• Subsidies and payments at different income levels
• Distribution of individual mandate penalties
• Effect on the Hospital Insurance (HI) trust fund
• Effect on projected enrollment in Medicare Advantage plans and subsidies for extra benefits not covered by Medicare

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.

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.

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.

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. 

In previous years, CBO used DoD’s Future Years Defense Program (FYDP), which the department typically prepares each fiscal year and submits to the Congress as part of the President’s budget request, as a key source of information for projecting defense spending. This year, however, the Administration did not submit a FYDP. CBO’s projections for fiscal years 2011 through 2028 are based on the President’s 2010 budget request; changes to defense plans announced in early April 2009 by Secretary of Defense Robert M. Gates; and other sources, including press releases and briefing materials.
 
Base Projections of Defense Spending
 
CBO’s base projection of DoD’s current plans averages about $567 billion annually (in constant 2010 dollars) from 2011 to 2028—excluding overseas contingency operations (that is, overseas military operations against hostile forces, such as those in Iraq and Afghanistan). That amount is about 6 percent more than the $534 billion in total obligational authority requested by the Administration in its regular 2010 budget. Four main factors in particular account for the higher resources in the long term:

• The likelihood of continued real growth in pay and benefits for DoD’s military and civilian personnel;
• Projected increases in the costs of operation and maintenance (O&M) for aging equipment as well as for newer, more complex equipment;
• DoD’s plans to develop and field advanced weapon systems to replace many of today’s military systems that are nearing the end of their service lives; and
• Investments in new capabilities, such as advanced intelligence, surveillance, and reconnaissance systems, to meet emerging security threats.

Rather than having funding provided through supplemental and emergency appropriations, the Administration has requested a full year of anticipated appropriations for overseas contingency operations along with its regular defense budget request for fiscal year 2010. The Administration’s request of $130 billion would support 100,000 service members in Iraq and 68,000 in Afghanistan. CBO does not have access to DoD’s estimates of costs for overseas contingency operations in 2011 or later that would have been contained in the 2010 FYDP.
 
Potential for Higher Costs
 
The long-term demand for defense resources could be larger than CBO’s base projections. CBO has developed a scenario under which, consistent with the Status of Forces Agreement signed by the governments of Iraq and the United States in November 2008, all U.S. troops would be withdrawn from Iraq by December 31, 2011. Under that scenario, the total number of U.S. military personnel deployed worldwide would decline to 30,000 starting in fiscal year 2013, although those troops would be in unspecified locations and not necessarily in Iraq or Afghanistan. CBO estimates that supporting that number of deployed service members would require recurring annual appropriations of about $20 billion in 2010 dollars. CBO refers to those costs as “contingency unbudgeted costs.”
 
Other factors also could increase defense resources above CBO’s base projections. There could be higher costs for developing and purchasing new weapon systems. In addition, as has been true historically, medical costs could rise more rapidly than DoD has assumed. Accounting for those and other factors, as well as contingency costs, CBO has projected the “total unbudgeted costs” of current defense plans. The inclusion of total unbudgeted costs increases the overall projection to an annual average of $624 billion through 2028, or 17 percent more than the regular funding requested for 2010. Some 38 percent of the total unbudgeted costs between 2013 and 2028 are associated with overseas contingency operations.

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.

As shown in the figure below, federal spending and receipts diverged dramatically in 2009, reflecting the weakening economy and the federal response. The increase in the deficit of almost 7 percentage points of GDP from 2008 reflected a sharp drop in revenues and a substantial increase in spending. Receipts in 2009 tumbled to $2,105 billion, a decrease of $419 billion, or 17 percent, from 2008. That year-over-year decline follows a small drop in revenues for fiscal year 2008 and is the largest annual percentage decline in revenues in more than seven decades. Total revenues fell from 17.5 percent of GDP in 2008 to 14.8 percent of GDP in 2009; individual income tax receipts showed the largest decrease—from 7.9 percent to 6.4 percent of GDP.

Receipts and Outlays as a Percentage of GDP

Outlays rose by 18 percent in 2009, the fastest rate of growth since 1975. Three initiatives—the Troubled Asset Relief Program (TARP), net cash infusions for Fannie Mae and Freddie Mac, and ARRA—drove that growth, adding $353 billion to outlays in 2009, or 2.5 percent of GDP. Specifically, stimulus spending from ARRA totaled $108 billion in 2009—$32 billion for Medicaid, $22 billion for unemployment benefits, and $54 billion for other programs and activities. All other federal spending accounted for 22.2 percent of GDP in 2009, up from 20.6 percent in 2008.

Payments for unemployment benefits in 2009 were more than 2½ times the amount paid in 2008, an increase of $73 billion. That jump was caused by substantially greater unemployment and increased benefits. Conversely, spending for net interest on the public debt decreased by $58 billion (from 1.8 percent of GDP in 2008 to 1.4 percent in 2009) because of lower short-term interest rates and lower costs for inflation-indexed securities.

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.