The Effects of Health Reform on the Federal Budget

April 12, 2010

This morning I made a presentation to the World Health Care Congress on the effects of the recently enacted health reform legislation on the federal budget. Everything that I said was drawn from cost estimates and other letters that CBO has released.

I began by reviewing the budget estimates done by CBO and the staff of the Joint Committee on Taxation (JCT):

  • In combination, the initial legislation and the subsequent reconciliation act that modified it will generate changes in direct spending and revenue that will reduce federal deficits by $143 billion during the 2010-2019 period.
  • The legislation will increase the size of the federal budget by increasing outlays by $411 billion and revenues by $525 billion over the next 10 years (excluding the provisions of the reconciliation act related to education, which will reduce spending by about $19 billion over that period).
  • The legislation will increase the federal budgetary commitment to health care (the sum of net federal outlays for health programs and tax preferences for health care) by $390 billion over the next 10 years.
  • The legislation will reduce federal deficits during the decade beyond the 10-year budget window relative to those projected under current law—with a total effect in a broad range around one-half percent of GDP.

Then I discussed a number of challenges to those estimates: 

  • Some observers have asserted that CBO and JCT have misestimated the effects of the changes in law. Concerns have been expressed in different directions—for example, some believe that subsidies will be more expensive than we project, while others maintain that Medicare reforms will save more money than we project.
o   Our estimates reflect the middle of the distribution of possible outcomes based on our careful analysis and professional judgment, drawing upon relevant research by other experts. Nevertheless, estimates of the effects of comprehensive reforms are clearly very uncertain, and the actual outcomes will surely differ from our estimates in one direction or another. 
  • Some observers have asserted that budget conventions hide or misrepresent certain effects of the law, such as its impact on future discretionary spending, its effect on the government’s ability to pay Medicare benefits, and its effects on the economy.
o   The estimates I discussed above focus on direct spending and revenues because those are the figures that are relevant for the pay-as-you-go rules and those effects will occur without any additional legislative action. As CBO’s estimate noted, the legislation will lead to some increases in discretionary spending (that is, spending subject to future appropriation action) that are not included in the deficit figures cited above.
o   The legislation will improve the cash flow in the Hospital Insurance trust fund (that is, Part A of Medicare) by more than $400 billion over 10 years. Higher balances in the fund will give the government legal authority to pay Medicare benefits longer, but most of the money will pay for new programs rather than reduce future budget deficits and therefore will not enhance the government’s economic ability to pay Medicare benefits.
o   Following standard procedures for the Congressional budget process, the estimates do not include any effects of the legislation on overall economic output, although CBO wrote last summer about possible effects of health reform proposals on output. 
  • Some observers have asserted that the law will be changed in the future in ways that will make deficits worse.
o   CBO estimates the effects of proposals as written and does not forecast future policy changes. As is the case for many pieces of legislation, the budgetary impact of the health reform legislation could indeed be quite different if key provisions are ultimately changed.
o   In fact, CBO’s cost estimate noted that the legislation maintains and puts into effect a number of policies that might be difficult to sustain over a long period of time. For example, the legislation reduces the growth rate of Medicare spending (per beneficiary, adjusting for overall inflation) from about 4 percent per year for the past two decades to about 2 percent per year for the next two decades. It is unclear whether such a reduction can be achieved, and, if so, whether it would be through greater efficiencies in the delivery of health care or through reductions in access to care or the quality of care. The legislation also indexes exchange subsidies at a lower rate after 2018, and it establishes a tax on insurance plans with relatively high premiums in 2018 and (beginning in 2020) indexes the tax thresholds to general inflation.

In addition, some observers believe that, whether CBO and JCT’s estimates of the effects of the health reform legislation are accurate or not, the law misses critical opportunities to reduce future deficits. For example, some say that the legislation will hamper future deficit reduction by using spending cuts and extra revenues to pay for a new entitlement rather than existing entitlements, or that the legislation should have reformed health care delivery more significantly.

Of course, CBO does not make policy judgments or recommendations. However, we have frequently noted the long-run unsustainability of the nation’s current budgetary policies and indicated that using savings in existing programs to finance new programs would necessitate even stronger policy actions in other areas. In December 2008, CBO released a report that included a wide range of options for changes in health policy, and in 2009, we published a volume presenting a variety of options for policy changes in other areas.