption that under health reform there could be

changes in employment patterns such as greater

“outsourcing.” Second, the potential impacts on

subsidy costs were estimated with an alternative

assumption of 2 percent unemployment under

health reform (6).1 ]

Lewin-VHI’s document did not clearly indicate

whether it incorporated behavioral responses in its

estimates of the employer subsidy.

1 Expenditures for New Benefit Programs

The Health Security Act would establish two major new benefits: prescription drug reimbursement under Medicare Part-B and federal grants to

the states to provide community-based long-term

care for individuals with severe disabilities. The

degree of variation across analysts’ estimates of

the cost of new benefits depends, in part, on the

9 Because we Hea]~ security Act capped employers’ premium spending on the basis of average payroll and firm SiZe, infO~atiOn on the

distribution of average payroll across different firm size is a crucial element in the estimates of employer subsidies.

10 ~is is ~ause we Hea]~ securi~ Act cap~d the employers’ premium payments (to the regional alliances) on a sliding SCde from 7.9 to

3.5 percent of the payroll. As the size and average payroll of the firm decreased, the levels of federal premium subsidies would increase.

I I me Administm[ion co~espondence, however, did not identify the magnitude of the outsourcing effect that the Clinton Administration

had assumed to formulate the level of “cushion.” Additionally, the 2 percent unemployment effect does not reflector capture the (specific)

behavioral responses pertinent to the premium subsidies,
Chapter 2 Estimates of the Health Security Act | 17

way the programs are designed and the payment

mechanisms specified in the legislation.

Differences in Analysts’ Estimates:

Medicare Drug Benefit

Analysts’ estimates of the Medicare Part-B prescription drug benefit represent less than one-fifth

of the estimated new federal expenditures proposed under reform. In absolute monetary terms,

the largest difference in analysts’ estimates is less

than $14 billion for the six years from 1995

through 2000. In relative terms, as shown in table

2-3, the Clinton Administration’s estimated costs

of the Medicare drug benefit program are much

higher than Lewin-VHI’s, and slightly lower than

CBO’S.

The estimates of federal outlays for the Medicare Part-B prescription drug benefit are determined by three factors:

●

✘

■

the baseline expenditures for prescription drugs

by the potential beneficiaries,

the assumption about the demand elasticity for

prescription drugs (i.e., the inducement effect

due to insurance coverage), and

the number of eligible beneficiaries and the participation rate of the eligible population.

The estimates of the Medicare drug benefit illustrate how even when analysts’ estimates are

close, they may still be subject to some uncertaint y. The Clinton Administration, for example, used

a lower baseline expenditure for prescription

drugs but a much larger demand inducement effect

than CBO. Although both inputs differ from

CBO’S inputs, they tend to offset each other and

thus CBO and the Clinton Administration arrived

at similar estimates. Using the Clinton Administration’s lower baseline expenditures and CBO’S

lower demand inducement effect would result in a

lower projection of the federal expenditures than

the Clinton Administration has estimated. Similarly, using CBO’S higher baseline expenditures

and the Clinton Administration’s higher demand

inducement effect would result in a projection of

expenditures even higher than the $73 bill ion estimated by CBO.

Baseline Expenditures for

Prescription Drugs

Analysts’ estimates of baseline spending for prescription drugs by Medicare beneficiaries are

based on data reported in the 1987 NMES. The

figures are adjusted for the increases in prices and/

or utilization between 1987 and the base year of

Lewin-VHl vs.

CBO vs. Clinton Clinton Lewin-VHl

Benefit Clinton Congressional Administration Administration vs. CBO

provisions Administration Budget Off ice Lewin-VHl s (“/0) $ (“/0) $ (%)

Medicare prescription $691 $73 $593 $39 (56 %) -$98 (-14 2%) -$137 (-18 8%)

drug benefit

Community-based 567 61 64.7 4.3 (7.6) 80 (14 1) 37 (6 1)

long-term care

benefit program

Total 1258 134 124,0 82 (66) -18 (-1 ,4) -lo (-7 5)

SOURCE Off Ice of Technology Assessment, 1994, based on data from Lewm-VHl, Inc , The Financial Impact of the Health Security

Act (Fairfax, VA. Dec 9, 1993), U S Congress, Congressional Budget Office, An Ana/ysls of the Administrations Health Proposal

(Washington, DC February 1994), U S Executive Office of the President, Off Ice of Management and Budget Budget of the U S

Government, 1795 (Washington, DC U S Government Printing Office, February 1994)
..

18 | Understanding Estimates of the Impact of Health Reform on the Federal Budget

the projection.

12 Since all analysts have obtained

the data on prescription drug spending from the

same data source, their estimates of baseline expenditures presumably would not differ significantly. CBO, however, reported that its estimated

baseline expenditures are higher than those of the

Clinton Administration (38). CBO’S higher baseline prescription drug expenditures may result

from its adjustment for underreporting that it believed existed in the 1987 NMES data. Neither the

Clinton Administration nor Lewin-VHI reported

making any sort of adjustment for underreporting

of prescription drug expenditures.

Demand Elasticity for Prescription Drugs

Not all Medicare Part-B beneficiaries have private

supplementary insurance that covers prescription

drugs. Thus, analysts have to account for the additional demand for prescription drugs that insurance would induce among those previously without prescription drug coverage. Analysts differed,

however, in how they accounted for this inducement effect.

The Clinton Administration assumed that each

dollar of new Medicare prescription drug coverage would induce an additional 60 cents of prescription drug spending (50).

CBO based its estimate on its earlier study of

the Medicare catastrophic drug insurance program (28), which suggested that different “inducement effects” must be considered for three

separate groups of Medicare enrollees: 13

~ Those who already have prescription drug coverage, either through Medicaid or private supplementary insurance, would not increase their

utilization of prescription drugs.

● Those with supplementary insurance to cover

the copayment and deductible for physician

8

services but no drug coverage would increase

their use by 7 percent.

Those without any supplementary insurance

would increase their use by 60 percent.

Clearly, the Clinton Administration has assumed a much higher inducement factor than

CBO for Medicare beneficiaries who currently

have supplementary insurance to cover the copayment and deductible for physician services but no

coverage for prescription drugs (60 versus 7 percent). There are no differences between the Clinton Administration and CBO in their assumptions

about the inducement effects for the other two

groups.

Lewin-VHI used a somewhat different approach to estimate the additional demand and

spending for prescription drugs by Medicare

beneficiaries currently without drug coverage. Lewin-VHI used information on prescription drug

utilization by Medicare beneficiaries who had private prescription drug coverage before the reform

as a reference to adjust for the prescription drug

utilization of those previously without prescription drug coverage. 14 The different approach

adopted by Lewin-VHI may account for the difference between Lewin-VHI’s estimate and those of

CBO and the Clinton Administration (nearly$14

billion and $10 billion). However, Lewin-VHI did

not report the inducement effect implied by their

analysis so the source of the difference is difficult

to isolate.

Participation Rate Among

Potential Beneficiaries

The Clinton Administration assumed that 500,000

high-income Medicare beneficiaries would disenroll from Medicare Part-B because of the proposed increase in premiums, while all of the reIZ An~ysts have used different years as their base year for projection. Both the Clinton Administration and CBO used 1994 as their base

year. Lewin-VH1 adjusted its 1987 expenditures to 1992 figures.

13 me 1989 CB() Smdy based its conclusions on the Rand Health Insurance Experiment. See CBO (28) for details.

14 ~wjn-vH] ba=d jtS estimates on tie He~th Benefits simulation Model (HBSM) it had deve]oped. &pending On whether my actual

service utilization occurred, the adjustment of utilization can either be based on a her-decking technique or on a Aqdicafing approach. For a

detailed description of the Health Benefits Simulation Model, see Lewin-VH1 (13).
Chapter 2 Estimates of the Health Security Act | 19

maining beneficiaries would be covered by the

new prescription drug benefit. Neither CBO nor

Lewin-VHI considered the possible disenrollment

effect, but rather assumed that all Medicare Part-B

beneficiaries would remain in Medicare Part-B

and accept and participate in the drug benefit program.

Differences in Analysts’ Estimates:

Long-Term Care Benefit

As in the case of estimates for the Medicare drug

benefit, analysts’ estimates of the proposed community-based long-term care program represent

less than one-fifth of the estimated additional

federal expenditures under the Health Security

Act. As shown in table 2-3, in absolute terms, the

largest difference among analysts’ estimates is $8

billion for the period from 1995 through 2000.

There is, however, one major difference between the Medicare prescription drug benefit and

the new long-term care program for severely disabled individuals. The former is essentially part of

an entitlement program, while the latter is designed as a federal grant program to states. The

total amount of federal appropriation and the

phase-in schedule for the long-term care program

are specified in the Health Security Act. For the

fiscal years from 1995 through 2000, the states

would receive $4.5 billion, $7.8 billion, $11.0 billion, $14.7 billion, and $18.7 billion, for a sixyear capped total of $56.7 billion. ’s The Clinton

Administration used these figures as its estimates

of the federal outlays for the long-term care program.

Since total federal spending for the program

would be capped, one might assume that the estimates of federal expenditures would be the same.

CBO, however, stated that federal spending for

the long-term care program would be higher than

the amount prescribed in the legislation. According to CBO, states would spend about one-fourth

of their savings from the elimination of their longterm care expenditures under Medicaid on other

optional Medicaid services not mandated by the

federal government. As a result, the government

would have to spend more matching funds on the

Medicaid program. Whether states would actually

respond as CBO assumed is not certain.

Lewin-VHI stated that its figures for the longterm care program expenditures were the amounts

budgeted in the legislation. Nevertheless, LewinVHI’S numbers differ from those in the legislation

by $8 billion. One explanation for the discrepancy

is that Lewin-VHI’s figures include other outlays,

such as tax incentives for long-term care and other

provisions that liberalize the Medicaid personal

needs allowance. Another explanation is that the

figures represent Lewin-VHI’s own estimates of

federal expenditures for the program instead of the

budgeted amounts stated in the legislation as suggested in the Lewin-VHI document.

Potential Variations in Estimates

of the Long-Term Care Program

Although the long-term care program is not an entitlement program for individuals under the Health

Security Act, the Clinton Administration has based

its capped budget amount on the assumption that

IS ~ls cap~d budget amount dc~s not include the effect of state transfers of Medicaid enrollees to the new program, which was estimated

separately to have a $13 billion to $14 billion offset effect. The capped budget amount also does not include the additional federal outlays from

tax incentives for long-term care and other provisions that liberalize the Medicaid personal needs allowance, which the Clinton Administration

projected at approximately $5.5 billi(m from 1995 through 2000(5 I ).
20 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

the program would provide benefits to all participating eligible individuals.l6 The expenditures

were derived from the estimated participation

rates and average annual costs across population

groups with different underlying disabil- ities.

However, all the input parameters in the Clinton

Administration’s estimates, especially the size of

the severely disabled population, are likely to be

subject to uncertainty.

17 If analysts used different

assumptions for any of the input parameters, they

would arrive at different estimates of the expenditures for the long-term care program.

The three estimates reviewed here suggest that

analysts do not perceive the long-term care benefit

as an entitlement program. Because the long-term

care benefit is a capped federal-to-state grant program, assumptions about eligibility, utilization,

and costs per unit of service are not relevant toestimate federal spending. However, if the size of

the eligible population is understated while federal funding is capped, services for part of the eligible population would have to be denied, or the

states would have to decide whether to provide the

benefits out of their own funds. Hence, the initial

estimates of the size of the eligible population

could become extremely important for federal and

state policy makers.

I Savings from Existing Public Programs

(Medicare and Medicaid)

To provide funding for the new benefit programs,

the Health Security Act would increase Medicare

Part-B premiums, establish a new Medicare Hospital Insurance (HI) tax for state and local government employees, reduce Medicare payments to

hospitals and physicians through numerous

changes in the current reimbursement formulas,

and increase Medicare patient cost-sharing for

certain services.18

Medicaid would be substantially restructured

under the Health Security Act. Current Medicaid

noncash recipients would be excluded from Medicaid coverage and incorporated into the regional

alliance health plans (with income-based premium subsidies from the federal government).

The individual mandate provision would require

individuals who are no longer eligible for Medicaid coverage and not covered by employmentbased insurance to purchase private health insurance. Most other beneficiaries would maintain

their Medicaid coverage under a capitated payment system in the regional alliance health plans.

The growth of Medicaid costs would be limited to

the growth of insurance costs in the private sector

16~e C]inton Ad~i~iSt~ation estimated that there am 3.1 million severely disabled individuals who would be eligible for the long-te~ ca~

benefit, with the elderly accounting for about 73 percent of the eligible population, the mentally disabled 9 percent, and others about 18 percent

(50).

17 Mmy factors, including the validity of the sumey data used to identify and project the population with Severe disability, and the Stringency and enforcement of eligibility criteria, would affect the baseline estimates of how many individuals among different population groups

would be eligible for the benefit. OTA is currently conducting a separate study on the eligibility criteria of the federally-mandated long-term

care program.

18 Major Chmges ~ Medlcam payments to Providem p~scribed in the Hea]th Secutity Act include: reducing capital payments to hospitals;

lowering indirect medical education adjustment payments to hospitals; reducing in the hospital market basket index update factor; and limiting

the growth of physician payments to the growth rate of gross domestic product. In addition, payments for disproportionate share hospitals,

which are additional payments to hospitals that serve a disproportionate share of low-income beneficiaries, under Medicare (and Medicaid) will

be eliminated due to universal coverage. The Health Security Act would also impose a 20-percent and 10-percent patient cost-sharing for laboratory and home health services, respectively.
Chapter 2 Estimates of the Health Security Act | 21

Lewin-VHI vs.

CBO vs. Clinton Clinton Lewin-VHl

Medicare and Ciinton Congressional Administration Administration vs. CBO

Medicaid savings Administration Budget Office Lewin-VHI $ (%0) s (%) $ (%)

Reduced payments $88 4a $81 $79.9 -$74 (-84%) -$85 (-9.6%) -$1.1 (-1 4%)

to providers

(Medicare)

Additional Part-B 17 6a

15 14,9 -26 (-15) -2.7 (-15) -01 (-o 1)

premium/Hl tax

(Medicare)

Imposing patient 162 15 270 -12 (-74) 108 (66 7) 12 (80)

cost-sharing

(Medicare)

Others (Medicare) 22a 3 2.1 08 (364) -01 (-4 5) -09 (-30)

Total Medicare savings 1183 1 12b 1239 -63 (-53) 56 (4 7) $11.9 (106)

Total Medicaid savings 608 54 667 -68 (-11 2) 59 (9 7) $127 (235)

a The Clinton Administration's February 1994 document did not provide information on these separate sources of savings For Illustrative purposes,

the three iftgures shown here are drawn from the Administration's December 1993 estimates Figures from the February 1994 estimates, If available,

would be lower than what are shown here

b Total savings shown are lower than the sum of individual savings sources due to rounding

SOURCE Off Ice of Technology Assessment, 1994, based on data from Lewln-VHl, Inc., The Fmancial Impact of the Health Security

Act (Fairfax, VA Dec. 9, 1993), U S Congress, Congressional Budget Office, An Analysis of the Administration's Healfh Proposal

(Washington, DC February 1994), U S Executive Off Ice of the President, Off Ice of Management and Budget, Budget of the U.S.

Government, FY95 (Washington, DC U S Government Printing Office, February 1994)

because the beneficiaries would be insured

through the health plans within the regional alliances. Disproportionate share hospital payments

(DSH) would be eliminated.19 States would be required to return to the federal government savings

realized from transferring certain beneficiaries out

of Medicaid to the regional alliances.

Differences in Analysts’ Estimates

Medicare and Medicaid savings represent a significant portion (about one-half) of the estimated

source of funds under reform. As shown in table

2-4, the Clinton Administration, CBO, and Lew in-VHI estimates of savings from both Medicare

and Medicaid are reasonably close. CBO’S and the

Clinton Administration’s estimates of Medicare

savings differ by only approximately $6 billion, or

5 percent, while their estimates for Medicaid savings differ by approximately $7 billion, or 11 percent, for the period from 1995 through 2000.

There are, however, some variations in the projected savings from specific sources. Lewin-VHI,

for example, projected substantially higher Medicare savings from patient cost-sharing for laboratory or home health services than either the Clinton Administration or CBO. Lewin-VHI’s higher

estimates of Medicare savings from patient costsharing may have resulted from a much larger demand elastic it y for the laboratory and home health

services than that assumed by the Clinton Administration and CBO. However, none of the three indicated what demand elasticity they used.

19 DiSprfJp(Jrtl{)nate share hospital (DSH) payments are payments provided by Medicare and Medicaid to hospitals that serve a dispr(~p(~rti(mate share of low-income beneficiaries. The Health Security Act proposes the elimination of payments for DSH based on the assumption that

under reform insurance coverage will be universal and hospitals will not be burdened by uncompensated care for the uninsured population.

Hence, there will be no need for the special payment factor currently added to the payment fomm]a for the DSH hospitals.
22 | Understanding Estimates of the Impact of Health Reform on the Federal Budget

The Clinton Administration projected much

higher Medicare savings from reducing payment

to providers than CBO and Lewin-VHI. It may be

that the Administration assumed higher growth

rates for the Medicare baseline expenditures than

CBO and Lewin-VHI and thus estimated greater

savings from the reduced payments.

ESTIMATES OF FEDERAL REVENUES20

| Revenues from New Taxes

The Health Security Act is expected to bring in

additional tax revenues from:

● a 75-cent per pack increase in the federal excise

tax on cigarettes and an additional excise tax of

$12.5 per pound of tobacco content for other tobacco products;

● additional individual and corporate income

taxes because of higher individual income and

corporate profit resulting from lower health insurance premiums and lower out-of-pocket

health care expenses;

• I -percent payroll assessment from corporate alliances; and

■ a temporary assessment on employers for early

retiree subsidies.

Differences in Analysts’ Estimates:

Tobacco Taxes

Analysts’ estimates of the additional federal revenues from tobacco taxes represent an important

funding source under the Clinton Administration’s reform proposal (15 to 20 percent, depending on different analysts’ estimates). Table 2-5

provides an overview of three different estimates

of various new tax revenues under the act. As

shown in this table, analysts’ estimates of tobacco

tax revenues are basically the same. CBO and Lewin-VHI’s estimates only differ by 1 to 2 percent

from those of the Clinton Administration.

The estimation of tobacco tax revenues is essentially based on three major pieces of information: baseline tobacco consumption, the new

product prices resulting from additional taxes, and

the reduction in tobacco consumption following

higher prices. The major source of uncertainty in

this case is how consumers will respond to higher

prices.

Lewin-VHI suggested that, based on an estimated -0.4 price elasticity of demand for cigarettes, the additional tax would decrease demand

for cigarettes by 18 percent. Although neither the

Clinton Administration nor CBO indicated what

they assumed about the price elasticity of demand

for tobacco products, the agreement of the three

estimates suggests that analysts adopted similar

assumptions about the magnitude of consumer response.

Even though analysts appeared to agree on their

estimates of the revenue effects of a 75-cent excise

tax on cigarettes, one should view the estimates

with caution. First, a 75-cent per pack or larger tax

increase falls outside the range of current U.S. tax

rates on tobacco products. Extrapolating consumer behavioral responses (with a constant elasticity

assumption) outside the existing tax rate range

may underestimate the decline in consumption because the elasticity of demand for cigarettes presumably would fall with higher prices (i.e., a demand elasticity of less than -0.4 may have to be

assumed). As a result, analysts’ estimates of the

ZO me estimtes of federal revenues within the federal agencies are generally performed by different agencies that generated =tirnates for

expenditures. Within the executive branch, revenue projections are traditionally done by the Treasury Department. Within the legislative

branch, revenue projections are performed by the Joint Committee on Taxation (JCT). Since the discussion of health care reform has largely

been focused on the expenditure-related issues, substantially less information is available regarding the revenue effects under the Health Security Act. The Clinton Administration’s primary documentation on the federal budget effects of the act (50), for example, was devoted in its entirety

to expenditure-related items. A recent document released by the Treasury’s OffIce of Tax analysis, Estimating [he Impacl of Healrh Reform on

Federal Receip/s (49), discusses only the general methodology of revenue projection used by the Department. The document provides no actual

projection figures. This OTA report draws the Clinton Administration’s revenue projections from the FY 1995 budget proposal (51). CBO’S

estimates of the revenue effects under the Health Security Act actually come from the JCT analysis, ~umrnury and EstimatedRet~enue Effects of

Tu Provisions of rhe Administration’s Healrh Secwi~ Acf (43). The J~ analysis, however, provides only limited information about how analysts derived the estimates.
Chapter 2 Estimates of the Health Security Act | 23

Lewin-VHl vs.

CBO vs. Clinton Clinton Lewh-VHl

New tax Clinton Congressional Administration Administration vs. CBO

revenues Administration Budget Office Lewin-VHl $ (“/0) $ (Y”) $ (%)

Excise tax on $67,4 $68.5 $658 $11 (1 .6%) -$16 (24%) -$27 (-39%)

tobacco products

Effects of universal 284 24 -37 -44 (-1 5.5) -32.1 (-1 13.0) -27.7 (-1 154)

coverage, cost

containment, and

premium subsidy

Assessment for 242 8 330 -16.2 (66 9) 88 (364) 25,0 (312.5)

corporate alliances

Assessment for 114 13 121 16 (14) O 7 (6 1) -09 (-69)

retiree subsidy

SOURCE Office of Technology Assessment, 1994, based on data from Lewin-VHl, Inc , The Financial Irnpact of the Health Security

Act (Fairfax, VA Dec. 9, 1993), U S Congress, Congressional Budget Office, An Analysis of the Administration’s Health Proposal

(Washington, DC February 1994), US. Executive Office of the President, Office of Management and Budget, Budget of the U.S.

Government, FY95 (Washington, DC. U S Government Printing Office, February 1994)

revenues that would be produced by additional tobacco excise taxes may be overstated.

In addition to the effect of higher prices, smoking may also be affected by antismoking regulation. A recent study by Wasserman and colleagues, suggests that smoking behavior responds

to regulation (52). As antismoking regulations

(e.g., restrictions on smoking in public places) increase, cigarette consumption may decrease further. Furthermore, since smoking is an acquired

habit both price and regulation may work not only

to reduce the tobacco consumption of current

smokers but also to decrease the smoking population in the long run by reducing the number of new

smokers .21

Differences in Analysts’ Estimates:

Taxes on Individual or Corporate Income

Taxable income, from individual wages or corporate profits, is expected to rise if health reform reduces the growth of employer spending on health

benefits and insurance premiums (which currently

are excluded from employee’s taxable income).

However, the variation in the estimates of additional tax revenues expected under the Health Security Act illustrate the uncertainties underlying

the estimation process. Analysts’ projections of

tax revenues from income changes differ by more

than $32 billion (or, in relative terms, by more

than 110 percent) for the period from 1995

through 2000. As shown in table 2-5, both the

Clinton Administration and CBO estimate that a

substantial amount of additional tax revenues

would be generated ($28.4 billion and $24 billion,

respectively) because of higher taxable incomes

resulting from cost containment, lower premium

spending, and universal coverage.22 Lewin-VHI,

by contrast, projects no additional tax revenues

and that the federal government would in fact experience a $3.7-billion loss in tax revenues.

‘] If the smoking population decrease overtime, tobacco taxes may not be a sustainable source of revenues over an extended period of time.

The Congressional Research Service (CRS) recently undertook an economic analysis of cigarette taxes and health care reform. CRS’S study

suggests that since young smokers are more price sensitive than older smokers, long term cigarette tax revenues will fall to two-thirds of the

level of current estimates in all analyses (41).

22 me actual figure ]Isted in CBO’s rep(l~ is $25 bi]li(>n, which results from rounding the JCT’.S estimate for each year (38). The $24 billion

tax revenue reported here is derived from JCT’S more detailed analysis (43).
24 | Understanding Estimates of the Impact of Health Reform on the Federal Budget

Estimates of the potential additional tax revenues from higher personal or corporate income

can be ascertained by comparing current employer

health spending and estimated employer health

spending under the Health Security Act.23 Analysts may differ in their estimates of spending under both the current system and under reform.

The Clinton Administration estimated that,

without comprehensive reform, employer spending on health insurance premiums would increase

from $180 billion in 1994 to $303 billion in 2000.

Under the Health Security Act, employer premium payments would be only $276 billion in

2000, or $27 billion less than under current law.

Similarly, CBO calculated that all businesses together would pay $20 billion less for employee

health benefits in 2000 under the act (38). It is assumed that all the savings in premium payments

would then be subject to either corporate or personal income taxes.

Lewin-VHI estimates that under the current

system private employer health spending would

increase from $185.0 billion in 1994 to $254.2 billion in 1998 and to $293.2 billion in 2000. Under

the Health Security Act, employer spending

would be $283 billion in 1998 and $309 billion in

2000. Thus, contrary to what the Clinton Administration and CBO estimated, Lewin-VHI estimated that employers would actually spend $29

billion and $16 billion more on health benefits in

1998 and 2000, respectively. Compared with the

other two analyses, Lewin-VHI has assumed lower employer premium spending under the current

system and a higher employer spending under the

reform. 24 Since it is assumed that employers will

offset the higher spending with wage reductions,

higher premium costs result in a loss of both income and payroll taxes.25

Differences in Analysts’ Estimates:

Corporate Assessment

Under the Health Security Act, large employers,

those with 5,000 or more employees, may elect

not to participate in the regional alliances and

form their own corporate alliances. These corporate alliances would be subject to a 1-percent payroll assessment because they presumably would

benefit from reduced cost-shifting resulting from

the universal coverage provision of the Health Security Act. According to the Clinton Administration’s estimates, the assessment on corporate alliances represents more than 6 percent of the total

expected revenues to be used to fund the reform.

As shown in table 2-5, CBO’S estimate of the

revenues from the corporate assessment is nearly

67 percent less than the Clinton Administration’s,

while Lewin-VHI’s estimate is about 36 percent

more than the Clinton Administration’s. In absolute monetary terms, estimates of additional revenues from the 1-percent payroll tax range from

CBO’S $8 billion and the Administration’s $24.2

billion to Lewin-VHI’s $33.0 billion.

Estimates of revenues from the corporate payroll assessment hinge on analysts’ assumptions

about the participation rate of corporate alliances.

This in turn is determined by each firm’s own

evaluation of the relative costs of the two options

(i.e., regional versus corporate alliances), as well

23 Depending on tie assurnptj~n of how the potential savings would be distributed between employers and employees, he Savings can k

subject to either corporate or individual income taxes. In the latter case, the estimation of tax revenues would require additional information on

the distribution of taxable income across income tax brackets.

2A Lewin.VHI’s baseline estimates of emp]oyer spending apparently were based on a slower average annual Vowth rate than that used by

the Clinton Administration (approximately, 8.0 percent versus 9.1 percent, according to OTA’s calculation). Lewin-VH1 also assumeda 17 percent higher initial premium level and a higher premium growth rate than the Clinton Administration.

25 It should & noted that al~ough ~win-vH] estimated that tie higher p~mium costs and employer mandate would result in a $17.9 billion

loss of federal tax revenues, they estimated that universal coverage and premium subsidies would have a positive effect on income and are

expected to generate $14.2 billion in tax revenues. Taken together, however, Lewin-VHI estimated that the federal government would still face a

$3.7 billion loss in tax revenues from changes in premiums under the regional alliances, cost containment, premium subsidies, and universal

coverage.
Chapter 2 Estimates of the Health Security Act I 25

as such factors as corporate philosophy about employee benefits and the fact that a decision to participate in a regional alliance is irreversible. The

costs under the regional alliances reflect analysts’

estimates of average health plan premiums given

reform, while the costs under the corporate alliances reflect analysts’ estimates of baseline employer health spending and additional administrative costs. Analysts who assumed relatively high

regional alliance premiums and relatively lower

baseline employer health spending estimate a relatively larger number of corporate alliances.

The Clinton Administration did not indicate

exactly what participation rate it assumed but said

that it assumed that “most” of the eligible employers would elect to form their own corporate alliances and thus be subject to the payroll tax.

CBO est i mated that onl y a relative] y small portion of the eligible firms would find corporate alliances financially attractive. According to CBO,

a typical firm would have to be able to save at least

$800 per employee for health benefits, compared

with the standard benefit package in 1996, to consider forming a corporate alliance financially

more attractive than joining a regional alliance.

Based on data from the March 1993 CPS, CBO estimated that the firms meeting the corporate alliance criterion employ only 23 percent of the employees in eligible large firms, and the percentage

would decline further in later years.

Lewin-VHI assumed that all unionized workplaces eligible to choose corporate alliances

would do so. while the participation rate among

the non-unionized firms would depend on the relative costs of the two options.26 Overall, LewinVHI assumed that 60 percent of the eligible employers would still find corporate alliances a

financ ially more attractive option than regional alliances. Given the similarity of their premium estimates, one plausible explanation for why Lewin -

VHI and CBO estimated different participation

rates in corporate alliances is that Lewin-VHI assumed lower current employer benefit expenses

than CBO and thus higher expected savings under

the corporate alliances.

Differences in Analysts’ Estimates:

Retiree Assessment

Under the Health Security Act. early retirees aged

55 to 64 who are not working full time and are eli -

gible for Medicare at 65 would receive special

subsidies covering their employer share of the

premiums. From 1998 through 2000, employers

who benefit from the subsidy because they no

longer have to pay for these benefits directly are

required to “return” to the federal government

some of the savings realized. Specifically, the

Health Security Act would impose a temporary

assessment on employers with base period retiree

health costs. The assessment would equal 50. percent of the greater of: 1 ) the adjusted base period

retiree health costs for a given calendar year, 2) the

amount by which the employer applicable retiree health costs were reduced due to the enactment

of the Health Security Act.

Compared with other sources of funding for reform. the potential revenues from the temporary

assessment on early retiree subsidies represent a

relatively small portion of federal receipts. As

shown in table 2-5, analysts' estimates differ by as

much as 14 percent. but the absolute difference is

only $1.6 billion for the six-year period from 1995

through 2000.

Since the assessment for retiree subsidies is

based on the employers’ liabilities for- retiree

health benefits before reform. analysts’ estimates

of potential revenues from the assessment are

based on estimates of employers’ baseline retiree
— — . . -. .- -—— — . - - -

26 I Understanding Estimates of the Impact of Health

health liabilities. Variation in analysts’ estimates

thus reflect different estimates of the baseline retiree health liabilities currently borne by the employers. None of the analysts provided any detailed information on the subject.

1 Revenues from Recovered Tax

Expenditures

In addition to new tax revenues from a higher excise tax on tobacco products, and potential y, from

higher incomes and wages, the Health Security

Act would attempt to raise additional funds from

recovering certain health-related tax expenditures

under current law.27 For example, the act would

no longer allow the use of tax-exempt cafeteria

plans for employer-sponsored health benefits.28

In addition, after 2004 the tax exclusion for health

insurance premiums would be limited to the costs

of the standard benefit package. Because the cafeteria plan provision represents the major source of

revenues among all tax expenditure related provisions in the Health Security Act, the discussion

Reform on the Federal Budget

here will focus only on the cafeteria plan provision.

Differences in Analysts’ Estimates

According to the Clinton Administration, repealing cafeteria plans for health benefits would yield

nearly 8 percent of the funds needed to finance reform. As shown in table 2-6, however, analysts’

estimates of the amount of tax expenditures that

could be recovered differ significantly, both in relative and absolute monetary terms. CBO’S estimate, for example, is $21.4 billion less than that

of the Clinton Administration’s, a difference of

more than 68 percent.

Estimates of recoverable tax expenditures from

repealing the cafeteria plan for health benefits depend on:

= the baseline tax expenditures under the plan

(and the distribution of such tax expenditures

across individuals at different tax brackets),

and

CBO vs. Clinton Lewin-VHl vs. Clinton Lewin-VHl

Clinton Congressional Administration Administration vs. CBO

Administration Budget Office Lewin-VHl $ (“/0) $ (%) $ (%)

Recovered tax expenditures (from repealing cafeteria plan for health benefits)

$31.4 $10 $1 7.0 -$214 (-682 %) -$14,4 (-45 9%) $7.0 (70 o%)

SOURCE Off Ice of Technology Assessment, 1994, based on data from Lewin-VHl, Inc , The Fmancla/ Impacf of the Health Security

Act (Fairfax, VA Dec. 9, 1993), U S Congress, Congressional Budget Office, Analysis of the Administration's Health Proposal

(Washington, DC February 1994), U S Executive Office of the President, Off Ice of Management and Budget, Budget of the U S

Government, FY95 (Washington, DC U S Government Printing Office, February 1994)

~’ Acctmiing to CBO, w hich based its estimates on data from the JCT and the OMB, total federal health-related tax cxpendi[ures have grown

fr(ml $19.7 billi(m in 1980 to $44.2 billi(m in 1990, and are expected to grow K) $127.8 billiim in 2000 under current law (29). However, these

expenditures include not only the exemption of emph)ycr-paid health insurance premlurns, but also various deducti(ms such as medical expenses and charitable contributions as well as untaxed Medicare health insurance benefits.

2* Under the Health Security Act, the present-law exclusi(m for employer contributions to health benefits wtmld still be preserved. The

rationale for disallowing the use of tax-exempt cafeteria plans (and the flexible spending acctmnts) for health benefits is to limit employees”

ablllty to shelter their shares of the premiums and (mt-of-fxwkct expenses in tax-exempt funds when a tax cap for htzdth benefits is in place.
■ assumptions about behavioral responses to

changing plans.29

Although some published data exist on the

magnitude of tax expenditures associated with

employer-paid insurance premiums (29,39), no

detailed information is available on the tax expenditures associated specifically with health benefits under the cafeteria plans.30 Neither the Clinton Administration nor CBO has reported its

estimute of baseline tax expenditures associated

with cafeteria plans nor its assumptions about

whether individuals will increase other forms of

tax-exempt compensation.

If the Clinton Administration assumed that all

current health benefits under cafeteria plans

would be replaced with taxable wages, the $31.4

billion of recover-able tax expenditures it projected represents the baseline estimate of this particular ttix expenditures. CBO, by contrast, stated

only that it assumed that a fraction of the cafeteria

plan health benefits would actually end up as

wages, Compared with the Clinton Administration’s implicit assumption, CBO has assumed that

more individuals would opt for other tax-exempt

benefits rather than additional wages.

Lcwin-VHI estimated baseline health-related

tax expenditures under the cafeteria plans to be

$34.0 billion from 1995 through 2000, all of

which could be recovered if employers did not alter their employee compensation packages. However, Lewin-VHI assumed that employers and employees are likely to shift the compensation into

other nontaxable forms of benefits, such as penChapter Z Estimates of the Health Security Act | 27

sions, that could still be included in cafeteria plans

under reform. Specifically, Lewin-VHI assumed

that only half of the potentiaI revenues it projected

($17.0 billion, from 1995 through 2000) would be

realized and the other half would be shifted to other nontaxable compensation.

| Lost Revenues from New Tax

Expenditures

Under the tax code, self-employed individuals are

allowed to deduct only 25 percent of their health

insurance costs. Under the Health Security Act,

they would be allowed to deduct their health insurance premiums in full.

Estimates of baseline income tax liabilities

among self-employed individuals are unlikely to

differ significant] y. The number of people who are

self-employed, their insurance expenses, and corresponding income tax brackets can be obtained

from the Statistics of Income, an income tax database maintained by the Internal Revenue Service,

and from such other federal household surveys as

the CPS. Additionally, individual behavioral responses to this particular tax code change are unlike] y to be a major factor in analysts’ estimates of

the potential revenue lost.3

1

As shown in table 2-7, the estimates by the

Clinton Administration, CBO, and Lewin-VHI

differ at most by only about $1 billion from 1995

through 2000. Because of its relatively small effect on the overall budgetary impacts under health

reform, differences in analysts’ estimates of this

new tax expenditure does not represent an area of

particular concern.

20 The hcha~ lfwal rcsp)nscs In this respect reflect an assumption ah)ut the p)ssibil ity tha[ cn)plo) m and cmployccs m]:h[ rcplacc the hcnetits currently paid for through the cafctcria plans with other tax-exempt hencflts rather than w ]th Rage con)pcnsa(it)ns. If t)ne assunwd that (I1c

cnlplt~y cc’s total conlpensat]on” rcmaind unchanged, and the cn)plo~ cc prclcrrcd other tai-exempt hcnctlts rather than wages, there m t)uld hc

~utxtantlally lcs~ add]tlonal w age con)pmsatl(m subject to lakatltm. and accordrngl) less tal cxpcndlturcs R ould k rcco~ erd,
—.—. _-

28 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

CBO vs. Clinton Lewin-VHl vs. Clinton Lewin-VHl

Clinton Congressional Administration Administration vs. CBO

Administration Budget Office Lewin-VHl $ (%) $ (%) $ (%)

$8.9 $8 $ 7 9 -$09 (-1 0.1%) -$10 (-11 ,2%) -$0.1 (-1 .3%)

SOURCE Off Ice of Technology Assessment, 1994, based on data from Lewin-VHl, Inc , The Financial Impact of the Hea/fh SecurNy

Acf (Fairfax, VA Dec 9, 1993), U S Congress, Congressional Budget Off Ice, An Ana/ysis of (he AdrninNrafionSF/ea/fh Proposa/

(Washington, DC February 1994), U S Execuhve Off Ice of the President, Office of Management and Budget, Budget of (he U S

Government, W95 (Washington, DC U S Government Prmhng Office, February 1994)
-—

Overview

of

Selected

Issues | 3

P

revisions in the reform proposals that affect the federal

budget fall into two general categories:

■ those that affect federal outlays, such as provisions that

provide insurance premium subsidies or establish new

benefits; and

■ those that affect federal revenues, such as provisions

that impose new taxes on individuals and/or businesses.

The following discussion examines these two general budget

categories as contained in the major pieces of health reform legislation introduced in the 103d Congress. The chapter highlights

key determinants necessary to estimate budget items falling under these two categories. The discussion is not formulated around

any specific proposal. Rather, it focuses on general types of reform provisions and their implications for the federal budget.

Table 3-1 summarizes provisions in the major health reform

legislation introduced in the 103d Congress at the time of writing,

the direction of effect of these provisions on the federal budget;

and the major factors necessary to estimate the magnitude of their

effect. 1

PROVISIONS THAT AFFECT FEDERAL OUTLAYS

Federal outlays for health care under reform can change either as a

result of savings from existing public programs or increases in

spending for new benefits, new programs, or subsidies for the

purchase of private health insurance. To reduce federal spending,

nearly all major health reform legislation introduced in the 103d

1 Only bills introduced before February 1, 1994 were considered. However. the issues

raised in the chapter are relevant to many approaches to rcform and to bills Introducd after February 1, 1994.

| 29
—

COJ

o—

Federal budget-related provisions Potential budgetary effects Major determinants of estimates Reform proposals .- . .

Federal outlays

Expenditures for subsidies or Increase in federal spending Baseline estimates of income distribution by

vouchers family size

Baseline estimates of wage distribution by

firm size

Baseline expenditures for standard benefit

package

Estimated premium level and growth under

reform

Assumption about employers’ and

employees’ behavioral responses

Assumption about individuals’ demand

elasticity for Insurance and medical care

Increase in federal spending Baseline estimates of the size of eligible

population and partcipation rates

Current expenditures for covered services

Assumption about inducement effects

Assumption about future growth rates of

expenditures

Decrease in federal spending Baseline estimates of program expenditures

and growth

Assumption about providers behavioral

responses

Assumption about Individuals' demand

elasticity for Insurance and medical care

Expenditures for new benefits

Savings from Medicare and

Medicaid, and other public

health Insurance programs

Affordable Health Care Now Act of 1993

(H R 3080/S 1533)

Consumer Choice Health Security Act of

1993 (H R 3698/S 1743)

Health Equity and Access Reform Today

Act of 1993 (H R 3704/S 1770)

Health Security Act (H R 3600/S 1757)

Managed Competition Act of 1993 (H R

3222/S 1579)

American Health Security Act of 1993

(H R 1200/S 491)

Health Equity and Access Reform Today

Act of 1993 (H R 3704/S 1770)

Health Security Act (H R 3600/S 1757)

Affordable Health Care Now Act of 1993

(H R 3080/S 1533)

Consumer Choice Health Security Act of

1993 (H R 3698/S 1743)

Health Equity and Access Reform Today

Act of 1993 (H R 3704/S 1770)

Health Security Act (H R 3600/S 1757)

Managed Competition Act of 1993

(H R 3222/S 1579)

o

s

CD

(continued)
Federal budget-related provisions Potential budgetary effects

Federal revenues

Taxes on income and payrollc

Increase or no change in

federal revenue

Taxes on tobacco products

Recovered tax expendituresd

New tax expendlturesd

Increase in federal revenue

Increase or no change in

federal revenue

Decrease in federal revenue

Major determinants for estimates

Baseline taxable income and wage

distribution by tax brackets

Baseline Insurance expenditures under

current regime

Estimated premium levels (or Insurance

expenditures) and growth under reform

Assumption about behavioral responses to

higher income (e g use of other

nontaxable compensation elasticity of

labor supply)

Baseline expenditures (and consumption)

of tobacco products

Assumption about elasticity of demand

Baseline distribution of tax expenditures by

tax brackets

Baseline distribution of health benefits by

tax brackets

Assumption about behavioral responses to

higher taxes (e g use of other

nontaxable compensation elasticity of

labor supply)

Baseline distribution of tax expenditures by

tax brackets and self-employment

Assumption about estimated premiums

under reform

Assumption about costs and particlpation

rates for tax-exempt Insurance

Reform proposals —.—

American Health Security Act of 1993

(H R 1200/’S 491)

Health Security Act (H R 3600/S 1757)

American Health Security Act of 1993

(H R 1200/S 491)

Health Security Act (H R 3600/S 1757)

Health Security Act (H R 3600/S 1757)a

Managed Competition Act of 1993

(H R 3222/S 1579)

Affordable Health Care Now Act of 1993

(H R 3080/S 1533)

Health Equity and Access Reform Today

Act of 1993 (H R 3704/S 1770)

Health Security Act (H R 3600/S 1757)a

Managed Competition Act of 1993 (H R

3222/S 1579)

3 Not al I factors I Iisted here are necessary for the esimation of each provision For example the baseline estimates of wage distribution by firm IS only needed for the estimates mates of a firm 

subsidy, not an individual subsidy

b proposals are from the 103d Congress

C New tax revenues could be generated either with an Increase of tax rates or as result of higher income and wage Some reform proposals would also impose a higher tax rate on payroll or

impose a new assessment on the payroll of certain employers

d some reform proposals Would eliminate or restrict the tax exclusion of certain health care related expenses that are tax-exempt under current law Some proposals would Introduce new tax

expenditures either with a tax credit system for health care expenses or by excluding certain health care related expenses from taxable income

SOURCE Off Ice of Technology Assessment , 1994

cd

0
. — . .- . . — - - - ———— — - _

32 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

Congress propose cost-saving strategies for existing public insurance programs, especially Medicare and Medicaid.

Many proposals also call for additional federal

spending to subsidize the purchase of health insurance. In addition, some proposals would create

new benefits, such as prescription drug coverage

and long-term care, to address health care needs of

certain population groups. At the most comprehensive level, some proposals would create a national health insurance program. These provisions

would inevitably increase federal spending on

health care.

This section will focus on three general budget

items common to most of the reform proposals:

■ expenditures for insurance premium subsidies

or vouchers,

■ expenditures for new benefits and programs,

and

■ savings from existing public insurance programs.

For each item, factors that might affect analysts’ estimates or contribute to the variations in

those estimates will be identified and described.

I Subsidies or Vouchers for Health

Insurance and/or Health Care

Various reform proposals have adopted markedly

different approaches to extending insurance coverage to all or part of the uninsured population.

The American Health Security Act (H. R.1200/

S.491 ) would establish a national health insurance

program and directly involve the federal and state

governments in providing health insurance to all

legal residents. The other major reform proposals

would maintain a system largely based on private

health insurance. Some of these private insurancebased proposals have no requirements regarding

the purchase or provision of insurance, and would

rely exclusive y on various regulatory and/or market mechanisms to increase the availability and

purchase of health insurance. Others would require individuals to buy insurance and/or employers to provide insurance (individual and/or employer mandates). All the major reform proposals,

that retain the private insurance market, would

provide some level of government assistance in

the form of subsidies, vouchers, or tax credits for

those with incomes or wages below a given level. 1

Table 3-2 provides an overview of the provisions

in various reform proposals aimed at improving

access to insurance and/or health care services.

In general, additional federal expenditures that

result from helping individuals to buy insurance

are a function of the number of individuals and/or

employers who would receive the assistance (e.g.,

subsidies and vouchers) and the amount of assistance across individuals and/or firms.2 Determinants of these estimates include: eligibility for

subsidies or vouchers, behavioral responses to

subsidies or vouchers, and the premiums under reform.

1 For example, h)th the Health Security Act and the Managed Competition Act (H. R. ~22ZS. 1579) have prescribed premium subsidies for

the purchase of private health insurance. The Health Equity and Access Refom~ Today Act (H. R.3704/S. 1770) wtmld use federal vouchers to

subsidize the cost of qualified health plan premiums for h)w-income individuals. The Consumer Cht)ice Health Security Act (H. R.3698/S. 1743)

w(mld provide no direct incentive or assistance in the purchase of health insurance, but instead w(mld rely on inc(mw tax credits to offset indi -

v iduals’ health care spending (discussed in the new tax expenditures section below).

2 In additi(m, certain administrative costs will be incurred in administering the premium subsidies. The magnitude of administrative costs

related to premium subsidy program will depend on the mechanisms of payments f(w the premium subsidies used by different reform proposals.

Under the Health Security Act, for example, the disbursement of premium subsidies is made through a single lump-sum payment to the regional

alliances for the difference between alliance payments (premiums and administrative costs) and alliance receivables (employer and individual

cmm-ibutions, federal and state payments for Medicare and Medicaid beneficiaries enrolled in the alliance). Under the Health Equity and Access

Ref(~ml Today Act (H. R.3704/S. 1770), the premium subsidy is administered through a voucher system distributed to individuals, which presumably would incur much higher administrative costs.
—

Chapter 3 Overview of Selected Issues | 33

Federal policies to subsidize the purchase of

Reform proposals insurance and/or health care

Affordable Health Care Now Act of 1993 Subsidy for premium costs above 150 percent of the average premium

(H R 3080/S 1533) for individuals with pre-existing conditions.

Consumer Choice Health Security Act Federal grant to the states for health care expenditures for famlies with

of 1993 (H R 3698/S 1743) Incomes below 150 percent of poverty level,

Health Equity and Access Reform Today Federal vouchers for Insurance premiums with a phase-in schedule from

Act of 1993 (H R 3704/S 1770) 1997 to 2004 for families with Incomes between 90 to 240 percent of

the poverty level.

Health Security Act (H R 3600/S 1757) Subsidy for the “family share” of the premium for working famlies with

Incomes below 150 percent of the poverty level

Subsidy for the 80 percent share of premium for non-working families

with Incomes below 250 percent of the poverty level

Subsidy for employer premium spending 1) employers’ premium spending capped at 79 percent of total payroll, 2) additional subsidies for

smaller employers with 75 or fewer workers and average annual wage

under $24,000

Subsidy for “employer share” of premium for retired workers aged 55 to

65 not covered by Medicare

Managed Competition Act of 1993 Subsidy for full premium costs for families with incomes below 100 per-

(H R 3222/S 1579) cent of the poverty level

Subsidy for part of the premium costs on a sliding scale for families with

Incomes between 100 and 200 percent of the poverty level

aAmercan Health Security Act (H R 1200 S 491), which provides health coverage to all legal residents regardless of economic status, are not discussed here Additionally the tax credit provisions prescribed in the Affordable Health Care Now Act and the Consumer Choice Health Security Act

are discussed in the new tax expenditures section below

b proposals are from 103d Congress

SOURCE Off Ice of Technology Assessment 1994

Eligibility

The information needed to calculate the number of

individuals or organizations e] eligible to receive

subsidies will naturally depend on how eligibility

is determined. In general, the more complex the

eligibility criteria, the greater the informational

requirements. In the health reform proposals currently before the 103d Congress, eligibility criteria include: income; income and employment; and

employer size, payroll, and health spending.

In some cases information needed to determine

the size of the eligible population may not be

readily available, or analysts may disagree on the

appropriateness of certain data sources. For example, information on the distribution of employers

by firm size and average payroll is one area where

analysts use different data sources and methods

and arrive at different estimates for the number of

workers in subsidy-eligible firms (5).

Behavioral Responses to

Subsidies or Vouchers

In some instances, the eligibility criteria for premium subsidies or vouchers may encourage

changes in employment patterns or firm organization. For example, if smaller firms with lower average payrolls receive higher premium subsidies,

employers might attempt to create small subsidiary firms with lower average wages to qualify for

the higher subsidy. In this case, assumptions about

individual and/or employer responses are needed

to estimate federal spending on premium subsi-
. . .

34 | Understanding Estimates of the Impact of Health Reform on the Federal Budget

dies. Analysts may differ in how they incorporate

these behavioral responses in their estimates of the

costs to the federal government.

Health Insurance Premiums Under Reform

The estimates of baseline expenditures for the services covered by insurance provide the basis for

premium estimates under reform. The higher the

estimated baseline expenditures, the higher the

projected premium levels. When universal coverage (or expanded coverage) is provided, premium

estimates also have to reflect expenditures

associated with additional demand for health services among the previously uninsured population

and individuals with less coverage than provided

under the “standard benefit package.”3 In addition, the premium estimates under universal coverage or expanded coverage would have to account for changes in the amount of cost-shifting.

If analysts differ in their estimates of the baseline

expenditures for covered services, or make different assumptions about the magnitude of inducement effects and cost-shifting, their premium estimates and, accordingly, their subsidy estimates,

will differ.

Additionally, analysts might also differ in their

assumptions regarding the growth rate of premiums

under health reform. Analysts who assumed a higher premium growth rate than that of others would

arrive at a higher estimates for premium subsidies

or vouchers, all other things being equal.

| Expenditures Associated with

New Public Programs and Benefits

Table 3-3 provides an overview of the provisions

in various health care reform proposals that prescribe new benefits or services (e.g., preventive

care, prescription drug coverage) for existing public programs or create new “entitlement-like” programs (e.g., long-term care) for certain populations with special health care needs.

How federal expenditures would be affected by

certain new benefits depends on the characteristics of the benefits, as well as the federal government’s involvement in providing those benefits.4

In general, estimates of additional federal outlays

attributable to new benefit provisions are affected

by how analysts estimate and incorporate four parameters: 1 ) the number of beneficiaries, 2) baseline utilization and expenditures for the new services or benefits, 3) the inducement effects on the

additional demand for the new services or benefits, and 4) the growth rate of expenditures for the

new services or benefits in future years. s

~ The prt)visi(m of universal health insurance coverage w(mld essentially lower the costs of health care faced by indi~ idual c(msumcrs who

are uninsured or underinsured (i.e., have c(wcrage less than the “standard benefit package”) under the current system. Ev idtmcc fr(m} the Rand

Health Insurance Experiment suggests that the demand for serv]ces, and acc(mtingl y the associated expenditures, increases as the COSIS of services borne by individual consumers fall ( 17).

~ ]n ~ases where fcderaI Paynlents for [he new benefits are capped by a designated am(mnt in (he Iegislati(m, the issue for analysts and Policy -

makrs becomes less about expenditure estimates and rmm about whether [he p)licy objectives can actually k> achieved as originally ]n[cndcd

in the refom~ prop~sal.

5 [n cases where new agencies are needed, or new rcspmsibilitics and functi(ms have to be added to the cx isting agencies to administer the

new benefit programs, additional federal (mtlays ww.dd also be accrued for administrative functi(ms. Experience fr(m] cx isting publlc insurance

programs such as Medicare suggest, however, that addititmal federal spending for administrati(m under ref(~m] w(mld be relatively insignificant. HCFA estimated that Medicare ~werhead for administrative functions as a percentage of Medicare expenditures was only 2. I percent in

1991 ( 1,2). However. not all adminiswative costs are borne by the federal government. Depending tm the specific ref(tml pr(~visitms. cmtaln

administrative requirements may also be imposed on state governments and numerous parties in the private sector (e.g., insurers, pr(~viders, and

individuals). This report focuses only on the federal budget effects of health refornl. For a detailed discussi(m of the administrative costs issues

related to the projections of health care refom), see the OTA assessment Under.\ /andlng Esfintafcs ofNa/rwal health E~pcndlture.~ Under

I{ealth Rejwm (45).
— — —

Chapter 3 Overview of SeIected Issues | 35

Reform proposals New benefits in existing public programs or new benefit programs

Affordable Health Care Now Act of 1993

—.

No new benefits in existing public programs or new benefit programs

(H R 3080/S, 1533)

American Health Security Act of 1993 All public health Insurance programs (except the Indian Health Service

(H R 1200/S. 491) and VA) are repealed and replaced with a national health Insurance

program

Consumer Choice Health Security Act of No new benefits in existing public programs or new benefit programs

1993 (H R 3698/S 1743)

Health Equity and Access Reform Today No new benefits in existing public programs or new benefit programs

Act of 1993 (H R 3704/S 1770)

Health Security Act (H R 3600/S 1757) Medicare Part-B prescription drug benefits

Community-based long-term care program for the severely disabled

Managed Competitopm Act of 1993 (H R No new benefits in existing public programs or new benefit programs

3222/S 1579)

‘] Proposals are from 103d Congress

NOTE Changes m el!g[blllfy cnfer[a for publlc programs are not discussed here

SOURCE Off Ice of Technology Assessment, 1994

Eligibility and Participation Rate

In some cases, the baseline estimate of the eligible

population is readily available because the population is relatively well defined. Analysts need

only make an assumption as to whether all of the

eligible individuals would participate in the benefit program. This assumption may either be based

on experiences from similar programs, or when no

similar program exists, on analysts’ judgments.

In some other cases, however, estimates of the

eligible population are more uncertain. For example, estimates of the number of severely disabled

persons who meet certain eligibility criteria depend not only on the qualityty of the survey data but

also on whether the eligibility criteria themselves

can be clearly defined.6 Self-reported survey data

on the health of individuals may be subject to reporting bias and misrepresent the size of population with certain health conditions. Whether the

eligibility criteria are clearly defined in the legislation or the extent to which there is discretion (by

—

the examining physicians or other individuals) to

determine eligibility are also important factors

that can lead to an unexpected increase in the size

of the population eligible for new benefits.

Current Expenditures, Inducement Effects,

and Growth Rate

In addition to the number of participating beneficiaries, analysts’ estimates of the initial expenditures for new benefits are based on the current use

and expenditures of the services, and assumptions

about the additional demand due to lower effective prices for the services. The estimated baseyear expenditures are extrapolated to future expenditures based on analysts’ assumptions about

the growth rates of expenditures for the public

programs involved. If analysts differ in their estimates or assumptions of any of the three parameters (i.e., current expenditures, inducement effects,

and future growth rates), their estimates of expenditures for the new benefits would differ as well.
. . . . — -- -- -.

36 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

H Savings from Existing Public Programs

Many reform plans have proposed ways to

achieve savings from existing public programs,

especially from Medicare and Medicaid. In some

cases these savings are intended to help pay for

new benefits. Savings could result from reducing

payments to health care providers, increasing

beneficiaries’ premiums, increasing patient costsharing, or eliminating programs altogether.7

Analysts’ estimates of savings from existing

programs are determined by baseline expenditures, the magnitude of changes in provider payments and patient cost-sharing, and behavioral responses to the proposed changes in provider

payments or patient cost-sharing.

Growth Rates of Public Programs

Expenditures

Information on current federal expenditures for

public programs is readily available. In contrast,

analysts must estimate program expenditures in

future years based on assumptions about public

program growth rates under current law. If growth

rates are overstated, the projected savings also

will be overstated. For example, reform proposals

that tie the expenditure growth rates of public programs to general inflation will not yield savings if

spending on public programs grows at the rate of

inflation without reform. In the past, analysts have

tended to underestimate the growth rate of Medicare and Medicaid spending (30).

Behavioral Responses

Estimates of potential savings from public programs are also affected by assumptions about how

patients respond to higher copayments and how

providers respond to lower payments for particular services. Patients are likely to reduce their use

of health services when a higher copayment is required (44). Providers who face lower payments

for particular services may try to substitute nonregulated services, substitute higher-payment services, or increase the overall volume of services

they provide (20). Providers may also adjust the

coding of services. In general, analysts would

have to make assumptions about both the likelihood and the magnitude of such behavioral responses.

PROVISIONS THAT AFFECT

FEDERAL REVENUES

To help finance new benefit programs or expanded coverage, many reform proposals would seek

additional sources of revenue in addition to the

various cost-saving efforts. In most cases, the revenue would come from new taxes or restrictions

on health-related tax expenditures. Examples of

the latter include disallowing the use of cafeteria

plans and flexible spending accounts for health

benefits, s setting a cap on the tax exclusion of

health insurance premiums, and repealing the tax

exclusion of employer-paid health premiums.

7 Both the Health Security Act and the Health Equity and Access Reform Today Act (H. R.3704/S. 1770), for example, would rely on both

mechanisms to reduce federal spending in the Medicare and Medicaid programs. The Managed Competition Act of 1993 (H. R.3222/S. 1579)

also proposes to increase Medicare Part-B premiums, while at the same time repealing the Medicaid program. Both the Afftmiable Health Care

N(NV Act ( H. R.3080/S. 1533) and the C(msumcr Choice Health Security Act (H. R.369WS. 1743 ) prxpw 10 restructure and cap the grmvth of the

Mcdlcaid program and either incrcasc the Muhcarc Part-B premium or establish c(~paynwnts for h(mw health care, skilled nursing facilities, and

lah)ratory services.

8 A Cafeteria plan, as prescrl~.d in [he ]n[cma] Revenue C(tie (secti(m 125), is a benefit plan sponsored by enlph)yers where all PaflicJPatJng

employees can choose among two m more benefits consisting of cash and qualified benefits (e.g., health insurance, life insurance). Under the

provlsi(ms of sectimr 125, employers may ctmtribute flexible benefit credits that emph~yees can allocate toward the purchase of health benefits.

Employers may alst) setup salary conversion mechanisms that allow employees to pay for health insurance premiums with pretax income. In

addition, emph)ycrs may also prwvidc flexible spending accounts aih)wmg employees to contribute pretax funds fm health care expenditures.
Chapter 3 Overview of Selected Issues | 37

In contrast to provisions that would raise new

tax revenues or recover a portion of the existing

tax expenditures, some reform proposals would

reduce tax revenues from certain sources to provide incentives or assistance for purchasing health

insurance. Examples include a higher tax deductibility of health insurance premiums for the selfemployed, tax-exempt individual medical savings

accounts, and income tax credits for health care

spending.

The focus of this section is on three general revenue sources common to most of the reform proposals:

~ revenues from individual and corporate income

taxes, payroll taxes, and excise taxes on certain

commodities;

■ revenues from recovered tax expenditures;

■ revenue loss resulting from new tax expenditures.

The section will discuss issues that might affect

analysts’ estimates or contribute to the variations

in those estimates for each budget item. Table 3-1

identifies the relevant reform proposals and the

major determinants of the estimates under each

budget item.

I New Taxes on Income, Payroll, and

Certain Commodities9

Additional tax revenues from income and payroll

can result from either a higher tax rate or a larger

tax base as income and payrolls increase. Excise

taxes on certain commodities (e.g., cigarettes)

would also bring in additional revenues. Table 3-4

provides an overview of the provisions in various

reform proposals that directly increase tax liability.

The information required for analysts’ estimates depends on the types of tax revenues involved. For example, estimates of the potential

revenues from a “sin tax” on tobacco products

hinge mostly on data about current tobacco consumption and consumers’ responses to higher

prices (i.e., the price elasticity of demand for tobacco products). If information about the demand

elasticity for tobacco products is readily available,

the revenue estimation is relatively straightforward.

If health reform lowers health expenditures,

wages and corporate profits may increase and lead

to higher tax revenues. Estimates of this type of income-based tax revenue will mostly depend on

analysts estimates of health benefits spending before and after the health reform as well as how

much of the potential savings are passed through

in the form of corporate profits or employee

wages. Other things being equal, analysts who

base their estimates on a relatively lower baseline

spending would arrive at a lower level of tax revenues. Analysts who based their estimates on a relatively lower health spending under reform would

arrive at a higher level of tax revenues.

| Recovered Tax Expenditures

Under the current system, the federal government

subsidizes spending on health care and health insurance through various tax expenditures. Examples of general categories of health-related tax expenditures under the Internal Revenue Code

include: the exclusion from employee taxable income of employer contributions to workers’

health care benefits (sections 105 and 106), and

the personal deduction for a specified portion of

the health insurance premium paid by selfemployed individuals (section 162).

Many reform proposals before the 103d Congress rely on recoverable tax expenditures as a potential source of revenue. Table 3-5 provides an

overview of the provisions in various reform proposals that would recover a portion of the tax expenditures.

g me discussion here focuses cln]y t~n tax liabilities directly imposed on individuals and employers. The 1 percent aSSf3SSTTHN of grclss Premium receipts imposed on the accountable health plans, as prescribed in the Managed Competition Act (H. R.322Z S. 1579) is not discussed

here. In general, the estimate of potential revenues from this particular assessment is a function of premium levels, premium grow th rates, and

enrollment.
. ..—. —

38 | Understanding Estimates of the Impact of Health Reform on the Federal Budget

Reform proposalsc Provisions related to increase tax Iiability

Affordable Health Care Now Act of 1993

(H.R. 3080/S. 1533)

American Health Security Act of 1993

(HR. 1200/S, 491)

Consumer Choice Health Security Act of

1993 (H.R, 3698/S. 1743)

Health Equity and Access Reform Today

Act of 1993 (H.R. 3704/S. 1770)

Health Security Act (HR. 3600/S, 1757)

Managed Competition Act of 1993 (H.R,

3222/S, 1579)

No provision on new tax liability

Individual income tax rates increase from 28 to 30 percent, and 31 to 34

percent, with 38 percent being the highest tax rate,

Corporate income tax rates increase to 38 percent,

Employer Medicare hospital insurance payroll tax Increases from 145 to

7.9 percent, with no cap on wages subject to payroll tax,

No provision on new tax Iiablity,

No provision on new tax Iiablity

Impose a corporate assessment of 1 percent of payroll for corporate

alliances.

Impose a temporary corporate assessment for businesses with existing

retiree health care costs,

Increase the excise tax on tobacco products,

No provision on new tax liability.

a This table includes only speclflc provmons m the major reform proposals that prescribe an Increase jr? tax liability and have relatively larger impacts on federal revenues It does not include the Impliclt assumptions about larger lax bases due to a decrease m insurance premwms

b Whether the Insurance premiums paid 10 the federal treasury (e g , the monthly $65 long-term care premium fOr all elderly People under the

American Health Security Act) or the regional alliances (e,g , all insurance premiums for the standard benefit package under the Health Security

Act) should be considered as taxes has been subject to much discussion Although the Congressional Budget Off Ice does not cons[der premiums paid under the Health Security Act as “taxes,” It does consider premium payments paid to the regtonal alllances under a mandatory

Insurance system as government “recetpts “

c Proposals are from 103 Congress

SOURCE Off Ice of Technology Assessment, 1994.

Reform proposals Provisions related to limiting tax expenditures

Affordable Health Care Now Act of 1993 No provision on recovering current tax expenditures.

(HR. 3080/S. 1533)

Consumer Choice Health Security Act of Repeal of current tax exclusions for health Insurance premiums,

1993 (H.R. 3698/S. 1743)

Health Equity and Access Reform Today Limit the tax exclusion of health insurance premiums to a cap equal

Act of 1993 (HR. 3704/S. 1770) to the average costs of the lowest priced one-half of qualified

health plans.

Health Security Act of 1993 (H.R. 3600/S. After 2004, Iimit the tax exclusion of health insurance premiums to

1 757) benefit plans not exceeding the “standard benefit package. ”

Disallow any health benefits from the tax-exempt cafeteria plans.

Managed Competition Act of 1993 (H.R. Limit the employer deduction of health insurance premiums to a cap

3222/S. 1579) equal to the lowest priced accountable health plans, Employer

contributions exceeding the cap are subject to a 35 percent excise

tax. a

a An excise t- On employers’ Contrlbutlons m excess of the cap techmcally IS not recovering the tax expendlures recurred under the Current law

However, since the prowslon also represents an effort to hmd the tax subsidy of employer-paid health benefits, it IS included r the drscusslon of

recovered tax expenditures

b Proposals are from 103d Congress.

SOURCE Off Ice of Technology Assessment, 1994
Chapter 3 Overview of Selected Issues | 39

The information required for analysts’ estimates depends on the specific approaches used to

recover health-related tax expenditures. For example, if the tax subsidy for employer-paid health

benefits were limited through a tax cap that treats

excess benefits (relative to the tax cap) as employee income, one would need information about

the distribution of excess benefits across individuals at different income tax bracket.

A critical issue is the assumption analysts make

about how individuals and employers will respond to the proposed tax changes and whether

options for other tax-exempt benefits exist. For

example, if employers and employees could transfer the taxable health benefits or wages into other

forms of tax-exempt compensation, the amount of

recoverable tax expenditures would be limited.10

I New Tax Expenditures

To achieve various policy objectives, many reform proposals would introduce new or additional

tax subsidies for certain health-related spending.

For example, many proposals would allow selfemployed individuals to deduct their health insurance premiums in full, or make spending for longterm care premiums and contributions to

individual medical savings accounts tax deductible.11 Table 3-6 gives an overview of the provisions that would introduce new tax expenditures.

Reform proposalsa Provisions related to new tax expenditures

Affordable Health Care Now Act of 1993

(H.R. 3080/S 1533)

Consumer Choice Health Security Act of

1993 (H. R 3698/S, 1743)

Health Equity and Access Reform

Act of 1993 (H R 3704/S. 1770)

Health Security Act (H. R. 3600/S. “

today

757)

Managed Competition Act of 1993 (H. R

3222/S 1579)

Raising the tax deductibility of health insurance premiums to 100 percent

for self-employed individuals.

Tax deductibility of spending for long-term care insurance premiums.

Full tax deductibility for medical savings accounts

Income tax credits for health spending.

Income tax credits for medical savings accounts.

Raising the tax deductibility of health Insurance premiums to 100 percent

for self-employed Individuals,

Tax deductibiliy of spending for long-term care Insurance premiums.

Full tax deductibility for medical savings accounts.

Raising the tax deductibility of health insurance premiums to 100 percent

for self-employed Indviduals.

Tax deductibility of spending for long-term care insurance premiums.

Raising the tax deductibility of health insurance premiums to 100 percent

(Up to the tax cap) for self-emploved individuals.

a Proposals are from 103d Congress

SOURCE Off Ice of Technology Assessment, 1994

lo In ~eov, assumptions a~)ut the elasticity of labor supply (i.e., whether people will work more or less as a result of the change in their

income taxes) will also need to be considered. That is because, depending on the relative size of the income and substitution effects, wage

changes may affect labor supply in many different ways. Federal agencies responsible for budget estimation (e.g., OMB, the Treasury Department, CBO, and JCT) adopted a “constant gross domestic product (GDP)” assumption and required analysts to assume total employment compensati{m would remain unchanged under reform. By impl ication, the constant GDP assumption would translate into an assumption that labor

supply and demand would remain fixed (i.e., near perfect inelasticity with respect to income and price) over the budget period. See appendix B

for a more detailed discussi(m of the “constant GDP” convention used by federal analysts.

I I C{)nceptual]y, medlca] savings accounts Cm be viewed as similar to the flexible spending accounts s~)ns~)red by manY emPl~)Ye~. The

differences are that funds remain in the flexible spending account at year-end are forfeited and the flexible spending accounts are tied to employment, while the medical savings accounts are not.
40 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

The information required to arrive at the estimates of new tax expenditures will depend on the

specific type of tax expenditure proposed. For example, estimating the cost of fully deductible

health insurance for self-employed individuals

depends on three factors: the number of individuals who are self-employed, the respective income

tax brackets of the self-employed, and the distribution of additional health insurance expenses

subject to tax-exclusion across individuals in different income tax brackets.

Since self-employed individuals currently are

allowed to deduct 25 percent of their health insurance premiums, most of the baseline information

about self-employed individuals and their health

insurance premiums related to tax expenditures

presumably is readily available. The critical element that might cause estimates of the tax expenditures to vary is the amount of additional health

insurance expenses subject to tax exclusion,

which in turn depends on analysts’ estimates of

the premium levels and premium growth rates under reform.

Estimates of lost revenues from other sources

of tax expenditures are likely to be subject to

greater uncertainty than the estimates of tax expenditures resulting from the self-employed tax

deductibility provision. For example, estimates

for the tax expenditures associated with the taxexempt individual medical savings accounts

would depend mainly on: the amount of savings

being put into those accounts, and the number of

medical savings accounts across different income

tax rate groups (i.e., the participation rate).

Since individual medical savings accounts do

not exist under current law, analysts may use the

experience of other programs, such as individual

retirement accounts or flexible spending accounts, to infer the participation rate and amounts

of potential savings in the medical savings accounts programs. However these programs differ

from medical savings accounts. For example,

since funds remain in the flexible spending account at year-end are forfeited, and not all employers provide the flexible spending accounts, the

participation rate and level of flexible spending

accounts may understate both the participation

and the magnitude of savings for medical savings

accounts.

Similarly, estimates of additional tax expenditures for the favorable tax treatment of long-term

care insurance premiums will be affected by the

costs and participation across individuals at different income tax brackets. These estimates also

have to take into account the potential inducement

effects on the demand for such insurance as well as

on the utilization of related services. Since analysts may differ in their assumptions about the demand of such insurance, estimates of the related

tax expenditures are likely to vary too.
Estimates

of

Other

Reform

Proposals | 4

T

he uncertainty and variations in analysts’ estimates of the

impact of health reform on the federal budget is not

unique to the Health Security Act. This chapter provides

a brief overview of potential areas of uncertainty in analysts’ estimates of two other bills introduced in the 103d Congress: the American Health Security Act of 1993

(H. R. 1200/S.491) and the Managed Competition Act of 1993

(H. R.3222/S. 1579). So far only CBO has estimated specific provisions of these two bills. However, CBO’S analysis is likely to

highlight areas of potential uncertainty that will also influence

other analysts’ estimates of these bills.

AMERICAN HEALTH SECURITY ACT OF 1993

(H. R.1200/S.491)

I CBO’S Estimates of the American Health Security Act

The American Health Security Act would create a national health

insurance program modeled on the Canadian single-payer system. 1 CBO estimated only national health expenditures and fed1’ { I I )

‘ The House and the Senate versions of the bill are similar except that the Senate version would prohibit coinsurance or copayments on all services, while the House version

would only prohibit coinsurance or copayment for acute care m preventive services.

I 41
42 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

eral outlays under the House and Senate versions

of the bill, not the revenue effects (34,35 ).2

Compared with the estimation of the Health Security Act’s effects on the federal budget, the estimation of outlays under a single-payer system is

relatively straightforward. Under the new national

health insurance program nearly all spending currently covered by private health insurance would

be shifted to the public sector. Thus, the estimation of federal outlays can be ascertained by determining what is currently spent on private insurance coverage. A few adjustments have to be

made, however, to account for the additional demand for health care services induced by better insurance coverage, as well as for the effects of possible savings due to “simplified” health insurance

administrative structures and functions. Since the

American Health Security Act also prescribes

limits on the growth rate of public spending for

health care, the effects of such limits also have to

be taken into account.

Based on this general methodology, CBO estimated that total federal spending for the national

health insurance program (essentially federal payments to the states for covered services) would

amount to $630 billion in 1997, $939 billion in

1998, and $1.1 trillion in 2000.3 Federal spending

for the national health insurance program would

be funded mostly by an increase in income and

payroll taxes, a hospital insurance tax, and additional excise taxes on certain products such as tobacco. Additionally, part of the federal expenditures for the national program will be offset by

“savings” from repealing Medicare, Medicaid,

and other existing federal health programs.

The estimation of savings from Medicare and

Medicaid and the American Health Security Act is

relatively straightforward. The amount essentially equals the estimates of baseline spending for

the repealed programs.4 CBO estimated that baseline Medicare and Medicaid spending by the federal government would be $265 billion and $174

billion respectively, in 2000. Thus, repealing the

two programs would save $439 billion. Taking

into account this revenue effect, net additional

federal outlays under the act would be $371 billion, $556 billion, $571 billion, and $583 billion

for the four years from 1997 through 2000.

| Potential Uncertainty in

CBO’S Estimates

Conceptually the estimation of

for covered services appears

federal spending

to be relatively

straightforward, but in practice, many aspects of

the process are subject to uncertainty. Four factors

are critical to CBO’S estimate, none of which can

be estimated precisely:

‘2 A]though a few analysts have projected the economic effects of health reform under a generic single-payer system, CBO’S analysis is the

only one that has provided expenditure estimates specific to the provisions of the proposed legislation. Most other analyses focus only on national health expenditures and have not addressed specifically the issue of federal budget effects of a single-payer system. For example, LewinVH1 two analyses, “O Canada: Do We Expect Too Much From Its Health System?” (23), and NalimulHealth Spending Under A Single-Payer

Sys~em: The Canadian Approach(11 ), provide estimates only for national health expenditures and have not explicitly discussed the implications of a national health budget and changes in federal outlays. The Lewin-VH1 analyses suggest that a system of health expenditure budgets

would result in substantial savings in health spending. It estimated that if the single-payer program were to reduce the rate of growth in per-capita health spending by 1 percent each year, U.S. health spending would be reduced by$137 billion over the period from 1991 through 2000. The

estimated savings, however, are pertinent only to national health expenditures, and it is not possible to derive from Lewin-VHl estimates what

the federal budget effects would be of either a generic single-payer system or, specifically, the American Health Security Act.

J me figures p~sented here ~the projections for the House version of the bill. The projected federal outlays under the Senate version are

slightly higher, as the bill would require no coinsurance or copayments for any covered services. Also note that the substantial increase in the

additional outlays from 1997 through 1998 result from the fact that the projected figures are for fiscal years, not calendar years. While the bill is

assumed to take effeet in January 1997, FY 1997 actually includes the last three months of 19%, when the current system would still be in place.

4 Concepwally, tie only Unceflainy or vM1ation5across different estimates in such cases would be the differences in the baseline estimates

of Medicare and Medicaid expenditures and growth rates of federal spending on these programs.
Chapter 4 Estimates of Other Reform Proposals | 43

●

9

■

m

the baseline health expenditures pertinent to the

covered services and the growth rate of spending on these services,

the additional demand for health services due to

enhanced insurance coverage,

the decrease in administrative spending resulting from the simplification of insurance administration and structure, and

the likely effectiveness of expenditure limits

prescribed by the legislation.

As discussed earlier, the baseline growth rate of

health care spending is a critical factor in estimating savings under reform. Analysts who assume

different growth rate of health care spending under

current law will arrive at different projections of

savings under anew system. Similarly, behavioral

responses to changes in insurance coverage and

the extent of administrative savings under a

single-payer system are all areas of contention

among analysts.5

Rather than assume that the limits on expenditures would work as intended, CBO assigned an

effectiveness rating to the limits6 The effectiveness rating of the expenditure limits is a critical

factor for the estimates. Assigning an effectiveness score to expenditure limits is a very difficult

exercise and one that depends greatly on analysts’

judgments. 7 CBO estimated what national health

expenditures would be under the act using alternative effectiveness ratings, but they did not perform

a similar analysis for the federal budget estimate.

MANAGED COMPETITION ACT OF 1993

(H. R.3222/S.1579)

I CBO’s Estimates of the Managed

Competition Act

The Managed Competition Act of 1993 would establish regional health plan purchasing cooperatives (HPPCs), which would allow individuals

and small groups to purchase health insurance at

prices comparable to what large groups pay.8 It

would also provide subsidies to low-income families to purchase health insurance.

So far, only CBO has provided estimates of the

federal budget effects of the act (39).9 According

s For a detailed discussion (m the uncertainty associated with the potential savings from administrative streamlining, see the OTA report

Understanding Estimates of National Health Expenditures Under Health Reform (44).

G A de(ai]ed discussi[~n of CBO’S estimation methodology for the American Health Security Act appeared in a separate OTA Rpotl, underskmd[ng E.sfinwes of Natlwwl Heal[h Expenditures Under Health Reform (44). The general methodology discussed there also applies to the

estimates of federal budget effects under the American Health Security Act.

7 For a detailed discussion on the effectiveness of expenditure limits and the assignment of effectiveness scores, see the OTA report Understanding Esmnates of National Health Expenditures Under Health Reform (44).

8 Managed competition, as defined by A lain Enthoven, one of the original architects of the concept, is a “purchasing strategy to obtain max imum value for consumers and employers, using rules for competition derived from macroeconomic principles” (4). Other than the Managed

Compctitlon Act, several health reform proposals in the 103d Congress, such as the Clinton Administration’s Health Security Act

(H. R.3600, S. 1757) and the Health Equity and Access Reform Today Act (H. R.3704/S.1770), also have elements of managed competition.

g A few analysts have pr(~Vl&d estimates of the economic effects of health reform either under a generic managed COmpetitiOn System or

under the Managed Competition Act of ] 992 proposed in the 102d Congress. For example, Sheils and colleagues’ analysis, “Potential Public

Expenditures Under Managed Competition,” (22) provided expenditure estimates under a managed competition system proposed by Paul Star.

Meyer and colleagues’ analysis, Managed Compe[irion in Health Care: Can If Work? (14), provided estimates of federal budget effeets under

the Managed Competition Act of 1992. However, estimates from these analyses are not directly comparable to CBO’S estimates of the latest

version of the Iegislati(m, There are important changes (e.g., the provisions of premium subsidies for low-income individuals) between the

Managed Competition Act of 1992 and 1993 which would result in substantial differences in federal expenditures.
44 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

to CBO, the bill, if implemented in 1996, would

add $19 billion to the federal budget deficit from

1996 through 2000.10

I Potential Uncertainty in

CBO’s Estimates

Two major provisions of the act would have the

most significant and direct effects on the federal

budget. One is the repeal of Medicaid; the other is

the premium and cost-sharing subsidy to enable

low-income families to purchase and use insurance through the HPPCs.

The estimate of federal outlays for the premium

and cost-sharing subsidy is by far the most critical

element in projecting the bill’s effect on the federal budget. The level of the subsidy depends primarily on the estimated premium for the least expensive health plan in a region. Higher premiums

would inevitably increase federal outlays. The act,

however, does not specify a “standard benefit

package.” Analysts therefore are left to their own

discretion in estimating premiums.]]

In addition, estimating the number of families

eligible for the subsidy is complicated because the

act does not require employers to sponsor or contribute to insurance benefits for their employees. It

is plausible that some employers who currently

pay a substantial share of their employers’ insurance premiums may decide to drop the benefit and

shift the costs of insurance to the federal subsidy

program. Thus, the estimate of the number of eligible families depends not only on the income distribution but also on assumptions of employers’

behavioral responses.

Estimates of Medicaid “savings” can be made

simply from the estimates of baseline spending for

the program. The only potential source of variations across different projections in this case is the

baseline expenditure estimates and the growth

rates of federal spending for Medicaid. Since most

private analysts usually adopt CBO’s baseline

projections, differences tend to be negligible.

10 According t. CBO’s ~stimates, the federal deficit would be substantially higher ($189 billion from 1996 through 2~) if individuals

eligible for premium assistance were to receive the full amount of subsidies as prescribed in the legislation. However, under the funding mechanism specified in the act, the federal government would reduce the proportion of the premium subsidies it paid (for low-income people not

receiving Medicare) if the savings from Medicaid and other revenue sources failed to cover the cost of the subsidies. The resulting shortfall in

subsidies would have to be absorbed by the health plans.

I I CBO’s ~a]ysls provided two different estimates based on two benefit packages, one with comprehensive benefit identical to the “Nandard benefit package” in the Clinton Administration’s proposal, the other with limited benefits that costs 20 percent less than the comprehensive

plan. However, conceptually this is different from a sensitivity analysis that is based on two different premium estimates for the same benefit

package.
OTA wishes to thank the individuals and organizations listed below for their assistance. These individuals and organizations do not necessarily approve, disapprove, or endorse this background paper.

OTA assumes full responsibility for the background paper and the accuracy of its content.

Harold Beebout

Mathematical Policy Research

Institute

Washington, DC

John M. Bertko

Coopers and Lybrand

San Francisco, CA

Judith Feder

U.S. Department of Health and

Human Services

Washington DC

Marsha Gold

Mathematical Policy Research

Institute

Washington, DC

Donald Goldstone

Agency for Health Care Policy

and Research

Public Health Service

U.S. Department of Health and

Human Services

Rockville, MD

Michael Gutowskl

Human Resources Division

U.S. General Accounting Office

Washington, DC

Janet Holtzblatt

Office of Tax Analysis

U.S. Department of Treasury

Washington, DC

Dale Yamamoto

Hewitt Associates

Lincolnshire, IL

Roland McDevitt

The Wyatt Company

Washington, DC

Wilbur Steger

Consad Corporation

Pittsburgh, PA

| 45
Appendix B:

General Description

of the

B

Budgetary

Process1

The federal budget is produced through the

cooperation of many offices in the government.

Within the executive branch, the Office of Management and Budget (OMB) is officially responsible for the overall projection of the budget, although numerous agencies and departments play

important roles. At the basis of all budget estimates is the macroeconomic forecast produced by

OMB, the Council of Economic Advisers, and the

Treasury Department, which is represented for

this purpose by the Office of Economic Policy.

The group is informally referred to as the “Troika.”

On the expenditure side, OMB must perform

many more functions than in the revenue process,

where it mainly takes the numbers provided by

Treasury and collates them into the overall budget. Because OMB has expertise in many of the expenditure functions, it generally collects, collates,

and checks for consistency on the expenditure

numbers (gathered from numerous agencies) in

the budget process. OMB even directly forecasts a

few expenditure items. The process is a two-way

street. Specific departments such as Defense,

Health and Human Services, and Education, for

instance, provide various levels of input into the

macroeconomic assumptions. To a large extent,

the expenditure forecasts are developed within

each department and the information is collected

and integrated by OMB.

Given a particular forecast, receipts are estimated by the Office of Tax Analysis in Treasury.

Payroll tax estimates are developed in conjunction

with the Social Security Administration (social

insurance payroll taxes) and the Department of

Labor (unemployment insurance). OMB does not

change the revenue estimates provided by Treasury. These forecasts can be changed indirectly,

however, by modifying the underlying macroeconomic assumptions.2

In Congress the budget estimation process is a

bit different. The Congressional Budget Office

(CBO) and the Joint Committee on Taxation

(JCT) dominate the estimating process in the same

] This appendix is adapted from the appendix in an OTA contractor paper for this project by Steuerle and Wallace (24).

2 me foreca~k may Present a more or less ~sjtlve view of tie fu~re. For example, a decrease in the forecast for inflation CMI lead to a

forecast of lower government spending .On the revenue side, a change in the forecast for interest rates can significantly alter the forecast of

investment and consumer spending.

46|
Appendix B:

way that OMB and Treasury do in the executive

branch. Revenue estimates for bills generally are

made by JCT, just as the Treasury provides such

estimates for the executive branch. CBO is responsible for the congressional estimates and

analysis of the federal budget. CBO often derives

its expenditure estimates from data provided by

the expenditure departments of the executive

branch and OMB. Because CBO’s staff is relatively small, it relies mainly on JCT and Treasury data

for the revenue aspect of the budget estimates. In

point of fact, all of the estimators at Treasury, JCT,

OMB, CBO, and relevant executive departments

communicate closely with each other, and their estimates of federal receipts and outlays are usually

quite similar.

One difference between the executive and legislative branches is the macroeconomic forecast.

This forecast is at the heart of many budgetary

forecasts. The Troika and CBO each uses its own

sense of the future and interpretation of the output

from macroeconomic models to produce the forecast. These models, in turn, are based on historical

relationships among aggregate indicators and

forecasted trends in certain indicators. These forecasts become crucial for estimating future changes

in expenditures and taxes as a result of a bill. In

large part, the estimates are based upon past

growth trends, modified slightly for economic

cycles and demographic changes.3

OMB produces its budget near the beginning of

the calendar year mainly under “proposed services” for the fiscal year in question. OMB’S

budget baseline, therefore, includes any presidential proposal for tax or expenditure changes in the

budget year. CBO, on the other hand, emphasizes

a “current services” budget—a budget that assumes services will be maintained under the curGeneral Description of the Budgetary Process | 47

rent tax and expenditure code—since it does not

want to presume what would be enacted (or favored) by Members of Congress.4 OMB’s macroeconomic forecast, budget estimates, and revenue estimates, therefore, could end up very

different from those of CBO and JCT.

COMPONENTS OF BASELINE

BUDGET ESTIMATES

The revenue and expenditure forecasting methodologies of both branches of government are complex, and many of the components of revenues and

expenditures are interrelated. Table B-1 provides

a summary of the major inputs of the budget forecasting process. Changes to any of these components can significantly alter the resulting budget

projection. The first column of the table presents

the main components of the budget forecasting

process.

5 These inputs include: 1 ) the macroeconomic forecast, which is produced under various

assumptions about the outlook for the economy;

2) the baseline of the government programs,

health expenditures, income subject to tax, and

other variables that are developed using the macro

forecast and other models and analyses; 3) current

tax laws; 4) current law on expenditures; and 5)

the rules regarding debt financing.

The second column of the table indicates which

office produces the components, and the period

covered by the information. A number of agencies

and offices provide input to OMB and CBO for all

types of analyses. The third column shows the use

of the inputs in the overall budget process. The last

column contains commentary on each input.

Expenditure and revenue forecasting depend

on assumptions about the distributions of income

and employment. Many of these assumptions in3 Despite adjusting for past cyclical patterns of economic growth, macroeconomic forecasts by tradition contain no future recessions.

4 It is not always easy to figure out what to include in either budget. This has been especially true in recent years because Congress has

adopted requirements to reach certain aggregate targets for discretionary and other spending. CBO estimates current services, for instance, by

assuming that new legislation is enacted to meet these targets.

s Other agencies and analysts in the private sector may produce budget forecasts for their own uses. The discussion here focuses on the

methods used by OMB and CBO.
. . .- — — .—. -— —.

Component (output) —

Macroeconomic forecast including:

Income by sector

Prices (health/general iCPI)

Employment by sector

Population

Consumption

Investment, etc.

Baseline of:

National health expenditures

Health care needs

Income distribution

Distribution of age

Number of families in poverty

Income subject to tax

Capital income

Wage and salary income

Corporate profits

Other income

Current law and proposed law tax code

Definition of AGI, taxable income

Tax preferences, deductions, exemptions

Taxable income by source

Tax liability

Current law rules on nondiscretionary and

discretionary expenditures Participants

in programs (Medicaid, Medicare,

AFDC, etc.)

Total spending by type of program

Budgeted expenditures by type

Debt financing

Supplier of component

and period covered uses .- -—

OMB, CBO, private, and other forecasting firms.

OMB and CBO make 5-year projections, other firms and offices vary,

SSA makes 75-year projections.

Individual models and analysis.

Within the Clinton Administration these

include models in individual departments, CBO, private, academic,

and other modelers. Forecasted

baselines are projected for 1 to 5

years (except SSA).

IRS tax code, OMB.

Budget tax components developed by

OMB, CBO, private models.

OMB, CBO, private models.

OMB, CBO, private models.

.

As an input to produce estimates of

baseline components of expenditures and taxable income, as an

instrument to project changes in expenditure and tax policy.

Used as the baseline for many

policy simulations and budget projections. Provides an overview of

the current status of various facets

of the economy and status under

proposed legislation.

Used as the basis for the revenue

component of the budget forecast.

Used as the expenditure basis of

the budget forecast.

Listed as a separate expenditure

component of the budget.

Comments

Macroeconomic forecasts are of

various levels of sophistication, from

econometric models to relatively

simple growth models. Forecasts

are made under some assumption

regarding policy, current law, or proposed law.

The development of baseline involves estimation of behavioral responses, hitting targets of actual

data from a variety of sources including the CPS, Statistics of income (IRS). Projecting the baseline

typically includes use of some macroeconomic forecast. Baseline

models also include number of users of various services (e.g., Medicaid) and number of tax filers.

This component is used interactively

with some form of tax calculator,

and includes behavioral components for capital gains realizations,

deductions, and compliance. The

code provides definitions for taxable

income, etc.

This component is used Interactively

with specific models and analyses

for each component of expenditure.

In health, these estimates are correlated closely with estimates of national health expenditures.

This component uses, among other

items, the macroeconomic forecast

components related to Interest rates

and investment. —

KEY: AFDC = Aidto Famheswth Dependent children program, AGI - adwstedgross income, CBO = U S Congress, Congressional Budget Office, CPI = consumer price Index, CPS = current

populatonsurvey; OMB = U.S Executwe OfflceofthePresldenl, Ofhceof Management and Budget. SSA = U S Department of Health and Human Services, SOc!al Securty Admmstratlon, IRS

= U.S. Department of Treasury, Internal Revenue Serwce

0

g

Q’

3

0

a

s

CD

SOURCES: Sunley, E., and Wess, R., “Revenue Eslmatnn,” Tax Notes (June 10, 1991 ), pp 458-472, U S Congress, Joint Committee on Taxation, “Dvscusslon of Revenue Estimahon and

Methoddogy” (Washington, DC: Aug 13, 1992), U.S. Department of Treasuw, Offlceof Tax Analyses, Compendwnof T= Research 1987 (Washington DC US Government Pnntmg Off Ice,

1987); U S. Department of Treasury, OffIce of Tax Anafysm “Estlmatlng the Impacf of Health Reform on Federal Receipts, ” Washington, DC, Dec 9, 1993
i. .. . .—

Appendix B: General Description of the Budgetary Process | 49

teract. Note also the crucial role played by the actual rules, regulations, and procedures under

which taxes are collected and expenditures are

made. A slight change in what is viewed as permissible under, for example, income tax or Medicaid regulations can change estimates of the budget

deficit by billions of dollars. Furthermore, a

change in any component of the macroeconomic

forecast or other more “narrow” parameters, such

as effective marginal tax rates, can change the

budget forecast.

Many of the items listed in table B-l—for example, distribution of income by adjusted gross

income (to determine taxes), distribution of income relative to eligibility criteria in incometested expenditure programs, tax preferences, and

program participants—are estimated by using

household survey data and microsimulation models. Differences in the calibration due to use of different data sets will lead to different baselines of

income and expenditures. Tax code and expenditure rules are also put into models—i.e., these

rules are approximated by computer language—to

be able to simulate the outcomes of changes in

rules on baseline revenues and expenditures. Finally, changes in debt financing rules and interest

rates will influence the debt finance expenditure.

AN ESTIMATING CONVENTION

1 The Constancy of GDP and Other

Macroeconomic Variables

Within both the executive branch and Congress,

estimators often make estimates for bills under an

assumption of constancy for gross domestic product (GDP) and other large-scale macroeconomic

variables, such as employment and total income.

Estimators within and outside the government are

influenced differently by this convention, and

their estimates vary accordingly.

OMB and CBO typically treat proposals during

the year under a constant GDP assumption, meaning that the total change in GDP under any proposal is usually assumed to be zero. Thus, even if

there are decreases in output by one sector, they

are offset by increases in another sector. This convention is adopted for a variety of reasons, among

them the impossible task of estimating the change

in national output that would result from every bill

and amendment that comes before Congress.

Another rationale is that every bill put forward by

an Administration or Member of Congress is intended to do some “good.” To the proponent,

therefore, it must have a positive effect. In fact,

though, whether a bill is good or bad from a macroeconomic standpoint often goes beyond ‘what

can be determined scientifically.

This estimating convention has led some to

criticize the estimates as being static and to argue

that no behavioral adjustments are incorporated.

While the estimates assume that the overall level

of economic activity is not influenced by a particular proposal, the estimates do allow for such behavioral changes as sectorial shifts in employment, the composition of income, the allocation of

savings and investment, the recognition of capital

gains and other income for tax purposes, and participation rates in programs. The estimates thus

are hardly static.6

6 For a description of the dynamic elements of revenue estimating, see Nester (15).
Appendix C:

Databases Used

To Develop

c

Health Reform

Estimates

Many estimates reviewed in this report were

developed, in part, using microsimulation models. In microsimulation models, the unit of analy -

sis is an individual person and household. To develop expenditure estimates under health reform,

the models usually depict the changes in individual health insurance coverage and health care expenditures between a base case, usually current

law, and an alternative scenario with specific

policy changes.

The models simulate health expenditures under

alternative scenarios by adjusting the data for each

individual and family. To estimate aggregate

health care expenditures under alternative scenarios, expenditures of individuals and families are

simulated and then summed over all units. Data on

many different variables are required. Not all of

these data are collected in any single database.

Consequently, several different databases have

served as sources of data for health care reform estimates. Table C-1 provides an overview of the

major databases used by various analysts to develop health care reform estimates. The most important types of data and databases are the following:

Demographic and Economic Characteristics

of the Population

■ Current Population Survey (CPS) March Income Supplement

● National Medical Expenditure Survey (NMES)

Household Survey

Health Care Expenditures of Individuals

Ž NMES Household Survey

● Consumer Expenditure Survey (CES)

Health Care Utilization

● NMES Household Survey

● National Health Interview Survey (HIS)

Aggregate Health Care Expenditures over

Time and in the Future

~ National Health Accounts (NHA)

Individual Tax Characteristics and Payments

● Statistics of Income (SOI) Individual Income

Tax Returns

Health Insurance Characteristics

● NMES Health Insurance Plans Survey (HIPS)

● Health Insurance Association of America

(HIAA) Health Insurance Survey

Firm Characteristics

● County Business Patterns (CBP)

● HIAA Health Insurance Survey

Hospital Utilization and Expenditures

● American Hospital Association (AHA) Annual

Survey of Hospitals

50 I
Database Description Use in models Models used

Current Population Sponsored by BLS and BC

Survey (CPS), Monthly cross-sectional survey of 60,000 U S households

March Income Data collected Include labor force status for ages 15 and

Supplement older March CPS Includes supplementary questions on

income and employment status, and health Insurance

coverage during previous calendar year

National Medical Sponsored by AHCPR and HCFA Five rounds of data

Expenditure Survey collection between February 1987 and July 1988 for sam-

(1987) ple of 14,000 households (Household Survey), plus surveys of physicians and health care facilities providing

care to the survey sample households during 1987

(Medical Provider Survey) and of employers and insurance companies responsible for their Insurance coverage

(Health Insurance Plan Survey)

The database also Includes a survey of 13,000 residents

of institutions such as nursing and personal care homes,

psychiatric hospitals, and facilities for mentally retarded

persons (institutional Population component).

Data collected include utilization, expenditures, and

sources of payment for all major forms of medical care,

demographic and socioeconomic characteristics of respondents, Insurance coverage of respondents, information from medical providers about respondents, and access to medical care.

Consumer Expendi - Sponsored by BLS.

ture Surveys (CES) CES are specialized surveys in which the primary purpose

is to collect data relating to family expenditures for goods

and services used in day-to-day Iiving.

Data are also collected on the amount and sources of

family income, changes in savings and debts, and demographic and economic characteristics of family members

The current survey actually consists of two separate surveys the Interview Survey, where each consumer unit in

the sample IS interviewed every three months over five

calendar years, and the Diary Survey, which IS completed

at home by participating families over two consecutive

one-week periods

Serves as host database for HCFA and HCFA’s SPAM Model

CBO. In several models, including HCFA, CBO

AHCPR, and Lewin-lCF, it is matched with

1987 NMES and provides Information on Lewin-VHl’s HBSM model

Insurance status, family income, gender, AHCPR AHSIM model

age, poverty classification, family composition, race and ethnicity, sex, and employment status

Also used to age the NMES data in some

models

In the HCFA and AHCPR models, NMES IS Lewin-VHl’s HBSM model

the source for such key elements as health AHCPR AHSIM model

expenditures and utilization. HIPS, a derivative of NMES, IS used in the AHCPR model CBO

for such data elements as employer’s establishment size, industry, Iocation, and premium sources.

CES are a source of excise tax information CBO

and source of Information on individuals'

health premiums and out-of pocket health

care spending under the CBO model

(continued)
—— . —— .—

Database Description Use in models Models used

County Business

Patterns (CBP)

National Health

Accounts (NHA)

Statistics of Income

(SOI) Individual income Tax Returns

Health insurance

Association of America (HIAA) survey

Sponsored by BC. All business establishments with one

or more paid employees (except agriculture production,

railroad, most government, and household employment) in

all U.S. counties are represented. Data collected on employment, payroll, and number of establishments by employment-size classes; data tabulated by detailed industry based on 1987 edition of the Standard Industrial Classification (SIC) manual. At the three-digit SIC code level,

450,000 aggregate industry records from over 3,000

counties in the U.S. exist.

Aggregate time series database developed by HCFA.

NHA are statistics representing total national health expenditures for all goods and services relating to health

care, and the sources of payments for these goods and

services.

Developed by the IRS.

Samples of tax returns and supporting schedules are abstracted each year from approximately 100 million tax

returns; sample sizes are about 80,000 returns in even

years and 120,000 returns in odd years.

Data collected on taxpayers’ income, exemptions, deductions, credits, and taxes owed.

Sponsored by Health Insurance Association of America

The HIAA Survey was discontinued in 1993.

The HIAA survey database includes data on employee

health benefits coverage and health costs.

The HIAA database originally presented data in terms of

employee-level health benefits. In recent years the database has been weighted by national population counts of

both firms and employees, by size of firm, public versus

private firm categorization, and region.

Within the CBO model, CBP is used as a

source of wage information. Within AHCPR,

CBP is used to impute average wages.

NHA are used within the CBO, AHCPR,

HCFA, and Lewin-VHl models for benchmarking health care spending by category

SOI serve as a source for income tax information within the CBO and AHCPR models.

Used in the AHCPR model to project market

shares for FFS, HMO, and PPO plans by

region. Used by Lewin-VHl for premium

data. Lewin-VHl also uses HIAA for information on coverage of workers, average

payroll, share of individuals with family coverage, eligibility of workers, and income level. The HIAA Survey is a source for information on employment-based insurance preAHCPR AHSIM model

CBO

HCFA’s SPAM Model

AHCPR AHSIM model

Lewin-VHl’s HBSM model

CBO

AHCPR AHSIM model

CBO

Lewin-VHI's HBSM model

AHCPR AHSIM model

CBO

miums within the CBO model.

o

(continued)
Database Description Use in models Models used

American Hospital Sponsored by the American Hospital Association’s Hospi- In the AHCPR model, AHA data are used to AHCPR AHSIM model

association (AHA) tal Data Center Mailed to all hospitals, both AHA regis- segregate overall rates of growth in hospital CBO

annual survey of tered and nonregistered in the United States and its spending into components attributable to

hospitals associated areas, U S government hospitals outside Inpatient and outpatient services CBO uses

United States not Included Data collected Include a pro- AHA Surveys in Medicare cost estimates

file of services, utilization, personnel, and finances of hospitals in U.S. and associated areas -.—

KEY AHA - American Hospital Assoaatlon, AHCPR = U S Department of Health and Human Services, Public Health Service, Agency for Health Care Policy and Research, AHISM = Agency

Health Simulation Model BLS - U S Department of Labor, Bureau of Labor Statistics; CBO = U S Congress, Congressional Budget Office, CBP = County Business Patterns, CES = Consumer

Expenditure Survey, CPS = Current Population Survey, FFS - fee-for-service, HBSM - Health Benefits Simulation Model, HCFA = U S Department of Health and Human Services, Health Care

Flnanclng Admlnlstratlon, HIAA - Health Insurance Assoaation of America, HIPS = Health Insurance Plan Survey, HMO = health maintenance organlzatlon, IRS = Internal Revenue Survey,

NHA = National Health Accounts, NMES - Nahonal Medical Expenditure Survey, PPO = preferred provider orgamzatlon, SOI = Statmtics of Income, SPAM = Special Policy Analysts Model

SOURCE Lewm-VHl, Inc , The Financial Impact oflhe Healrh Secur@Act (Fairfax, VA Dec 9, 1993), Rlvlm, A M , Cutler, D M , and Nichols, L M “Flnanclng, Estlmatlon, and Economic

Effects, ” Hea/thAffafrs 13(1) 30-49, 1994, U S Congress, Congressional Budget Off Ice, AnAna/ysjs of theAdmmMratlon~ HealthProposa/ (Washington, DC U S Government Prmtlng Off Ice,

February 1994), U S Congress, Off Ice of Technology Assessment, Underslandmg Estimates of the Nat\onal Health Expenditures Under Health Reform, OTA-H-594 (Washington, DC U S

Government Pnntmg Office, May 1994)

D

u

u

m

3

n-.

;
54 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

Each model has a host database that serves as

the central source of data. The CPS serves as the

host database for the Health Care Financing Administration’s (HCFA) and the Congressional

Budget Office’s (CBO) model. NMES serves as a

host for the Agency for Health Care Policy and

Research’s (AHCPR) and Lewin-VHI’s analyses.

No one database regularly provides the majority of the variables needed to evaluate alternative

health care policies. In addition to the host database, several other databases are used piecemeal

to fill in various gaps left by the host database.

Analysts use various types of procedures to

link different databases. This in turn may lead to

differences in the estimates of different analysts.

Statistical matching is one such technique that is

used to add or impute information to one database

by using information from a different database.

Records in the two files are classified by elements

they share in common (such as age, sex, or income). Then other data elements from the records

in the “donor file” can be attached to the host file

records drawn from the same matching group.

For example, CPS has information on demographic and economic characteristics of persons

and families (including health insurance coverage

and employment characteristics), but it does not

have information on health care expenditures. In

the Health Care Financing Administration’s

(HCFA) SPAM Model, each CPS record is

matched to the record of a similar person or family

in the NMES Household Survey database (in

terms of age, sex, income, and insurance coverage), and the health expenditures data for that person or family are added to the CPS record.

All survey databases correspond to a past year

when the data were collected. (The NMES data

were collected in 1987. The most recent March

CPS data used by many analysts were collected in

1993 and provide information for 1992.) To provide estimates pertinent to the population in current or future years, the existing survey data must

be adjusted (or “aged”) to correspond to the

changes in population characteristics and other

relevant information (e.g., expenditures, income).

This is usually done in two stages. First, each record is reweighted to correspond to projections of

the population by specific characteristics relevant

to the analysis, such as age, sex, race, and insurance coverage. Most analysts adjust population

weights in their models to match population projections by the U.S. Bureau of the Census or by the

Office of the Actuary of the Social Security Administration. Second, individual income and

health expenditure data on each record are adjusted so that, in the aggregate, the totals either reflect the income growth over time or match certain

aggregate projections, such as the National Health

Accounts produced by the Office of the Actuary

of the Health Care Financing Administration.
—.

This background paper is published as part of

the OffIce of Technology Assessment’s (OTA)

study Understanding the Estimates Under Health

Reform. OTA recently published its main report,

Understanding Estimates of National Health Expenditures Under Health Reform (U.S. Congress,

OTA, 1994), which focuses on the assumptions analysts used in their estimates of the national health

expenditures under various reform proposals.

This particular background paper evaluates

major areas of disparities and potential sources of

variations in analysts’ estimates of the federal

budget effects of key reform provisions. Specifically, this paper uses three different estimates of

the Health Security Act to discuss the major determinants that may account for the differences

across analysts’ estimates. To summarize the

method used for this paper, this appendix divides

the report’s development into four sections: focus

of the study, research, analysis, and review. These

sections overlap to some extent and are not strictly

chronological.

FOCUS OF THE STUDY

The study was requested in August 1993 by OTA’s

Technology Assessment Board and Senator Ted

Stevens in response to findings in a June 1993

OTA report, An Inconsistent Picture: A CompilaAppendix D:

Method

of the

Study D

tion of Analyses of Economic Impacts of Competing Approaches to Health Care Reform by Experts

and Stakeholders. Members of the Technology

Assessment Board and Senator Stevens expressed

concern over the wide array of estimates of the

economic impact of health reform as outlined in

An Inconsistent Picture, and requested OTA to do

a followup study to assist policy makers in understanding why estimates are so variable. The

Technology Assessment Board approved the

study in July 1993, and OTA staff began working

on the project in August 1993.

OTA assembled an advisory panel to assist in

determining what issues and materials to consider

in examining economic and budgetary estimates

of reform proposals. The 14 individuals on the

panel represented a variety of perspectives and

had expertise in health policy, health economics,

quantitative analysis, economic models, macroeconomics, health care delivery, and health systems of foreign countries (see listing at the front

of this report). Joseph Newhouse, the John D.

MacArthur Professor of Health Policy and Management at Harvard University, chaired the advisory panel.

To determine the critical elements in analysts’

estimates of federal budget effects associated with

specific reform provisions, OTA staff carefully

| 55
56 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

examined documentation of available analyses.

Because estimates of federal budget effects under

the health reform are very sensitive to the specific

provisions that define the federal government’s

involvement in providing health care and insurance, OTA staff studied only estimates of specific

health reform proposals from the 103d Congress.

OTA staff also spoke to analysts, attended briefings, attended relevant congressional hearings,

and attended conferences on health reform to understand how specific reform provisions might affect the federal budget and the major determinants

of analysts’ estimates. On January 15, 1994, OTA

started its research and analysis of various estimates of the federal budget effects under health reform.

RESEARCH

OTA’S research for this background paper relied

mainly on an examination of available documentation on analyses of health reform proposals. On

numerous occasions, OTA staff also contacted

analysts for further clarification and explanation.

OTA staff members met with representatives from

the Agency for Health Care Policy and Research,

the Congressional Budget Office, the Department

of the Treasury, the General Accounting Office,

Hewitt Associates, Lewin-VHI, Mathematical

Policy Research, Inc., the Office of Management

and Budget, the Office of the Assistant Secretary

for Health, the Urban Institute, the American

Academy of Actuaries, and the Wyatt Company.

OTA staff spoke with representatives from the

Health Care Financing Administration, the Economic and Social Research Institute, and the Economic Policy Institute.

OTA also commissioned contractor papers to

assist in analyzing relevant issues and limitations

in the budget estimation process. OTA convened a

workshop of the contractors on October 1, 1993,

to discuss the relation of the various contractor papers to the study as a whole. Many of the contractor papers were reviewed externally; some will be

available from the National Technical Information Service (NTIS). See table D-1 for a list of contractor papers related to the estimates of federal

budget effects under health reform.

ANALYSIS

In its paper, OTA first proposed a framework to

examine how federal expenditures and receipts

are likely to be affected by reform provisions that

either expand or limit the federal government’s

presence in the health care market. Based on the

framework, OTA used various estimates of the

Health Security Act (H. R.3600/S.1757) to illustrate how estimates of federal budget effects under

health reform might differ and what factors would

most likely contribute to the differences in analysts’ estimates. OTA’s analysis, however, is hampered by its limited access to analysts’ models.

With a few exceptions, analysts provided only a

Kath~n Langwell, Ph. D., KPMG Peat Marwick, Washington, DC, “Employment Effects of Health Reform, ‘(June

1994,

Lynn C. Paringer, Ph. D., California State University at Hayward, Hayward, California, “Assessing the Assumptions

Behind Definitions, Projections, and Uses of Baseline National Health Expenditures, ” June 1994.

● Eugene Steuerle, Ph. D., The Urban Institute, and Sally Wallace, Ph D , Georgia State University, “Projecting the

Impact of Health Reform on the Federal Budget. A Summary of the Estimation Process and Its Limitations, ” January

1994 (NTIS #PB94-181021)

Cynthia Sullivan, Ph. D., Sullivan Research Services, Chicago, Illinois, “Strengths and Weaknesses of Employer

Health Benefits Surveys as Inputs to Microsimulation Modeling of the Effects of Health Reform on National Health

Expenditures, ” December 1993.

NOTE Asterisks md(cate those papers available from National Technical Information Serwce, Sprmgfleld, VA, (703) 487-4600.
——. — .—. —

Appendix D: Databases Used To Develop Health Reform Estimates 157

general description of their methodology, and

little information regarding the input data and estimation steps they used in their models. ] In most

instances, OTA could only analytically infer the

major factors that may have contributed to the differences in estimates based on its understanding

of the general methodology used by different analysts.

REVIEW

Upon completion of the draft paper, OTA sent the

manuscript to the study’s advisory panel and relevant outside experts (see appendix A). Reviewers

included members of organizations whose analyses were examined in this paper, as well as individuals from academia, think tanks, private consulting firms, public interest groups, the health

insurance industry, congressional support agencies, and the executive branch. Reviewers’ comments and critiques were incorporated where appropriate.

The OTA staff that prepared this report received

assistance from other OTA staff members. Meetings were held with a “shadow panel” consisting

of OTA staff from other programs with particular

expertise and interest in methods and approaches

to estimating the economic effects of health reform. Members of this panel provided helpful

comments and critiques of the analytical approach

adopted by this paper. The final draft of the report

was sent to the Technology Assessment Board on

June 25, 1994.

1 Typically, federal agencies responsible for budget estimate (e.g., Treasury, OffIce of Management and Budget, Congressional Budget Office, and Join[ Committee on Taxation) do not make available to the public information regarding the methodology behind estimates of major

pieces of legislation. Relative to the norm, federal analysts have provided more information regarding the methodology used in estimating the

effects of health care reform. However, most of the information released so far is a description of general methodology, which usually does not

help in identifying the input figures and estimation steps taken in the analysis.
Appendix E:

Abbreviations

E

and

Glossary

ABBREVIATIONS

A H A

AHCP R

AHSI M

B L S

C B O

C B P

C E S

CHAMPU S

C P S

C R S

F F S

G D P

HCFA

HIAA

American Hospital Association

Agency for Health Care Policy and

Research (USDHHS)

Agency Health Simulation Model

Bureau of Labor Statistics

(USDOC)

Congressional Budget Office

(U.S. Congress)

County Business Patterns

Consumer Expenditure Survey

Civilian Health and Medical Program of the Uniformed Services

(USDOD)

Current Population Survey

Congressional Research Service

(Library of’ Congress)

fee-for-service

gross domestic product

Health Care Financing Administration (USDHHS)

Health Insurance Association of

America

HIP S

H M O

HPP C

I R S

JCT

NHA

NMES

OMB

OTA

PPO

SOI

SPAM

USDHHS

USDOC

USDOD

USDOL

Health Insurance Plan Survey

health maintenance organization

health plan purchasing cooperative

Internal Revenue Service

(U.S. Department of Treasury)

Joint Committee on Taxation

(U.S. Congress)

National Health Accounts

National Medical Expenditure Survey

Office of Management and Budget

(U.S. Executive Office of the President)

Office of Technology Assessment

(U.S. Congress)

preferred provider organization

Statistics of Income

Special Policy Analysis Model

U.S. Department of Health and Human Services

U.S. Department of Commerce

U.S. Department of Defense

U.S. Department of Labor

58 |
Appendix E: Abbreviations and Glossary | 59

GLOSSARY

Affordable Health Care Now Act of 1993

(H.R.3080/S.1533)

A health reform proposal sponsored primarily by

Rep. Robert Michel and Sen. Trent Lott in the

103d Congress that would require employers to

offer, but not pay for, a basic health benefit plan.

The proposal includes regulation of underwriting

and rating practices in the small group market and

requirements that insurers offer three different

health plans and portability of coverage. It also includes measures to encourage development of

multiple employer purchasing groups.

American Health Security Act of 1993

(H. R.1200/S.491)

A health reform proposal sponsored by Rep. Jim

McDermott and Sen. Paul Wellstone in the 103d

Congress that would establish a single-payer national health insurance program, federally mandated and administered by the states. This program would replace private health insurance and

public program coverage. The program would

provide coverage of comprehensive health and

long-term care benefits. A national board would

establish a national health budget that would be

distributed among the states, based on the national

average per capita cost of covered services, adjusted for differences among the states in costs and

the health status of their populations.

Baseline

The state of a system before any proposed policy

change or reform. It is a benchmark for measuring

the effects of proposed policy changes. It can refer

to the expenditures, the demographic compositions, or the underlying macroeconomic factors

that are generally used as the input parameters in

estimating the effects of reform.

Cafeteria plan

A benefit plan provided by employers that allows

all participating employees to choose among two

or more benefits consisting of cash and qualified

benefits (e.g., health insurance and life insurance).

Under section 125 of the Internal Revenue Code,

employers may contribute flexible benefit credits

that employees can allocate toward the purchase

of health benefits. Employers may also set up

salary conversion mechanisms that allow employees to pay for health insurance premiums with

pretax income. Employers may also provide flexible spending accounts allowing employees to contribute pretax funds for health care expenditures.

Consumer Choice Health Security Act of

1993 (S.1743/H.R.3698)

A bill introduced by Sen. Don Nickles and Rep.

Cliff Stearns in the 103d Congress under which all

persons would be required to purchase health insurance through a plan meeting federal standards

relating to minimum benefits and rating and underwriting practices, or through a state-established health plan. Current tax exclusions for employer-sponsored health plans would be replaced

with refundable tax credits for a portion of the premium cost of qualified health insurance plans and

for other medical expenses. Employers currently

providing health benefits would be required to

convert them into added wages.

Corporate alliances

A term used in the Health Security Act

(H. R.3600/S.1757) that refers to entities created

by employers with 5,000 or more employees to provide health insurance. Corporate alliances would

have to enroll all eligible persons and provide the

comprehensive benefit package. They would have

to offer a choice of at least three health plans, one

of which would be a fee-for-service plan.

Cost-sharing

The provisions of a health benefit plan that require

the enrollee to pay a portion of the cost of services

covered by the plan, typically exclusive of premium cost-sharing (sharing the cost of a health

care plan premium between the sponsor and the

enrollee). Usual forms of cost-sharing include deductibles, coinsurance, and copayments. These

payments are made at the time a service is received

or shortly thereafter, and are only made by those

insured people who seek treatment.
60 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

Cost-shifting

The condition that occurs when health care providers are not reimbursed, or not fully reimbursed,

for providing health care and, therefore, charges to

those who do pay are increased.

Current Population Survey (CPS)

Sponsored by the Department of Labor’s Bureau

of Labor Statistics, and the Department of Commerce Bureau of the Census, the CPS is a continuing monthly cross-sectional survey of about

60,000 U.S. households. Data collected includes

labor force status for ages 15 and older. The March

CPS includes supplementary questions on income, employment status, and health insurance

coverage during the previous calendar year.

Disproportionate share hospitals

Hospitals that serve a relatively large volume of

low-income patients and therefore receive a payment adjustment under the prospective payment

system (PPS) from Medicare and Medicaid.

Elasticity of demand

The percentage change to be expected in the demand for an economic good in response to a specified percentage change in one of its determinants,

such as price or income.

Entitlement programs

Programs that provide benefits paid out automatically to all who qualify unless there is a change in

underlying law. These programs may or may not

require an annual appropriation by Congress. Social Security and Medicare, for example, are autonomous trust funds that possess the authority to

pay benefits without an annual appropriation by

Congress. Many other individual benefit programs such as Medicaid, Supplemental Security

Income, and Aid to Families with Dependent

Children programs, are all considered entitlements by Congress.

Flexible spending account

A reimbursement account under which participating employees are reimbursed for medical expenses or other nontaxable employer-sponsored

benefits. A flexible spending account can either be

part of a cafeteria plan or a stand-alone benefit

plan.

Health Equity and Access Reform Today Act

of 1993 (H.R.3704/S.1770)

A reform proposal introduced by Rep. Bill Thomas and Sen. John Chafee and others in the 103d

Congress that would require all persons to purchase coverage through a qualified health plan or

face a penalty for noncompliance. All employers

would be required to offer their employees enrollment in a qualified health plan or face a penalty for

noncompliance, No employer, however, would be

required to make contributions for coverage of an

employee. Small employers and individuals could

participate voluntarily in state-established purchasing cooperatives or select other qualified

health plans. All plans would have to offer standard benefits and would be subject to restrictions

on rating and underwriting practices. Federal subsidies in the form of vouchers would be phased in

for low-income persons, subject to savings being

achieved under the Medicare and Medicaid programs.

Health Security Act (H.R.3600/S.1757)

A proposal devised by the Clinton Administration

that would require all persons to obtain a comprehensive health benefits package from large insurance purchasing cooperatives called health alliances. Health plan premiums would be paid

through a combination of employer and individual contributions, supplemented by federal subsidies for some types of firms, early retirees, and

persons with incomes below certain levels. A national health care budget would be established for

expenditures for services covered under the comprehensive package. This budget would limit both

initial premiums and the year-to-year rates of increase that could be charged by health plans participating in the alliances. Ultimately, premiums

could grow no faster than the rate of growth in per

capita gross domestic product, unless Congress

specified a different inflation factor.
Appendix E: Abbreviations and Glossary | 61

Home health care

Items and services such as nursing, therapy, and

health-related homemaker or social services provided as needed in patients’ homes by a home

health agency or others under arrangements made

by a home health agency,

Hospital insurance tax

The Medicare program consists of two parts: the

hospital insurance (Part-A) program and the supplementary medical insurance (Part-B) program.

The hospital insurance program is financed primarily through the hospital insurance payroll tax

contributions paid by employers, employees and

the self-employed. For wages paid in 1993, the total hospital insurance tax rate is 2.9 percent of the

first $135,000 of wages. One half of the taxis imposed on the employee and one half on the employer. All wages paid after December 31, 1993,

will be subject to hospital insurance taxes. Under

current law, state and local government employees hired before April 1, 1996, are not covered under Medicare, thus are not subject to hospital insurance tax, unless a voluntary agreement is

in effect.

Induced demand

The increase in the demand and utilization of

health care services associated with an increase in

the insurance coverage for the services or other

nonprice factors.

Long-term care insurance

Insurance for medical and social services care provided by both institutional and noninstitutional

providers to persons with debilitating chronic

health conditions.

Managed competition

An approach to health reform that would combine

health insurance market reform with health care

delivery system restructuring. The theory of managed competition is that the quality and economy

of health care delivery will improve if independent groups compete with one another for consumers in a government-regulated market.

Managed Competition Act of 1993

(H.R.3222/S.1579)

A proposal sponsored by Rep. Jim Cooper and

Sen. John Breaux in the 103d Congress that would

allow states would establish health plan purchasing cooperatives (HPPCs) that would contract

with accountable health plans (AHPs), AHPs

would be required to cover a uniform set of benefits and comply with premium rating and underwriting standards. All employers would be required to offer, but not pay for, coverage in an

AHP. Small employers with 100 or fewer employees would have to participate in the HPPC;

larger employers could offer their own AHP.

Health plan expenses would be tax deductible up

to the cost of the lowest-cost basic plan in an area.

An excise tax would be imposed on employer contributions in excess of this level.

Medicaid

A joint federal/state program that provides health

care and health-related services for low-income

individuals. Medicaid regulations are established

by each state within federal guidelines, and the eligibility requirements and services covered vary

significantly among the states. In general, Medicaid pays for medical, nursing home, and home

health care for individuals who meet the eligibility

requirements. In some states, Medicaid also pays

for adult day care and in-home services such as

personal care and homemaker services. Financial

eligibility for Medicaid is determined by a means

test, in which a ceiling is placed on the maximum

income and assets an individual may have in order

to qualify for assistance. The income and assets levels are low in all states and very low in some states.

Medicaid noncash recipients

Individuals who are covered by Medicaid but do

not receive cash assistance (e.g., persons who

qualify for Medicaid as medically needy).

Medical Savings Accounts

A trust created or organized exclusively for the

purpose of paying the medical expenses of beneficiaries of such a trust.
62 I Understanding Estimates of the Impact of Health Reform on the Federal Budget

Medicare

A nationwide, federally administered health insurance program authorized by Title XVIII of the

Social Security Act of 1965 to cover the cost of

hospitalization, medical care, and some related

services for eligible persons over age 65, persons

receiving Social Security Disability Insurance

payments for two years, and persons with endstage renal disease. Medicare consists of two separate but coordinated programs--hospital insurance (Part-A) and supplementary medical

insurance (Part-B). Health insurance protection is

available to insured persons without regard to income, and is mainly funded through the U.S. Treasury and the Medicare portion of the payroll tax.

Medicare Part-B

See Medicare.

Microsimulation model

A model that essentially conducts program experiments (simulations) on large samples of microdata for individual decision units. In general

terms, the first step, which serves the same function as the control group for an experiment, is to

prepare a baseline database representing the current situation, that is, the situation in the absence

of a program change. The second step is to simulate the program change and its impact. The third

step is to summarize the differences between the

baseline and alternative program databases. Microsimulation models typically include routines

to generate the database, routines to mimic the

rules of government programs, and routines to

produce tabulations of the simulation results.

They may also include routines to simulate behavioral responses to proposed program changes.

National Health Accounts (NHA)

The National Health Accounts are statistics representing total national health expenditures used to

identify all goods and services relating to health

care, and the amount spent on these goods and services.

National health expenditures (NHE)

An estimate of national spending on health care

made up of two broad categories: 1) health services and supplies, which consist of personal

health care expenditures (the direct provision of

health care), program administration and the net

cost of private health insurance, and government

public health activities; and 2) research and

construction of medical facilities.

National Medical Expenditure Survey

(NMES)

A survey conducted by the USDHHS involving

five rounds of data collection, between February

1987 and July 1988, sampling 14,000 households

(Household Survey). The NMES also surveys

physician and health care facilities providing care

to members of a household sample during 1987

(Medical Provider Survey) and employers and insurance companies responsible for their insurance

coverage (Health Insurance Plan Survey). The

NMES also included an institutional survey of

13,000 residents of nursing and personal care

homes, psychiatric hospitals, and facilities for

mentally retarded persons.

Payroll taxes

Taxes based on wages and salaries that often are

levied against both employer and employee but

are collected for the government by employers.

Premium

The periodic payment made to an insurer under

the terms of an insurance contract.

Regional alliance

As defined in the Health Security Act, a regional

alliance can be a nonprofit organization, an independent state agency, or an agency of the state

which contracts with certified health plans to provide coverage to residents of the region. An alliance would be required to offer a contract to any

certified plan seeking to serve in its area unless the

plan’s proposed premium exceeded the per capita
Appendix E: Abbreviations and Glossary | 63

premium target by more than 20 percent. The alliance would also be required to ensure that at least

one fee-for-service plan is available among plan

offerings.

Sensitivity analysis

An analysis of the effect of changes in key assumptions or uncertainties on the findings and

outcome of an overall study.

Skilled nursing facilities

A facility that provides skilled nursing care. A

“distinct part skilled nursing facility” is a distinct

unit within the hospital that provides such care

(i.e., beds set up and staffed specifically for this

service), is owned and operated by the hospital,

and meets Medicare certification criteria.

Tax credit

The amount that can be directly subtracted from

the amount of tax due for a taxpayer.

Tax deductibility

Under the provision of the Internal Revenue Code,

businesses can generally deduct, as a business expense, from their gross incomes certain expenses

such as the full cost of health insurance coverage

provided for their employees.

Tax exclusion

Under the provisions of the Internal Revenue

Code, certain portions of an individual’s income

or noncash compensation, such as employer contributions for health benefits, is excludable from

his or her gross income (for the purpose of determining income taxes) and wages (for the purpose

of determining payroll taxes).

Tax expenditures

As defined by the Congressional Budget and Impoundment Act of 1974 (Public Law 93-344), tax

expenditures are reductions in individual and corporate income tax liabilities that result from special tax provisions or regulations that provide tax

benefits to particular taxpayers. These special provisions can take the form of exclusions, credits,

deductions, preferential tax rates, or deferrals of

tax liability.

Uncompensated care

Care for which a provider or health care facility

does not expect to receive payment.

Voucher

A form or check indicating a credit against future

purchases or expenditures.
. . ...———.

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