The Congressional Budget Office came out with its long-term fiscal projections today. The headline was grim: The federal budget is substantially out of balance over the long term. This is not news. There is no way to absorb the Bush administration’s reckless tax cuts and two wars paid for on credit, prevent a depression, prepare for an aging population, and finance higher medical spending without something having to give.
Yet the health care story beyond the aggregate headline is more interesting. The much maligned, supposedly budget-busting Affordable Care Act will actually reduce the deficit substantially. The CBO estimates budget savings of $143 billion in the next decade and more than $1 trillion in the subsequent decade. Score one for fiscal responsibility.
That by itself is not enough. Health care costs will continue to increase even under the CBO’s assumptions about the Affordable Care Act, putting pressure on the budget. There are two reasons for this. Population aging is the first factor, which is inevitable absent dramatic increases in fertility or immigration. It results in part from advances in medical care. When you save people from death, those survivors need more resources. We have to decide as a society how to pay for this.
The second factor in rising spending is the inexorable expansion of medical treatments. Medical spending growth has historically been attributable in great part to the development and diffusion of new ways of treating people. Cancer used to be a (cheap) death sentence. Now it is thankfully less fatal, and also much more expensive. The CBO assumes this will continue—as well it should. Medical care is by and large valuable, even if we need to figure out how to direct it in the right way.
What CBO misses is a third factor: changes in the organization of medical care to increase its value and reduce its cost. Health industry leaders and experts are in agreement that improving quality and lowering costs in our health care system will require bringing health care into the information age, reforming health insurance markets, learning what works, and rewarding health care providers accordingly. The goal of the Affordable Care Act is to extend efficiency measures throughout the medical system. It does this in several ways: by measuring the quality of different providers and disseminating that widely, and by moving toward payment systems that reward more efficient care and away from systems that reward greater volume of care.
The CBO did not know what to make of these provisions, and admitted as much. “A wide range of changes could occur—in people’s health, in the sources and extent of their insurance coverage, and in the delivery of medical care—that are almost impossible to predict but that could have a significant effect on federal health care spending, both under the legislation and under prior law.” Uncertainty is understandable; assuming away any such effects is less so.
In fact, there are estimates of the possible outcomes. Melinda Beeuwkes-Buntin and I estimated that health system modernization can achieve spending reductions of 1.5 percentage points annually. And Karen Davis, Kristof Stremikis, and I estimated that reform could reduce spending by 1.0 percentage points annually above and beyond the legislation’s reductions in payment increases to hospitals and Medicare Advantage plans. This would translate into nearly $600 billion in savings in the next decade, and over $3 trillion in the subsequent decade.
The key for the Affordable Care Act is to unlock these savings. That will depend on how well administrators in Washington implement the law and how providers respond to it. The initial experience is encouraging. The Department of Health and Human Services is moving rapidly to implement reform, and payer and provider groups are transitioning from discussing reform toward making it work. If reform turns out the way many think it might, the Affordable Care Act may contribute more to deficit reduction than even the CBO’s long-term estimates suggest.
David Cutler is a Senior Fellow at the Center for American Progress.
For more information, see: