Congressional Budget Office
Director’s Blog

CBO and the staff of the Joint Committee on Taxation (JCT) worked together to produce a preliminary analysis of the major provisions related to health insurance coverage that are contained in draft legislation called the America’s Affordable Health Choices Act, which was released today by several House committees. Among other things, those provisions would establish a mandate for most legal residents to obtain insurance, significantly expand eligibility for Medicaid, and set up insurance “exchanges” through which certain individuals and families could receive federal subsidies to substantially reduce the cost of purchasing that coverage. The analysis issued today does not take into account other parts of the proposal that would raise taxes or reduce other spending (particularly in Medicare) in an effort to offset the federal costs of the coverage provisions.

The tables included in the report summarize our preliminary assessment of the coverage provisions’ budgetary effects and their likely impact on rates and sources of insurance coverage for the nonelderly population. According to that assessment, enacting those provisions by themselves would result in a net increase in federal budget deficits of $1,042 billion over the 2010–2019 period. By 2019, CBO and the JCT staff estimate, the number of nonelderly people who are uninsured would be reduced by about 37 million, leaving about 17 million nonelderly residents uninsured (nearly half of whom would be unauthorized immigrants).

The figures released today do not represent a formal or complete cost estimate for the draft legislation. First, as noted above, these figures do not address the entire bill. Second, the analysis was based on specifications that were provided by staff of the three committees and that differ in important ways from the “discussion draft” version of legislative language that was released in June. The specifications that we analyzed are supposed to be reflected in the draft language released by the committees today, but we have not yet been able to analyze that language to determine whether it conforms to those specifications. Third, our analysis does not incorporate the administrative costs to the federal government of implementing the specified policies nor all of the proposal’s likely effects on spending for other federal programs; we expect to include those effects in the near future, and we do not expect that they will have a sizable impact on our estimates. Finally, the budgetary information reflects many of the major cash flows that would affect the federal budget as a result of implementing the specified policies, and it provides our preliminary assessment of the proposal’s net effects on the federal budget deficit. Some additional cash flows would appear in the budget—either as outlays and offsetting receipts or outlays and revenues—but would net to zero and thus would not affect the deficit.

CBO will continue to work on an ongoing basis with the House and Senate committees involved in health care reform to provide estimates and analyses as legislation is considered.

Today CBO delivered a letter to Representative Paul Ryan that responded to his request for an analysis of H.R. 2920, the Statutory Pay-As-You-Go Act of 2009. H.R. 2920 is virtually identical to the proposal recently advanced by the Administration. It would establish a new statutory form of pay-as-you-go (PAYGO) budget enforcement—which is generally intended to ensure that laws affecting direct (mandatory) spending or revenues are, in total, budget neutral.

That process, although similar to the statutory PAYGO system that was in place from 1990 through 2002, would differ from the former system in several significant ways. CBO’s analysis reviews the statutory PAYGO system that was enacted in 1990 and that remained in place until fiscal year 2002, and the current pay-as-you-go rules adopted by the House of Representatives and the Senate. It then presents an overview of the key features of H.R. 2920 and assesses the possible effects of the legislation on future budget deficits and control of the budget process.

In CBO’s view, the PAYGO process specified in H.R. 2920 includes some features—specifically, the statutory sequestration mechanism—that could enhance overall budget enforcement. However, the proposed process has other features—a proposed temporary rule to score certain changes in spending and revenues relative to “current policy” rather than current law; a modification of the baseline’s treatment of some expiring mandatory programs; and new procedures for scoring legislation that would convert programs’ spending from discretionary to mandatory—that could lead to greater spending or reduced revenues in the coming decade than would occur under the existing House and Senate rules. In addition, some features of the bill’s proposed sequestration mechanism would limit its usefulness in deterring increases in spending.

H.R. 2920 also would shift some control over the budget process from the Congress to the executive branch in ways that could effectively require lawmakers to vote on legislation without a clear indication of the potential impact of their decisions on the triggering of a future sequestration.

The federal budget deficit was $1.1 trillion for the first nine months of fiscal year 2009, CBO estimates in today’s Monthly Budget Review, more than $800 billion greater than the deficit recorded through June 2008. Outlays are 21 percent higher than they were in the first three quarters of 2008, but revenues have fallen by 18 percent.

The federal government recorded a deficit of $97 billion in June, CBO estimates. Declining revenues and increasing spending resulted in the first June deficit in more than 10 years. Quarterly payments of estimated individual income taxes and corporate income taxes typically result in a budget surplus for the month. CBO estimates that receipts in June were about $46 billion (or 18 percent) lower than receipts in June 2008, marking the fourteenth consecutive month in which receipts were lower than those in the same month of the previous year. Net corporate receipts were $24 billion (or 41 percent) below those in June 2008, accounting for about half of the overall decline.

For the first nine months of the fiscal year, declining receipts from individual income and payroll taxes account for almost 60 percent of the overall decrease in receipts. Those collections are down by almost $200 billion. Withholding of income and payroll taxes fell by about $80 billion (or 6 percent) compared with receipts in the first three quarters of 2008, primarily because of the ongoing effects of the recession on wages and salaries and the effective tax rates on that income. Receipts from corporate income taxes have declined sharply, falling by $133 billion (or 56 percent).

Outlays through June were $457 billion higher than in the same period last year, CBO estimates.  That total includes $147 billion for the Troubled Asset Relief Program (TARP), recorded on a net-present-value basis, and spending of $83 billion in support of Fannie Mae and Freddie Mac. Spending for all other federal programs rose by nearly 14 percent (or $275 billion) relative to outlays in the first nine months of fiscal year 2008. In contrast, net outlays for interest on the public debt declined by more than 25 percent (or $49 billion) because of lower short-term interest rates and lower costs for inflation-indexed securities.

Outlays for unemployment benefits so far this year are more than 2 ½ times what they were at this point last year. About half of that increase stems from the higher unemployment rate; the rest comes from legislation that boosted the duration and amount of those benefits.

In response to several requests, CBO has considered the likely effects on federal spending and health insurance coverage of adding a substantial expansion of eligibility for Medicaid to the Affordable Health Choices Act, a draft of which was recently released by the Senate Committee on Health, Education, Labor, and Pensions (HELP). (CBO’s preliminary analysis of that draft legislation was released on July 2.)

The precise effects such a Medicaid expansion would depend importantly on the specific features of that expansion. For example, the effects would depend on how eligibility for the program was determined and on whether the expansion started immediately or only as the proposed insurance exchanges went into operation. The effects would also depend what share of the costs for newly eligible people was borne by the federal government and what share was borne by the states (which would be determined by the average FMAP, or Federal Medical Assistance Percentage). In addition, the effects would depend on whether states faced a maintenance-of-effort requirement regarding their current Medicaid programs.

CBO has not yet had time to produce a full estimate of the cost of incorporating any specific Medicaid expansion in the HELP committee’s legislation. However, our preliminary analysis indicates that such an expansion could increase federal spending for Medicaid by an amount that could vary in a broad range around $500 billion over 10 years.

Along with that increase in federal spending would come a substantial increase in Medicaid enrollment, amounting to perhaps 15 million to 20 million people. Such an expansion of Medicaid would also have some impact on the number of people who obtain coverage from other sources (including employers). All told, the number of non-elderly people who would remain uninsured would probably decline to somewhere between 15 million and 20 million. (For comparison, CBO’s analysis of the draft legislation that was released by the HELP committee found that, absent any expansion of Medicaid or other change in the legislation, about 33 million people would ultimately remain uninsured if it were to be enacted.)

Such an expansion of Medicaid would have some impact on other aspects of the federal budget beyond Medicaid itself (including tax revenues and the proposed payments to the government by employers who do not offer coverage to their workers, which the legislation labels “equity assessments”). Those additional effects might increase or decrease the effect of the proposal on the federal deficit by as much as $100 billion.

Yesterday CBO released a letter in response to a request for additional information regarding our analysis of provisions of the Affordable Health Choices Act that would establish a federal insurance program for long-term care. Those provisions are called the Community Living Assistance Services and Supports Act (the CLASS Act) and are currently under consideration by the Senate Committee on Health, Education, Labor, and Pensions.

Enrollment in the program would be open to noninstitutionalized individuals who are either active workers or the nonworking spouse of an active worker. Premiums would vary according to the person’s age at enrollment. The average premium would be limited to $65 per month in 2011 and indexed for inflation in subsequent years. The benefit would be at least $50 per day (indexed for inflation). To qualify for benefits, an enrollee would need to have paid premiums for at least five years and been actively working for at least three of those years; the enrollee also would have to be unable to perform at least two or three activities of daily living. The legislation would provide considerable authority to the Department of Health and Human Services (HHS) Secretary to adjust premiums and benefits to maintain the solvency of the program. The Secretary would be allowed to reduce all benefits to the daily minimum of $50 and, if that action was inadequate to avoid insolvency, to increase enrollees’ premiums.

CBO estimates that the proposal’s net effect on the federal budget would be to reduce the budget deficit by about $58 billion during the 2010–2019 period, including some effects on federal revenues and Medicaid spending. In CBO’s analysis, the real (inflation-adjusted) average monthly premium was assumed to be $65, and the real daily benefit was assumed to average about $75. The estimated reduction in the federal budget deficit over the next 10 years is chiefly the result of the five-year vesting requirement; the payout of benefits would not begin until 2016, five years after the initial enrollment in 2011.

Beyond the 10-year budget window, the effects of the program could be quite different, and CBO expects that the HHS Secretary would need to reduce benefit payments and increase premiums to maintain the program’s solvency. Assuming that the premiums and daily benefit amounts were $65 and $75, respectively, CBO estimates that benefit payments would exceed premium income within the first decade after 2019, leading to depletion of previously accumulated premium reserves (and accumulated interest on those reserves). Although outcomes in the distant future are very uncertain, CBO expects that actions by the Secretary to reduce all benefits to the real daily minimum of $50 and raise the real average monthly premium for new enrollees to roughly $85 sometime during the first decade after 2019 would be adequate to ensure that the program could pay benefits through 2050.

Overall, CBO estimates, if the Secretary did not modify the program to ensure its actuarial soundness, the program would add to future federal budget deficits in a large and growing fashion beginning a few years beyond the 10-year budget window. If the Secretary did act to ensure the program’s solvency, the program and its effects on Medicaid spending and revenues might—or might not—add to future budget deficits, depending on the specific actions that were taken.

The American Clean Energy and Security Act (H.R. 2454), recently passed by the House of Representatives, would establish two cap-and-trade programs for greenhouse gas (GHG) emissions. One small program would apply only to hydrofluorocarbons (HFCs) while a much larger program would apply to other types of GHG emissions—practically all emissions from the combustion of fossil fuels plus a fraction of other emissions from industrial and agricultural sources. Under the bill, operators of most sources of emissions would be required to hold an allowance for each ton of GHG they emit, and other entities would be required to hold an allowance for each ton of GHG that will be emitted when the fuel they sell (such as gasoline) is burned or when a product they produce (such as HFCs) escapes into the atmosphere.

By gradually reducing the total number of allowances available every year, the bill would lower the total amount of emissions from the sources it covers. However, the bill would allow those sources to produce emissions in excess of their allowances if they pay for reductions in emissions elsewhere. For example, if an electric utility paid a landowner to reforest a parcel of farmland so that the trees would absorb carbon dioxide, it would receive “offset” credits that it could submit in lieu of allowances, allowing it to produce a larger quantity of emissions than it would have otherwise. The bill would allow covered entities to purchase such offsets from domestic sources and, under certain circumstances, from sources outside of the United States. In CBO’s estimation (CBO’s original cost estimate), covered sources would use significant amounts of offsets and thereby reduce their own emissions substantially less than they would if offsets were not available—which, in turn, would cause the price of allowances to be much lower than otherwise.

The bill also would allow entities to “bank” unused allowances if they chose, carrying them over from year to year until they decided to use them. CBO projects that entities would undertake more emission reductions than necessary in the early years of the program, banking several hundred million tons’ worth of allowances per year to use in later years when emission allowances would become increasingly scarce and hence more valuable.

The figure below shows CBO’s estimate of how U.S. emissions (or output of products that will ultimately result in emissions) would be reduced under the House-passed bill. This estimate incorporates the number of allowances that would be issued under both the GHG and HFC caps, as well as the opportunities to purchase domestic and international offsets and incentives to bank allowances.

Estimated U.S. Emissions under the House-passed Bill

For example, in the absence of any change in policy, CBO projects that in 2020 total U.S. emissions will be about 7,580 million metric tons of carbon dioxide equivalents; emissions by entities that would be covered under the two cap-and-trade programs would account for about 6,550 million tons, more than 85 percent of total U.S. emissions. Under the legislation, covered entities would have access to about 5,200 allowances (the nominal cap in that year less a set-aside of allowances that would become available only if allowance prices in the large program spiked unexpectedly high). By CBO’s estimates, these entities would pay for about 300 million tons of reductions by domestic entities not covered by the cap-and-trade programs, and they would purchase nearly 430 million tons of reductions in foreign countries, for which they would receive credit against 350 million tons worth of domestic emissions. The allowances and offsets together would allow covered entities to emit roughly 5,850 million tons of carbon dioxide equivalents (5,200+300+350), but CBO estimates that the entities would choose to bank allowances for 20 million tons (having already accumulated over 2,000 million tons of banked allowances by 2020). Thus, total emissions of the covered entities in that year would be about 5,830 million tons, 720 million tons (or 11 percent) below the amount anticipated under current law. (That percentage would increase to about 53 percent by 2050.)

If the offsets represented true emission reductions relative to baseline, then total emission reductions spurred by the bill would be 1,450 million tons (6,550-5,830+300+430). However, many observers worry that at least some of the offsets might be difficult to verify or might themselves be “offset” by increases in emissions elsewhere.

CBO and the staff of the Joint Committee on Taxation (JCT) have completed a preliminary analysis of the provisions of title I of draft legislation called the Affordable Health Choices Act, which has been posted on the Web site of the Senate Committee on Health, Education, Labor, and Pensions.

Much of title I addresses health insurance coverage. Among other things, that title would: require all legal residents to have insurance; establish insurance exchanges (called “gateways”) through which individuals and families could purchase coverage; set certain minimum requirements regarding the availability, pricing, and actuarial value of policies; and provide federal subsidies to substantially reduce the cost of coverage for some enrollees. Title I also includes provisions that, among other things, would establish a reinsurance program for early retirees and improve access to and availability of community living assistance services and supports.

Enacting those provisions would result in an estimated net increase in federal budget deficits of $597 billion over the 2010-2019 period—reflecting net costs of $645 billion for the coverage provisions, which would be partially offset by net savings of $48 billion from other provisions of title I. (CBO has also estimated the budgetary impact of provisions in titles III and VI of an earlier draft of the legislation, which would add another $14 billion to the net cost of the proposal.)

Once the legislation was fully implemented, CBO and JCT staff estimate, about 20 million fewer people would be uninsured compared with projections under current law. About 26 million individuals would obtain coverage through the new insurance exchanges, and about 6 million fewer people would purchase nongroup coverage outside the exchanges. In the aggregate, the number of people obtaining coverage through an employer would change very little.

The draft legislation does not include a significant expansion of the Medicaid program or other options for subsidizing coverage for those with income below 150 percent of the federal poverty level (FPL); such provisions may be incorporated at a later date. By CBO’s estimate, about three-quarters of the people who would remain uninsured under this version of the legislation would have income below 150 percent of the FPL.

The figures presented in this analysis do not represent a formal or complete cost estimate for the draft legislation. This estimate reflects the major provisions of the legislation but CBO has not yet completed an analysis of all of its effects. Specifically, the agency has not yet estimated the administrative costs to the federal government of implementing the specified policies or the costs of establishing and operating the new insurance exchanges, nor has it taken into account all of the proposal’s likely effects on spending for other federal programs or their potential effects on revenues from corporate taxes.

The estimated cost of this draft of the legislation is roughly $400 billion less over 10 years than the cost CBO estimated for an earlier version of the proposal (in CBO’s letter dated June 15, 2009). A number of changes in the legislation account for that difference. First, the subsidies available in the insurance exchanges would be less extensive; there would now be no premium subsidies for individuals and families with income above 400 percent of the federal poverty level, and subsidies for people below that level would be smaller. Second, a penalty (labeled an “equity assessment”) was added for employers that do not offer insurance coverage to their workers and contribute a specified share of the premium. Third, the new draft substantially limits the opportunity for employees with an offer of health insurance from their employer to receive subsidies in the insurance exchange because their employer’s offer was deemed unaffordable.

Collectively, those changes contributed to a substantially lower estimate of the number of people who would purchase coverage through the insurance exchanges (and a corresponding reduction in federal subsidy payments) and led to a much smaller estimated impact on the amount of coverage provided through employment-based plans. The new draft also includes provisions regarding a “public plan,” but those provisions did not have a substantial effect on the cost or enrollment projections, largely because the public plan would pay providers of health care at rates comparable to privately negotiated rates—and thus was not projected to have premiums lower than those charged by private insurance plans in the exchanges.

Today CBO released an updated report on the treatment of federal receipts and expenditures in the National Income and Product Accounts (NIPAs). The Congress, executive branch agencies, and the press generally focus on the accounting of government finances presented in the Budget of the United States Government, which is prepared by the Office of Management and Budget (OMB). The budget is structured to provide information that can assist lawmakers in their policy deliberations, facilitate the management and control of federal activities, and help the Treasury manage its cash balances and determine its borrowing needs.

In contrast, the NIPAs—produced by the Bureau of Economic Analysis (BEA), an agency within the Department of Commerce—are intended to provide a comprehensive measure of activity in the U.S. economy, of which the federal sector is one part. Because the aims of the NIPAs differ from those of the federal budget, the two accounting systems treat some of the government’s transactions very differently, as described in this report. Despite the accounting differences, the government budget numbers reported by the BEA are not all that different from those reported under the OMB framework.

Last week CBO released the Long-Term Budget Outlook. Under current law, the federal budget is on an unsustainable path: projected spending rises well above projected revenue, producing growing budget deficits and accumulating debt. Almost all of the projected growth in spending relative to GDP (other than interest payments on the debt) is attributable to Medicare, Medicaid, and Social Security. For these three programs together, the two health programs account for 80 percent of spending growth over the next 25 years and 90 percent over the next 70 years.

Two factors underlie the projected increase in federal spending on Medicare, Medicaid, and Social Security as a share of GDP: rapid growth in health care costs and an aging population. To demonstrate the relative importance of these factors, CBO calculated how much of the projected increase in federal spending for the three programs would be attributable to aging and “excess cost growth” (growth in age-adjusted health care costs per person that exceeds the growth of per capita GDP) under the extended-baseline scenario (see my June 26 blog entry on the fiscal gap for a description of our long-term scenarios). CBO did so by comparing the outlays projected under that scenario with the outlays that would occur under two alternative paths: one with an aging population but no excess cost growth for health programs and one with no aging but with excess cost growth.

The interaction between the aging of the population and excess cost growth accentuates their individual effects. Higher spending per person has a larger influence as the number of beneficiaries in Medicare and Medicaid rises. Conversely, having more beneficiaries in those programs imposes a larger budgetary cost when health care costs are growing. That interaction can be identified separately, or it can be allocated according to the shares attributable to aging and excess cost growth.

Aging is the more important factor over the next 25 years or so. If the interaction is allocated between the two factors, aging accounts for about 64 percent of the projected growth in spending on the major entitlements by 2035.

That result is not surprising because the aging of the baby-boom generation significantly expands the number of Medicare, Medicaid and Social Security beneficiaries. Over the longer term, however, the situation reverses: 56 percent of the growth in total federal spending for those three programs by 2080 is attributable to health care costs per person rising more rapidly than per capita GDP. (Of course, the growth of health care costs has no effect on spending for Social Security.)

Identifying the interaction separately from the direct effects of aging and excess cost growth gives a slightly different perspective. By 2035, aging alone accounts for 56 percent of the projected growth in spending for the three entitlement programs. Excess cost growth accounts for another 32 percent, and the interaction between the two factors causes the remaining 11 percent. For the period through 2080, the picture changes, as aging accounts for 32 percent of the increase in spending, excess cost growth accounts for 41 percent, and the interaction effect contributes 26 percent.

Looking only at Medicare and Medicaid, excess cost growth is the primary factor driving the growth of federal spending, even over the intermediate term. By 2035, excess cost growth by itself accounts for 46 percent of projected growth in federal spending on those two programs. Adding in that factor’s share of the interaction raises the contribution of excess cost growth to 56 percent. The figure for excess cost growth alone is similar in the long term and in the intermediate term (49 percent by 2080 and 46 percent by 2035). But with its share of the interaction included, excess cost growth is responsible for 70 percent of the projected growth in federal health care spending by 2080.

Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security

(Percentage of gross domestic product)

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Yesterday CBO released the Long-Term Budget Outlook. Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run.

How much would policies have to change to avoid unsustainable increases in government debt? A useful answer comes from looking at the so-called fiscal gap. The gap represents the extent to which the government would need to immediately and permanently raise tax revenues, cut spending, or undertake some mix of both to make the government’s debt the same size (relative to the size of the economy) at the end of a given period as prevailed at the beginning of the period.

The fiscal gap is a present-value measure of the nation’s fiscal imbalance. A present-value calculation adjusts future payments for the time value of money to make them comparable with payments today. CBO calculates the present value of a stream of future revenues by taking the revenues for each year, discounting each value to 2009 dollars, and then summing the resulting series. The same method is applied to the projected stream of outlays. CBO also computes a present value for future gross domestic product (GDP) so it can calculate the present value of outlays and revenues as a share of the present value of GDP.

CBO performed such calculations for two different scenarios that represent, in different ways, a continuation of current policies. The “extended-baseline scenario” adheres most closely to current law and assumes that many policy adjustments that lawmakers have routinely made in the past will not occur. The “alternative fiscal scenario” represents another interpretation of what it would mean to continue today’s underlying fiscal policy; it incorporates some policy changes that are widely expected to occur and that policymakers have regularly made in the past. For example, under the latter scenario, the changes in tax rates enacted in 2001 and 2003, now scheduled to expire in December 2010, would be extended and the alternative minimum tax would be indexed to inflation.

Under the extended-baseline scenario, the fiscal gap would amount to 2.1 percent of GDP over the next 25 years and 3.2 percent of GDP over the next 75 years. In other words, under that scenario (ignoring the effects of debt on economic growth), an immediate and permanent reduction in spending or an immediate and permanent increase in revenues equal to 3.2 percent of GDP would be needed to create a sustainable fiscal path for the next three-quarters of a century. (That amount would come to about $450 billion in 2009.) If the policy change was not immediate, the required percentage would be greater.

Under the alternative fiscal scenario, the fiscal gap is greater: 5.4 percent of GDP over the next 25 years (equivalent to about $750 billion in 2009) and 8.1 percent over the next 75 years.