Can health care spending be reduced while improving effectiveness?

A Congressional Budget Office (CBO) report analyzing certain federal health care policy proposals concluded that, while lawmakers often strive for policies that both reduce the growth of spending and improve the effectiveness of health care, designing policies to achieve both goals is challenging and most policies have significant disadvantages as well as advantages. The CBO also cautioned that it is uncertain how health insurers, providers, and patients would respond to the proposed policies.

Before analyzing the proposed the policies, the CBO reported on current and projected health care spending, federal subsidies, and the effect of the Patient Protection and Affordable Care Act’s (ACA) health insurance mandate, as required by section 1501 of the ACA, on coverage levels and the federal deficit.

2014 spending. The CBO reports that public and private spending for health care in 2014 was $2.9 trillion. Of that amount, $1.4 trillion (48 percent) was public spending, and $1.5 trillion (52 percent) was private spending. The public spending in 2014 included $619 billion for Medicare (22 percent); $509 billion for Medicaid (18 percent); and $243 billion for other government spending (8 percent). The private spending in 2014 included $991 billion in payments by private health insurers (34 percent); $330 billion in patients’ out-of-pocket spending (11 percent); and $186 billion in other spending (6 percent).

Federal spending projections. The CBO projects that gross federal spending on major health care programs as a share of gross domestic product (GDP) will increase by 4 percent from 2016 to 2046, from 6.1 percent to 10.1 percent. Of the 4 percent, 1.8 percent comes from population aging (new Medicare enrollees) and 2.2 percent from excess cost growth (increased spending per beneficiary will grow faster than the per capita GDP).

Net federal subsidies. The CBO analyzed the net federal health insurance subsidies for individuals under 65 years of age in 2016 and from 2017 to 2026. The net subsidy figures included employment-based coverage, Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), nongroup coverage, and premium tax credits to ACA basic health plans, as required by section 1401 of the ACA. In 2016, the net federal subsidies for these categories was $660 billion. From 2017 to 2026, the CBO projects that the net federal subsidies will be $8.877 trillion.

ACA effects on coverage. The CBO also analyzed the effects of the ACA on health insurance coverage in 2016 for individuals under 65 years of age. The CBO estimates that individuals with employer-based coverage dropped approximately 2 million, Medicaid and CHIP coverage increased over 12 million, Marketplace and basic health coverage increased over 12 million, nongroup plans and other coverage dropped approximately 2 million, and the number of uninsured dropped approximately 22 million.

ACA effect on the federal deficit. The CBO estimates that the net budgetary effect of the ACA’s health insurance coverage provisions will be over $150 billion by 2026. The CBO estimated that repealing the ACA would add approximately $40 billion to the deficit in 2017, but by 2021 a repeal would begin to reduce the deficit, with an estimated $50 billion reduction by 2023, and an estimated $90 billion reduction by 2025.

Proposed policies. The CBO analyzed the following proposed policies to reduce federal spending: (1) reducing federal subsidies for health insurance; (2) paying Medicare providers in different ways (e.g., new payment models and bundling payments for related services); (3) making broader structural changes in Medicare or Medicaid (e.g., cap payments to states for Medicaid and adopt a premium support system for Medicare); and (4) improving the health of the population.

Analysis of proposed policies. The CBO concluded that cutting federal subsidies for health insurance would decrease the federal budget, but would leave individuals with higher premium costs. Likewise, it concluded that paying Medicare providers in different ways and making structural changes to Medicare and Medicaid could decrease the budget, but would have a range of effect on both providers, states, and beneficiaries.

The CBO found that the policy initiatives to improve population health would need to result in a reduction in annual health care costs per person and a corresponding increase in tax revenues from people living longer. The CBO concluded that this would require a change in behavior by the population, which could be difficult. The changes in individual behavior then would need to result in improved health, which could take some time. Finally, the health improvements would need to result in lower health care costs, which could also take some time and would be uncertain.

SOURCE: CBO Report, September 21, 2016.

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