Wednesday, June 22, 2011

CBO’s Long-Term Budget Outlook and Obamacare

The Congressional Budget Office released its annual long-term budgetary outlook today, and it contains some striking statements in regards to the health care law.  Among the key points:

The Law Will Not Lower Costs:  The report notes that in calculating its long-term health spending projections, CBO is “using the same growth rates that would have been applied in the absence of the legislation,” which reflect the fact that CBO “does not have an analytic basis for projecting the effects of the recently enacted legislation on the growth rate of federal health care spending over the very long term.” (Page 36)  These assertions are consistent with Director Elmendorf’s statements last year that “putting the federal budget on a sustainable path would almost certainly require a significant reduction in the growth of federal health spending relative to current law (including [last] year’s health legislation).”

The Law Includes Budgetary Gimmicks:  CBO’s alternative fiscal scenario assumes – just as it did last year – that the health care law’s productivity adjustments, the payment reductions imposed by the IPAB, and the slowdown in the growth of Exchange insurance subsidies would be “difficult to sustain over a long period” (pages 44-45).  In other words, Congress’ non-partisan budgetary scorekeeper believes that the major savings proposals in the health care law cannot—and will not—be sustained in the long-term.

Massive Tax Increases:  Pages 65-67 of the report quantify the large – and growing – effect of the law’s tax increases.  Table 6-2 notes that the tax increases in the health care law will increase revenues by 1.2% of GDP between now and 2035.  Based on the size of the economy in 2011 dollars, that amounts to a $180 billion annual tax increase thanks to the law.  More specifically, CBO estimates that “Cadillac tax” on high-cost health plans “would increase total revenues by more than 0.7 percent of GDP in 2035 and higher percentages thereafter.”  Moreover, CBO notes that a greater share of premiums will be subject to the “Cadillac tax” over time.  This year’s report does not make long-range estimates, but in last year’s report CBO projected the “Cadillac tax” alone would raise 3 percent of GDP in 2080.

Over and above the conclusions regarding the health care law, the report once again illustrates the need for comprehensive entitlement reform.  Under the alternative fiscal scenario, federal health care spending is projected to rise from 5.6% of GDP in 2011 to over 11% – more than one out of every ten dollars in the American economy – by 2035.  Medicare alone is projected to nearly double over the next 25 years, from 3.7% of GDP to almost 7 percent by 2035. (Note that unlike last year, this year’s report does NOT include projections out to 2080; last year’s report indicated that under the alternative fiscal scenario, federal health care spending would reach 18-19% of GDP by 2080, with Medicare alone comprising nearly one in seven dollars in the American economy.)  These trends are clearly unsustainable, and illustrate the need for fundamental reforms to solve America’s entitlement crisis.

Finally, a couple of other interesting tidbits.  First, Table 3-1 on page 42 confirms that from 1975-2007 and 1990-2007, excess cost growth in Medicare has exceeded that of Medicaid and all other health spending (including from private sources), raising doubts about Medicare’s ability to function as a leader in controlling health care costs.  Second, Box 1-1 on page 10 of the document estimates that between now and 2035, 64% of the growth in entitlement spending, and 48% of the growth in health care entitlement spending, will be driven by demographic factors associated with the retirement of the Baby Boomers and general aging of the American population.  The chart illustrates the importance of fundamental reforms to Medicare and Medicaid; even if health care costs were brought under control, entitlement programs face significant structural difficulties, as nearly half of the growth in entitlement spending over the next generation comes from demographics, NOT rising costs.