Uncertainty in Estimates for Health Care Legislation

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March 19, 2010

Yesterday CBO and the staff of the Joint Committee on Taxation (JCT) completed a preliminary estimate of the direct spending and revenue effects of the reconciliation proposal that represents one component of the health care legislation being considered by the Congress. The other component is a bill, H.R. 3590, that the Senate passed in December.

CBO and JCT estimate that enacting the combination of the reconciliation proposal and H.R. 3590 as passed by the Senate would reduce federal budget deficits by $138 billion between 2010 and 2019. Although CBO does not generally provide cost estimates beyond the 10-year budget projection period, many Members have requested our analysis of the long-term budgetary impact of broad changes in the nations health care and health insurance systems. Therefore, we have developed a rough outlook for the decade following the 2010-2019 period. We estimate that the combined effect of enacting those two pieces of legislation would be to reduce federal budget deficits during that following decade relative to those projected under current lawwith a total effect that is in a broad range around one-half percent of gross domestic product (GDP). That calculation is very uncertain, and the imprecision of the estimate is intended to reflect that uncertainty.

Many people have raised questions about those projections of deficit reduction and similar projections that we have made regarding earlier pieces of health legislation. Their questions often focus either on the uncertainties surrounding the various technical, behavioral, and economic factors underlying the estimates, or on uncertainties as to whether the legislation would ultimately be implemented as written.

Some analysts believe that CBO is underestimating the ultimate costs of the new subsidies to buy health insurance (which could make the legislation deficit-increasing instead of deficit-reducing). Others assert that CBO is underestimating the ultimate savings from changes in the Medicare program (which could make the legislation reduce deficits by more than we have estimated). Certainly, the budgetary impact of broad changes in the nations health care and health insurance systems is very uncertain. However, CBO staff, in consultation with outside experts, has devoted a great deal of care and effort to this analysis, and the agency strives to develop estimates that reflect the middle of the distribution of possible outcomes. As a result, we believe that CBOs estimates of the net savings that would result from the legislation have a roughly equal chance of turning out to be too high or too low.

Focusing on another area of concern, some observers argue that CBOs estimates are unrealistic because the Congress will not allow the Medicare spending cuts and future tax increases in the proposals to take effect. CBOs responsibility to the Congress is to estimate the effects of proposals as written and not to forecast future legislation. However, the agency does try to provide information about the consequences of implementing proposals. For example, our cost estimate for the bill taken up by the Senate in December and our estimate for the House bill last October noted that inflation-adjusted Medicare spending per beneficiary would slow sharply under those proposals. We estimated that growth in such spending under the Senate bill would drop from about 4 percent per year for the past two decades to roughly 2 percent per year for the next two decades; whether such a reduction 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. In addition, CBOs estimates have shown that relaxing previously enacted constraints on Medicare spending can add significantly to long-run budget deficits, as we wrote in answer to a question last fall about the effects of combining the House bill with a change in the so-called Sustainable Growth Rate mechanism for Medicares payments to physicians.

As we reported yesterday, budget deficits would be reduced, in our estimation, if the reconciliation proposal and Senate-passed health bill are enacted and remain unchanged throughout the next two decades. However, the legislation would maintain and put into effect a number of provisions that might be difficult to sustain over a long period of time. Whether any of its provisionsand if so, which onesmight be changed in the future is not for CBO to judge.

Today, in a letter responding to questions from Congressman Ryan, CBO described the effects on the federal budget of enacting the reconciliation proposal and the Senate-passed health bill if:

  • The excise tax on insurance plans with relatively high premiumswhich would take effect in 2018 and for which the thresholds would be indexed at a lower rate beginning in 2020was never implemented;
  • The annual indexing provisions for premium subsidies offered through the insurance exchanges continued in the same way after 2018 as beforein contrast with the reconciliation proposal, which would slow the growth of subsidies after 2018;
  • The adjustment to physician payment rates under Medicare that was passed by the House last fall was included; and
  • The Independent Payment Advisory Boardwhich would be required, under certain circumstances, to recommend changes to the Medicare program to limit the rate of growth in that programs spending, and whose recommendations would go into effect automatically unless blocked by subsequent legislative actionwas never implemented.

We estimated that if this set of changes was made, the legislation as modified would increase federal budget deficits during the decade beyond 2019 relative to those projected under current lawwith a total effect during that decade in a broad range around one-quarter percent of GDP.