Options for Reducing the Deficit: Health

Posted by
Noelia Duchovny
December 5, 2013

CBO recently issued a report Options for Reducing the Deficit: 2014 to 2023, a compendium of 103 options for reducing federal spending or increasing tax revenues. In order to facilitate use of that volume, today CBO made available on its website a tool for finding budget options according to their major budget category, budget function, and major program category. In addition, because spending on health care and tax provisions related to health care have such a major impact on the nation’s budgetary outlook, today the agency has released a volume that contains just the options related to health. That publication is a reprint of Chapter 5 of the full volume of options and includes the same 16 options that were in that chapter—all listed at the bottom of this post with estimates of their budgetary savings.

Federal Spending and Revenues Related to Health

The federal government’s net outlays for mandatory health care programs, combined with the subsidies for health care that are conveyed through reductions in federal taxes, exceeded $1.0 trillion in fiscal year 2013, CBO estimates. Net outlays for Medicare and Medicaid, the two largest federal health care programs, totaled an estimated $760 billion, roughly one-quarter of all federal spending in 2013. Other mandatory health care programs include the Children’s Health Insurance Program (CHIP), the Federal Employees Health Benefits program for civilian retirees, and the TRICARE for Life program for military retirees. In addition, the federal tax code gives preferential treatment to payments for health insurance and health care, primarily through the exclusion of premiums for employment-based health insurance from income and payroll taxes. CBO estimates that the tax expenditure for that exclusion (accounting for income and payroll taxes together) was about $250 billion in 2013.

The federal government also supports many health programs that are funded through annual discretionary appropriations: Taken together, funding for public health activities, health and health care research initiatives, health care programs for veterans, and certain other health-related activities totaled about $115 billion in 2013.

Under current law, federal budgetary costs related to health will increase considerably starting in 2014, as some people become newly eligible for Medicaid and others qualify for tax subsidies to purchase coverage through new health insurance exchanges. Policy changes relating to health could reduce federal deficits by lowering outlays for mandatory health care programs and by limiting tax preferences for health care. Reductions in discretionary spending on health programs would reduce total appropriations if the statutory caps set by the Budget Control Act of 2011 were reduced as well, or if appropriations were provided at levels below those caps.

Spending for Medicare and Medicaid has grown quickly in recent decades, in part because of rising enrollment. Rising costs per enrollee also have driven spending growth in those programs—much like growth in private spending for health care. In 1975, a decade after the enactment of legislation creating the Medicare and Medicaid programs, federal spending on those programs, net of offsetting receipts, accounted for 1.2 percent of gross domestic product (GDP). That share rose to 2.0 percent of GDP by 1985 and has more than doubled since then, as net federal spending for the two programs grew to 4.6 percent of GDP in 2013, by CBO’s estimates. Between 1985 and 2013, the share of the population enrolled in Medicare rose from 13 percent to 16 percent, and average annual enrollment in Medicaid rose from 8 percent to 18 percent of the population. Including the smaller CHIP (which was established in 1997), 20 percent of the population was enrolled in either Medicaid or CHIP, on average, in 2013, according to CBO’s estimates.

Per capita spending for health care in this country has been rising in recent decades. A key reason has been the emergence, adoption, and widespread diffusion of new medical technologies and services. Other factors contributing to the growth of health care spending include increases in personal income and the expanded scope of health insurance coverage. Altogether, health care spending per person has expanded more rapidly than the economy for a number of years, although the rate of increase in health care spending has slowed recently.

Discretionary spending related to health also has grown significantly in recent decades. From 1973 to 1998, it rose at an average annual rate of about 7 percent, and that rate increased to 10 percent between 1998 and 2004. Since then, health-related discretionary spending has risen more slowly overall—at an average annual rate of about 5 percent—although spending in different program areas has grown at markedly different rates. For example, from 2004 to 2012, outlays for veterans’ health care rose at an average annual rate of 8 percent, whereas spending for health research and training (mostly by the National Institutes of Health) grew by an average of about 3 percent per year.

Over the next decade, the government’s health care programs will be a continuing source of budgetary pressure—primarily because of a sharp increase in the numbers of beneficiaries enrolled in those programs but also because of ongoing growth in health care costs per beneficiary. Assuming that current laws governing those programs generally do not change, net federal spending for Medicare, Medicaid, CHIP, and subsidies for premiums and cost sharing in the health insurance exchanges is projected by CBO to reach 5.9 percent of GDP in 2023, compared with 4.6 percent in 2013 (see the figure below). By comparison, outlays for Social Security are projected to be 5.3 percent of GDP in 2023. The tax expenditure for employment-based insurance (including income and payroll taxes) will remain close to 1.5 percent of GDP during the coming decade, CBO projects. Although health care costs per person are expected to continue to grow faster than the economy, which will tend to push up the tax expenditure relative to GDP, an excise tax on high-cost employment-based plans (set to begin in 2018) will work in the opposite direction.

The projected rise in the number of beneficiaries of federal health care programs has two main causes. First is the aging of the population—particularly the retirement of the baby-boom generation—which, over the next 10 years, will result in an increase of about one-third in the number of people who receive benefits from Medicare. Second is the expansion of federal support for health insurance under current law, which will boost the number of Medicaid recipients and make other people eligible for subsidies as they purchase health insurance through exchanges. Despite the significant expansion of federal support for health care for lower-income people over the next 10 years, only about one-fifth of federal spending for the major health care programs in 2023 will finance care for able-bodied, nonelderly people. CBO projects that roughly another one-fifth will fund care for people who are blind or disabled, and about three-fifths will go toward care for people who are 65 or older.

Federal Spending on Major Health Care Programs, by Category, 1973 to 2023


Most of the 16 options would either decrease federal spending on health programs or increase revenues (or equivalently, reduce tax expenditures) as a result of changes in tax provisions related to health care. Some options would result in a reallocation of health care spending—from the federal government to businesses, households, or state governments, for example—and most would give parties other than the federal government stronger incentives to control costs while exposing them to more financial risk.

Eleven of the options are similar in scope to those in CBO’s previous volumes of budget options. The other five options address broad approaches to changing federal health care policy, all of which would offer lawmakers a variety of alternative ways to alter current law. Those five broad approaches are the following:

  • Impose caps on federal spending for Medicaid,
  • Convert Medicare to a premium support system,
  • Change the cost-sharing rules for Medicare and restrict medigap insurance,
  • Bundle Medicare’s payments to health care providers, and
  • Reduce tax preferences for employment-based health insurance.

* For options primarily affecting mandatory spending or revenues, savings sometimes would derive from changes in both. When that is the case, the savings shown include effects on both mandatory spending and revenues. For options primarily affecting discretionary spending, the savings shown are the decrease in discretionary outlays.

Noelia Duchovny is an analyst in CBO’s Health, Retirement, and Long-Term Analysis Division. The options related to health are the result of work by various analysts at CBO, whose names can be found on the About the Document page.