More About Paul N. Van de Water

Paul N. Van de Water

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

Full bio and recent public appearances | Research archive at CBPP.org


Medicare and Medicaid Should Be Protected in Trade Agreements

October 22, 2014 at 3:39 pm

CBPP, AARP, the AFL-CIO, Consumers Union, and ten other national organizations have written to the U.S. Trade Representative asking that Medicare, Medicaid, and other health programs be excluded from the investor-state dispute settlement (ISDS) provisions of pending trade agreements.

ISDS would give companies a new legal avenue to challenge U.S. pricing and patent policies for drugs and medical devices: the ability to sue the U.S. government before an international arbitration panel that wouldn’t be subject to normal democratic checks and balances.  In our letter, we say:

ISDS . . . would allow global pharmaceutical firms to challenge mechanisms that state legislatures, the Congress and public agencies use to manage pharmaceutical costs in public programs.  For example, a pharmaceutical company could challenge a state’s Medicaid preferred drug list or drug utilization management rules that limit access to a certain drug under specific circumstances.  Reimbursement policies for medicines under Medicare Part B could be challenged.  If adopted, the President’s own proposal to establish rebates under the Medicare Part D program for low-income beneficiaries could be subject to an ISDS challenge.  Simply stated, ISDS would impose an unnecessary risk to government administered health programs by limiting what policy makers can do to keep these programs affordable for taxpayers and beneficiaries.

Concerns about ISDS are growing and span the political spectrum.  In a recent editorial, The Economist suggested various ways of defining and narrowing the scope of ISDS, including exempting measures “to protect legitimate public welfare objectives, such as health, safety, and the environment,” allowing only governments to bring complaints against another government, and making proceedings public and subject to appeal.  As The Economist concludes, “Firms need protection; but so does the right of governments to pursue reasonable policies.”

Health Reform Reduces the Deficit, Contrary to Senate GOP Analysis

October 21, 2014 at 5:00 am

A recent analysis by Senate Budget Committee Republican staff that claims health reform will increase the deficit rests on two dubious propositions.  Under more reasonable assumptions, health reform will reduce the deficit, as the Congressional Budget Office (CBO) and Joint Committee on Taxation have consistently estimated.  Just a few months ago, CBO Director Douglas Elmendorf wrote, “the agencies have no reason to think that their initial assessment that [health reform] would reduce budget deficits was incorrect.”

How did the Senate Budget Committee’s Republican staff reach such a different conclusion?

First, they produced an estimate of savings from the health reform provisions that reduce Medicare and other program costs that’s significantly lower than CBO’s.  They did so by assuming that health reform had nothing whatsoever to do with the substantial slowdown in health care cost growth in the past few years.  That slowdown has led CBO since 2010 to lower its projections of Medicare and Medicaid spending by $1.1 trillion over this decade (see graph).

The decline in projected Medicare spending means that health reform provisions that cut Medicare costs directly will save less than previously thought.  (A provision that reduces Medicare costs by a certain percentage will save fewer dollars if that percentage cut is applied to a smaller base of costs.)  But the Senate Republican analysis lowers CBO’s estimate of health reform’s Medicare savings to reflect that effect alone, as though not one dollar of the savings from the slowdown in health costs were due to health reform’s focus on reducing cost growth in the U.S. health care system.

As Kaiser Family Foundation President Drew Altman has written, “Even though its direct effects on system-wide costs may be limited so far, I believe Obamacare is having a significant indirect effect, although cause and effect and the magnitude are hard to prove. . . . [It] is entirely likely that Obamacare has played and will continue to play a role in the slowdown in health-care cost growth and accelerating market change.”

Even under the conservative assumption that health reform accounts for only a small part of the slowdown in health care costs, it would more than offset the Senate Republicans’ reduction in health reform’s estimated Medicare savings

Second, the Senate Republican analysis overstates the budgetary impact of changes in labor supply (that is, the total hours of work that workers choose to supply) under health reform.  CBO estimates that health reform will cause a small reduction in the labor supply, in significant part because some people who now work mainly to obtain health insurance — a situation known as “job lock” — will choose to retire earlier or work somewhat less; that reduction will shrink total labor compensation by roughly 1 percent from 2017 through 2024, according to CBO.  The Senate Republican analysis assumes that the overall amount of income subject to tax will drop by the same percentage.

But wages and salaries, in fact, represent only about 70 percent of adjusted gross income, which also includes interest, dividends, rental income, capital gains, and some retirement distributions.  Thus, a 1-percent cut in labor compensation would shrink tax revenues by much less than 1 percent.

Correcting the Senate Republican staff analysis for these two factors shows that health reform will still reduce the deficit, as CBO has estimated — not increase it.  Those who seek the best assessment of the fiscal impacts of health reform should stick with CBO’s.

Reassessing a View on Federal Accounting

September 26, 2014 at 1:55 pm

So-called “fair-value accounting” is misguided because it would make federal loan and loan guarantee programs look more expensive than they really are, as my colleague Richard Kogan and I have explained.  Jason Delisle and Jason Richwine, writing in the latest issue of National Affairs, correctly note that the logic of our argument is inconsistent with a 2005 CBPP analysis of proposals to invest part of the Social Security trust funds in stocks instead of Treasury bonds.  We concur.  We have re-analyzed our assessment of investing a portion of the Social Security trust fund in equities and now come to a different conclusion than we did in 2005.

The current method of accounting for federal credit programs fully records — on a present-value basis — all the cash flowing into and out of the Treasury.  In contrast, fair-value accounting would add an extra amount to the budgetary cost, based on the fact that loan assets are somewhat less valuable to the private sector than to the government for several reasons: businesses must make a profit; they can’t put themselves at the head of the line when collecting a debt; they borrow at higher interest rates; and private-sector investors are risk-averse — they dislike losses (in this case, higher-than-expected loan defaults) more than they like equal, and equally likely, gains (lower defaults).  None of these factors represents an actual cost that the government incurs when it makes loans.

Including in the budget a cost that the government does not actually pay would overstate spending, deficits, and debt, making the federal budget a less accurate depiction of the nation’s fiscal position.  It would also treat different federal programs inconsistently, because it would not make a similar adjustment for non-credit programs whose costs are also uncertain and variable.  In a recent article, New York University law professor David Kamin thoroughly explains why “including the cost of risk would skew budget estimates.”

Proposals to invest the Social Security trust funds in the stock market raise similar issues.  Stocks produce higher returns than Treasury bonds on average over the years, but they also entail a greater risk of losing money.  That risk is an important consideration in assessing the pros and cons of a proposal, but it’s not an actual cost to the government and therefore doesn’t belong in the budget.  This conclusion differs from the one CBPP reached in 2005, which, upon further consideration, we now believe was mistaken.

(Proposals to replace Social Security with private accounts are very different, since individuals, rather than the government, would bear the risk of holding their retirement savings in stocks.  Individuals are rightly risk-averse.  As a result, any analysis of their well-being — as distinguished from analysis of the impact on government finances — should account for the variability of the stock market.)

Census Report Shows Rise in Full-Time Work, Undercutting Claims by Health Reform Opponents

September 17, 2014 at 9:55 am

Yesterday’s Census Bureau report shows that the share of workers with full-time, full-year work rose in 2013, while the share with part-time, part-year work fell.  This finding further undercuts assertions that health reform is causing a large increase in part-time employment — as proponents of a House measure to change health reform’s rules on covering full-time workers claim.

Health reform requires employers with at least 50 full-time-equivalent workers to offer coverage to full-time employees — defined as those who work at least 30 hours a week — or pay a penalty.  Critics claim that employers are shifting some employees to part-time work to avoid offering them health insurance.  But the data provide scant evidence of such a shift.

To the contrary, part-time work became less frequent last year.  “An estimated 72.7 percent of working men with earnings and 60.5 percent of working women with earnings worked full time, year round in 2013, both percentages higher than the 2012 estimates of 71.1 percent and 59.4 percent respectively,” according to the new Census report.  These data are consistent with a recent Urban Institute analysis that found little evidence that health reform has increased part-time work.

The share of involuntary part-timers — workers who’d rather have full-time jobs but can’t find them — tells a similar story.  If health reform were distorting hiring practices, as critics assert, we’d expect the share of involuntary part-timers to be growing.  Instead, as the chart (based on Labor Department data) shows, it’s down by 1½ percentage points from its post-recession peak.  My colleague Jared Bernstein finds that this pattern is typical for this stage of a recovery.

Later this week, the House will consider a proposal (part of a so-called “jobs bill”) to raise health reform’s threshold for full-time work from 30 to 40 hours.  But this step would make a shift toward part-time employment much more likely — not less so.

Only about 7 percent of employees work 30 to 34 hours (that is, at or modestly above health reform’s 30-hour threshold), but 44 percent of employees work 40 hours a week and thus would be vulnerable to cuts in their hours if the threshold rose to 40 hours.  Employers could easily cut back large numbers of employees from 40 to 39 hours so they wouldn’t have to offer them health coverage.

If you exclude workers at firms that already offer health insurance and thus won’t be tempted to cut workers’ hours, more than twice as many workers would face a high risk of reduced hours under a 40-hour threshold than under the current 30-hour threshold, according to New York University economist Sherry Glied.

There’s little evidence to date that health reform has caused a shift to part-time work.  There’s every reason to expect the impact to be small as a share of total employment, as we have explained.  And raising the cutoff for the employer mandate from 30 to 40 hours a week would be a step in the wrong direction.

“Generational Accounting” Spreads Confusion

August 1, 2014 at 1:05 pm

“Generational accounting” purports to compare the effects of federal budget policies on people born in different years.  But, contrary to economist Lawrence Kotlikoff’s New York Times op-ed promoting a bill requiring federal agencies to adopt the practice, generational accounting is far more likely to obscure than illuminate the budget picture.

Kotlikoff helped develop generational accounting over 20 years ago.  It was supposed to provide useful information missing from standard budget presentations.  It doesn’t do that, however, and few budget analysts use the approach.

Generational accounting rests on several highly unrealistic assumptions, as our detailed analysis explains.  It doesn’t account for the benefits that government spending can have for future generations (for example, education and infrastructure spending that raises living standards).  It also ignores the fact that our children and grandchildren will be richer than we are and have more disposable income, even if they pay somewhat higher taxes.

Generational accounting’s most serious flaw may be that it requires projecting such key variables as population growth, labor force participation, earnings, health care costs, and interest rates through infinity.  Budget experts recognize that projections grow very iffy beyond a few decades — and spinning them out to infinity makes them much more so.  The American Academy of Actuaries describes projections into the infinite future as “of limited value to policymakers.”

The Congressional Budget Office, the Center on Budget and Policy Priorities, and other leading budget analysts focus instead on the next 25 years or so, which amply documents future fiscal pressures and presents a reasonable horizon for policymakers.  These organizations produce simple, straightforward long-run projections that show the path of federal revenues, spending, and debt under current budget policies.  In that way, they show clearly what’s driving fiscal pressures, and when (see chart).

Policymakers should certainly look beyond the standard ten-year horizon of most budget estimates, but they already have the tools to do that.  Generational accounting is hard to interpret and easily misunderstood, and including it in the federal government’s regular budget reports and cost estimates would be a mistake.