government

Health reform savings barely dent deficit, CBO says

A presidential commission to control the federal debt has few easy choices, according to the Congressional Budget Office.

By Doug Trapp — Posted July 19, 2010

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The national health reform law will reduce the nation's deficit, but not nearly enough to address its long-term fiscal imbalance, Congress' chief budget adviser told a bipartisan deficit commission on June 30. Health care spending will continue to be a significant driver of overall federal spending.

Congressional Budget Office Director Douglas Elmendorf, PhD, offered another sobering 75-year projection of federal spending during the National Commission on Fiscal Responsibility and Reform's third meeting. CBO updates its long-term projection each June. Absent significant spending cuts or additional revenues, the nation faces a fiscal crisis, he said.

The 18-member commission is charged with crafting proposals to balance the federal budget by 2015, excluding interest payments on the national debt. The panel's recommendations are due Dec. 1, but Congress is not obligated to vote on them.

Elmendorf said CBO still expects the health system reform law to reduce the federal deficit by $143 billion by 2019 and by about 0.5% of the gross domestic product in the following decade. Predicting the law's effect beyond about 2030 is difficult because of the uncertainties involved, he said.

However, these savings are small considering the fiscal challenges facing the country, Elmendorf said. Federal deficits for this fiscal year are expected to reach 62% of the GDP, levels not seen since just after World War II. In CBO's judgment, Elmendorf said, the health care law "made a dent in the problem, but did not substantially diminish that challenge."

CBO offered long-term spending estimates based on two scenarios: under current law and under actions Congress is likely to take, Elmendorf said.

Under existing law, federal debt would reach 79% of gross domestic product by 2035. But that assumes Congress will not block huge Medicare physician pay cuts, will allow the 2001 and 2003 Bush tax cuts to expire, and will allow every cost-saving provision in the health reform law to be implemented, among other decisions, Elmendorf said.

If Congress protects wealthier taxpayers, prevents Medicare pay cuts and backtracks on cuts in the health reform law, the deficit could reach highs of 109% of GDP by 2025 and 185% of GDP by 2035, Elmendorf said. Such deficits would create a fiscal crisis in which the cost of borrowing would spike, slowing the economy.

Keeping the debt ratio at a manageable level -- perhaps 50% of GDP -- in 25 years would require a $700 billion reversal in terms of spending or revenues, Elmendorf said. That would equal a 25% tax increase or a 20% cut in spending.

Health care is a big factor in the long-term spending increases, Elmendorf said. An aging population and continuing growth in medical costs are the two main reasons health care spending continues to climb.

Commission Co-Chair Erskine Bowles, former chief of staff to President Clinton, said commission members should look at all parts of the budget for savings, including health care. "We have to find more cost reduction in health care or it will just consume the budget."

The other commission co-chair, former Sen. Alan Simpson (R, Wyo.), agreed. "We don't know where [health spending is] going, but I can tell you it's going up."

Reform debate continues

Some commission members took issue with CBO offering an alternative spending projection based on likely congressional actions.

Rep. Jan Schakowsky (D, Ill.) bristled at CBO's assumption that Congress would not allow all of the reform law's cost savings provisions to take effect. She called the projection a departure from standard CBO practices. "I think it's irresponsible."

Senate Finance Committee Chair Max Baucus (D, Mont.) -- who last year sometimes sparred with CBO over its cost estimates of health reform legislation -- told Elmendorf that CBO should not try to guess what Congress will do. "When it gets into health care, there's no track record yet."

Other members disagreed. Senate Budget Committee Chair Kent Conrad (D, N.D.) said CBO has presented useful alternate spending scenarios for years. CBO began doing so to show the projected fiscal impact of allowing the Bush tax cuts of 2001 and 2003 to expire or continuing them, he said. Rep. Paul Ryan (R, Wis.) also said the alternate projection was helpful.

Elmendorf defended the alternate spending projections. "There are a number of provisions of current law that many analysts are skeptical will unfold." He noted that CBO is not rooting for any of the scenarios.

Rep. Xavier Becerra (D, Calif.) noted that the CBO spending charts failed to highlight that an estimated 32 million Americans will gain health insurance coverage under the law, which he said is a significant gain in a law that will help reduce the deficit.

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ADDITIONAL INFORMATION

What should go

Repealing the national health reform law was not a popular choice with the more than 58,000 visitors to a website designed to simulate the tough fiscal choices facing Congress. Visitors chose from dozens of options for reducing federal deficits or maintaining existing programs:

Most popular options

91%: Eliminate certain outdated programs
88%: Cut earmarks in half
81%: Reduce farm subsidies
79%: Increase the normal retirement age for Social Security to 68
78%: Reform the international tax system

Least popular options

5%: Repeal the health reform law
6%: Repeal the health reform law's tax on high-cost health care plans
6%: Increase average federal Medicaid match to states, from 57% to 60% of costs
7%: Limit discretionary spending growth to the growth of the GDP
9%: Institute a minimum Social Security benefit

Source: "Stabilize the Debt Simulator," Committee for a Responsible Federal Budget, July

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External links

National Commission on Fiscal Responsibility and Reform (link)

The Committee for a Responsible Federal Budget (link)

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