Health Care Reform and the Federal Budget

June 16, 2009

Today CBO delivered letters to Senators Kent Conrad and Judd Gregg that respond to their request for information about the features of health care reform proposals that would affect federal spending on health care over the long term. In the absence of significant changes in policy, rising costs for health care will cause federal spending to grow much faster than the economy, putting the federal budget on an unsustainable path. To elucidate the possible effects of major legislation affecting health care and health insurance on the federal budget, CBOs analysis examines the budget outlook under current law; the likely budgetary effect of efforts to expand the scope of insurance coverage; the potential for reducing health care spending; the likely impact of specific changes in the health system; and mechanisms for engendering efficiency gains in health care over time.

The federal government's budgetary commitments to health care (including both spending programs and tax preferences) total more than $1 trillion in 2009. Many proposals to significantly expand health insurance coverage would add to federal costs by providing large subsidies to help lower-income individuals and families purchase insurance. Such proposals could permanently boost the government's budgetary commitments to health care by something in the vicinity of 10 percent. Improving the long-term budget outlook would require addressing that added cost in addition to the budgetary strains anticipated under current law. Health care legislation might include provisions that would make it budget neutral over the first 10 years, but such legislation might nevertheless add to budget deficits in later years.

Many experts believe that a substantial share of spending on health care contributes little if anything to the overall health of the nation. Therefore, changes in government policy have the potential to yield large reductions in both national health expenditures and federal health care spending without harming health. Moreover, many experts agree on some general directions in which the governments health policies should movetypically involving changes in the information and incentives that doctors and patients have when making decisions about health care.

However, large reductions in spending will not actually be achieved without fundamental changes in the financing and delivery of health care. The government could spur those changes by transforming payment policies in federal health care programs and by significantly limiting the current tax subsidy for health insurance. Those approaches could directly lower federal spending on health care and indirectly lower private spending on it as well. Yet, many of the specific changes that might ultimately prove most important cannot be foreseen today and could be developed only over time through experimentation and learning. Modest versions of such effortswhich would have the desirable effect of allowing policymakers to gauge their impactwould probably yield only modest results in the short term.

CBO has analyzed a number of reform options in its recent publications, including creating so-called accountable care organizations, bundling payments to hospitals and other providers, providing additional information about effective medical treatments, expanding the use of preventive and wellness services and primary care, increasing cost sharing by patients, and modifying the tax treatment of employment-based health insurance(Key Issues in Analyzing Major Health Insurance Proposals & Budget Options, Volume I). When CBO evaluates policies, the agency aims to reflect the middle of the range of expert opinion about likely outcomes. For any particular policy option, CBO carefully reviews the relevant empirical evidence and examines the incentives that would be created to control costs and the factors that might limit the success of those incentives. At this point, experts do not know exactly how to structure such reforms so as to reduce federal spending on health care significantly in the long run without harming people's health.

Therefore, one broad long-range approach for reform that has drawn interest recently would combine specific policy actionsto generate near-term savings and provide experience that would lay the groundwork for future savingswith a mechanism or framework to impose ongoing pressure on the health care system to achieve efficiencies in the delivery of health care. That path would require tough choices to be made, and its effectiveness would depend ultimately on the willingness of federal policymakers to maintain significant and systemic pressure over time. Without meaningful reforms, the significant costs of many current proposals to expand federal subsidies for health insurance would be much more likely to worsen the long-run budget outlook than to improve it.