ACA Impact on the Federal Budget Deficit

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Affordable Care Act (ACA) >> ACA Impact Analysis >> ACA Impact on the Federal Budget Deficit (last updated 3.17.17)

Short-Term Forecasts (10-Year)

Congressional Budget Office

•  The Budget and Economic Outlook: 2017 to 2027 (January, 2017). “Over the following nine years, the projected deficit increases in most years relative to the size of the economy, reaching 5.0 percent of GDP by 2027. Although revenues are projected to increase as a share of GDP from 18.1 percent in 2018 to 18.4 percent in 2027, outlays (excluding the effects of shifts in timing) are projected to increase faster each year, driven by the aging of the population, the rising costs of health care, and escalating interest payments.
  • Exchange Subsidies. “CBO and JCT estimate that, in calendar year 2017, 9 million people per month, on average, will receive subsidies for nongroup coverage purchased through the health insurance marketplaces established under the ACA. That number is projected to be 11 million in 2027 under current law. The agencies also estimate net federal subsidies for coverage obtained through the marketplaces to be $49 billion, or 0.3 percent of GDP, in fiscal year 2017. Those subsidy amounts are projected to rise at an average annual rate of about 9 percent, reaching $110 billion (or 0.4 percent of GDP) in 2027. For the 2018– 2027 period, the net subsidy is projected to total $919 billion under current law.
  • Medicaid. Spending for Medicaid is expected to increase by $20 billion (or 5.5 percent) in 2017. The projected rate of growth in outlays is about the same as last year’s and is well below the average annual rate of growth recorded over the two years before that, primarily because the optional expansion of coverage authorized by the ACA will have been in place for three years and because the rapid growth in enrollment that occurred during the initial stage of the expansion has moderated. CBO projects that, under current law, total enrollment in the program will increase by about 1 percent in 2017, a slightly faster rate of increase than in 2016. Projected outlays for Medicaid, as a percentage of GDP, edge up over the period, from 2.0 percent in 2017 to 2.3 percent in 2027. CBO and JCT currently estimate that federal spending for people made eligible for Medicaid by the ACA will be $70 billion, or 0.4 percent of gross domestic product (GDP), in fiscal year 2017. Such spending is projected to rise at an average annual rate of about 7 percent, reaching $142 billion (or 0.5 percent of GDP) in 2027. For the 2018–2027 period, such spending is projected to total $998 billion if current laws remained in place.
• The Budget and Economic Outlook: 2016 to 2026. (January, 2016). “In 2016, the federal budget deficit will increase, in relation to the size of the economy, for the first time since 2009, according to the Congressional Budget Office’s estimates. If current laws generally remained unchanged, the deficit would grow over the next 10 years, and by 2026 it would be considerably larger than its average over the past 50 years, CBO projects. Debt held by the public would also grow significantly from its already high level. Outlays for Medicare (net of premiums and other offsetting receipts), Medicaid, and the Children’s Health Insurance Program, plus subsidies for health insurance purchased through exchanges and related spending, are expected to be $104 billion (or 11 percent) higher this year than they were in 2015.”
  • Exchange Subsidies. “Subsidies for health insurance purchased through the exchanges that were established under the ACA, as well as related spending, increased by $23 billion in 2015, to a total of $38 billion. They are expected to increase by $18 billion in 2016, reaching a total of $56 billion. Exchange subsidies make up the largest portion of that spending: Outlays are projected to total $39 billion in 2016 (up from $27 billion in 2015) and to reach $93 billion by 2026.”
  • Medicaid. “Medicaid spending, which grew by $48 billion (or 16 percent) last year—after increasing by $36 billion (or 14 percent) in 2014—represented the largest increase among major health programs. The average monthly enrollment of newly eligible Medicaid beneficiaries was 55 percent higher in 2015 than in the previous year—a total of 9.6 million compared with 6.1 million in 2014. Federal outlays for Medicaid totaled $350 billion in 2015, 16 percent more than spending for the program in 2014. About two-thirds of that increase resulted from enrollment of people who were newly eligible because of the ACA and from the greater share of costs paid by the federal government for those new enrollees.
    Medicaid spending is expected to increase by $31 billion (or 8.8 percent) in 2016. By 2026, federal outlays for Medicaid are projected to total $642 billion, or about 2.3 percent of GDP (up from 2.1 percent of GDP in 2016).”

• Dynamic Scoring at CBO (10.21.15).  A dynamic analysis of the effects of repealing the ACA found “there is substantial uncertainty about budgetary effects and macroeconomic feedbacks. Over the next decade, the uncertainty is large enough that repealing the ACA could reduce cumulative deficits—or increase them by much more than estimated” (p. 23).
  • With dynamic feedback, CBO and JCT estimate that repealing the ACA would increase federal budget deficits by $137 billion over the 2016-2025 period.
    – Excluding feedback, deficits would increase by $353 billion.
    – Thus, incorporating feedback reduces deficits by $216 billion
  • The estimates include a high degree of uncertainty.
  • Over the 2016-2025 period, repeal could reduce deficits or increase them by much more than estimated.
    – Over the 2026-2035 period, repeal would be unlikely to reduce deficits, even given great uncertainty.”
• Estimates for the Insurance Coverage Provisions of the Affordable Care Act Updated for the Recent Supreme Court Decision (July 2012). Includes a table showing the 11-year impact of coverage provisions on the federal deficit, 2012-2022 (this does not account for all the impacts of ACA on the federal deficit).

Other Projections

• Blahous, Charles. How to Repair ObamaCare’s Fiscal Damage (3.16.17). “Lawmakers must bear in mind, even as they balance other important value judgments affecting the health and income security of millions of Americans, that the current repeal-and-replace effort represents a unique, fleeting opportunity to accomplish essential fiscal corrections. Three factors contribute significantly to widespread confusion about the ACA’s damaging fiscal effects.
  • The first is that many of the provisions designed to finance its expansion of insurance coverage haven’t borne fruit. Various financing provisions have instead been repealed, suspended, postponed or weakened by regulation.
  • The second confusing factor is the complex system of scorekeeping rules Congress imposes on the Congressional Budget Office, which evaluates the budgetary effects of legislation. Those rules require the CBO to compare the effects of legislation to a baseline that differs from actual law in various critical respects.
  • The third significant reason for confusion has been misinterpretation of intermittent CBO reports over the past several years on the evolving cost estimates for the ACA’s coverage expansion. These have tended to come in below initial projections due to lower-than-expected enrollment in the ACA’s insurance marketplaces, and to a deceleration in national health-spending growth that began before the ACA was enacted.

In a comprehensive study soon to be released by the Mercatus Center at George Mason University, I estimate that repealing all of the ACA’s new spending and tax provisions going into effect next year could cumulatively reduce federal deficits by more than $1 trillion from 2017-26.”

• Jacobs, Christopher. According to this 2.23.17 analysis, all these conditions must be met for Obamacare to lower the deficit. “If:
  • Annual Medicare payment reductions that will render more than half of all hospitals unprofitable within the next 10 years keep going into effect; and
  • Provisions that will, beginning in 2019, reduce the annual increase in Exchange insurance subsidies—making coverage that much more unaffordable for families—go into effect; and
  • An unpopular ‘Cadillac tax’ that has already been delayed once—and which the Senate voted to repeal on a bipartisan 90-10 vote in December 2015—actually takes effect in 2020 (which just happens to be an election year);

then the Congressional Budget Office estimates that the law will reduce the deficit by a miniscule amount. But if any of those conditions aren’t met, then the law becomes a budget-buster. And if you think all those conditions will actually come to pass, then I’ve got some land to sell you.”

• McCosh, Cameron. Labor Markets and Health Care Reform: New Results. American Action Forum. August 25, 2011. Estimates that up to 35 million workers and dependents will lose employer-based coverage due to employer incentives to drop coverage, make it inadequate or unaffordable. If this happens, it will increase the gross cost of subsidies on the exchanges by $1.4T in the first 10 years.
• Warshawsky, Mark. Bending the Cost Curve: Will Health Care Reform Rein in Health Care Spending? Towers Watson, October, 2010. “Opinions differ as to the net effect on the rate of health care spending, in both the near and the long term. This article reviews the range of opinion and estimates by government and academic experts. We evaluate and weigh this information and then consider the economic and political consequences of the likely outcomes.”

Long-Term Forecasts

Congressional Budget Office

CBO annually produces long-term (e.g., 75-year) budget projections.

• July 2016 LTBO. Includes Chapter 3: The Long-Term Outlook for the Major Federal Health Care Programs. “Federal debt held by the public would rise from its already high level—from 75 percent of GDP today to 86 percent by 2026, CBO projects. Beyond the next 10 years, the long-term budget outlook is projected to worsen further, with debt reaching 141 percent of GDP in 2046—the highest ever recorded (see Table 1-1)… In CBO’s projections, deficits rise during the next three decades because the government’s spending grows more quickly than its revenues do (see figure below). In particular, spending grows for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt. Outlays for the major health care programs consist of spending for Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP), as well as spending on subsidies for health insurance purchased through the marketplaces established under the Affordable Care Act (ACA) and related spending. CBO expects that, under current law, federal spending on those programs would continue to rise substantially in relation to GDP.  In CBO’s extended baseline, net federal spending for those programs grows from an estimated 5.5 percent of GDP in 2016 to 8.9 percent in 2046: Net spending for Medicare amounts to 5.7 percent of GDP that year, and spending on Medicaid and CHIP, combined with outlays for subsidies for insurance purchased through the marketplaces and related spending, equals 3.1 percent.”
• Dynamic Scoring at CBO (10.21.15).  A dynamic analysis of the effects of repealing the ACA found that over the 2026-2035 period, repealing the ACA would increase deficits substantially, with or without macroeconomic effects because the loss in revenues greatly exceeds the reduction in expenditures.
• June 2015 LTBO. Includes Chapter 2: The Long-Term Outlook for Major Federal Health Care Programs.
• July 2014 LTBO.

General Accounting Office (GAO)

• Patient Protection and Affordable Care Act: Effect on Long-Term Federal Budget Outlook Largely Depends on Whether Cost Containment Sustained (2.26.13). The effect of PPACA on the long-term fiscal outlook depends largely on whether elements in PPACA designed to control cost growth are sustained.  Federal health care spending is expected to continue growing faster than the economy. In the near term, this is driven by increasing enrollment in federal health care programs due to the aging of the population and expanded eligibility. Over the longer term, excess cost growth (the extent to which growth of health care spending per capita exceeds growth of income per capita) is a key driver. Slowing the rate of health care cost growth would help put the budget on a more sustainable path. There is general agreement that technological advancement has been the key factor in health care cost growth in the past, along with the effects of expanding health insurance coverage and increasing income, but there is considerable uncertainty about the magnitude of the impact that the different factors will have on future health care cost growth.

Analysis

Items are in reverse chronological order.

• Koenig, Andy. It’s Not Just Premiums: ObamaCare Is Hiking The National Debt, Too. Forbes, 10.31.16. “The Congressional Budget Office projects the federal government will run larger and larger deficits over the next 30 years without serious fiscal changes, adding substantially to our national debt each year. By 2024, the government will be adding $1 trillion to the debt annually, which will grow bigger with each passing year… In 2014, the Senate Budget Committee conservatively estimated that the health care law would contribute $131 billion to the debt over its first decade. And that projection was made when costs for premiums and Medicaid weren’t expected to balloon as fast as they did. Every year, we learn about new costs, adding more and more to yours and my tab. It’s critical that we get an accurate picture of the law’s tremendous costs. That’s why the House Committee on Energy and Commerce recently asked the federal Department of Health and Human Services to provide an accurate accounting of how much ObamaCare’s subsidies are adding to our debt.”
• Capretta, James C. and Antos, Joseph R. Indexing in the Affordable Care Act: The Impact on the Federal Budget. Mercatus Research, Mercatus Center at George Mason University, Arlington, VA, October 2015. “Proponents of the Affordable Care Act have pointed to the Congressional Budget Office’s cost estimates to support their argument that the law will result in lower federal budget deficits in the future. Much less is said about the reasons for this forecast. This paper explains that the primary reason for the projected deficit reduction is the law’s heavy reliance on indexing important provisions in order to restrain spending and increase revenue. The key provisions are a ‘productivity adjustment factor’ that results in across-the-board cuts to hospitals and other facilities in perpetuity; frozen income thresholds for new taxes that supposedly apply only to higher-income households; thresholds for a new ‘Cadillac’ tax on high-cost insurance that rise more slowly than healthcare costs; and indexing rules for premium credits that will cause lower-income households to pay ever higher percentages of their income in premiums. As more taxpayers and beneficiaries come to understand the full implications of these provisions, pressure will build to make significant adjustments to them. The result could be much higher spending and lower revenue than originally forecast by the Congressional Budget Office.”
• Domenech, Ben. The CBO Is Using Enron-Style Accounting On Obamacare. 7.29.14. This explains that a little-advertised change in assumptions regarding the alternative fiscal scenario has lowered CBO’s 75-year projection of federal health spending by $6.2 trillion.  Specifically, the CBO explains: “Under its extended alternative fiscal scenario last year, CBO assumed that lawmakers would not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect after the first 10 years of the projection period. However, this year, after reassessing the uncertainties involved, CBO no longer projects whether or when those restraints might wane. Instead, for those elements of the alternative fiscal scenario, there are now no differences from the extended baseline.”  This implies that CBO is using fundamentally different assumptions in its calculation of the alternative fiscal scenario than are the Medicare actuaries, who continue to make the same assumptions CBO made in last year’s report.
• Elmendorf, Douglas. Revisions to CBO’s Projections of Federal Health Care Spending. 7.28.14. “CBO now projects that, if current laws remained generally unchanged, net federal spending for the government’s major health care programs in 2039 would equal 8.0 percent of gross domestic product (GDP)—1.6 percentage points, or about 15 percent, less than the 9.6 percent the agency projected in 2010.” This post explains that all of this change is due to changes in technical factors used in making these projections.
• Niu, Xiaotong  & Julie Topoleski. What Are the Causes of Projected Growth in Spending for Social Security and Major Health Care Programs? 7.18.14.  “A CBO blog post yesterday noted that federal spending is projected to rise noticeably relative to the size of the economy over the long term because of growth in spending for Social Security, major health care programs, and interest on the government’s debt. Today we will discuss the factors that account for the projected growth in the first two of those major components of the budget.”
• Conover, Christopher. ‘Not One Dime’: Health Care Law Projected to Add $6.2 Trillion to U.S. Deficit. The American, 3.14.13. This analysis is based on figures from a GAO report on long term budget trends showing that under the alternative fiscal scenario, the ACA adds $6.2 trillion (in present value terms) to the federal deficit over 75 years.
• Blahous, Charles. The Fiscal Consequences of the Affordable Care Act. Mercatus Center, 2012. “The Affordable Care Act (ACA) enacted in 2010 will significantly worsen the federal government’s fiscal position relative to previous law. Over the years 2012–21, the ACA is expected to add at least $340 billion and as much as $530 billion to federal deficits while increasing federal spending by more than $1.15 trillion over the same period and by increasing amounts thereafter. These adverse fiscal effects are not everywhere understood because of widely circulated analyses referencing scoring conventions of the Congressional Budget Office (CBO) and the Medicare Trustees, which compare the health care reform legislation to a baseline scenario that differs from actual law. Moreover, there is substantial risk that the ACA’s cost saving provisions will not be enforced as currently specified. To avoid worsening the federal fiscal outlook, legislative corrections are required before the ACA’s provisions become fully effective in 2014. Roughly two-thirds of the law’s subsidies for health insurance exchanges must be eliminated to avoid worsening federal deficits and the entirety of their costs eliminated to avoid further increasing federal health care financing commitments.”