Wednesday, June 30, 2010

CBO Exposes Budgetary Gimmicks in Health Care Law

The Congressional Budget Office released its annual long-term budgetary outlook today, and it contains some striking new statements in regards to the health care law.  First, 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 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.” (citation at page 26; longer discussion at page 36)

When analyzing the health care law, the report includes a section entitled “Questions About Sustainability” on page 35, which I’ve pasted below.  Many of the same quotes were included in CBO’s initial analyses of the health care and reconciliation laws.  CBO notes that “increases in payment rates for many providers will be held below the rate of increase in the average cost of providers’ inputs” and “it is unclear whether the [Medicare provisions] can be sustained, and, if so, whether it will be accomplished through greater efficiencies in the delivery of care or will instead reduce access to care or diminish the quality of care.”  CBO similarly calls provisions in the reconciliation law slowing the growth of insurance subsidies after 2018 “difficult to sustain.”

For these reasons, CBO’s alternative fiscal scenario – which, for example, presumes that physicians will receive increases in Medicare reimbursements, rather than cuts under the sustainable growth rate (SGR) mechanism – similarly assumes that “the continuing reductions in updated for Medicare’s payment rates, the constraints on Medicare imposed by the IPAB, and the additional indexing provision that will slow the growth of exchange [insurance] subsidies…will not continue after 2020” (page 37).  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.

In addition, CBO highlighted the scope of the “Cadillac tax” on high-cost health plans.  Page 57 of the report asserts that “a greater share of premiums will be subject to” the tax over time.  More importantly, the report notes that “in CBO’s estimation, whether policy-holders pay the excise tax through higher premiums or avoid it by switching to lower-cost plans, total taxes will ultimately rise” as a result of the provision.

Finally, I’ll reference a couple of other interesting tidbits.  First, Table 2-1 on page 31 confirms that from 1975-2008 and 1990-2008, excess cost growth in Medicare has exceeded that of Medicaid and all other health spending (including from private sources), which raises doubts about Medicare’s ability to function as a leader in controlling health care costs.  Second, a discussion on page 30 notes that “the substantial reduction in the percentage of health care costs that people pay out of pocket has also increased demand” – a trend that will likely only get worse as a result of the health care law.

But the major story here – as with CBO Director Elmendorf’s presentation from a month ago – is that Congress’ independent budget arbiter once again confirmed that Democrats’ new, $2.6 trillion health care law is ultimately unsustainable.

 

Questions About Sustainability

One challenge that arises in projecting federal outlays for health care over the long term is that the recent legislation either left in place or put into effect a number of procedures that may be difficult to sustain over a long period.  For example, the legislation did not alter the sustainable growth rate mechanism used for determining updates to Medicare’s payment rates for physicians; under that mechanism, those rates are scheduled to be reduced by about 21 percent in 2010 and then decline further in subsequent years. Since that mechanism was enacted in 1997, its provisions have usually been modified to avoid scheduled reductions in payment rates, and legislation was just enacted to delay cuts in those payment rates until December 2010 (a development that is not reflected in the projections). At the same time, the legislation includes provisions that will constrain payment rates for other providers of Medicare’s services. In particular, increases in payment rates for many providers will be held below the rate of increase in the average cost of providers’ inputs.

Taking all the provisions of the legislation together, CBO expects that, adjusted for inflation, Medicare spending per beneficiary will increase at an average annual rate of less than 2 percent during the next two decades—compared with a roughly 4 percent annual growth rate during the past two decades (a calculation that excludes the effect of establishing the Medicare prescription drug benefit). It is unclear whether that lower rate of growth can be sustained and, if so, whether it will be accomplished through greater efficiencies in the delivery of health care or will instead reduce access to care or diminish the quality of care (relative to the situation under prior law).

Another provision that may be difficult to sustain will slow the growth of federal subsidies for health insurance purchased through the insurance exchanges. For enrollees who receive subsidies, the amount they will have to pay depends primarily on a formula that determines what share of their income they have to contribute to enroll in a relatively low-cost plan (with the subsidy covering the difference between that contribution and the total premium for that plan). Initially, the percentages of income that enrollees must pay are indexed so that the subsidies will cover roughly the same share of the total premium over time. After 2018, however, an additional indexing factor will probably apply; if so, the shares of income that enrollees have to pay will increase more rapidly, and the shares of the premium that the subsidies cover will decline.