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The Costs and Revenues of the Affordable Care Act and their Impacts on the Federal Budget Deficit

The American health system is twice as expensive as the average for all the other industrialized countries and yet leaves many of its citizens uninsured (nearly 20% of Californians over the course of the year) with middling health outcomes.[1] Its high cost is due to high prices, not to high use of services.[2] About half the cost is in the private sector (employers and individuals), which is reinforced by the tax breaks and tax advantages for employment based coverage,[3] and the other half is in the public sector, primarily for the costs of seniors and the disabled.[4]

Unlike past public program expansions such as the addition of prescription drug coverage for seniors and the disabled, the Affordable Care Act was fully paid for. In fact when it was enacted, it was projected by the Congressional Budget Office to extend the financial solvency of the Medicare program by over 12 years and reduce the federal budget deficit modestly in the first decade and very substantially over the following decade.[5]

The ACA reduces health spending by $483 billion over the period 2010-2019 and raises revenues by $413 billion.[6] The costs of the ACA would be $763 billion, leaving a net budget reduction of $132 billion for that 2010-2019 time frame.[7] The new revenues include higher taxes on high-income individuals, health plans, medical devices, tanning salons, drug manufacturers and fees from uninsured individuals and large employers who offer no coverage for their employees.[8] The spending reductions include reductions in the rate of increased payments for hospitals, nursing homes, home health care, Medicare Advantage and cuts in hospitals’ DSH payments.[9] Many prospective enrollees will pay for a share of their medical costs, albeit with their premium and out of pocket cost contributions subsidized on a sliding fee basis based on their incomes.[10]

The initial projections of the ACA’s costs have recently gotten even lower as the rate of growth in the nation’s health spending has slowed appreciably. CBO’s estimates on the rate of growth in Medicare and Medicaid program spending have recently been revised downward, based on the sustained, slower growth in health spending – Medicaid by 5.2% and Medicare by 2.2% — the slower growth apparently is due in large measure to the ACA’s reforms in health plan and provider payments and comparable private sector efforts.[11] Federal Medicaid spending will temporarily spike in 2014 to pay for the Medicaid expansion.[12] CBO now projects that federal spending for Medicare and Medicaid will be $200 billion lower during the 2010-2020 time frame than its earlier estimates.[13] In addition, the federal and state Exchanges are thus far negotiating in competitive markets for health premiums lower than earlier projected.[14] Some states with large potential Medicaid enrollment have unfortunately yet to decide whether to accept the generous federal matching rates for Medicaid expansion.[15]

However while the recent and dramatic improvements in federal revenues and sequestrated reductions in spending are sharply narrowing the budget deficit, the longer term still requires continued efforts to better balance revenues and spending as baby boomers move from the workplace onto Social Security and Medicare as they retire.[16]  The ACA helps to address the long-term budget deficit through caps on the growth of Medicare spending and Cadillac benefits.[17] Repealing it would significantly increase, rather than decrease the nation’s deficits.[18] The ongoing challenge the public and private sectors face in common is the adoption of payment reforms, such as pay for performance, reference pricing based on value, bundled payments and global budgets, not the quixotic efforts to repeal the ACA.[19]

[1] See Schlaboski, Health Care Systems Around the World (ITUP, 2008 at www.itup.org and Wulsin, International Health Effectiveness Comparions: How does the US Stack Up (ITUP, April 29, 2008) at www.itup.org

[2] See ITUP, Reforming California’s Delivery System (January 24, 2011) at www.itup.org

[3] State and federal tax policies subsidize about 1/3rd of the cost of private insurance. See Sheils and Haught, The Cost of Tax Exempt Health Benefits in 2004, Health Affairs, (February 2004) at http://content.healthaffairs.org/content/suppl/2004/02/25/hlthaff.w4.106v1.DC1

[4] See Wilson, Health Care Costs 101: Slow Growth, a New Trend? (CHCF, September 2013) at www.chcf.org  Yoo, 2012 Health Care Financing Report (ITUP, October 25, 2012) at www.itup.org

[5] See Congressional Budget office, Analysis of HR 3590, Letter to Senator Harry Reid (March 11, 2010) at www.cbo.gov and CBO, Letter to Honorable John Boehner, Providing an Estimate for HR 6079, the Repeal of Obama Care Act (2011) at www.cbo.gov

[6] Ibid.

[7] Ibid.

[8] Ibid. See Connolly, the Affordable Care Act, How is it Financed (September 26, 2012) at www.itup.org

[9] Ibid.

[10] See ITUP, ObamaCare 101, Presentation Slides (August 2013) at http://itup.org/special-features/2013/07/12/obamacare-101-the-affordable-care-act/

[11] See Elmendorf, How have CBO’s Projections if Spending for Medicare and Medicaid Changed Since the August 2012 Baseline (CBO, February 21, 2013) at www.cbo.gove/publication/43947

[12] Wilson, Health Care Costs 101: Slow Growth, a New Trend?

[13] Ibid.

[14] Varney, California Insurance Exchange Rates: Not too High, Not too Low (Kaiser Health news, may 24, 2103)

[15] Tavernise, Millions of Poor are Left Uncovered by New Health Care Law, New York Times, October 2, 2013) at http://www.kaiserhealthnews.org/Stories/2013/May/24/calif-health-insurance-exchange-marketplace.aspx  http://www.nytimes.com/2013/10/03/health/millions-of-poor-are-left-uncovered-by-health-law.html Other states are doing their best to sabotage the federally administered Exchanges. See Reston, Obamacare Meets Extra Resistance in Oklahoma (Los Angeles Times, October 4, 2013) at http://www.latimes.com/nation/la-na-obamacare-oklahoma-20131004,0,1239453.story

[16] See CBO, The 2013 Long Term Budget Outlook (CBO, Septemebr 17, 2013) at www.cbo.gov/publication/44521

[17] See n. 5 and 8.

[18] See n. 5.

[19] See for example, Stabile, et al. Heath Care Cost Containment Strategies Used in Four Other High-Income Countries Hold Lessons for the United States and MacDonnell and Darzi, A Key to Slower health Spending Growth Worldwide Will be Unlocking Innovation to Reduce the Labor Intensity of Care, Health Affairs (April 2013) at www.healthaffairs.org

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