Congressional Budget Office
Director's Blog

This morning CBO released an analysis of how health insurance premiums might be affected by enactment of the Patient Protection and Affordable Care Act, as proposed by Senator Reid on November 18, 2009. The marketplace for health insurance is complex and many-faceted, and the impact of a proposal on premiums cannot be readily summarized in one or two numbers. The analysis, which was prepared in conjunction with the staff of the Joint Committee on Taxation (JCT), looks separately at the average effects on premiums in 2016 for coverage purchased individually (in the “nongroup” market), coverage purchased by small employers, and coverage provided by large employers. However, many individuals and families would experience changes in premiums that differed from the changes in average premiums in their insurance market. Table 1 in our analysis summarizes the major components of CBO and JCT’s estimate of the changes in average premiums that would result from the legislation.

The analysis focuses on the effects of the legislation on the average premium per person—that is, per covered life, including dependents covered by family policies. The analysis examines the effects of the proposal in 2016 in order to indicate the impact that it would have once its provisions were fully implemented. As with other types of projections involving significant changes in the nation’s health insurance system, a substantial degree of uncertainty surrounds any estimates of the legislation’s impact on future premiums.

Effect of the Legislation on Premiums in 2016

The effects of the proposal on premiums would differ across insurance markets. The largest effects would be seen in the nongroup market, which would grow in size under the proposal but would still account for only 17 percent of the overall insurance market in 2016. The effects on premiums would be much smaller for employer-based coverage (which accounts for five-sixths of the insurance market). 

Nongroup Market

The nongroup market would consist of coverage purchased individually through the new insurance exchanges that would be established, and coverage purchased by individuals and families directly from insurers. The average, unsubsidized premium per person covered (including dependents) for new nongroup policies would be about 10 percent to 13 percent higher in 2016 than the average premium for nongroup coverage in that same year under current law.

The government would subsidize the purchase of nongroup insurance through the exchanges for individuals and families with income between 133 percent and 400 percent of the federal poverty level (FPL). (Most nonelderly people with income below 133 percent of the FPL would be eligible for Medicaid.) More than half of the enrollees in nongroup policies would get federal subsidies, and taking those subsidies into account, the amount that subsidized enrollees would pay for nongroup coverage would be roughly 56 percent to 59 percent lower, on average, than the nongroup premiums charged under current law.

Average premiums in this market would be higher than under current law primarily because the typical insurance policy in this market would cover both a substantially larger share of the average enrollee’s costs for health care and a slightly wider range of benefits. That outcome would reflect the requirement that all new policies in the nongroup (and small group) market cover at least a minimum specified set of “essential health benefits”; the requirement that such policies have a certain minimum actuarial value (that is, the percentage of costs for covered services that the insurer pays); and the design of the federal subsidies, which would encourage many enrollees in the newly established insurance exchanges to join plans with an actuarial value above the required minimum. As a result, new nongroup policies would cover certain services that are often not covered by nongroup policies under current law (such as maternity care, prescription drugs, and mental health and substance abuse treatment). Although new nongroup policies would be required to have an actuarial value of at least 60 percent, federal subsidies would be tied to a “reference premium” equal to the premium of a plan with an actuarial value of 70 percent. As a result, taking into account the projected choices of people who would receive subsidies as well as those who would not, CBO and JCT estimate that the average actuarial value of nongroup policies would be roughly 72 percent. Other effects generated by the proposal would offset some of the premium increase that would result from greater coverage, including savings in administrative costs and increased competition among insurers.

Employment-Based Coverage (Small Group and Large Group Markets)

The legislation would have much smaller effects on premiums for employment-based coverage. In the small group market, which is defined in this analysis as consisting of employers with 50 or fewer workers, CBO and JCT estimate that the change in the average premium per person resulting from the legislation could range from an increase of 1 percent to a reduction of 2 percent in 2016 (relative to current law). In the large group market, which is defined here as consisting of employers with more than 50 workers, the legislation would yield an average premium per person that is zero to 3 percent lower in 2016 (relative to current law). Those overall effects reflect the net impact of many relatively small changes, some of which would tend to increase premiums and some of which would tend to reduce them. As in the nongroup market, the effects on the premiums paid by some people for coverage provided through their employer could vary significantly from the average effects on premiums, particularly in the small group market.

Those figures do not include the effects of the small business tax credit on the cost of purchasing insurance. A relatively small share (about 12 percent) of people with coverage in the small group market would benefit from that credit in 2016. For those people, the cost of insurance under the proposal would be about 8 percent to 11 percent lower, on average, compared with that cost under current law. 

The reductions in premiums described above also exclude the effects of the excise tax on high-premium insurance policies offered through employers, which would have a significant impact on premiums for the affected workers but which would affect only a portion of the market in 2016. Specifically, an estimated 19 percent of workers with employment-based coverage would be affected by the excise tax in that year. Those individuals who kept their high-premium policies would pay a higher premium than under current law, with the difference in premiums roughly equal to the amount of the tax. However, CBO and JCT estimate that most people would avoid the cost of the excise tax by enrolling in plans that had lower premiums; those reductions would result from choosing plans that either pay a smaller share of covered health care costs (which would reduce premiums directly as well as indirectly by leading to less use of covered medical services), manage benefits more tightly, or cover fewer services. On balance, the average premium among the affected workers would be about 9 percent to 12 percent less than under current law. Those figures incorporate the other effects on premiums for employment-based plans that were summarized above.

Uncertainty Surrounding These Estimates

The analysis presented here reflects the cost estimate for the legislation that CBO and JCT provided on November 18. The same substantial degree of uncertainty that surrounds CBO and JCT’s estimates of the impact that the proposal would have on insurance coverage rates and the federal budget also accompanies this analysis of the proposal’s effects on premiums. Some components of those effects are relatively straightforward to estimate, such as the effect of imposing specific fees or the effect of a change in the amount of coverage purchased because of requirements for minimum coverage; however, estimating effects that depend heavily on how enrollees, insurers, employers, or other key actors would respond—to such things as the changes in the market rules for nongroup policies or the excise tax on high-premium policies—involve greater uncertainty. The projections of average premiums in each market under current law are also uncertain.

Under the American Recovery and Reinvestment Act of 2009 (ARRA), also known as the economic stimulus package, certain recipients of funds appropriated in ARRA (most grant recipients, contractors, and subcontractors) are required to report the number of jobs they have created or retained with ARRA funding since the law’s enactment in February 2009. The law also requires CBO to comment on that reported number.  Today CBO released a report to satisfy that requirement. The report also provides CBO’s estimates of ARRA’s overall impact on employment and economic output as of the third quarter of calendar year 2009. Those estimates—which CBO considers more comprehensive than the recipients’ reports—are based on evidence from similar policies enacted in the past and various economic models.

Limitations of Recipients’ Estimates

Recipients report that about 640,000 jobs were created or retained with ARRA funding through September 2009. However, such reports do not provide a comprehensive estimate of the law’s impact on employment in the United States. That impact may be higher or lower than the reported number for several reasons (in addition to any issues about the quality of the data in the reports). First, it is impossible to determine how many of the reported jobs would have existed in the absence of the stimulus package. Second, the reports filed by recipients measure only the jobs created by employers who received ARRA funding directly or by their immediate subcontractors (so-called primary and secondary recipients), not by lower-level subcontractors. Third, the reports do not attempt to measure the number of jobs that may have been created or retained indirectly as greater income for recipients and their employees boosted demand for products and services. Fourth, the recipients’ reports cover only certain appropriations made under ARRA, which encompass only about one-quarter of the total amount spent by the government or conveyed through tax reductions in ARRA through September 2009. The reports do not measure the effects of other provisions of the stimulus package, such as tax cuts and transfer payments to individuals.

CBO’s Estimates of ARRA’s Impact on Employment and Economic Output

Estimating the law’s overall effects on employment requires a more comprehensive analysis than the recipients’ reports provide. Therefore, looking at the actual amounts spent so far (where identifiable) and estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law’s impact on employment and economic output using evidence about how previous similar policies have affected the economy and various mathematical models that represent the workings of the economy. On that basis, CBO estimates that in the third quarter of calendar year 2009, an additional 600,000 to 1.6 million people were employed in the United States, and real (inflation-adjusted) gross domestic product (GDP) was 1.2 percent to 3.2 percent higher, than would have been the case in the absence of ARRA. Those ranges are intended to encompass most economists’ views and to reflect the uncertainty involved in such estimates.

CBO’s current estimates differ only slightly from those CBO prepared in March 2009. At that time, CBO projected that in the third quarter of 2009, U.S. employment would be higher by 600,000 to 1.5 million people with ARRA than it would be without the law, and real GDP would be 1.1 percent to 3.0 percent higher. CBO’s new estimates reflect small revisions to earlier projections of the timing and magnitude of changes to spending and revenues under ARRA. On the one hand, tax cuts through September are now estimated to be roughly $10 billion larger than originally projected (mainly because certain tax changes were carried out more quickly than anticipated); on the other hand, the net change in federal spending as a result of the legislation has turned out to be slightly smaller than CBO initially estimated.

CBO’s current estimates do not reflect any change in the agency’s assessment of the effect that each dollar of spending increase or revenue decrease has on output and employment. Since March, CBO has continued to examine new research on the relationships between changes in government policy and changes in output and employment. To date, that examination has generated no significant change in CBO’s assessment of those relationships. CBO has also examined incoming data on output and employment during the period since ARRA’s enactment. However, those data are not as helpful in determining ARRA’s economic effects as might be supposed, because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact. Economic output and employment in the spring and summer of 2009 were lower than CBO had projected at the beginning of the year. But in CBO’s judgment, that outcome reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects of ARRA. 

Today CBO released a letter providing additional information on the budgetary effects of proposals to establish the Community Living Assistance Services and Supports (CLASS) Program, a new federal program for long-term care insurance. H.R. 3962, the Affordable Health Care for America Act, as passed by the House of Representatives, and the Patient Protection and Affordable Care Act proposed by Senator Reid contain similar proposals that would establish a voluntary program for such insurance.

The major difference between the two proposals is in the population eligible to enroll: H.R. 3962 would allow both active workers and nonworking spouses to enroll, while the Senate proposal would allow only active workers to participate. For both the House and Senate versions of CLASS, CBO estimates that the cash flows under the new program would generate budgetary savings (that is, a reduction in net federal outlays) for the 2010-2019 period and for the 10 years following 2019, followed by budgetary costs (an increase in net federal outlays) in subsequent decades. That pattern would occur because enrollees would pay premiums for a number of years before receiving benefits. Because participation in the program would be voluntary, collections of insurance premiums under CLASS would be recorded as offsetting receipts (a credit against direct spending).

On balance, CBO estimates that the version of CLASS specified in H.R. 3962 would reduce deficits by $102 billion over the 2010-2019 period, and the version contained in the Senate proposal would reduce deficits by $72 billion over that period.

Last week, CBO released a revised estimate for H.R. 3962 to correct a mistake that CBO made in its earlier assessment regarding the population eligible to enroll in the CLASS program.  Please see my blogs on November 19 and November 20 for more information.

The consumption of fossil fuels and deforestation are producing increasingly large quantities of greenhouse gases, particularly carbon dioxide (CO₂). Most experts expect that the accumulation of such gases in the atmosphere will result in a variety of environmental changes over time Although the magnitude and consequences of such developments are highly uncertain, researchers generally conclude that a continued increase in atmospheric concentrations of greenhouse gases would have serious and costly effects.

Reducing emissions, through a cap-and-trade program or regulations for example, would impose a burden on the economy by lessening the use of fossil fuels and altering patterns of land use. Today CBO released a brief discussing the economic costs of reducing greenhouse-gas emissions in the United States, describing the main determinants of costs, how analysts estimate those costs, and the magnitude of estimated costs. The brief also illustrates the uncertainty surrounding such estimates using studies of a recent legislative proposal, H.R. 2454, the American Clean Energy and Security Act of 2009.

What Determines the Costs of Reducing Emissions?

The costs of reducing emissions would depend on several factors: the growth of emissions in the absence of policy changes; the types of policies used to restrict emissions and the magnitude of the reductions achieved by those policies; the extent to which producers and consumers could moderate emission-intensive activities without reducing their material well-being; and the policies pursued by other countries.

Emissions in the Absence of Policy Changes.Experts generally expect that, in the absence of policy changes to reduce them, domestic greenhouse-gas emissions will grow substantially in the next few decades. (See CBO’s 2009 publication, Potential Impacts of Climate Change in the United States.) However, long-term trends in emissions are notoriously difficult to project because they will be influenced by population and income growth, by advances in technology, and by the availability and price of fossil fuels. The more rapidly that emissions are projected to grow without policy changes, the greater the changes that would be required and the greater the mitigation costs that would be incurred to keep emissions below any specific level.

Types of Policies Adopted. A basic choice facing policymakers is whether to adopt conventional regulatory approaches, such as setting standards for machinery, equipment, and appliances, or to employ market-based approaches, such as imposing taxes on emissions or establishing cap-and trade programs (which, over a period of time, restrict the quantity of emissions that can be produced through the allocation of allowances to emit CO₂). Experts generally conclude that market-based approaches would reduce emissions to a specified level at significantly lower cost than conventional regulations. Whereas conventional regulatory approaches impose specific requirements that may not be the least costly means of reducing emissions, market-based approaches would provide much more latitude for firms and households to determine the most cost-effective means of accomplishing that goal.

Policymakers face many other critical decisions. Specifically, they must choose which types of emissions to control, and when and how much to reduce them. Further, if policymakers decided to adopt market mechanisms to control emissions, they would face decisions about which type of mechanism to use (a carbon tax vs. a cap-and-trade system, for example), as well as how to allocate allowances in a cap-and-trade program or how to use the revenues generated by taxes on emissions. For a more detailed discussion of the issues facing policymakers in designing a plan to reduce CO₂ emissions, see the following CBO publications:

• Policy Options for Reducing CO₂ Emissions (February 2008)
• How Regulatory Standards Can Affect a Cap-and-Trade Program for Greenhouse Gases (September 2009)
• Uncertainty in Analyzing Climate Change: Policy Implication (January 2005)
• The Use of Offsets to Reduce Greenhouse Gases (August 2009)
• Trade-Offs in Allocating Allowances for CO₂ Emissions (April 2007)
• Limiting Carbon Dioxide Emissions: Prices Versus Caps (March 2005)
• Flexibility in the Timing of Emission Reductions Under a Cap-and-Trade Program (March 2009)

The Response of the Economy. By gradually increasing the prices of fossil fuels and other goods and services associated with greenhouse-gas emissions, market-based policies would induce firms and households to change their practices-in the short run, by driving slightly less, adjusting thermostats, and switching fuels in the power sector; and in the long run, by buying more-efficient vehicles and equipment, for example. Rising costs of emission-intensive activities would tend to dampen overall economic activity by reducing the productive capacity of existing capital and labor, by reducing households’ income (which, in turn, would tend to reduce consumption and saving), and by reducing real (inflation-adjusted) wages. The more easily that producers and consumers can respond to price changes by altering their production techniques and behavior and by bringing low-emission fuels and technologies to market, the lower the costs of reducing emissions would be. (See CBO’s 2003 study, Economics of Climate Change: A Primer.)

Efforts by Other Countries. The stringency of other nations’ efforts to reduce emissions could strongly influence the costs of reducing them in the United States. As long as a significant percentage of the world’s economy did not restrict greenhouse-gas emissions, a portion of any reductions achieved in the United States would probably be offset by increases in emissions elsewhere. Such “leakage” could be avoided if most countries restricted emissions at the same time. Even so, the policies used in other countries would influence costs in the United States.

How Large Are Estimated Costs?

In recent years, a few legislative proposals for long-term emission reductions have been analyzed using several different models, providing an opportunity to compare cost estimates and to understand the sources of differences in estimates. Most recently, several groups have released estimates of the economic impact of H.R. 2454, the American Clean Energy and Security Act of 2009. That bill would create two cap-and-trade programs for greenhouse-gas emissions-a large one applying to CO₂and most other greenhouse gases, and a much smaller one applying to hydrofluorocarbons-and would make further significant changes in climate and energy policy.

Some of the findings of the leading models are similar. In nearly all of the reported scenarios, changes in the demand for energy and reductions in overall energy use are modest through 2025. However, the projected allowance prices vary substantially.

The aggregate employment effects of H.R. 2454 are likely to be modest over the long term. However, the legislation would cause a significant, although gradual, shift in the composition of employment over time, with potentially substantial adverse effects for some workers, families, and communities. Production and employment would shift away from industries related to the production of carbon-based energy and energy-intensive goods and services and toward the production of alternative and lower-emission energy sources.

All of the models reporting macroeconomic impacts project that the emission reductions required by H.R. 2454 would slightly dampen the growth of GDP over the long term. Quantitative estimates of the losses in GDP and consumption vary among studies, depending in large part on differences in assumptions about the availability of offsets (reduced availability of offsets increases the emission reductions required in the energy sector and thus increases economic costs) and differences in assumptions about the sensitivity of energy use to changes in prices (reduced sensitivity increases the price hikes required to reach emission targets and thus increases economic costs).

For a more detailed discussion, see CBO’s analysis of H.R. 2454 in the following cost estimates and publications:

• Cost estimate for H.R. 2454, as ordered reported by the House Committee on Energy and Commerce (June 2009)
• Cost estimate for H.R. 2454, as amended and reported by the House Committee on Rules (June 2009)
• The Estimated Costs to Households from the Cap-and-Trade Provisions of H.R. 2454 (June 2009)
• The Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions (September 2009)

This issue brief was prepared by Robert Shackleton of CBO’s Macroecononic Analysis Division.

In response to many questions we have received, CBO has released several additional pieces of analysis of the Patient Protection and Affordable Care Act:

• Subsidies and payments at different income levels
• Distribution of individual mandate penalties
• Effect on the Hospital Insurance (HI) trust fund
• Effect on projected enrollment in Medicare Advantage plans and subsidies for extra benefits not covered by Medicare

CBO has just released a revised estimate of the net budgetary impact of H.R. 3962, the Affordable Health Care for America Act, the health care reform bill that was passed by the House of Representatives on November 7. The revised estimate corrects a mistake that CBO made in its earlier assessment of a provision that would establish the Community Living Assistance Services and Supports (CLASS) program, a federal insurance program for long-term care.  In the previous estimate, which was transmitted on November 6, CBO and the staff of the Joint Committee on Taxation (JCT) estimated that changes in direct spending and revenues from enacting H.R. 3962 would yield a net reduction in federal budget deficits of $109 billion over the 2010-2019 period. To reflect the change in our assessment of the CLASS provision, CBO and JCT now estimate that the legislation would yield a net reduction in deficits of $138 billion over the 10-year period.

According to the CLASS provision in H.R. 3962, both active workers and their nonworking spouses would be eligible to enroll in a voluntary federal program of long-term care insurance. Because of an oversight discussed in yesterday’s blog, CBO’s original estimate of the CLASS provision did not reflect the inclusion of nonworking spouses. CBO anticipates that the average nonworking spouse who would enroll in the program would have more functional limitations than the average enrolled worker, which would make nonworking spouses more likely to qualify in the future for the program’s benefits.

CBO’s corrected estimates are that the monthly premium for the CLASS program as it is specified in H.R. 3962 would average about $146 in 2011 (as compared with $123 in the original estimate) and that the program would reduce deficits by about $102 billion over the 2010-2019 period, rather than the original estimate of a reduction of about $72 billion over 10 years. (The bill would require premiums to be set so as to cover the full cost of the program as measured on an actuarial basis; the program’s cash flows would show net receipts for a number of years, followed by net outlays in subsequent decades.)

As explained in yesterday’s blog, the CLASS provision in the Senate bill proposed this week would not include nonworking spouses, and CBO projects that the CLASS program in the Senate legislation would reduce deficits by $72 billion over the 2010-2019 period.

CBO just released a letter responding to questions from Congressman Ryan about H.R. 3961, the Medicare Physicians Payment Reform Act of 2009, which is scheduled to be considered by the House of Representatives today. Congressman Ryan inquired about the total budgetary impact of enacting that bill, which would increase the rates Medicare pays to physicians, along with H.R. 3962, the Affordable Health Care for America Act, the broad health care reform bill passed by the House of Representatives a few weeks ago.

H.R. 3961 would change payment rates and restructure the sustainable growth rate (SGR), the formula that determines the updates to payment rates for fee-for-service physicians’ services in Medicare. Under current law, those payment rates are scheduled to be reduced by about 21 percent in January 2010, and CBO estimates that the rates will be reduced by about 2 percent annually for several subsequent years. H.R. 3961 would increase those payment rates by 1.2 percent in 2010 and implement a new formula beginning in 2011. Those changes would result in significantly higher payment rates for physicians than those that would result under current law.

CBO estimates that enacting H.R. 3961, by itself, would cost $210 billion over the 2010–2019 period. CBO and the staff of the Joint Committee on Taxation have separately estimated that enacting H.R. 3962 would reduce federal budget deficits by $109 billion over that same period.

CBO estimates that enacting both bills would add $89 billion to budget deficits over the 2010–2019 period, somewhat less than the sum of the effects of enacting the bills separately because of interactions between their provisions. The agency estimates that the two bills together would increase the budget deficit in 2019 by $23 billion relative to current law, an increment that would grow in subsequent years.

A detailed year-by-year projection for the following decade, like those that CBO prepares for the 10-year budget window, would not be meaningful because the uncertainties involved are simply too great. CBO has therefore developed a rough outlook for that decade. As stated in its October 29, 2009, letter to Congressman Charles B. Rangel, “CBO expects that [H.R. 3962] would slightly reduce federal budget deficits in that decade relative to those projected under current law—with a total effect during that decade that is in a broad range between zero and one-quarter percent of GDP [gross domestic product].” If both H.R. 3961 and H.R. 3962 were enacted, CBO expects that federal budget deficits during the decade following the 10-year budget window would increase relative to those projected under current law—with a total effect during that decade that is in a broad range between zero and one-quarter percent of GDP.

Last night CBO and the staff of the Joint Committee on Taxation (JCT) issued an estimate of the budgetary effects of the Patient Protection and Affordable Care Act proposed by Senator Reid. Among other things, the bill would establish a mandate for most legal residents of the United States to obtain health insurance; set up insurance “exchanges” through which certain individuals and families could receive federal subsidies to substantially reduce the cost of purchasing that coverage; significantly expand eligibility for Medicaid; substantially reduce the growth of Medicare’s payment rates for most services (relative to the growth rates projected under current law); impose an excise tax on insurance plans with relatively high premiums; and make various other changes to the federal tax code, Medicare, Medicaid, and other programs.

Estimated Budgetary Impact

CBO and JCT estimate that the direct spending and revenue effects of enacting the Patient Protection and Affordable Care Act would yield a net reduction in federal deficits of $130 billion over the 2010-2019 period. That estimate is subject to substantial uncertainty.

The estimate includes a projected net cost of $599 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $848 billion in subsidies provided through the exchanges, increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $149 billion in revenues from the excise tax on high-premium insurance plans and $100 billion in net savings from other sources. Over the 2010–2019 period, the net cost of the coverage expansions would be more than offset by the combination of other spending changes that CBO estimates would save $491 billion and other provisions that JCT and CBO estimate would increase federal revenues by $238 billion.

In total, CBO and JCT estimate that the legislation would increase outlays by $356 billion and increase revenues by $486 billion between 2010 and 2019.

Effects of Provisions Regarding Insurance Coverage

By 2019, CBO and JCT estimate, the number of nonelderly people who are uninsured would be reduced by about 31 million, leaving about 24 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants). Under the legislation, the share of legal nonelderly residents with insurance coverage would rise from about 83 percent currently to about 94 percent.

About 25 million people would purchase their own coverage through the new insurance exchanges, and there would be roughly 15 million more enrollees in Medicaid and CHIP than is projected under current law. Relative to currently projected levels, the number of people purchasing individual coverage outside the exchanges would decline by about 5 million, and the number obtaining coverage through their employer would also decline by about 5 million. Roughly one out of eight people purchasing coverage through the exchanges would enroll in the public plan administered by the Secretary of Health and Human Services, CBO estimates, meaning that total enrollment in that plan would be 3 million to 4 million.

Effects of the Legislation Beyond the First 10 Years

Although CBO does not generally provide cost estimates beyond the 10-year projection period (2010 through 2019 currently), many Members have requested CBO analyses of the long-term budgetary impact of broad changes in the nation’s health care and health insurance systems. A detailed year-by-year projection for years beyond 2019, like those that CBO prepares for the 10-year budget window, would not be meaningful because the uncertainties involved are simply too great. CBO has therefore developed a rough outlook for the decade following the 10-year budget window.

All told, the legislation would reduce the federal deficit by $8 billion in 2019, CBO and JCT estimate. In the decade after 2019, the gross cost of the coverage expansion would probably exceed 1 percent of gross domestic product (GDP), but the added revenues and cost savings would probably be greater. Consequently, CBO expects that the bill, if enacted, would reduce federal budget deficits over the ensuing decade relative to those projected under current law—with a total effect during that decade that is in a broad range around one-quarter percent of GDP. The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it, compared with CBO’s 10-year budget estimates. The expected reduction in deficits would represent a small share of the total deficits that would be likely to arise in that decade under current policies.

CBO uses the term “federal budgetary commitment to health care” to describe the sum of net federal outlays for health programs and tax preferences for health care—providing a broad measure of the resources committed by the federal government that includes both its spending for health care and the subsidies for health care that are conveyed through reductions in federal taxes. During the 2010-2019 period, that budgetary commitment would be about $160 billion higher under the legislation than under current law. CBO expects that, during the decade following the 10-year budget window, the increases and decreases in the federal budgetary commitment to health care stemming from this legislation would roughly balance out, so that there would be no significant change in that commitment. The range of uncertainty surrounding that assessment is quite wide.

These longer-term calculations assume that the provisions are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments, and legislation to do so again is currently under consideration in the Congress. The legislation would put into effect a number of procedures that might be difficult to maintain over a long period of time. Although it would increase payment rates for physicians’ services for 2010 relative to those in effect for 2009, those rates would be reduced by about 23 percent for 2011 and then remain at current-law levels (that is, as specified under the SGR) for subsequent years. At the same time, the legislation includes a number of provisions that would constrain payment rates for other providers of Medicare services. In particular, increases in payment rates for many providers would be held below the rate of inflation (in expectation of ongoing productivity improvements in the delivery of health care). The projected longer-term savings for the legislation also assume that the Independent Medicare Advisory Board that would be established by the bill is fairly effective in reducing costs—beyond the reductions that would be achieved by other aspects of the bill—to meet the targets specified in the legislation.

Based on the extrapolation described above, CBO expects that Medicare spending under the bill would increase at an average annual rate of roughly 6 percent during the next two decades—well below the roughly 8 percent annual growth rate of the past two decades (excluding the effect of establishing the Medicare prescription drug benefit). Adjusting for inflation, Medicare spending per beneficiary under the bill would increase at an average annual rate of roughly 2 percent during the next two decades—much less than the roughly 4 percent annual growth rate of the past two decades. Whether such a reduction in the growth rate 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.

The Patient Protection and Affordable Care Act proposed yesterday by Senator Reid and H.R. 3962, the Affordable Health Care for America Act passed by the House of Representatives, contain very similar proposals regarding long-term care insurance. Both proposals would establish a voluntary federal program for such insurance, termed the Community Living Assistance Services and Supports (CLASS) program. Under the proposals, individuals could purchase coverage that would provide specified future benefits, and premiums would be set to cover the full cost of the programs as measured on an actuarial basis. However, the programs’ cash flows would show net receipts for a number of years, followed by net outlays in subsequent decades. In particular, the programs would pay out far less in benefits than they would receive in premiums over the 10-year budget window (2010-2019), thereby reducing federal budget deficits over that period.

According to the legislation proposed in the Senate, only active workers would be eligible to enroll in the program. Under that specification, CBO estimates that the monthly insurance premium would average about $123 in 2011 and that the proposal would reduce budget deficits by about $72 billion over the 2010-2019 period.

According to the legislation passed by the House, both active workers and their non-working spouses would be eligible to enroll. CBO anticipates that the average non-working spouse who would enroll in the program would have more functional limitations than the average enrolled worker, which would make non-working spouses more likely to qualify in the future for the program’s benefits. Due to an oversight, CBO’s original estimate of the House version of the CLASS program did not reflect the inclusion of non-working spouses and, as a result, concluded that its premiums and budgetary effects would be the same as those for the Senate version of the program. CBO’s corrected estimates are that the monthly insurance premium for the House version of the CLASS program would average about $146 in 2011 and that the program would reduce budget deficits by about $102 billion over the 2010-2019 period. Correspondingly, the program’s outlays in future years would also be larger than those under the Senate version of the program. 

CBO’s Acting Assistant Director in charge of the National Security Division, Matt Goldberg, testified today before the House Committee on Armed Services about the long-term implications of the fiscal year 2010 budget submission for the Department of Defense (DoD). Today’s testimony is similar to CBO’s testimony before the House Budget Committee last month. Decisions about national defense that are made today—whether they involve weapon systems, military compensation, or numbers of personnel—can have long-lasting effects on the composition of the nation’s armed forces and the budgetary resources needed to support them.

In previous years, CBO used DoD’s Future Years Defense Program (FYDP), which the department typically prepares each fiscal year and submits to the Congress as part of the President’s budget request, as a key source of information for projecting defense spending. This year, however, the Administration did not submit a FYDP. CBO’s projections for fiscal years 2011 through 2028 are based on the President’s 2010 budget request; changes to defense plans announced in early April 2009 by Secretary of Defense Robert M. Gates; and other sources, including press releases and briefing materials.
 
Base Projections of Defense Spending
 
CBO’s base projection of DoD’s current plans averages about $567 billion annually (in constant 2010 dollars) from 2011 to 2028—excluding overseas contingency operations (that is, overseas military operations against hostile forces, such as those in Iraq and Afghanistan). That amount is about 6 percent more than the $534 billion in total obligational authority requested by the Administration in its regular 2010 budget. Four main factors in particular account for the higher resources in the long term:

• The likelihood of continued real growth in pay and benefits for DoD’s military and civilian personnel;
• Projected increases in the costs of operation and maintenance (O&M) for aging equipment as well as for newer, more complex equipment;
• DoD’s plans to develop and field advanced weapon systems to replace many of today’s military systems that are nearing the end of their service lives; and
• Investments in new capabilities, such as advanced intelligence, surveillance, and reconnaissance systems, to meet emerging security threats.

Rather than having funding provided through supplemental and emergency appropriations, the Administration has requested a full year of anticipated appropriations for overseas contingency operations along with its regular defense budget request for fiscal year 2010. The Administration’s request of $130 billion would support 100,000 service members in Iraq and 68,000 in Afghanistan. CBO does not have access to DoD’s estimates of costs for overseas contingency operations in 2011 or later that would have been contained in the 2010 FYDP.
 
Potential for Higher Costs
 
The long-term demand for defense resources could be larger than CBO’s base projections. CBO has developed a scenario under which, consistent with the Status of Forces Agreement signed by the governments of Iraq and the United States in November 2008, all U.S. troops would be withdrawn from Iraq by December 31, 2011. Under that scenario, the total number of U.S. military personnel deployed worldwide would decline to 30,000 starting in fiscal year 2013, although those troops would be in unspecified locations and not necessarily in Iraq or Afghanistan. CBO estimates that supporting that number of deployed service members would require recurring annual appropriations of about $20 billion in 2010 dollars. CBO refers to those costs as “contingency unbudgeted costs.”
 
Other factors also could increase defense resources above CBO’s base projections. There could be higher costs for developing and purchasing new weapon systems. In addition, as has been true historically, medical costs could rise more rapidly than DoD has assumed. Accounting for those and other factors, as well as contingency costs, CBO has projected the “total unbudgeted costs” of current defense plans. The inclusion of total unbudgeted costs increases the overall projection to an annual average of $624 billion through 2028, or 17 percent more than the regular funding requested for 2010. Some 38 percent of the total unbudgeted costs between 2013 and 2028 are associated with overseas contingency operations.