CBO Lowers Estimated Cost of PPACA Insurance Provisions By $9B

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A new report lowers the projected cost of the healthcare reform law through 2024.

Total federal outlays will grow faster than the economy and reach 22.4 percent of gross domestic product by 2024, driven partly by an aging population, rising healthcare costs and subsidies for health insurance, according to the most recent budget and economic outlook report from the Congressional Budget Office and Joint Committee on Taxation.

Spending on major healthcare programs, including Medicare (net of premiums and other offsetting factors), Medicaid, the Children's Health Insurance Program and spending related to subsidies and the Patient Protection and Affordable Care Act health insurance exchanges is expected to grow from 5.1 percent of GDP in 2015 to 6.1 percent in 2024.

Medicare spending went up by $11 billion (2 percent) in 2013, the slowest growth rate recorded since 1999 and well below the average growth rate of 8 percent between 2003 and 2012. The CBO estimates gross spending for Medicare will total $603 billion this year. Under current law, spending on the program is expected to grow on average by 6 percent annually during the next decade, driven by increasing caseloads and rising costs per beneficiary. The number of Medicare beneficiaries is also expected to rise from about 51 million in 2013 to 71 million in 2024 as a result of the aging baby boomer population.

moneyMedicare spending per beneficiary, adjusted for inflation, is expected to grow by an average annual rate of 1.5 percent between 2014 and 2024, much slower than the average rate of 4 percent experienced between 1985 and 2007. The influx of baby boomers into the program will reduce the average beneficiary age, along with average healthcare costs per beneficiary, since younger enrollees tend to be healthier.

The slow growth rate also takes into account the slowdown in Medicare cost growth observed during the past several years and constraints on reimbursement included in the PPACA and in Medicare's sustainable growth rate. The CBO projections assume physicians will experience pay cuts under the SGR, although Congress has averted double-digit cuts under the formula every year since 2003 with temporary legislative patches. Federal lawmakers have also been working to permanently repeal and replace the SGR. 

According to the CBO, the PPACA is expected to increase the number of nonelderly people with health insurance coverage by about 13 million this year, 20 million in 2015 and 25 million in each subsequent year through 2024. Although it remains unclear how the PPACA will unfold during the next few years, the CBO and JCT have projected the law will cost the federal government $41 billion in 2014 and $1.49 trillion from 2015 to 2024.

The 2014 cost estimate takes into account roughly $2 billion in spending on Medicaid, CHIP, tax credits for small employers, subsidies for people buying health plans through the exchanges and other spending for insurance obtained through the exchanges. The report predicts that spending will be offset by $517 billion brought in from penalties paid by certain uninsured people and employers, an excise tax on high-premium health insurance plans and other budgetary effects.

The risk adjustment and reinsurance programs the PPACA establishes to stabilize the health insurance market and promote insurer competition based on quality and value will have no net budgetary effect during the next decade, as the amount the government pays to insurers and collects from them will be equal, according to the CBO. Under the risk corridor program, another PPACA provision meant to stabilize the market, the federal government will pay health insurers a total of $8 billion and collect $16 billion, yielding $8 billion in savings.

Under the PPACA, states have the option of expanding their Medicaid programs this year to cover those earning as much as 138 percent of the federal poverty level. For states that are expanding their programs, the federal government will foot 100 percent of the bill in 2014, an amount that will be gradually scaled back to 90 percent in 2020 and beyond. Currently, 26 states and the District of Columbia are expanding their programs this year.

The CBO anticipates more states will decide to expand coverage during the next few years. By 2024, about 89 million people will be enrolled in Medicaid at some point during the year, up from 69 million in 2013. Federal Medicaid spending is expected to reach $574 billion by 2024, compared with $265 billion in 2013.

The PPACA is expected to increase the number of people enrolled in Medicaid and CHIP combined by 8 million in 2014 and by 12 million to 13 million people in every subsequent year until 2024. The greater enrollment will lead to additional spending of $70 billion by 2017. From 2015 to 2024, additional expenditures on these programs are projected to total $792 billion.

Additionally, tax credits available to small employers to help cover the cost of health plans for their workers are expected to total $15 billion from 2015 to 2024. Tax credits or premium subsidies for individuals purchasing plans through the exchange are projected to cost $18 billion in 2014 and reach $166 billion in 2024.

Furthermore, the PPACA is expected to reduce the number of people with employer-based insurance coverage by between 6 million and 7 million each year from 2016 through 2024. As a result, the share of people's income represented by nontaxable benefits will shrink, and their amount of taxable wages will get bigger. Overall, this shift will reduce federal deficits by $206 billion by 2024.

The projected cost of the PPACA insurance coverage provisions is $9 billion less than the CBO and JCT's May 2013 estimate, $2 billion of which is due to a decrease in spending and $7 billion of which results from an increase in revenues. The CBO and JCT now estimate about 1 million fewer people will get coverage through the exchanges this year than previously estimated, and about 1 million fewer people will enroll in Medicaid and CHIP, primarily because of the technical problems that have plagued the rollout of the exchanges. Premium estimates have also been lowered based on an analysis of health plans available through the exchanges. The risk corridor program was also previously expected to have no net budgetary effect.

Additionally, the PPACA is expected to reduce the total number of hours worked by 1.5 percent to 2 percent from 2017 to 2024, primarily because workers will choose to supply less labor because of the new taxes and other incentives they face and the financial benefits for some. The health insurance premium subsidies are phased out with rising income, therefore discouraging work, according to the CBO. The reduced hours will equate to a decline in the number of full-time-equivalent workers of about 2 million in 2017, rising to 2.5 million in 2024.

More Articles on Healthcare Spending:
5 Key Observations on Healthcare Spending, Price Growth in 2013
Report: State, Local Healthcare Spending Grew Faster Than Nation Rate in 2012
Congress Passes $1.1T Omnibus Spending Bill 

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