Before passage of our nation's new health reform law, the projected growth in the Medicare and Medicaid programs dwarfed other aspects of our long-term federal budget outlook. The two programs, which represent 34% of the federal budget and 5.6% of gross domestic product, were expected to outpace the long-term growth of Social Security by a factor of three. Much of this growth is related to enrollment. As the baby boomer generation turns 65, it becomes eligible for Medicare coverage. It also will begin to need long-term care, which is the most expensive component of the Medicaid program.
Repeal would unleash savage cuts in programs
But that's not the entire story. A significant portion of this growth is attributable to across-the-board growth in overall healthcare costs. Medicare and Medicaid exist within the broader healthcare system and are pummeled by the same cost dynamics that affect employers and families who purchase private health insurance. Rising healthcare costs were clearly a key component of long-term federal budget shortfalls.
Our new health reform law, the Patient Protection and Affordable Care Act, expands health insurance coverage through two major approaches—premium subsidies that moderate-income families can use to purchase health insurance in the new Health Insurance Exchange, and expanded eligibility for Medicaid coverage, which will ensure that all low-income individuals will qualify for this public health insurance program. The new law also helps small businesses provide coverage to their employees through tax credits that offset the cost of coverage.
At the time the Affordable Care Act was enacted, the Congressional Budget Office projected that, all told, these coverage provisions would cost $794 billion through 2019. To pay for these new federal expenditures, the new law takes two approaches.
First, it reduces projected Medicare spending, largely by reducing scheduled increases in provider payments. This tried-and-true approach to reducing Medicare's growth, the CBO estimated, will save $424 billion through 2019. (It also adds 12 more years of solvency to the Medicare trust fund.)
Second, the new law creates some new taxes, such as an excise tax on very-high-premium insurance policies, and expands other taxes, such as the Hospital Insurance payroll tax, which will now apply to some types of unearned income. Altogether, the combination of reduced Medicare spending and new tax receipts exceeds projected new spending under the Affordable Care Act by $143 billion. This means the health reform bill pays for itself while bringing down the federal deficit over the next 10 years—and, the CBO concluded, will have an even greater impact in later years.
These CBO estimates, as welcome as they are, may underestimate the savings that reform will generate for the federal budget and for the healthcare system as a whole. The new law takes important steps toward reforming healthcare provider payments, such as moving away from volume-driven fee-for-service approaches toward payment systems that reward care coordination and improved patient outcomes.
It also makes real investments in prevention and primary care, which should bring down costs over time. CBO was not comfortable relying on the existing evidence that these innovations will change the trajectory of healthcare costs—so they scored little, if any, savings for these provisions of the law.
But other analysts conclude that if the healthcare system takes full advantage of the modernization provisions in the new healthcare law, then we can reduce overall growth in healthcare costs from 6.3% annually to 5.7%—even after paying for the costs of new coverage under the new law. This will translate to an additional $257 billion in deficit reduction, for a total of $400 billion shaved off the deficit from 2010 to 2019.
Some of the policymakers and pundits who opposed the new reform law in the first place argue that the CBO got their estimates wrong. They claim the Affordable Care Act will actually increase the federal budget deficit.
Of course, CBO's projections are just that—projections. But given that CBO did not give credit for payment and delivery system reforms that will control the growth of healthcare costs, if they erred, it was in the wrong direction.
Today, the new health reform law is nearly a year old. The “budget window” has moved, meaning that when CBO went to estimate the budget impact of repealing the Affordable Care Act, it concluded that repeal would cost the federal government $230 billion over 10 years. This new estimate looks at 2012 to 2021—and adding two additional years of health reform implementation raises the costs of repeal by almost $90 billion.
The new House of Representatives of the 112th Congress recently considered legislation that would repeal the new health reform law, but it chose not to cover this cost. It did not identify offsetting savings in other programs, nor did it raise revenues. So the $230 billion it costs to repeal the Affordable Care Act simply digs a deeper hole for the federal budget.
Karen Davenport is director of health policy at the Center for American Progress in Washington.
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