Health Care Reform Federal Deficit the American

Health Care Reform Federal Deficit

The American Health Care Crisis and the Federal Deficit

The United States spends more than any other country on medical care. In 2006, U.S. health care spending was $2.1 trillion, or 16% of our gross domestic product. At the same time, more than 45 million Americans lack health insurance and our health outcomes (life expectancy, infant mortality, and mortality amenable to health care) are mediocre compared with other rich democracies. We spend too much for what we get.

Nothing is new about these sobering realities. The Nixon administration first declared a health care cost crisis in 1969. Four decades later, the United States still has not adopted systemwide cost controls because the politics of health care make it extraordinarily difficult to control costs. I explain below why this is so (Marmor, et al., 2009).

The starting point for understanding the politics of cost control is an axiom of medical economics: A dollar spent on medical care is a dollar of income for someone. In other words, national health expenditures constitute the money that the medical care industry -- from physicians, nurses, and hospitals to pharmaceutical companies, insurers, lawyers, and sales and marketing staff -- earns. Controlling costs necessarily requires restraining the industry's income. As a consequence, serious attempts at cost control produce a battle with stakeholders who have resources, political clout, and strong incentives to oppose measures that reduce the rate of medical spending growth and their income (Marmor, et al., 2009).

On March 20, 2010, the Patient Protection and Affordable Care Act was put into law, after year-long debate on the issue of health care reform. The Act benefits the vast majority of Americans, including seniors, the middle class and the sick and uninsured. However, what impact does the Act have on the federal deficit? The health care crisis that spawned the Act, I argue, which will lead to an unmanageable federal deficit.

My argument is based on the reasoning of Douglas Holtz-Eakin and Michael Ramlet where they argue in a 2010 issue of the Health Affairs that health reform law will widen the federal deficit rather than reduce them. Their logic is based on how much the federal government spends on health care with the Act and budgetary elements.

The federal government faces a daunting fiscal outlook, which makes the budgetary impact of the Patient Protection and Affordable Care Act even more important. The official Congressional Budget Office (CBO) analysis indicates modest deficit reduction over the next ten years and beyond. Eakin and Ramlet examine the underpinnings of the CBO's projection and conclude that it is built on a shaky foundation of omitted costs, premiums shifted from other entitlements, and politically dubious spending cuts and revenue increases. A more comprehensive and realistic projection suggests that the new reform law will raise the deficit by more than $500 billion during the first ten years and by nearly $1.5 trillion in the following decade. The United States faces a daunting budgetary outlook. The Obama administration's budget displays an unsustainable debt spiral over the next decade. In this context, the fiscal consequences of the newly enacted Patient Protection and Affordable Care Act are of extreme importance.

Proponents of the health care reform law point to the Congressional Budget Office (CBO) analysis, which suggests a modest contribution to deficit reduction over the budget window and beyond. Proponents also argue that the CBO understates the beneficial reductions in the pace of healthcare spending. Opponents suggest instead that the act will exacerbate the fiscal outlook, as politically unrealistic spending reductions and tax increases fail to offset new entitlement spending. These arguments were briefly examined via the use of simple alternative scenarios. On balance, it is difficult to conclude that the act will not accelerate the coming fiscal crisis (Eakin and Ramlet 2010). However, opposing viewpoints concerning the economic benefits of the Act have been put forth. In Health Care Reform and American Politics: What Everyone Needs to Know (2010), Lawrence Jacobs and Theda Skocpol argue that the Patient Protection and Affordable Care Act will actually reduce deficits. Their argument is based on the fact that the Act removes the Medicare doughnut hole for seniors, insures the young and saves middle class Americans thousands of dollars a year on health care expenses. According to Jacobs and Skocpol, "the winners of health reform are the vast majority of Americans. When the provisions are effectively implemented, seniors, the sick, and middle Americans -- including many families in the upper middle class -- will receive wider and easier access to health insurance benefits protected from trickery by the insurance industry. The number of working-age Americans and their children who have to go without basic health insurance will decline by a remarkable 32 million people. This comes from the nonpartisan CBO, which projects that coverage will be extended to 94% of all Americans and legal immigrant residents (up from 83% today). About a third of the remaining uninsured will be undocumented or illegal immigrants, who are not eligible for coverage under the reform law… "The bill for health reform will be paid by multibillion dollar corporations in the health insurance industry, by pharmaceutical producers, and by medicalcare providers, as well as by slightly higher taxes on very rich families (individuals whose yearly incomes exceed $200,000, or married couples earning over $250,000). The tax dollars raised from those at the top are mostly to be used for subsidies to reduce the premiums paid by millions of middle-income Americans, and also to help people working for low wages who have been unable to afford private insurance in the past. The bottom line for the vast majority of Americans is more benefits, greater security, less cost" (Jacobs and Skocpol, 2010). However, as we shall see, Jacobs and Skocpol do not take into account the health economics of the issue and fail to understand the fiscal implications of the Act for the federal deficit.

An Approaching Fiscal Train Wreck

The federal government's unsustainable long run fiscal posture has been outlined in successive versions of the CBO's Long-Term Budget Outlook. In broad terms, over the next thirty years, the inexorable dynamics of current law will raise outlays, or committed federal expenditures, from about 20% of gross domestic product (GDP) to 30 -- 40% of GDP. Any attempt to keep taxes at their postwar norm of 18% of GDP will generate an unmanageable federal debt spiral. In contrast, ratcheting up taxes to the 30 -- 40% of GDP needed to match the federal spending appetite would likely be self-defeating, as it would undercut badly needed economic growth (Skinner, 1996). The policy problem is that spending rises above any reasonable level of taxation for the indefinite future. The diagnosis leads as well to the prescription for action. Over the long-term, the budget problem is primarily a spending problem, and correcting it requires reductions in the growth of large mandatory spending programs and the appetite for federal outlays.

This depiction of the federal budgetary future has been unchanged for a decade or more. However, the most recent administration budget shows that in part as a result the financial crisis, recession, and policy responses, the problem has become dramatically worse, and will arrive more quickly (Eakin and Ramlet, 2010)

The federal government ran a fiscal 2009 deficit of $1.4 trillion -- the highest since World War II -- as spending reached nearly 25% of GDP and receipts fell below 15% of GDP. In each case, the results are unlike those experienced during the past fifty years. Going forward, there is no relief in sight. Over the next ten years, according to the CBO's analysis of the President's Budgetary Proposals for Fiscal Year 2011, the deficit will never fall below $700 billion. In 2020 the deficit will be 5.6% of GDP -- roughly $1.3 trillion, of which more than $900 billion will be devoted to servicing debt on previous borrowing.

The budget outlook is not the result of a shortfall of revenues. The CBO projects that over the next decade the economy will fully recover and that revenues in 2020 will be 19.6% of GDP -- more than $300 billion more than the historic norm of 18%. Instead, the problem is spending. Federal outlays in 2020 are expected to be 25.2% of GDP -- about $1.2 trillion higher than the 20% that has been business as usual in the postwar era (Eakin and Ramlet, 2010). As a result of the spending binge, in 2020, public debt will have more than doubled from its 2008 level to 90% of GDP and will continue its upward trajectory.

Budgetary Effects Of Health Reform

In light of the fiscal threat from growing spending, the budgetary impacts of the Patient Protection and Affordable Care Act are central to any discussion of its merits. I begin by reviewing the CBO cost estimate that concludes that the act will serve to lower projected deficits over the next ten years and beyond. After our summary review, I analyze the budgetary implications of altering certain assumptions.

The final score of the Patient Protection and Affordable Care Act with reconciliation amendments was released publicly 20 March 2010. The CBO and the Joint Committee on Taxation estimated that the act would lead to a net reduction in federal deficits of $143 billion over ten years, with $124 billion in net reductions from health reform and $19 billion derived from education provisions (Eakin and Ramlet, 2010). Total subsidies in the act exceed $1 trillion over ten years. They include insurance exchange tax credits for individuals, tax credits for small employers, the creation of reinsurance and highrisk pools, and expansions to Medicaid and the Children's Health Insurance Program (CHIP). To finance the subsidies and reduce the deficit, total cost savings are projected to be nearly $500 billion based on reductions in annual updates to Medicare fee-for-service payment rates, Medicare Advantage rates, and Medicare and Medicaid disproportionate-share hospital (DSH) payments.

The act also raises more than $700 billion in tax revenue from an excise tax on high-premium plans; reinsurance and risk-adjustment collections; various penalty payments by employers and uninsured individuals; fees on medical device manufacturers, pharmaceutical companies, and health insurance providers; and other revenue provisions.

To gain a rough feel for the longer-run impacts, we extrapolated the impacts to the years 2020 -- 2029 using the CBO's estimated compounded annual growth rates. Under this crude approach, the act is expected to yield an additional $681 billion in deficit reduction. The prospect of these savings is important given the daunting fiscal outlook. But the scenario raises an important question: Is it really likely that a large expansion of public spending will reduce the long-run deficit? The answer, unfortunately, hinges on provisions of the legislation that the CBO is required to take at face value and not second-guess (Eakin and Ramlet, 2010).

Alternative Budgetary Scenarios

A more realistic assessment emerges if one strips out gimmicks and budgetary games and reworks the calculus. A wholly different picture emerges: The act would raise, not lower, federal deficits, by $554 billion in the first ten years and $1.4 trillion over the succeeding ten years.

The list of budgetary features begins with the fact that the act frontloads revenues and back-loads spending. That is to say, the taxes and fees it calls for are set to begin immediately in 2010, but its new subsidies are largely deferred until 2014. This contributes to the illusion that the act reduces the deficit. Note that if revenues were delayed to start in 2014, the act's 2010 -- 19 net deficit impact would be $66 billion lower. Other dubious budgetary provisions fall into four scenarios: unachievable savings, unscored budget effects, uncollectible revenue, and already reserved premiums (Eakin and Ramlet, 2010).

Unachievable Savings

The first scenario removes spending cuts that the Centers for Medicare and Medicaid Services (CMS) will ultimately be unable to implement. These are composed of cost reductions through Medicare market-basket updates, the Independent Payment Advisory Board, Medicare Advantage interactions, and the lower Part D premium subsidy for high-income beneficiaries (Eakin and Ramlet, 2010).

Although the specifics of each differ, these provisions share two features. First, the act itself does not automatically reform Medicare in such a manner that will permit it to operate at lower budgetary cost. Accordingly, when the time comes to implement these savings, or those developed by the Independent Payment Advisory Board, the CMS will be faced with the possibility of strongly limited benefits, the inability to serve beneficiaries, or both. As a result, the cuts will be politically infeasible, as Congress is likely to continue regularly to override scheduled reductions.

A vivid example is the Medicare physician payment updates. Each year since 2002 the "sustainable growth rate" formula in current law has imposed cuts in payments to physicians under Medicare. And each year, Congress has overridden these cuts. Massachusetts and Tennessee provide recent examples of cases where insurance coverage expansion has led to substantial cost increases instead of savings. In 1994, Tennessee implemented a massive Medicaid expansion, eventually covering 500,000 additional residents. A decade later, the state abandoned the experiment after costs more than tripled, from $2.5 billion in 1995 to $8 billion in 2004, consuming one-third of the state budget. When the experiment unraveled in 2005, 170,000 enrollees were dropped.

More recently, in April 2010, Tennessee announced that because of cost overruns, the program would need to cut an additional 100,000 people from the Medicaid rolls.6 In Massachusetts, the state's Special Commission on the Health Care Payment System has produced payment recommendations in the wake of passing an individual insurance mandate and coverage expansions. But the commission's recommendations have not yet been enacted into law, so overall costs, which are growing 8% a year in Massachusetts, have not been slowed. It is likely that recommendations from the federally empaneled Independent Payment Advisory Board would follow a similar trajectory, notwithstanding requirements that would force Congress to adopt the recommendations or find comparable savings (Eakin and Ramlet, 2010).

Unscored Budget Effects

The second scenario highlights acknowledged costs that are not included in the CBO score. To operate the new health care programs over the first ten years, future Congresses will need to vote for $274.6 billion in additional spending. This unbudgeted spending includes discretionary costs of $7.5 billion for the Internal Revenue Service (IRS) to enforce and $7.5 billion for the CMS to administer insurance coverage. It also includes $50.0 billion in explicitly authorized health care grant programs and $209.6 billion for the Medicare Physician Payment Reform Act, which would revise the sustainable growth rate formula for physician reimbursement. All of these provisions are noted with caveats in the CBO's final reports to Congress, but none of them was factored into the final score of the act (Eakin and Ramlet, 2010).

Uncollectable Revenue

Scenario three questions the political will of Congress and directly refers to the excise tax on high-premium, "Cadillac" health plans. This tax was supposed to start immediately, according to the Senate's version of the reform law. After intense lobbying by organized labor, Congress relented and pushed the tax back to 2018. This raises the possibility that it will prove politically infeasible ever to implement the tax, as was the case with the Medicare Physician Payment updates explained in scenario one. Thus, the scenario shows the impact of not collecting the associated tax revenue of $78 billion over the next ten years.

Reserved Premiums

Scenario four focuses on Community Living Assistance Services and Supports

(CLASS) Act premiums for long-term care insurance and the potential increase in Social Security receipts. In principle, if Social Security and CLASS were to be "funded" programs rather than pay-as-you-go programs, these receipts should be reserved to cover future payments and not be devoted to short-term deficit reduction.

Specifically, the scenario shows the implications of reserving the $70 billion in premiums expected to be raised in the first ten years for the legislation's new long-term care insurance. In addition to this accounting sleight of hand, the legislation uses $53 billion for deficit reduction from an anticipated increase in Social Security tax revenue. The CBO estimates that outlays for Social Security benefits would increase by only about $2 billion over the 2010 -- 19 period, and that the coverage provisions would have a negligible effect on the outlays for other federal programs. If Social Security revenues do rise as employers shift from paying for health insurance to paying higher wages, we should move Social Security into more of a "funded" program, and the extra money raised from payroll taxes should be preserved for the Social Security trust fund.

Bottom Line

What is the bottom line? Removing the potentially unrealistic annual savings, reflecting the full costs of implementing the programs, acknowledging the unlikelihood of raising all of the promised revenues, and preserving premiums for the programs they are intended to finance produces a radically different bottom line. The act generates additional deficits of $562 billion in the first ten years. And because the nation would be on the hook for two more entitlement programs rapidly expanding as far as the eye can see, the deficit in the second ten years would approach $1.5 trillion.

The stakes could not be higher. As documented in CBO analyses, the federal deficit is expected to exceed $700 billion every year over the next decade, doubling the national debt to more than $20 trillion.1 By 2020, the federal deficit is projected to be $1.2 trillion, $900 billion of which represents interest on previous debt. In this environment, the anticipated impact of the act is to reduce the deficit by a modest $124 billion over the next ten years. However, this projection is built on a shaky foundation of omitted costs, premiums shifted from other entitlements, and politically dubious spending cuts and revenue increases.

Of course, this is not the only source of budgetary uncertainty. Proponents point toward the possibility that the act will "bend the curve" more than anticipated, thereby reducing health care spending in federal programs and beyond. In this light, it is important to note that if federal subsidies do not grow at all between 2020 and

2029 -- a herculean reduction in annual spending growth of 3.4 percentage points -- it will reduce outlays by under $500 billion. That is, extraordinary success in bending the cost curve amounts to less than one-third of the downside budgetary risks embedded in the act.

The future of the Patient Protection and Affordable Care Act is likely to be even more important than its passage. In light of the precarious state of federal fiscal affairs and the enormous downside risks presented by the act, one can only hope that every future effort is devoted to reducing its budgetary footprint (Eakin and Ramlet, 2010). In short, the Act will increase the deficit due to the entitlement programs it produces that occur without raising taxes, which in effect will curtail economic growth.

Similarly, the potential for prevention to generate cost savings is often exaggerated. As health economist Louise Russell documents, "over the past 4 decades, hundreds of studies have shown that prevention usually adds to medical spending." Fewer than 20% of studied preventive options are cost-saving. Indeed, preventive measures that emphasize medical services (such as annual doctor visits and screening) rather than behavioral change (exercise and nutrition) can be costly. Moreover, changing behavior is not easy. For example, producing behavioral changes that reduce high and increasing obesity rates in the United States (which some analysts argue are a major cause of rising health care spending) is surely desirable. It is, however, unclear what public policies could be adopted that would promptly and reliably reduce obesity rates (Marmor, et al., 2009).

The International Scene

In this section, I ask what the United States can learn from international experience with controlling the costs of medical care. In fact, the Obama proposals for insurance regulation and a new public insurance option do follow in part from international experience. All other rich democracies concentrate purchasing power to counter the medical industry's efforts to increase costs. If, as in Canada and Sweden, overall medical costs are on public budgets, then officials have powerful incentives to restrain increases in medical costs to avoid reducing the funds for other public programs or having to raise taxes. In other countries, such as Germany and France, insurers are nongovernmental entities (sickness funds) that are financed through payroll contributions from employers and employees. The governments of these countries regulate insurers and help them control costs. Germany, for example, regulates the level of social insurance contributions (taxes) paid by employers and workers, thereby limiting the budget for all sickness funds.

Lower prices for medical care are the major explanation for the much lower medical costs of all the other rich democracies relative to the United States. Competing explanations -- that the U.S. population is particularly unhealthy or that Americans use many more medical services -- are largely false. In a detailed examination of health care spending patterns, the McKinsey Global Institute concluded that the United States population is "not significantly sicker" than that of Japan, Germany, France, Italy, Spain, or the United Kingdom. The McKinsey Global Institute also found that "U.S. patients consume approximately 20% less prescription drugs" in 9 therapeutic areas than do patients in Germany, Canada, or the United Kingdom. Furthermore, the average number of hospital days per year in the United States is the second lowest among 12 comparison countries, although American patients receive more inpatient surgeries and imaging services than patients in most peer countries. Other studies similarly conclude that "the prices of care, not the amount of care delivered, are the primary difference between the United States and other countries" in health care spending. International evidence also supports the emphasis on the administrative costs of health insurance. All studies agree that the United States has excess administrative costs that are substantially higher than those of other rich democracies. The Obama public insurance option draws on this comparative experience. It avoids the marketing expenses of private insurance and the costs of medical underwriting (the process insurers use to decide whether to offer applicants coverage and to calculate premiums on the basis of health status). In addition, a public plan does not have to generate profits to reward its stockholders (Marmor, et al., 2009).