Congressional Budget Office
Director’s Blog

CBO has just released a revised estimate of the net budgetary impact of H.R. 3962, the Affordable Health Care for America Act, the health care reform bill that was passed by the House of Representatives on November 7. The revised estimate corrects a mistake that CBO made in its earlier assessment of a provision that would establish the Community Living Assistance Services and Supports (CLASS) program, a federal insurance program for long-term care.  In the previous estimate, which was transmitted on November 6, CBO and the staff of the Joint Committee on Taxation (JCT) estimated that changes in direct spending and revenues from enacting H.R. 3962 would yield a net reduction in federal budget deficits of $109 billion over the 2010-2019 period. To reflect the change in our assessment of the CLASS provision, CBO and JCT now estimate that the legislation would yield a net reduction in deficits of $138 billion over the 10-year period.

According to the CLASS provision in H.R. 3962, both active workers and their nonworking spouses would be eligible to enroll in a voluntary federal program of long-term care insurance. Because of an oversight discussed in yesterday’s blog, CBO’s original estimate of the CLASS provision did not reflect the inclusion of nonworking spouses. CBO anticipates that the average nonworking spouse who would enroll in the program would have more functional limitations than the average enrolled worker, which would make nonworking spouses more likely to qualify in the future for the program’s benefits.

CBO’s corrected estimates are that the monthly premium for the CLASS program as it is specified in H.R. 3962 would average about $146 in 2011 (as compared with $123 in the original estimate) and that the program would reduce deficits by about $102 billion over the 2010-2019 period, rather than the original estimate of a reduction of about $72 billion over 10 years. (The bill would require premiums to be set so as to cover the full cost of the program as measured on an actuarial basis; the program’s cash flows would show net receipts for a number of years, followed by net outlays in subsequent decades.)

As explained in yesterday’s blog, the CLASS provision in the Senate bill proposed this week would not include nonworking spouses, and CBO projects that the CLASS program in the Senate legislation would reduce deficits by $72 billion over the 2010-2019 period.

CBO just released a letter responding to questions from Congressman Ryan about H.R. 3961, the Medicare Physicians Payment Reform Act of 2009, which is scheduled to be considered by the House of Representatives today. Congressman Ryan inquired about the total budgetary impact of enacting that bill, which would increase the rates Medicare pays to physicians, along with H.R. 3962, the Affordable Health Care for America Act, the broad health care reform bill passed by the House of Representatives a few weeks ago.

H.R. 3961 would change payment rates and restructure the sustainable growth rate (SGR), the formula that determines the updates to payment rates for fee-for-service physicians’ services in Medicare. Under current law, those payment rates are scheduled to be reduced by about 21 percent in January 2010, and CBO estimates that the rates will be reduced by about 2 percent annually for several subsequent years. H.R. 3961 would increase those payment rates by 1.2 percent in 2010 and implement a new formula beginning in 2011. Those changes would result in significantly higher payment rates for physicians than those that would result under current law.

CBO estimates that enacting H.R. 3961, by itself, would cost $210 billion over the 2010–2019 period. CBO and the staff of the Joint Committee on Taxation have separately estimated that enacting H.R. 3962 would reduce federal budget deficits by $109 billion over that same period.

CBO estimates that enacting both bills would add $89 billion to budget deficits over the 2010–2019 period, somewhat less than the sum of the effects of enacting the bills separately because of interactions between their provisions. The agency estimates that the two bills together would increase the budget deficit in 2019 by $23 billion relative to current law, an increment that would grow in subsequent years.

A detailed year-by-year projection for the following decade, like those that CBO prepares for the 10-year budget window, would not be meaningful because the uncertainties involved are simply too great. CBO has therefore developed a rough outlook for that decade. As stated in its October 29, 2009, letter to Congressman Charles B. Rangel, “CBO expects that [H.R. 3962] would slightly reduce federal budget deficits in that decade relative to those projected under current law—with a total effect during that decade that is in a broad range between zero and one-quarter percent of GDP [gross domestic product].” If both H.R. 3961 and H.R. 3962 were enacted, CBO expects that federal budget deficits during the decade following the 10-year budget window would increase relative to those projected under current law—with a total effect during that decade that is in a broad range between zero and one-quarter percent of GDP.

Last night CBO and the staff of the Joint Committee on Taxation (JCT) issued an estimate of the budgetary effects of the Patient Protection and Affordable Care Act proposed by Senator Reid. Among other things, the bill would establish a mandate for most legal residents of the United States to obtain health insurance; set up insurance “exchanges” through which certain individuals and families could receive federal subsidies to substantially reduce the cost of purchasing that coverage; significantly expand eligibility for Medicaid; substantially reduce the growth of Medicare’s payment rates for most services (relative to the growth rates projected under current law); impose an excise tax on insurance plans with relatively high premiums; and make various other changes to the federal tax code, Medicare, Medicaid, and other programs.

Estimated Budgetary Impact

CBO and JCT estimate that the direct spending and revenue effects of enacting the Patient Protection and Affordable Care Act would yield a net reduction in federal deficits of $130 billion over the 2010-2019 period. That estimate is subject to substantial uncertainty.

The estimate includes a projected net cost of $599 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $848 billion in subsidies provided through the exchanges, increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $149 billion in revenues from the excise tax on high-premium insurance plans and $100 billion in net savings from other sources. Over the 2010–2019 period, the net cost of the coverage expansions would be more than offset by the combination of other spending changes that CBO estimates would save $491 billion and other provisions that JCT and CBO estimate would increase federal revenues by $238 billion.

In total, CBO and JCT estimate that the legislation would increase outlays by $356 billion and increase revenues by $486 billion between 2010 and 2019.

Effects of Provisions Regarding Insurance Coverage

By 2019, CBO and JCT estimate, the number of nonelderly people who are uninsured would be reduced by about 31 million, leaving about 24 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants). Under the legislation, the share of legal nonelderly residents with insurance coverage would rise from about 83 percent currently to about 94 percent.

About 25 million people would purchase their own coverage through the new insurance exchanges, and there would be roughly 15 million more enrollees in Medicaid and CHIP than is projected under current law. Relative to currently projected levels, the number of people purchasing individual coverage outside the exchanges would decline by about 5 million, and the number obtaining coverage through their employer would also decline by about 5 million. Roughly one out of eight people purchasing coverage through the exchanges would enroll in the public plan administered by the Secretary of Health and Human Services, CBO estimates, meaning that total enrollment in that plan would be 3 million to 4 million.

Effects of the Legislation Beyond the First 10 Years

Although CBO does not generally provide cost estimates beyond the 10-year projection period (2010 through 2019 currently), many Members have requested CBO analyses of the long-term budgetary impact of broad changes in the nation’s health care and health insurance systems. A detailed year-by-year projection for years beyond 2019, like those that CBO prepares for the 10-year budget window, would not be meaningful because the uncertainties involved are simply too great. CBO has therefore developed a rough outlook for the decade following the 10-year budget window.

All told, the legislation would reduce the federal deficit by $8 billion in 2019, CBO and JCT estimate. In the decade after 2019, the gross cost of the coverage expansion would probably exceed 1 percent of gross domestic product (GDP), but the added revenues and cost savings would probably be greater. Consequently, CBO expects that the bill, if enacted, would reduce federal budget deficits over the ensuing decade relative to those projected under current law—with a total effect during that decade that is in a broad range around one-quarter percent of GDP. The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it, compared with CBO’s 10-year budget estimates. The expected reduction in deficits would represent a small share of the total deficits that would be likely to arise in that decade under current policies.

CBO uses the term “federal budgetary commitment to health care” to describe the sum of net federal outlays for health programs and tax preferences for health care—providing a broad measure of the resources committed by the federal government that includes both its spending for health care and the subsidies for health care that are conveyed through reductions in federal taxes. During the 2010-2019 period, that budgetary commitment would be about $160 billion higher under the legislation than under current law. CBO expects that, during the decade following the 10-year budget window, the increases and decreases in the federal budgetary commitment to health care stemming from this legislation would roughly balance out, so that there would be no significant change in that commitment. The range of uncertainty surrounding that assessment is quite wide.

These longer-term calculations assume that the provisions are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments, and legislation to do so again is currently under consideration in the Congress. The legislation would put into effect a number of procedures that might be difficult to maintain over a long period of time. Although it would increase payment rates for physicians’ services for 2010 relative to those in effect for 2009, those rates would be reduced by about 23 percent for 2011 and then remain at current-law levels (that is, as specified under the SGR) for subsequent years. At the same time, the legislation includes a number of provisions that would constrain payment rates for other providers of Medicare services. In particular, increases in payment rates for many providers would be held below the rate of inflation (in expectation of ongoing productivity improvements in the delivery of health care). The projected longer-term savings for the legislation also assume that the Independent Medicare Advisory Board that would be established by the bill is fairly effective in reducing costs—beyond the reductions that would be achieved by other aspects of the bill—to meet the targets specified in the legislation.

Based on the extrapolation described above, CBO expects that Medicare spending under the bill would increase at an average annual rate of roughly 6 percent during the next two decades—well below the roughly 8 percent annual growth rate of the past two decades (excluding the effect of establishing the Medicare prescription drug benefit). Adjusting for inflation, Medicare spending per beneficiary under the bill would increase at an average annual rate of roughly 2 percent during the next two decades—much less than the roughly 4 percent annual growth rate of the past two decades. Whether such a reduction in the growth rate could be achieved through greater efficiencies in the delivery of health care or would reduce access to care or diminish the quality of care is unclear.

The Patient Protection and Affordable Care Act proposed yesterday by Senator Reid and H.R. 3962, the Affordable Health Care for America Act passed by the House of Representatives, contain very similar proposals regarding long-term care insurance. Both proposals would establish a voluntary federal program for such insurance, termed the Community Living Assistance Services and Supports (CLASS) program. Under the proposals, individuals could purchase coverage that would provide specified future benefits, and premiums would be set to cover the full cost of the programs as measured on an actuarial basis. However, the programs’ cash flows would show net receipts for a number of years, followed by net outlays in subsequent decades. In particular, the programs would pay out far less in benefits than they would receive in premiums over the 10-year budget window (2010-2019), thereby reducing federal budget deficits over that period.

According to the legislation proposed in the Senate, only active workers would be eligible to enroll in the program. Under that specification, CBO estimates that the monthly insurance premium would average about $123 in 2011 and that the proposal would reduce budget deficits by about $72 billion over the 2010-2019 period.

According to the legislation passed by the House, both active workers and their non-working spouses would be eligible to enroll. CBO anticipates that the average non-working spouse who would enroll in the program would have more functional limitations than the average enrolled worker, which would make non-working spouses more likely to qualify in the future for the program’s benefits. Due to an oversight, CBO’s original estimate of the House version of the CLASS program did not reflect the inclusion of non-working spouses and, as a result, concluded that its premiums and budgetary effects would be the same as those for the Senate version of the program. CBO’s corrected estimates are that the monthly insurance premium for the House version of the CLASS program would average about $146 in 2011 and that the program would reduce budget deficits by about $102 billion over the 2010-2019 period. Correspondingly, the program’s outlays in future years would also be larger than those under the Senate version of the program. 

Last week I gave a talk at the annual fall research conference of the Association for Public Policy Analysis and Management. The session was titled “Aging and Health: The Challenges of Entitlement Growth,” and my slides drew on our August report The Budget and Economic Outlook: An Update and our June report The Long-Term Budget Outlook.

Entitlement spending is often viewed as a long-term budget challenge, but in fact such spending contributes significantly to the budget challenge facing the country during the next 10 years as well as the more distant future. CBO estimates that, if current laws remained in place, the federal deficit would shrink sharply during the next few years but would remain a little more than 3 percent of gross domestic product (GDP) between 2013 and 2019. Although the country has experienced persistent large deficits before—deficits during the economic expansion of the 1980s averaged about 4 percent of GDP—the budget challenge of the next decade will be especially acute in three respects:

• Federal debt held by the public will equal about 60 percent of GDP by the end of this fiscal year, the highest level since the early 1950s. As a result, further large deficits and increases in the debt will raise serious economic risks.
• The difference between current law (which underlies CBO’s baseline projections) and current policy as perceived by many people (in particular, the personal income tax rates now in effect) is very large. If the 2001 and 2003 tax cuts were extended (rather than expiring at the end of 2010, as under current law), the exemption amount for the alternative minimum tax (AMT) was indexed to inflation (rather than falling back sharply, as under current law), and no other policy changes were made, the deficit would exceed 6 percent of GDP by 2019 and debt would be nearly 90 percent of GDP.
• The aging of the U.S. population and rising costs for health care are making federal spending on Social Security, Medicare, and Medicaid a much larger burden relative to GDP.  During the expansion of the 1980s, federal spending on those three programs stayed close to 7 percent of GDP; by 2019, CBO projects that spending on those programs will be a little below 12 percent of GDP.

Beyond the 10-year budget window, the budget outlook is even more sobering. CBO’s report on the long-term budget outlook presented two scenarios—one that adheres closely to current law, and one that extrapolates current policy as many people might view it (including the tax changes I mentioned earlier and federal spending apart from Social Security, Medicare, and Medicaid that stays a roughly constant share of GDP). In the latter scenario, debt continues to rise sharply relative to GDP in the 2020s and beyond.

The imbalance between spending and revenues widens in part because of the aging of the population. As the baby boomers retire during the next two decades, the number of beneficiaries of Social Security, Medicare, and Medicaid will increase significantly. The imbalance between spending and revenues also widens because, under current law, spending per beneficiary in the Medicare and Medicaid programs will probably continue to increase more rapidly than total spending and income in the economy (and thus more rapidly than the tax base that supports that spending).

I concluded the talk by emphasizing that fiscal policy is on an unsustainable path to an extent that cannot be solved by minor tinkering. The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. That fundamental disconnect will have to be addressed in some way if the budget is to be placed on a sustainable course.

Earlier today, I posted a blog about the cost estimate for the health care legislation pending in the House. I explained how the repeal of certain tax rules in H.R. 3962, the health care bill, would now generate less revenue because the rules would only be in effect for two years during the 2010-2019 period as a result of the unemployment legislation that was signed into law today. The original estimate for the impact of that repeal under H.R. 3962, about $26 billion over the 10-year period, will now be reduced to about $6 billion. CBO just issued an updated estimate for the health care bill, reflecting the fact that the additional revenues that would result from its enactment will be smaller than those shown in last night’s estimate.  Reflecting this change, CBO and the staff of Joint Committee of Taxation now estimate that, on balance, the direct spending and revenue effects of enacting H.R. 3962, incorporating the manager’s amendment, would yield a net reduction in federal budget deficits of $109 billion (rather than $129 billion) over the 2010-2019 period.

Last night CBO and the staff of the Joint Committee on Taxation (JCT) released an estimate of the direct spending and revenue effects of H.R. 3962, the Affordable Health Care for America Act, as introduced on October 29, 2009, incorporating the manager’s amendment proposed by Representative John Dingell on November 3, 2009.

Among other things, the legislation would establish a mandate for most legal residents of the United States to obtain health insurance; set up insurance “exchanges” through which certain individuals and families could receive federal subsidies to substantially reduce the cost of purchasing that coverage; establish a public plan that would be administered by the Secretary of Health and Human Services; significantly expand eligibility for Medicaid; substantially reduce the growth of Medicare’s payment rates for most services (relative to the growth rates projected under current law); impose an income tax surcharge on high-income individuals; and make various other changes to the federal tax code, Medicaid, Medicare, and other programs.

CBO and the staff of JCT estimate that, on balance, the direct spending and revenue effects of enacting H.R. 3962, incorporating the manager’s amendment, would yield a net reduction in federal budget deficits of $129 billion over the 2010-2019 period. (CBO has not completed a comprehensive estimate of the legislation’s potential impact on spending that is subject to future appropriation action.) In the decade after 2019, the bill would probably result in slight reductions in federal budget deficits.

On October 29, 2009, CBO transmitted a preliminary analysis of H.R. 3962 as introduced.  (As discussed in that analysis, CBO and JCT estimated that enacting H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion over the 2010–2019 period.) This estimate differs from that preliminary analysis for several reasons:

• First, this analysis incorporates the effects on spending and revenues of the manager’s amendment. Those changes are relatively small with the exception of the addition of a tax provision regarding credits for producers of biofuel, which would increase net revenues by about $24 billion over the 2010-2019 period, according to JCT.
• Second, the updated analysis reflects Medicare’s payment rates for calendar year 2010 and other changes announced in final rules that were posted on the Federal Register’s Web site on October 30, 2009. Those final rules involve home health services, hospital outpatient services, the physician fee schedule, and other Medicare Part B services.
• Finally, this analysis incorporates several technical revisions that had a small impact on the estimated budgetary effects of the legislation.

By 2019, CBO and JCT estimate, the number of nonelderly people who are uninsured would be reduced by about 36 million, leaving about 18 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants). Under the bill, the share of legal nonelderly residents with insurance coverage would rise from about 83 percent currently to about 96 percent.

Those estimates for H.R. 3962 include revenue increases from a tax provision similar to one that was included in a bill that the Congress cleared yesterday. H.R. 3962 would repeal certain tax rules, scheduled to take effect in 2011, that would allow corporations with worldwide activities to reduce their U.S. income taxes by allocating more of their interest expenses to domestic profits. Yesterday, the Congress cleared for the President’s signature legislation that extends unemployment benefits, which also included a provision that will delay the implementation of those worldwide interest allocation rules until 2018. So, the repeal of those rules in H.R. 3962, the health care bill, would now generate less revenue because the rules would only be in effect for two years during the 2010-2019 period. Consequently, the original estimate for the impact of that repeal under H.R. 3962, about $26 billion over the 10-year period, will now be reduced to about $6 billion as a result of the cleared unemployment legislation. Later today, CBO will issue an updated estimate for the health care bill, reflecting the fact that the additional revenues that would result from its enactment will be smaller than those shown in last night’s estimate.

This evening, CBO released a preliminary analysis of a substitute amendment to H.R. 3962, the Affordable Health Care for America Act, proposed by Representative John Boehner, the Republican Leader in the House of Representatives. CBO and the staff of the Joint Committee on Taxation (JCT) estimate that the amendment would reduce federal deficits by $68 billion over the 2010-2019 period; it would also slightly reduce federal budget deficits in the following decade, relative to those projected under current law, with a total effect during that decade that is in a broad range between zero and one-quarter percent of gross domestic product.

That amendment contains several provisions that are intended to increase rates of insurance coverage by reducing its costs or subsidizing its purchase, including:

• Regulatory reforms in the small group and non-group markets, including establishing association health plans (insurance coverage that is offered to members of an association) and individual membership associations, and allowing states to establish interstate compacts with a unified regulatory structure;
• A State Innovations grant program to provide federal payments to states that achieve specified reductions in the number of uninsured individuals or in the premiums for small group or individually purchased policies;
• Federal funding for states to use for high-risk pools in the individual insurance market and reinsurance programs in the small group market; and
• Changes to health savings accounts (HSAs) to allow funds in such accounts to be used to pay premiums under certain circumstances, to make net contributions to HSAs eligible for the saver’s tax credit, and to provide a 60-day grace period for medical expenses incurred prior to the establishment of an HSA.

CBO and JCT estimate that those provisions would increase federal budget deficits by about $8 billion over the 2010-2019 period, reducing the number of nonelderly people without health insurance by about 3 million in 2019 and leaving about 52 million nonelderly residents uninsured. The share of legal nonelderly residents with insurance coverage in 2019—83 percent—would be roughly in line with the current share.

Other provisions of the amendment would alter federal spending and revenues in significant ways. The key provisions include:

• Limits on costs related to medical malpractice (“tort reform”), including capping noneconomic and punitive damages and making changes in the allocation of liability;
• Requirements that the Secretary of Health and Human Services adopt and regularly update standards for electronic administrative transactions that enable electronic funds transfers, claims management processes, and verification of eligibility, among other administrative tasks;
• Establishment of an abbreviated approval pathway for follow-on biologics (biological products that are highly similar to or interchangeable with their brand-name counterparts); and
• An increase in funding for HHS investigations into fraud and abuses.

CBO anticipates that the combination of provisions in the amendment would reduce average private health insurance premiums per enrollee in the United States, relative to what they would be under current law-by 7 percent to 10 percent in the small group market, by 5 percent to 8 percent for individually purchased insurance, and by zero to 3 percent in the large group market.  Those are averages, however, and they are subject to a great deal of uncertainty; some individuals and families in each market would see different results.

Today CBO released a letter responding to questions about the subsidies that enrollees would receive for premiums and cost sharing, and the amounts that they would have to pay, on average, if they purchased a relatively low cost plan in the new insurance exchanges to be established under H.R. 3962 as introduced in the House of Representatives on October 29. The analysis reflects the preliminary analysis of that bill that CBO, in conjunction with the staff of the Joint Committee on Taxation, released last week.

The table accompanying the letter focuses on enrollees who purchase a “reference” plan (the premiums equal the average of the three lowest-cost “basic” plans, as defined in the bill), because federal subsidies would be tied to that average. Such a plan would have an actuarial value of 70 percent, which represents the average share of costs for covered benefits that would be paid by the plan. Although premiums would vary by geographic area to reflect differences in average spending for health care and would also vary by age, the table shows the approximate national average for the reference plan—about $5,300 for single policies and about $15,000 for family policies in 2016. Enrollees could purchase a more expensive plan or more extensive coverage for an additional, unsubsidized premium—and CBO anticipates that many enrollees would do that, so the average premiums actually paid in the exchanges would be higher (although average cost-sharing amounts could be lower than those shown in the table). The figures are presented for 2016 in order to illustrate the likely situation after the proposed changes in insurance markets were fully implemented. (A downside of that approach is that the figures are harder to compare with those observed in 2009.)

Under the House bill, the maximum share of income that enrollees would have to pay for the reference plan in 2013 would range from 1.5 percent for those with income less than or equal to 133 percent of the federal poverty level (FPL) to 12 percent for those with income equal to 400 percent of the FPL. (People with income below 150 percent of the FPL, however, would generally be eligible for Medicaid and thus ineligible for subsidies within the exchanges.) After 2013, those income-based caps would all be indexed so that the share of the premiums that enrollees (in each income band) paid would be maintained over time. As a result, the income-based caps would gradually become higher over time; for example, they are estimated to range from about 1.6 percent to about 12.8 percent in 2016. Enrollees with income below 350 percent of the FPL would also be given cost-sharing subsidies to raise the actuarial value of their coverage to specified levels—ranging from 97 percent for those with income below 150 percent of the FPL to 72 percent for those with income between 300 percent and 350 percent of the FPL.

To illustrate the effects of those features, the table shows the amounts of income that would correspond to the midpoint of each FPL band, the resulting premiums that single individuals and families of four would have to pay for a reference plan if their income equaled that midpoint, and the share of their income that would be represented by the sum of the enrollee premiums and the average cost-sharing amount at that midpoint. For instance, a single person with income of $26,500 in 2016 (225 percent of the FPL) would pay a premium of about $1,900 (after getting a premium subsidy of 64 percent) and could expect to pay another $900 in cost sharing (net of federal subsidies); thus, the average payment by such a person for the premium and cost sharing combined is projected to be $2,800, or about 11 percent of income. A family of four with income of about $54,000 (also 225 percent of the FPL in 2016) could expect to pay about the same share of its income for premiums and cost sharing. (Because use of health care in a given year varies widely, many people would pay less in cost sharing than the average, but some would pay more—subject to the limits on out-of-pocket costs that are specified in the bill.)

The estimated average premiums and average cost-sharing amounts for the reference plan shown at the top of the table—before any subsidies are applied—are slightly higher than the premiums for the comparable plan shown in a similar table that CBO released on October 9 for the health care reform proposal introduced by the Chairman of the Senate Committee on Finance, as amended by the committee. (That table represented an update to a table enclosed in a letter to Chairman Baucus on September 22 that addressed the earlier Chairman’s mark.). Because the reference plans in both proposals would cover the same range of benefits and have the same extent of coverage (actuarial value), the difference in premiums cannot be attributed to a difference in coverage. Instead, the difference is the net result of a number of other provisions of each proposal and primarily reflects higher average health care costs projected for enrollees in the exchanges under the House bill than for enrollees in the exchanges under the Finance Committee’s proposal. That difference in average health costs would arise because exchange enrollees under the House bill would be slightly less healthy, on average, than exchange enrollees under the Finance Committee’s proposal—a difference that itself reflects a number of opposing factors described in the letter.

Current proposals to reform the health care and health insurance systems would affect the federal budget and the nation’s spending for health care in many ways, and those effects can be summarized using a variety of different measures. Today CBO released a letter to clarify the measures being used by CBO in its analysis of such proposals—in particular, the effects of proposals on federal budget deficits and on the magnitude of the federal budgetary commitment to health care. As concrete examples, the letter discusses the preliminary analysis recently completed by CBO and the staff of the Joint Committee on Taxation (JCT) of the proposal put forward by the Chairman of the Senate Committee on Finance, as amended by the committee, and of the preliminary analysis by CBO and JCT of H.R. 3962, the Affordable Health Care for America Act, which was introduced yesterday in the House of Representatives.

Effect on Federal Budget Deficits

CBO and JCT’s analysis of a health care reform proposal focuses on its net impact on federal budget deficits during the 10 year budget window from 2010 through 2019. This “bottom line” reflects all of the effects of a proposal on spending and revenues, regardless of whether or how they are related to the provision of health care. CBO and JCT estimated that the proposal approved by the Committee on Finance would result in a net reduction in federal budget deficits of $81 billion over the 2010–2019 period, and that H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion over the same period.

Effect on the Federal Budgetary Commitment to Health Care

CBO’s letters providing preliminary analyses of the proposal approved by the Senate Committee on Finance and H.R. 3962 also addressed the effects of the proposals on “the federal budgetary commitment to health care.” CBO used that phrase in a letter earlier this year to describe the sum of net federal outlays for health programs and tax preferences for health care. CBO has used this measure because some Members have expressed interest in the federal government’s overall role in the financing of health care—both under current law and under alternative reform proposals. (Whether the federal role should be expanded, contracted, or held the same is a policy choice, and CBO, as always, makes no policy recommendations.)

Federal outlays for health programs are not an adequate gauge of that overall role because tax expenditures for health care are substantial under current law and because new tax credits to help purchase health insurance are a significant part of some reform proposals. Similarly, federal tax expenditures for health care do not, by themselves, capture this overall role because federal spending on health care is also substantial under current law and because such spending would increase significantly under some reform proposals. By including both the federal government’s spending for health care and the subsidies for health care that are conveyed through reductions in federal taxes, the “federal budgetary commitment to health care” represents a broad measure of the resources allocated by the federal government in this area—and a measure that is independent of the extent to which outlays or tax provisions are used to channel those resources.

For example, how would the proposal approved by the Senate Finance Committee affect the budgetary commitment to health care? CBO and JCT’s estimates imply that the proposal would increase the federal budgetary commitment to health care by about $85 billion over the 2010-2019 period. (Again, we estimate that the proposal would result in a net reduction in federal budget deficits of $81 billion over the same time period.)

Bending the Cost Curve

Major proposals to reform health care would affect not only the federal budget but also spending for health care by individuals, firms, and other levels of government. A broad measure encompassing those effects would be the impact on total national health expenditures. However, CBO does not analyze national health expenditures as closely as it does the federal budget, and at this point CBO has not assessed the net effect of health care reform proposals on those expenditures, either within the 10-year budget window or for the subsequent decade. That is, CBO has not evaluated whether reform proposals would lower or raise—or bend down or up—the “curve” of national health expenditures.