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Will Health Care Reform Increase the Deficit and National Debt?

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Document date: August 01, 2010
Released online: August 06, 2010


This paper reviews CBO forecasts of spending and revenues and assesses whether the estimates of the impact on future deficit are realistic and sustainable over time. The conclusion is that the CBO projections have not underestimated spending growth in any significant way. There are some ways in which spending may prove to be higher, but on the other hand, CBO may also have underestimated the effectiveness of many cost-containment provisions in the bill.

The text below is an excerpt from the complete document. Read the full brief in PDF format.


The Patient Protection and Affordable Care Act (PPACA) expands coverage to over 30 million uninsured Americans through Medicaid expansions and tax credits. Reduced Medicare payments to providers will partially offset the new spending. The rest will be offset by revenues from an excise tax on high-cost health plans, increased payroll taxes on earned and unearned income, taxes on insurers and drug and medical device manufacturers, penalties on uninsured individuals, and assessments on medium and large employers whose employees obtain subsidies through the exchanges.

The Congressional Budget Office (CBO) projects that health reform will reduce the deficit over the first 10 years (2010-2019) and will continue to do so in the following decade. The CBO estimates that the deficit will decline by $143 billion over the first 10 years and, beginning in 2020, by 0.5 percent of gross domestic product (GDP) each year, on average.1 Relative to 2010 GDP, this would amount to about $75 billion a year. Over the 10-year period beginning in 2020, the health reform will, as projected by CBO, result in cumulative deficit reduction of about $1.5 trillion.

As shown in the table below,2 the CBO estimates that new spending from the Medicaid expansion will cost $434 billion over the 2010-19 period. Subsidies to individuals and families and to small firms will amount to $434 billion over the 2010-19 period. Subsidies to individuals and families and to small firms will amount to $464 billion and $40 billion, respectively. Penalties on uninsured individuals and employers and the excise tax on high-cost plans will provide about $150 billion in offsets. Cuts in Medicare and Medicaid (and some other provisions) will amount to $511 billion. Various new taxes on earned and unearned income, drug and medical device manufacturers, and insurers will generate revenue of an additional $420 billion. This accounts for the projected $143 billion in deficit reduction between 2010 and 2019. One could argue that if Congress just enacted the Medicare cuts without expanding coverage, there would be much more deficit reduction, but the affected providers would have opposed the payment reductions much more vigorously if there were to be no increase in coverage which will increase their revenues and reduce uncompensated care costs.

Beginning in 2019, the law will change the indexing of subsidies so that they will grow more slowly than they will in the preceding years. This will reduce the projected cost of these subsidies to government, and shift more costs to individuals and families (with the possibility that more people will be exempted from the requirement to obtain coverage). In addition, the premium threshold above which the excise tax would be imposed on health insurance premiums will be indexed to general inflation rather than to 1 percentage point above inflation, as it is in 2018 and 2019. This provision will increase taxes obtained from the excise tax, or if individuals cut back on the comprehensiveness of their employer-based coverage, they should have higher wages and salaries than otherwise and thus pay higher income and payroll taxes, which will bring in more revenue. In either case, the effect will be to reduce the deficit.

(End of excerpt. The full brief is available in PDF format.)

Topics/Tags: | Economy/Taxes | Health/Healthcare

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