How Is Health Care Reform Affecting the Federal Deficit?

image of $100 bill and deficit

Some analysts think it is helping reduce the deficit; but others wholeheartedly disagree.

Has the Affordable Care Act actually cut Medicare spending? The numbers from the Congressional Budget Office make a pretty good argument for that, and suggest that the ACA has had a distinct hand in the recent drop in the federal deficit. Detractors of the ACA say that statistical argument doesn’t tell the whole story.

Medicare has been a major factor in the deficit’s expansion. Its cumulative cash flow deficits came to $1.5 trillion in the first decade of this century, according to the Congressional Budget Office; across the current decade, those cumulative cash flow deficits are projected to hit $6.2 trillion as more and more baby boomers become eligible.1

Admirers of the ACA contend that its technical changes (reductions in payments to some providers, simplified payment systems geared to holistic care, discouragement of hospital readmissions and greater use of generic drugs) are holding Medicare costs in check. These changes have led the CBO to hack 12% off its estimate for Medicare spending across 2011-20. In 2014 dollars, the federal government spent about $12,700 on Medicare per recipient in 2010; the CBO sees that declining to about $11,300 in 2019.2

In the big picture, the savings projects to $95 billion in Medicare’s 2019 budget. That is more than the projected 2019 federal outlay for welfare, unemployment insurance and Amtrak combined. It also means Medicare’s trust fund will now last until at least 2030 according to the Medicare Trustees.1,3

Does the ACA deserve all the credit? Not really, say its detractors. They argue that while health care spending and Medicare spending have slowed in the past few years, it isn’t because of the ACA’s changes. The counterargument posits that Medicare spending lessened as a consequence of the recession (and the shallow recovery that followed) and higher-deductible health plans that meant greater out-of-pocket costs for consumers.1

Another contention: lawmakers could have done much more to reduce Medicare spending all along, but backed off of that opportunity. When Congress passed the Balanced Budget Agreement in 1997, it authorized cuts in federal payments to doctors who treat Medicare patients. These cuts (which would have significantly reduced Medicare spending) were supposed to occur in 2003, but Congress has postponed them 17 times since that date.1

Hasn’t the federal deficit declined anyway? It has, and it is also about to grow again. By the CBO’s estimate, the federal deficit for the current fiscal year will be $506 billion, equivalent to 2.9% of U.S. gross domestic product. At the turn of the decade, the deficit was above $1 trillion, corresponding to 9.8% of GDP. The CBO thinks that the deficit will rise again in two years, however, as an effect of increasing federal spending. As for the federal debt held by the public, it has risen 103% during the current administration.4

The deficit aside, the self-insured may pay cheaper premiums in 2015. Preliminary research from the non-profit Kaiser Family Foundation estimates that the mean premium on “silver” plans (the popular and second-cheapest choice among standard plans) will decline 0.8% next year. The KFF’s per-city projections vary greatly, though. For example, it forecasts “silver” plan premiums dropping 15.6% in Denver next year and rising 8.7% in Nashville.4

Bottom line, the CBO sees less Medicare spending ahead. That will contribute to a reduction in the federal deficit, and whether the projected decline is attributable to economic or demographic factors or the changes stemming from the ACA, that is a good thing.


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