The Effects of Health Reform Legislation beyond the Next Decade

July 24, 2009

In this years discussion of health reform, many people have put forth the goals of bending the curve of the federal budgetary commitment to health care, the federal budget deficit, or overall national health expenditures. Accordingly, Members of Congress are asking CBO to analyze the extent to which different health reform proposals meet these goals. Last month we wrote to Senator Conrad and Senator Gregg: CBO does not provide formal cost estimates beyond the 10-year budget window because the uncertainties are simply too great. However, in evaluating proposals to reform health care, the agency will endeavor to offer a qualitative indication of whether they would be more likely to increase or decrease the budget deficit over the long term. Let me explain our methodology for doing this and the limits of that methodology, beginning with the federal budget and then concluding with national health spending.

The health reform proposals being discussed this year generally include many specific changes to tax and spending policies. Although we and the staff of the Joint Committee on Taxation base our 10-year estimates of the budgetary effects of reform proposals on detailed examination of these changes, we cannot realistically conduct longer-term analysis at that level of detail. Therefore, we group the changes in a reform proposal into several broad categories and evaluate the rate at which the budgetary impact of each of those broad categories is likely to increase over time. Some elements of reform proposals, such as subsidies for people who purchase insurance through exchanges, tend to grow roughly in line with health care costs, although the allocation of those growing costs between enrollees and the government can push the growth rate somewhat higher or lower. Other elements of some proposals, like tax increases unrelated to health care,would generally grow along with increases in taxable incomes, although we aim totake into accountspecific aspects of legislation that can raise or lower that rate. Still other parts of proposals, such as changes in Medicare and Medicaid payment rates or practices, can have effects that increase at a range of rates at different points in time depending on the nature and extent of the changes. For all of these parts of reform proposals, we evaluate the impact of the legislation as written and do not assess the likelihood that policies will be changed later through subsequent legislation.

After we have developed an estimate of the growth rate of the costs or savings in each broad category, we assess how those costs or savings would evolve from the end of the 10-year budget window through the following decade. The result is a very approximate sense of whether a piece of legislation is increasing or decreasing the federal budgetary commitment to health care or the federal budget deficit during the second decade and at the end of that decade.

We are very reluctant to extend these extrapolations further into the future, because the uncertainties surrounding them magnify considerably. Although we publish projections of the federal budget 75 years ahead, those projections are inherently uncertain and are designed to identify broad trends rather than to reflect specific pieces of legislation. Trying to project several decades ahead not just the evolution of the health care system under current law but also the effects on that system of a particular comprehensive and interacting set of reforms is extremely difficult. One particular challenge is that our long-term projections under current law incorporate changes that we expect would be made by state governments and the private sector in response to the growing burden of health care spending (responses which could occur under current federal law). Because that burden will mount over time, the responses will likely increase in intensity as well; as a result, determining whether reforms proposed in current legislation might ultimately have occurred through the actions of these other agents becomes increasingly complicated as the time horizon lengthens. Indeed, our Panel of Health Advisers has encouraged us to focus on estimating the effects of legislation during the next couple of decades and not to attempt to estimate effects further out.

So, how do we evaluate whether certain health reform proposals bend the curve in terms of the federal budgetary commitment to health care or the federal budget deficit? And what does bend the curve mean? If the projected budget deficit is lower20 years from now under a reform proposal than it would be without any policy changes, then that curve is clearly being bent downward, on average, during the next twenty years; if the projected deficit is higher, then that curve is being bent upward. Would those downward or upward trajectories continue indefinitely? That sort of extrapolation might seem natural, but we simply cannot tell whether it is appropriate. Although we think we can provide a rough indication of the level of federal health spending or the budget deficit 20 years ahead, we are not confident that we have an analytic basis for projecting their growth rates at that point, much less for evaluating whether those growth rates will continue in future years. Therefore, we are more confident talking about whether proposals would lower or raise the curve of the federal budget deficit or budgetary commitment to health care 10 to 20 years from now than we are discussing the shape of the curve in that time period or the level or slope of the curve beyond that period.

CBO does not analyze national health expenditures (NHE) as closely as we analyze the federal budget (although we are working to enhance our capabilities in this area). Accordingly, we cannot provide precise quantitative estimates of the effect of health reform proposals on NHE even within the first 10 years. However, we will try to offer a qualitative indication of whether proposals would be more likely to raise or lower NHE during the next couple of decades. Expanding insurance coverage would raise NHE, because insured people generally receive more medical care than do uninsured people (see CBOs Key Issues in Analyzing Major Health Insurance Proposals, December 2008, pages 71-76). Yet, the increase in NHE would be much smaller than the increase in federal spending because some of that additional spending represents a shift in costs from other payers to the government (for example, new subsidies for people who would have purchased insurance anyway). At the same time, changes in Medicare or Medicaid that reduce federal spending and do not merely shift health costs to other payers would generally reduce NHE. For specific pieces of legislation, we will try our best to provide a very approximate sense of balance between these two opposing forces.

In sum, as health reform legislation is considered by the Congress, CBO will endeavor to offer a qualitative indication of whether certain legislation would be more likely to increase or decrease the federal budgetary commitment to health care, the federal budget deficit, and national health expenditures in the decade beyond the 10-year budget window. Whether these effects would persist in more-distant decades is not clear, and that uncertainty is an inherent feature of policy changes that could have substantial effects on such a large and growing share of the U.S. economy.