Bending the Federal Health Cost Curve (Maybe)

by: Donald Marron

Buried deep in CBO’s cost estimate of the new Senate health bill is a striking conclusion: CBO believes that the health bill would eventually reduce the federal commitment to health care. In short, the bill would eventually bend (or, at least, lower) the federal health cost curve (including both spending and tax subsidies).

That conclusion comes with two crucial caveats: CBO’s estimates into future decades are subject to great uncertainty and assume that the legislation executes exactly as written. As CBO itself points out, that latter assumption is shaky — Congress will undoubtedly revisit health care repeatedly in coming years and may well decide to soften the spending reductions and tax increases specified in the bill.

Still it is striking that the bill, as written, might reduce the federal commitment to health beyond the first decade. That certainly distinguishes it from the previous version of the Senate bill.

CBO writes (my emphasis added):

In subsequent years [i.e., after 2019], the effects of the proposal that would tend to decrease the federal budgetary commitment to health care would grow faster than those that would increase it. As a result, CBO expects that the proposal would generate a reduction in the federal budgetary commitment to health care during the decade following the 10-year budget window. By comparison, CBO expected that the legislation as originally proposed would have no significant effect on that commitment during the 2020-2029 period; most of the difference in CBO’s assessment arises because the manager’s amendment would lower the threshold for Medicare spending growth that would trigger recommendations for spending reductions by the Independent Payment Advisory Board. The range of uncertainty surrounding these assessments is quite wide.

The change in the IPAB is a bit arcane, but potentially a big deal if future Presidents and Congresses let it do its thing. Under the original Senate bill, the IPAB recommendations would be relevant only to the extent that Medicare spending per beneficiary was projected to grow faster than overall per capita health spending. In the new bill, the threshold is set much lower, reflecting inflation in overall consumer prices and consumer medical inflation. That change gives the IPAB more teeth and, in later years, more bite.

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