Three ways CBO expects health spending to change

February 5, 2013

Budget nerds, rejoice! The Congressional Budget Office has just released its new budget outlook. For health wonks especially, there's a lot to digest. Here's the whole budget outlook in charts. Now, let's get right to the three biggest changes the CBO projects for the Affordable Care Act, Medicare and Medicaid.


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1. Three million fewer Americans will receive health insurance from their employers. The CBO always expected that some Americans would lose their employer-health insurance under the Affordable Care Act, as some companies may direct their workers to the publicly-subsidized options available on the exchange. In this report though, they significantly increase that number, from 4 to 7 million.

Why will 3 million fewer Americans receive employer-sponsored insurance? You can thank the American Tax Payer Relief Act, which preserved low tax rates for those with incomes below $450,000. That change will "reduce the relative attractiveness of employment-based insurance for low-income workers and for their employers," the CBO projects. In other words, providing health insurance as a tax-free form of income becomes less attractive when marginal tax rates are lower - and when a publicly-subsidized option becomes available.

2. Slower health-care cost growth will cut $200 billion in entitlement spending. Health-care costs have grown slower as of late, at the same rate as the rest of the economy after years of growing faster. Some people think this slowdown is permanent, while others argue it's temporary, a product of Americans cutting back on health care during the recession.

The Congressional Budget Office, in its traditionally nonpartisan role, hasn't taken sides in this health wonk battle. But in its just released economic outlook, it does project that this slowdown in health-care spending - no matter how long it lasts - will have some very real effects on our spending. Here's their take (the bold emphasis my own):

In recent years, health care spending has grown much more slowly both nationally and for federal programs than historical rates would have indicated. (For example, in 2012, federal spending for Medicare and Medicaid was about 5 percent below the amount that CBO had projected in March 2010.) In response to that slowdown, over the past several years, CBO has made a series of downward technical adjustments to its projections of spending for Medicaid and Medicare. From the March 2010 baseline to the current baseline, such technical revisions have lowered estimates of federal spending for the two programs in 2020 by about $200 billion—by $126 billion for Medicare and by $78 billion for Medicaid, or by roughly 15 percent for each program.

Squeezing $200 billion out of entitlement programs is nothing to sneeze at; that's about double the revenue the government would generate by raising the Medicare eligibility age from 65 to 67. As the CBO mentions, this reduction works out to about 15 percent of both the Medicaid and Medicare budget - a significant spending cut that has come about without Congress taking any action on entitlement cuts.

3. Employers will pay more fines for not providing insurance - but individuals will pay less. If fewer employers offer health insurance, as the CBO projects, that means that more will be subject to a fine for not providing coverage (this fine only exists for companies with 50 or more employees). The CBO now expects that employers will end up paying $13 billion more in fines for non-compliance with the Affordable Care Act.

On the flip side, the CBO has revised down its expectations for how many people will pay the individual mandate fine, reducing that number by $11 billion. The reasoning there has to do with revised income projections. If Americans are earning less than previously thought, that means they're more likely to qualify for a hardship exemption from the mandate.

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Brad Plumer | February 5, 2013