Long-Term Analysis of a Budget Proposal by Chairman Ryan

April 5, 2011

In response to a request from House Budget Committee Chairman Paul Ryan, CBO has conducted a long-term analysis of a proposal to substantially change federal payments under the Medicare and Medicaid programs, eliminate the subsidies to be provided through new insurance exchanges under last years major health care legislation, leave Social Security as it would be under current law, and set paths for all other federal spending (excluding interest) and federal tax revenues at specified growth rates or percentages of gross domestic product (GDP).

CBO analyzed major provisions of the proposal as they were described by the Chairmans staff. The specifications may differ in some ways from the plan released today by Chairman Ryan in The Path to Prosperity: Restoring Americas Promise. CBO has not reviewed legislative language for the proposal, so this analysis does not represent a cost estimate for legislation that might implement the proposal. Rather, it is an assessment of the broad, long-term budgetary impacts of the proposal, with results spanning several decades and measured as a share of gross domestic product (GDP). It is therefore quite different from a cost estimate for legislation, which would require much more detailed analysis, focus on the first 10 years, and be based on more recent baseline projections. (CBOs most recent long-term projections, which are the basis for this analysis, were issued in June 2010 and were derived from the agencys March 2010 baseline projections.)

Major Provisions

Among other changes, the proposal would:

  • Convert the current Medicare program to a system under which beneficiaries would be entitled to premium support payments to help them purchase private health insurance. Those payments would grow over time with overall consumer prices. The change would apply to people turning 65 beginning in 2022; beneficiaries who turn 65 before then would remain in the traditional Medicare program, with the option of converting to the new system.
  • Convert the matching payments that the federal government makes to states for Medicaid costs under current law into block grants of fixed dollar amounts beginning in 2013. Those amounts would grow over time with overall consumer prices and the population.
  • Repeal the key provisions of the major 2010 health care legislation that deal with insurance coverage and certain other provisions.

As a result of those changes, the governments mandatory spending for health care would be about 6 percent of GDP in 2030 and 2040 and about 5 percent in 2050, CBO estimates, compared with more than 12 percent projected under current law.

The proposal would also:

  • Set all other spending (excluding that for Social Security and interest) on a path that would cause such spending to decline sharply as a share of GDPfrom 12 percent in 2010 to 6 percent in 2022 and 3 percent by 2050; the proposal does not specify the changes to government programs that might be made in order to produce that path.
  • Set revenues on a path that would cause them to rise from 15 percent of GDP in 2010 to 18 percent in 2022 and 19 percent in 2030 and beyond. No specifications were provided to CBO of the particular revenue provisions that might generate that path.

Long-Term Effects of the Proposal

By 2030, total federal spending, deficits, and debt under the proposal would all be lower than under CBOs June 2010 long-term projections. Those projections included two scenariosan extended-baseline scenario based on then-current law and an alternative fiscal scenario that incorporated several changes to then-current law that were widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. Both of those scenarios deviate significantly from the nations past budgetary experience: In the extended-baseline scenario, both spending and revenues are well above historical norms as a share of GDP, and federal debt rises to 90 percent of GDP by 2050; under the alternative fiscal scenario, tax revenues remain within their historical range relative to GDP, but with spending above that range, federal debt skyrockets on an unsustainable path and exceeds its historical peak relative to GDP by the mid-2020s. The governments total spending (excluding interest costs) in 2050 would come to 14 percent of GDP, compared with about 26 percent under the extended-baseline scenario and 29 percent under the alternative fiscal scenario.

Budget deficits under the proposal would be around 2 percent of GDP in the 2020s and would decline during the 2030s. The budget would be in surplus by 2040 and show growing surpluses in the following decade. Federal debt would equal about 48 percent of GDP by 2040 and 10 percent by 2050.

Under the proposal, most elderly people who would be entitled to premium support payments would pay more for their health care than they would pay under the current Medicare system. For a typical 65-year-old with average health spending enrolled in a plan with benefits similar to those currently provided by Medicare, CBO estimated the beneficiarys spending on premiums and out-of-pocket expenditures as a share of a benchmark amount: what total health care spending would be if a private insurer covered the beneficiary. By 2030, the beneficiarys share would be 68 percent of that benchmark under the proposal, 25 percent under the extended-baseline scenario, and 30 percent under the alternative fiscal scenario.

Federal payments for Medicaid under the proposal would be substantially smaller than currently projected amounts. States would have additional flexibility to design and manage their Medicaid programs, and they might achieve greater efficiencies in the delivery of care than under current law. Even with additional flexibility, however, the large projected reduction in payments would probably require states to decrease payments to Medicaid providers, reduce eligibility for Medicaid, provide less extensive coverage to beneficiaries, or pay more themselves than would be the case under current law.

Key Considerations

CBOs long-term scenarios and the proposal analyzed here are all subject to pressures over the long term that would make them difficult to sustain. Under the extended-baseline scenario, revenues would reach higher levels relative to the size of the economy than ever recorded in the nations history, payments to physicians under Medicare would be reduced well below current rates, and payments to other Medicare providers would grow more slowly than the cost of their inputs; nevertheless, federal debt would continue to grow relative to GDP. Under the alternative fiscal scenario, revenues would be lower and Medicares payments to physicians and other providers would be higher than under the extended baseline scenario, but the governments debt would skyrocket to levels unprecedented in the United States. Rising tax rates or surging federal debt might accentuate concerns about the budgetary situation and thereby lead policymakers to reduce benefits under Medicare, Medicaid, or other programs.

Under the proposal CBO analyzed, debt would eventually shrink relative to the size of the economybut the gradually increasing number of Medicare beneficiaries participating in the new premium support program would bear a much larger share of their health care costs than they would under the current program; payments to physicians and other providers for services provided under the traditional Medicare program would be restrained (as under the two scenarios); states would have to pay substantially more for their Medicaid programs or tightly constrain spending for those programs; and spending as a share of GDP for federal programs other than Social Security and the major health care programs would be reduced far below historical levels. It is unclear whether and how future lawmakers would address the pressures resulting from the long-term scenarios or the proposal.