Economic Effects of the March Health Legislation

October 22, 2010

Today I am speaking to a conference sponsored by the Schaeffer Center for Health Policy and Economics at the University of Southern California. My remarks review CBO’s analysis of the economic effects of the health legislation enacted in March. Those effects can be divided into two pieces: the effects on the five-sixths of the economy outside the health sector, and the effects on the health sector itself.

For the economy outside the health sector, the most significant impact of the legislation will be through the labor market—but that impact will probably be small, as we discussed in The Budget and Economic Outlook: An Update, which CBO issued in August. We estimated that the legislation, on net, will reduce the amount of labor used in the economy by roughly half a percent, primarily by reducing the amount that people choose to work. That net effect reflects changes in incentives that operate in both directions: Some provisions of the legislation will discourage people from working more hours or entering the workforce, and other provisions will encourage them to work more. Moreover, many people will face the same incentives regarding work as they do under current law. The net reduction in the supply of labor is largely attributable to the substantial expansion of Medicaid and the provision of subsidies through the new insurance exchanges. Other provisions in the legislation will also affect the supply of labor or firms’ demand for certain types of workers, but their impact is likely to be small in the aggregate as well.

Turning to the health sector, one effect of the March legislation will be to increase the amount of health care delivered to people who would have been uninsured in the absence of the law. CBO projected that 32 million fewer people will be uninsured in 2019 because of the legislation. Previous research suggests that, all else equal, gaining insurance coverage will increase an individual’s demand for health services by about 40 percent. By itself, this would represent an expansion of the health sector of the economy equal to an increase in total health services of a few percent.

Another effect of the March legislation will be to reduce unnecessary spending on health care for people who would be insured with or without the legislation—but probably only to a very limited extent, at least during the next decade. In particular:

  • The legislation changed the regulation of private health insurance. Those changes will reduce administrative costs and increase competition among insurers in the nongroup market, as CBO discussed last fall. The overall effect on spending from those changes will be a very small reduction.
  • The legislation imposed an excise tax on employment-based health insurance policies whose premium exceeds a specified threshold. Most employers will probably respond by offering policies with premiums at or below the threshold; plans will achieve lower premiums by reducing spending, primarily through greater cost sharing (which will also lower total spending on health care) and more stringent benefit management. However, the impact will be muted in the near term because the excise tax will not take effect until 2018.
  • The legislation reduced payments to many Medicare providers relative to what the government would have paid under prior law. Those reductions will impose greater pressure on providers to increase efficiency in the delivery of care. As a result of those cuts in payment rates and the existing “sustainable growth rate” mechanism that governs Medicare’s payments to physicians, CBO projects that Medicare spending will increase significantly more slowly during the next two decades than it has increased during the past two decades (per beneficiary, after adjusting for overall inflation). We wrote last spring that it is unclear whether such a reduction in the growth rate of spending could be sustained, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or through reductions in access to care or the quality of care.
  • The legislation set up a number of experiments in delivery and payment systems to induce providers to offer higher-quality and lower-cost care. However, for a number of reasons, it is unclear how successful the experiments will be: There is little reliable evidence about exactly how to move Medicare in the directions that many experts recommend; much more work needs to be done on measuring the quality and value of care; how federal agencies will administer the law is not knowable at this point; and the legislation included significant limitations on the experimentation that will occur. As a result, CBO projects limited savings from the experiments in delivery and payment systems during the next decade (taking into account the possibility that savings could be more or less than we anticipate).